Rev. Rul. 55-136

Advice has been requested whether the Internal Revenue Service will continue to follow the position taken in Revenue Ruling 119, C. B. 1953-2, 95, with respect to bonds issued at a discount prior to January 1, 1955.

Revenue Ruling 119, supra, holds that the discount at which a "Twelve Year Dollar Savings Bond" of the State of Israel is originally issued constitutes interest which is taxable as ordinary income under section 22(a) of the Internal Revenue Code of 1939 when realized upon redemption. It does not represent an amount received upon retirement of the bond within the meaning of section 117(f) of the Internal Revenue Code of 1939.

Section 117(f) of the Code provides in part as follows:

* * * For the purposes of this chapter [chapter 1], amounts received by the holder upon the retirement of bonds, debentures, notes, or certificates or other evidences of indebtedness issued by a corporation (including those issued by a government or political subdivision thereof), with interest coupons or in registered form, shall be considered as amounts received in exchange therefor.

Prior to the enactment of section 117(f) the gain realized by the holder of a bond, upon its retirement, constituted ordinary income whereas the gain realized from an actual sale or exchange of a bond to a third party immediately prior to retirement constituted capital gain. The legislative history in connection with the enactment of section 117(f) in the 1934 Revenue Act indicates clearly that Congress was directing its attention solely to treating the redemption of a bond the same as a sale or exchange of a bond and did not contemplate covering the treatment of initial discount which under the law in effect prior to 1934, was treated as ordinary income. The committee reports imply that Congress was thinking of amounts received upon retirement altogether in terms of amounts which would have represented gain or loss under section 111 and section 112 of the Revenue Act of 1934.

In Commissioner v. George Peck Caulkins, 144 Fed. (2d) 482, affirming 1 T. C. 656, acquiescence, C. B. 1944, 5, the court held that the excess of the amount received by the taxpayer, pursuant to a contract with Investors Syndicate over the aggregate payments made by him for Accumulative Installment Certificate constitutes capital gain, and stated that the certificate in question was "'an evidence of indebtedness' similar to a bond or debenture and hence falls within the statutory group governed by section 117(f)."

It has been the policy of the Internal Revenue Service to restrict the application of the Caulkins case to cases involving the identical facts. This position has been reconsidered in the light of the position taken in Revenue Ruling 119, supra, i. e., that the amount received upon the redemption of a bond which represents original or initial discount constitutes interest which is taxable as ordinary income. There is no logical basis in fact or in law to distinguish the discount element in the Accumulative Installment Certificate involved in the Caulkins case from the original discount element involved ordinarily in the issuance of any bonds. Accordingly, the acquiescence published in C. B. 1944, 5, has been withdrawn and a nonacquiescence has been published at page 7 of this Bulletin.

Revenue Ruling 119, supra, is modified to the extent that it is inconsistent with the views expressed herein. The provisions of this Revenue Ruling will not be applied to amounts received upon redemption of Accumulative Installment Certificates issued by Investors Syndicate which were purchased during the period beginning December 25, 1944, the date acquiescence in the Caulkins case was announced and March 14, 1955, the date this Revenue Ruling is published in the Internal Revenue Bulletin