The issue in this tax refund case is whether Gulf, Mobile & Ohio Railroad Company (GM&O) can receive a deduction for original issue discount on the exchange of debentures for its own preferred stock. Or, in other words, is this case distinguishable from Commissioner v. National Alfalfa Dehydrating & Milling Co., 1974, 417 U.S. 134, 94 S.Ct. 2129, 40 L.Ed.2d 717? The District Court held that a deduction for discount should be allowed, and we affirm. We disagree, however, with the lower court’s measurement of the discount.
The Bare Facts
The preferred stock involved in this exchange was originally issued in 1940 pursuant to a plan of reorganization for three railroads. The Mobile and Ohio Railroad Company, which had been operated by court appointed receivers since 1932, was combined with the Gulf, Mobile and Northern Railroad Company and the New Orleans Great Northern Railroad Company to form the GM&O.1
In 1956, GM&O received permission from the Interstate Commerce Commission (ICC) to issue 5% income debentures to be exchanged on a voluntary basis for up to 283,438V4 shares of GM&O’s outstanding preferred stock. One income debenture in principal amount of $100 was to be traded for one share of preferred stock with a stated value of $100. GM&O would then cancel the stock. The 5% interest on the income debentures was payable currently, *894only if earned, and cumulative interest was limited to 15%. Dividends on the preferred stock were payable at the rate of $5 per share per annum declared by the board of directors and were cumulative, subject, however, to certain limitations.
GM&O advised the ICC that the primary purpose of the exchange offer was to enable the corporation to save on taxes.2 Payment of interest on the debentures would be deductible, unlike the dividend payments on the preferred stock. The ICC approved the exchange, and subsequently, GM&O issued a total of 187,116 income debentures in exchange for a like amount of shares of preferred stock from December 31,1957, through December 31,1962,3 During this period, the preferred stock and income debentures were listed and traded on the New York Stock Exchange.
GM&O later filed for a tax refund for the years ending December 31, 1959 and 1961, based on a deduction for the amortizable bond discount arising from the exchange of the debentures for the preferred stock.4 Discount of $6,842,507.56 was computed by subtracting the total market value of the preferred stock ($11,869,092.44) during the *895exchange period5 from the total principal amount of the debentures ($18,711,600.00). The IRS disallowed the claim, and GM&O filed this action for a refund. In a decision prior to National Alfalfa, the District Court held for the taxpayer, S.D.Ala., 1972, 339 F.Supp. 489.
Absolute Ban Rejected
In National Alfalfa, pursuant to a recapitalization plan to eliminate arrearages on preferred shares,6 the taxpayer corporation required its shareholders to exchange their $50 par 5% cumulative preferred shares for $50 face value 5% sinking fund debentures. The taxpayer claimed a discount on the difference between the fair market value of the stock and the face amount of the debentures. The Tenth Circuit held in favor of the taxpayer, but the Supreme Court reversed.
The decision produced a flood of commentary.7 All the authorities, unfortunately, as well as counsel in this case, agree that National Alfalfa is difficult to interpret, to say the least. But difficult or not, it is our duty — without divine prescience — to divine and then apply it.
The Government argues that National Alfalfa establishes an absolute rule that no discount can occur when a corporation issues bonds for its own preferred stock. The exchange of bonds for stock, the Government contends, is nothing more than an adjustment of the corporation’s capital accounts in which no new capital is acquired. Discount can occur only if a corporation acquired new capital in exchange for its bonds. The assets side of the balance sheet must be adjusted before there can be discount. In a stock-for-bonds exchange, only the liability and equity accounts are altered.8
The Government finds support for its argument in Part IV of National Alfal*896fa. This section does mention “new capital”, but the gist of Part IV is concerned with whether the taxpayer incurred any additional cost for the use of capital.9 Indeed, the Court earlier in the opinion stated that “the relevant inquiry in each case must be whether the issuer-taxpayer had incurred as a result of the transaction[s], some cost or expense of acquiring the use of capital.” 417 U.S. at 147, 94 S.Ct. at 2136. In Part IV the Court explained that the transaction in National Alfalfa was merely a swap of one form of investment for another that was identical in every significant feature. The face amount of the debentures equalled the stated value of the stock; the fixed interest on the debentures was equal to the cumulative dividend on the preferred; and the sinking fund provisions for both the preferred and the debentures were comparable. Id. at 153-54, 94 S.Ct. 2129. The “cost of the capital invested in the corporation was the same whether represented by the preferred or by the debentures, and was totally unaffected by the market value of the shares received at the time of the issuance of the debentures.” Id. at 154, 94 S.Ct. at 2140. Thus, the controlling test from National Alfalfa is whether “some cost ... of acquiring the use of capital” occurred, not whether additional capital was acquired.
Our interpretation, furthermore, is supported by the Supreme Court’s emphasis in Part III of the opinion on the failure to prove market values for the stock and debentures. The Court explained that the record in National Alfalfa did not indicate the cash price at which the debentures could have been sold in the market had they been offered for sale. Neither did the record reveal the price at which the stock could have been purchased in the impending exchange. The Court concluded that the “claimed fair market value of both securities is somewhat artificial since the exchange is effectively insulated from market forces by the intracorporate and private nature of the transaction.” Id. at 150, 94 S.Ct. at 2138. Consequently, “the requisite evaluation of the property to be exchanged cannot occur in this intracorporate transaction and debt discount cannot be determined.” Id. at 151, 94 S.Ct. at 2138.10 If the Government’s “new capital” test was adopted, Part III of National Alfalfa would be an exercise in futility. It would make little difference what factual proof of discount might be presented if no discount could arise in a bonds-for-stock exchange.
Along with the Second Circuit, therefore, we refuse to read National Alfalfa as establishing an absolute ban on discount when a corporation exchanges its bonds for its own preferred stock. Cities Service Co. v. United States, 2 Cir., 1974, 522 F.2d 1281, cert. denied, 1975, 423 U.S. 827, 96 S.Ct. 43, 46 L.Ed.2d 43.11 In Cities Service, the corporate taxpayer, a public utility, was required to simplify its capital structure under the so-called “death sentence” provision of § 11(e) of the Holding Company Act, 15 U.S.C.A. § 79k(e). The reorganization plan, which was approved by the Securities and Exchange Commission, provided for the issuance of new debentures in exchange for all of Cities preferred stock. The aggregate face amount of the new debentures was equal to the stated value of *897the preferred, plus the call premiums and the dividend arrearages that had been accumulated over 14 years.
The Second Circuit held that a discount should be allowed because Cities incurred an additional cost for the use of capital. First, the face amount of the' debentures was greater than the stated value of the preferred, and second, the original issue price of the preferred stock was less than the face amount of the debentures. 522 F.2d at 1288. Thus, the preferred shares and the debentures were not identical as they were in National Alfalfa. Market values for the stock and the debentures also were readily available in Cities Service since both were traded on market exchanges.12
Does It Smell Like Alfalfa?
Three significant distinctions set this case apart from National Alfalfa. First, as in Cities Service, the original value received by GM&O for each preferred share was less than the face amount of the debentures. The District Court, after a thorough examination of the evidence, found that the original consideration for the preferred stock was approximately $9.50 to $11.00 per share.
The Government argues that the District Court should have accepted the 1939 ICC finding that the consideration received for each preferred share was its stated value of $100.13 The District Court in this tax case, however, is not inextricably bound by the ICC’s valuation of a particular stock in a railroad reorganization, especially if it is found that the Commission did not consider all relevant factors. The lower court explained that the ICC valuation “was based upon the book value of the assets being purchased by the GM&O. While an evaluation of assets at the time of the exchange might be persuasive to the court, a valuation based upon the generally unrealistic book value is deemed to be of little or no probative value and is not persuasive here.” R. at 258. In Cities Service, for example, the Securities and Exchange Commission had determined that the exchange of debentures for preferred stock was “fair and *898equitable to all parties and the debentures were the ‘equitable equivalent’ of the rights surrendered,” but the District Court refused to accept the finding that the debentures were worth their face value at the time of issuance. Cities Service Co. v. United States, S.D.N.Y., 1970, 316 F.Supp. 61, 68 (Mansfield, J.). Even in a railroad merger, the ICC’s overall findings on valuation are still subject to challenge, e. g., Schwabacher v. United States, 1948, 334 U.S. 182, 201-02, 68 S.Ct. 958, 92 L.Ed. 1305, 1317 (ICC valuation rejected in a rail merger because Commission failed to consider rights of minority shareholders under state law). The District Court based its finding of the original issue price on substantial evidence, including market prices of the stocks, the earnings record of the constituent corporations, the value of assets received, and even an Internal Revenue Service report on the value of the assets in the GM&O merger.14 We do not find the District Court’s conclusion clearly erroneous within the meaning of F.R.Civ.P. 52(a). And since the original value received for the preferred shares was much less than the $100 face amount of the bonds, there was an additional cost for the use of capital.
GM&O also incurred a cost of borrowing for a second reason. In the Exchange Offer to the shareholders, GM&O explains that, unlike the preferred stock, the debentures would give holders the benefit of a sinking fund.15 Although to some investors this distinction may seem insignificant, the Supreme Court in National Alfalfa stated that the change in the corporate structure in that case was inconsequential, in part, because the “sinking fund provisions for both the preferred and the debentures were comparable.” 417 U.S. at 154, 94 S.Ct. at 2139.16 Since in this case only the debentures have a sinking fund provision, the exchange of debentures for the preferred stock was not a mere “substitution” of one form for another that “did not create an obligation to pay in excess of an amount previously committed.” id.17 Instead, GM&O at least to this extent incurred an *899additional cost for the use of capital by requiring a sinking fund for the debentures only.18
Finally, and perhaps most importantly, this case is distinguishable from National Alfalfa because the exchange of debentures for preferred stock was completely voluntary and was affected by market forces.19 In National Alfalfa, an amendment to the articles of incorporation required the preferred shareholders to exchange their shares for debentures or else have “all rights and privileges” cease. National Alfalfa, 10 Cir., 1973, 472 F.2d 796, 798 n.l. The Supreme Court emphasized that the “cost of the capital invested in the corporation was . . . totally unaffected by the market value of the shares received at the time of the issuance of the debentures.” 417 U.S. at 154, 94 S.Ct. at 2140. Indeed, even in Cities Service, the exchange transaction was insulated to some extent from the market because it was required by statute.
In this case, however, while perhaps hoping for but without expecting all shareholders to participate, GM&O made an offer to sell, in effect, its debentures at a certain price, i. e., a stipulated amount of preferred stock.20 Both the stock and the debentures were traded on the New York Stock Exchange. The market values for these two GM&O obligations could be determined by anyone with a Wall Street Journal. We could assume that stockholders chose to participate in the exchange out of kindness for GM&O. Where market prices are clear, however, and the exchange is voluntary, it is economically more logical to assume that before deciding to trade the preferred shareholders compared the value of their stock to the value of the debentures in light of market prices and their own personal preferences. Some preferred shareholders then decided to trade, some did not. In fact, as late at 1971, over 63,000 preferred shares still had not been exchanged.21 Thus, unlike the transaction in National Alfalfa that was insulated from market forces, the success of this exchange was influenced by the “exigencies of the competitive money market.” 417 U.S. at 151, 94 S.Ct. at 2138.
Measure For Measure
In a sale of debentures for cash, discount is measured by the difference in *900the face amount of the debentures and their issue price. In a free market exchange of bonds for property, however, the issue price of the debenture should equal the market value of what the corporation got for the debenture.22 In this case, GM&O gave up one debenture to obtain one share of preferred stock. The market value of the preferred share, therefore, should correspond to the issue price of the debenture.23
In Cities Service the Second Circuit directed the District Court on remand to determine the issue price by the market value of the debentures, rather than the market value of the preferred stock.24 The Court explained that “an equivalence in value of the debentures and preferred shares might be assumed if the debentures were issued for cash and/or property in the marketplace,” 522 F.2d at 1290, but it concluded:
Any assumption of an equivalence of the debentures and the preferred is unjustified where the transaction is insulated from the marketplace since the market forces which normally would bring about an equivalence of the two are absent. Here there is no proof that the two were equal.
Id. In Cities Service the amount of securities the preferred shareholders received in exchange for the debentures was determined after SEC hearings and bargaining of the parties. But each preferred shareholder had no choice about accepting the final formula.
In contrast, the voluntary exchange in this case was influenced by the market. The holders of preferred shares could examine the published market prices for both the preferred and the debentures before deciding to trade. Thus, the market value of the preferred shares is a good yardstick for determining the real issue price of the debentures.25
*901 Jousting In The NYSE Lists
GM&O questions, however, the lower court’s determination of the value of the preferred shares. The parties stipulated that the preferred stock was actively traded on the New York Stock Exchange (NYSE). The mean NYSE price during the exchange period was $55.25 per share.26 Taxpayer’s expert, however, fixed the fair market value during the exchange period at $70.00 per share, while the government expert estimated the value at $121.58 per share. The trial court “in consideration of the equities between the taxpayer and the stock holders” adjusted the fair market value for the purpose of calculating the bond discount to $80.00 per share.
GM&O argues that the District Court should not have increased the price of the stock over and above the price that it traded at on the NYSE. The lower court ruled that the fair market value of the preferred shares was higher than the NYSE price because the stockholders were unaware of the tax implications of the exchange at the time the debentures were issued.27 We believe, however, that ignoring market quotations is inconsistent with National Alfalfa.
The market provides a forum for the economic forces of supply and demand to act upon goods, such as securities, to determine objectively how much of one is worth so much of another. The market performs that function at maximum efficiency when each entrant is entirely free to participate or not. In National Alfalfa the Supreme Court, after listing several factors that affect the value of securities, stated: “[Normally, the market itself performs this evaluative process.” 417 U.S. at 151, 94 S.Ct. at 2138. National Alfalfa then was “intended to avoid the very type of ‘battle of experts’ on the nebulous issue of market value which took place in this case.” Fed-Mart Corp. v. United States, S.D.Cal., 1975, 75-2 U.S.T.C. ¶ 9531 at 87,558, aff’d, 9 Cir., 1978, 572 F.2d 235. When market quotations are available, as in our case, they should be the sole criterion for determining the value of a bond discount. Besides, discount results from the cost of borrowing at the time of issuance of the debentures. If later, the parties discover that the price was wrong because of the tax implications, no one should suffer a penalty.
*902In summary, we hold: (i) GM&O is entitled to a deduction for discount on the exchange of debentures for its preferred stock, (ii) The amount of discount should be measured by the difference between the principal amount of the debentures and the fair market value of the preferred stock as determined by the mean NYSE price during the exchange period. We remand for the District Court to make the necessary calculations.
AFFIRMED IN PART, REVERSED IN PART, and REMANDED.