Rev. Rul. 55-757

Advice has been requested as to the criteria to be used in computing gain or loss upon a sale or redemption of certain marketable French Rentes (Bonds) which a taxpayer acquired in an exchange in 1945 for certain other marketable French Rentes previously purchased.

In 1919, the taxpayer, an American investor, purchased certain marketable French National Defense 4 percent Rentes of 1917 and 1918 for cash. In 1945, such rentes were called under their terms by the French Government and the taxpayer received in exchange therefor its new marketable registered 3 percent consolidated issue rentes due in 2005. The primary questions presented are whether such exchange in 1945 constituted a closed transaction upon which gain or loss is recognized at that time for Federal income tax purposes and what is the basis of the new rentes for determining any gain or loss upon their subsequent sale or redemption.

The National Defense 4 percent Rentes of France that were issued in 1917 had no fixed date of maturity and were issued in denominations of 100 francs or multiples thereof up to 100,000 francs. Interest was payable on such bonds on March 16, June 16, September 16 and December 16 of each year, and they were redeemable, in whole or in part, at par on or after January 1, 1943, at the option of the French Government.

The National Defense 4 percent Rentes of France that were issued in 1918 (Liberation Laon) also had no fixed date of maturity and were issued in denominations of 100 francs or multiples thereof up to 100,000 francs, and interest was payable thereon at the same rate and on the same quarterly dates as on the National Defense 4 percent Rentes of 1917. They were redeemable, in whole or in part, at par after January 1, 1944, at the option of the French Government.

The registered 3 percent Rentes of France were issued by the French Government in November 1945 for conversion of its 4 percent Rentes of 1917 and 1918 and 4 1/2 percent Rentes of 1932, A and B Tranches (Series). They are redeemable in 60 years by semi-annual drawings, or by purchase in the market, and were issued in denominations of 1000, 2000, 5000, 10,000 and 100,000 francs. They were to yield an income of 30 francs or multiples thereof per annum and are acceptable for subscription to the 5 percent perpetual loan of 1949.

It is evident from the above that the rentes of 1977 and 1918 were substantially different from those of 1945, particularly with respect to interest rates and maturity and redemption dates. Also, the exchange in 1945 of the former for the latter does not come within any of the exceptions provided in section 112(b) of the Internal Revenue Code of 1939. Therefore, such exchange was a closed transaction when it was made in 1945 which then resulted in gain or loss, computed under section 111(a) of the Code and recognized under section 112(a) of the Code, of the difference between the basis, under section 113(a) of the Code of the 4 percent rentes surrendered therein, namely their `cost' (purchase price), and the `amount realized' from such disposition, namely the fair market value, at the date of the exchange, of the 3 percent rentes received therefor, as provided in section 111(b) of the Code. See I.T. 2359, C.B. VI-1, 51 (1927); G.C.M. 1455, C.B. VI-1, 87 (1927); I.T. 2734, C.B. XII-2, 73 (1933), and I.T. 3523, C.B. 1941-2, 124. Where such fair market value was treated in a timely determination of the gain or loss from the exchange as the amount realized from the disposition therein of the 4 percent rentes, as permitted and required under sections 111 (a) and (b) and 112(a) of the Code, such fair market value is deemed to be the `cost' of the 3 percent rentes acquired therein and, hence, is their basis under section 113(a) of the Code. See G.C.M. 1022, C.B. VI-1, 12 (1927); I.T. 3523, supra ; I.T. 3721, C.B. 1945, 164, 166, and Rev. Rul. 55-641, page 294 of this Bulletin. Compare Continental Oil Co. v. Jones , 177 Fed.(2d) 508; Therese C. Johnson v. Commissioner , 162 Fed.(2d) 844; H. H. Timken, deceased v. Commissioner , 141 Fed.(2d) 625; Alamo National Bank v. Commissioner , 95 Fed.(2d) 622, certiorari denied 304 U.S. 577; Commissioner v. Monica R. Farren, executrix, et al. , 82 Fed.(2d) 141; Henry B. Robbins v. United States , 21 Fed.Supp. 403, and J. J. Larkin et al. v. United States , 78 Fed.(2d) 951, Ct. D. 1077, C.B. XV-I, 288 (1936). Accordingly, any gain or loss upon the subsequent sale or redemption of the 3 percent rentes is measured by the difference between such basis and the amount realized from such disposition. Where such rentes in the hands of a particular taxpayer are `capital assets,' as defined in section 117(a) of the Code, any gain or loss thus determined constitutes capital gain or loss under section 117 of the Code and is subject to the loss allowance limitation and other provisions of that section.

One of the conclusions in I.T. 2212, C.B. IV-2, 118 (1925), is that the basis of stock of a corporation which was acquired from it by a taxpayer for the assets of his going business in an exchange upon which gain or loss was recognized, is the fair market value of the assets at the time of the exchange and not the then fair market value of the stock. This principle was involved in G.C.M. 1022, I.T. 3523 and I.T. 3721, supra , and, because of these subsequent publications, I.T. 2212 has been in effect modified, at least by implication. Accordingly, I.T. 2212 is now specifically modified so that it conforms to the foregoing.