The Fed-Mart Corporation, a California Corporation v. The United States of America

Appellant, Fed-Mart Corporation, appeals from the judgment of the District Court in favor of the United States in consolidated actions for the refund of Federal income taxes for the taxpayer’s fiscal years 1967 through 1970. The appellant contends that it is entitled to a debt discount deduction arising from the exchange of junior subordinated 6V2% debentures for shares of its outstanding stock.

Fed-Mart is a California corporation engaged in the business of discount retailing. On March 3, 1967, Fed-Mart made an exchange offer to the holders of its common stock wherein it proposed to exchange up to $5,000,000 of 6V2% junior subordinated debentures, due February 1, 1987, for up to 400,000 of its more than 1,000,000 outstanding shares of no par common stock. The rate of exchange was to be $100.00 principal amount of debentures for every eight shares of common stock.

The primary purpose for the exchange offer was to effect the withdrawal of Morris Jaffe from corporate ownership and management in a manner agreeable to him. At the time of the offer, Jaffe was the holder of the largest single block of Fed-Mart’s common stock. Disagreements between Jaffe and Sol Price, Chairman of the…