Rev. Rul. 56-435

Advice has been requested whether the transaction described below represents an exchange of bonds within the meaning of section 1002 of the Internal Revenue Code of 1954, or whether it otherwise results in taxable income.

In 1925, the City of San Antonio, Texas, issued, pursuant to State law, Water Works Gold Bonds, bearing interest at the rate of 5 1/2 percent. The bonds are payable from the net revenues of the city's water system and are not callable. On May 1, 1955, there remained bonds outstanding in the amount of 3 x dollars. These bonds mature serially on May 1 of each year until and including the year 1965. During 1955, the city found it necessary to enlarge and extend its water works system and issued and sold 12 x dollars of 5 1/2 percent revenue bonds for the purpose of financing the improvements. Bonds of this new issue in the amount of 3 x dollars were used to refund the remaining bonds outstanding of the 1925 issue. The bonds of the new issue, which were used to refund the outstanding bonds are in the same denominations, will mature serially in the same years as the bonds they replaced, and are also noncallable.

On the basis of the foregoing facts, it is held that the refunding of unmatured outstanding 5 1/2 percent Water Works Gold Bonds, issued in 1925 by the City of San Antonio, Texas, by the issuance of City of San Antonio 5 1/2 percent Revenue Bonds in the same amounts and maturing serially in the same years as the Water Works Gold Bonds, to replace the latter bonds, does not create a new debt but results in a continuating of the existing indebtedness. Accordingly, there was no `exchange' of property under section 1002 of the 1954 Code which gave rise to recognized gain or loss to the bondholders, and such refunding does not otherwise result in taxable income, provided that both types of bonds are of equal fair market value on the date of exchange. See West Missouri Power Co. v. Commissioner , 18 T.C. 105, acquiescence, C.B. 1952-2, 3.