Rev. Rul. 59-271

Advice has been requested as to the Federal income tax consequences of the acquisition and disposition of United States Savings Bonds Series `G,' under the circumstances described below.

In 1953, the instant taxpayer, a bank, acquired all of the assets and assumed all of the liabilities of another bank, which was liquidated. Among the assets acquired were certain United States, Savings Baonds, Series `G,' for which the taxpayer, in an arm's-length transaction, paid the amount of their par (face) value, although they are nonmarketable and their `redemption value' at the date of such acquisition, as fixed in `redemption value' tables thereon, was substantially less. The bonds had been originally purchased by the other bank, were registered in its name, and were carried on its books at their original purchase or issue price (par or face value). The taxpayer recorded them on its books at their cost to it of face value, which it believed to be also their fair market value. They were transferred to it by reissue, as permitted under Section 315.56 of Treasury Department Regulations Governing United States Savings Bonds, Department Circular No. 530, Seventh Revision.

In accordance with bank supervisory authority instructions, the taxpayer established a valuation reserve account on its books of the bonds. The reserve represented the difference between their `redemption value' at the date of their acquisition by the taxpayer and their face value. Since such bonds are nonnegotiable and generally nontransferable (nonmarketable), their current `redemption value' is considered to be their fair market value. However, a write-down or book revaluation of securities owned from their cost to a lesser fair market value not based on worthlessness or on an inventory by a dealer in securities is clearly not deductible for Federal income tax purposes. In fact, no deduction was claimed by the taxpayer, for such purposes, for the amount of this valuation reserve.

But, upon redemption of the bonds in 1954 before maturity, the taxpayer, for Federal income tax purposes, claimed a deduction for an ordinary loss of the difference between their face value and the amount of their `redemption value' received upon their said redemption. From the date of the taxpayer's acquisition of the bonds to the date of such redemption thereof, it accrued interest thereon on its books as it became payable and properly and timely reported such interest for Federal income tax purposes. As held, inter alia , in I.T. 3504, C.B. 1941-2, 93, interest on Series `G' bonds accrues when it becomes payable, but not until then.

In I.T. 3504, supra , a some pertinent terms and conditions of Series `G' bonds are set forth and discussed. As outlined therein, upon redemption of such bonds prior to their maturity, although there is then paid over to the bondholder only their fixed `redemption value,' he in effect or constructively receives their full face amount (original purchase price) and simultaneously refunds a certain portion of interest previously realized thereon, namely in the amount of the difference between their face amount and the amount of their then `redemption value' actually received.

However, that ruling was promulgated in 1941 soon after Series `G' bonds were first placed on sale by the Treasury Department and obviously pertained generally to original purchasers thereof from it. Hence, the holdings therein are not applicable to cases of transferees thereof through reissue if they involve materially different factors. The holding therein, that the amount of such refund of previously realized interest upon redemption of the bonds prior to their maturity is then deductible, for Federal income tax purposes, as an ordinary loss, manifestly pertained to a case where such refund was of interest that was all previously realized by the taxpayer on Series `G' bonds originally purchased by him and, accordingly, represented in entirety a nonretroactive adjustment (repayment of a certain portion) of interest that he was required, as also held in I.T. 3504, supra , to include in his gross income, for such purposes, when received or accrued. Therefore, such holding is not applicable to refunds by taxpayers of certain portions of interest previously realized by a prior owner or owners of such bonds.

In the case of a taxpayer acquiring Series `G' bonds, from an original purchaser or other prior owner, by reissue under Treasury Department Circular No. 530, as revised, the difference between the face value and the `redemption value' of such bonds on the date of their acquisition by the taxpayer constitutes a contingent liability assumed by him to refund, in the event that he then obtains redemption of the bonds, a certain portion of interest previously realized thereon by their prior owner or owners. Under such circumstances, when the taxpayer obtains redemption of the bonds prior to maturity, to the extent that the difference between their face value and their `redemption value' on the date of their redemption does not exceed the difference between their face value and their `redemption value' on the date of their acquisition by the taxpayer, he refunds an amount of interest that was previously realized thereon by their prior owner or owners and is not entitled to an ordinary loss deduction for the amount of such refund. Such refund amount represents a cost to him of obtaining redemption of the bonds and, consequently, is properly to be taken into account in determining the (net) amount realized by him for them on their retirement, under section 1232 of the Internal Revenue Code of 1954 (section 117(f) of the 1939 Code, where applicable).

However, to the extent that the difference between the face value and the `redemption value' of the bonds on the date of their redemption exceeds the difference between their face value and their redemption value on the date of their acquisition by the taxpayer, he refunds, in connection with their redemption, interest which he has previously realized thereon, and, consistent with the principle of I.T. 3504, supra, he is then entitled to an ordinary loss deduction for the amount of such excess, provided such interest is or has been properly and timely returned as income, for Federal income tax purposes.

Application of the above principles to the Series `G' bonds listed below is illustrated by the following examples:

 Par or face                    "Redemption value" at      "Redemption

 Basis (cost of the bonds to the taxpayer..................... $35,000

 Amount (constructively) received by the taxpayer for the

 Basis (cost) of the bonds to the taxpayer................... $100,000

The foregoing principles are equally applicable to 2 1/2 percent Treasury Bonds, Investment Series A-1965, described in Revenue Ruling 55-274, C.B. 1955-1, 279, and United States Savings Bonds, Series K, described in I.T. 4110, C.B. 1952-2, 99, wherein the principles of I.T. 3504, supra , were applied to such bonds.

I.T. 3504, C.B. 1941-2, 93; I.T. 4110, C.B. 1952-2, 99; and Revenue Ruling, 55-274, C.B. 1955-1, 279; are hereby amplified.