Rev. Rul. 73-160

The purpose of this Revenue Ruling is to update and restate, under the current statute and regulations, the position set forth in G.C.M. 22056, 1940-2 C.B. 189.

The question presented is whether, under the circumstances described below, the extension by the issuer of the maturity date of its notes was a taxable transaction resulting in gain or loss for Federal income tax purposes.

M Company had outstanding notes in the face amount of 4x dollars. M extended the maturity date of the notes under the terms of an agreement that provided that, if the noteholders deposited their notes with certain depositaries, the notes would be returned to the noteholders with an agreement extending the maturity to a certain date and with interest coupons providing for payment of the same rate of interest as in the original notes. The agreement further provided that the notes were to continue to be secured by the trust indenture under which mortgage bonds of M were held as security and were to be guaranteed by the original guarantor, O Company. O which owned 2x dollars of the 4x dollars of the outstanding notes, agreed that it would not have any of the notes owned by it redeemed by M until all notes other than those owned by O were retired or their retirement provided for. O also agreed that the lien of the notes owned by it upon the collateral security would be subordinated to the lien of the other notes until such other notes were retired or provision made for their retirement. The income tax liability resulting from a particular transaction involving a change in the terms of outstanding securities is not controlled entirely by the mechanical means used for the accomplishment of the change. Where the changes are so material as to amount virtually to the issuance of a new security, the same income tax consequences should follow as if the new security were actually issued. Each case of this nature must be governed by its own facts.

In the instant case there was not an actual exchange of one security for another. All that occurred was that the maturity date of an existing series of notes was extended and the holder of a part thereof agreed that none of the notes owned by it would be redeemed during the period of extension until all the other notes were retired or their retirement provided for and that the lien of the notes owned by it upon the collateral security should be subordinated to the lien of the other notes.

Accordingly, in the instant case, the mere extension of the maturity of the notes, accompanied by the agreement of some of the noteholders not to resort to the underlying security until other noteholders have been paid does not constitute in substance the exchange of the outstanding note for a new and materially different note, or a closed and completed transaction upon which gain or loss may be determined. Therefore, neither gain or loss to any of the noteholders resulted from the above-described transactions.

G.C.M. 22056 is hereby superseded, since the position stated therein is restated under current law in this Revenue Ruling.

¹ Prepared pursuant to Rev. Proc. 67-6, 1967-1 C.B. 576.