Lincoln Savings and Loan Association v. Commissioner of Internal Revenue, 422 F.2d 90, 92 (9th Cir. 1970), U.S.App.Pndg.; 1 Mertens, Law of Federal Income Taxation, § 3.20. Insofar as such Ruling might be applied to the facts of this case, it is in conflict with the law as interpreted by the courts and should be disregarded. United States Truck Sales Company v. United States, 229 F.2d 693, 696 (6th Cir. 1956); First Kentucky Company v. Gray, 190 F. Supp. 824, 825 (W.D.Ky., 1960), affirmed 309 F.2d 845 (6th Cir. 1962). The judgment is affirmed.
In flat purchase cases, the courts have held the seller liable for ordinary income tax on the portion of the flat price attributable to the accrued interest. Jaglom v. Commissioner, supra; United States v. Langston, supra; First Kentucky Co. v. Gray, 309 F.2d 845 (C.A.6, 1962). Still another defense is that payment of the pre-1950 interest coupons cannot be held part of a capital transaction (giving rise to capital gain once basis has been returned) because there is no "sale or exchange."
The taxpayer, then, must return each year as income the proportionate amount of each monthly payment that represents discount income. See Hatch v. Commissioner of Internal Revenue, 190 F.2d 254, C.A.2; Shafpa Realty Corporation v. Commissioner of Internal Revenue, 8 B.T.A. 283; Vancoh Realty Company v. Commissioner of Internal Revenue, 33 B.T.A. 918; First Kentucky Company v. Gray, 309 F.2d 845, C.A.6. Phillips v. Frank, 295 F.2d 629, C.A.9, and Willhoit v. Commissioner of Internal Revenue, 308 F.2d 259, C.A.9, relied on by the petitioner both involve investments of a highly speculative nature and can be distinguished from the case at bar on their facts.
IT IS ORDERED AND ADJUDGED that the judgment of the District Court for the Southern District of Ohio be and it is hereby affirmed for the reasons stated in its opinion, reported in 204 F. Supp. 473. See First Kentucky Company v. Gray, 309 F.2d 845 (C.A.6) November 21, 1962.
As to question number two, involving the interest earned on the two endowment insurance policies, we conclude that the position of the Defendant-Government was correct. In arriving at this conclusion, we have given careful study and attention to the following cases: Helvering, Commissioner of Internal Revenue v. Horst, 311 U.S. 112, 61 S.Ct. 144, 85 L.Ed. 75; Austin v. Commissioner of Internal Revenue, 161 F.2d 666 (6th Cir.), Cert. Den. 332 U.S. 767, 68 S.Ct. 75, 92 L.Ed. 352; Fisher v. Commissioner of Internal Revenue, 209 F.2d 513 (6th Cir.); United States v. General Shoe Corp., 282 F.2d 9 (6th Cir.); First Kentucky Co. v. Gray, District Director of Internal Revenue, 309 F.2d 845 (6th Cir.); Friedman et al v. Commissioner of Internal Revenue, 346 F.2d 506 (6th Cir.). Plaintiffs' complaints, insofar as they relate to issues which have not been settled or conceded, are dismissed.
Interest on indebtedness received by a taxpayer to whom the indebtedness is owing is ordinary income and not capital gain. Commissioner v. Gillette Motor Transport, Inc., 364 U.S. 130 (1960); Jaglom v. Commissioner, 303 F.2d 847 (C.A. 2, 1962), affirming 36 T.C. 126 (1961); First Kentucky Co. v. Gray, 309 F.2d 845 (C.A. 6, 1962). In reaching the foregoing conclusions we have considered a contention made by the petitioner that it exchanged its old bonds for new bonds of identical face value, plus $45,000 face value funding issue bonds, plus interest arrearages, plus Talons; that such transaction is the equivalent of a purchase of bonds ‘flat’; and that accordingly the interest arrearages to the date of ‘purchase’ should be treated as a return of capital.