Rev. Rul. 56-77

Advice has been requested with respect to the effect, for Federal income tax purposes, of the exercise by a taxpayer of certain options contained in investment certificates issued prior to January 1, 1955, by Investors Syndicate of America, Inc., and its parent corporation. Particularly, the questions relate to a taxpayer's election prior to maturity to receive the matured value of the installments over a period of years and to the taxpayer's election to extent the original maturity date.

In the instant case, the taxpayer purchased Term Installment Faceamount Investment Certificates from Investors Syndicate of America, Inc., an investment company within the meaning of the Investment Company Act of 1940, 54 Stat. 789, 15 U.S.C. 80. Such certificates are face-amount certificates as defined in section 2(a)(15) of the Act, 15 U.S.C. 80a-2. Investors Syndicate markets several series of installment type certificates which differ only in the length of time over which installment payments are made by an investor. The contracts under which the certificates were sold provide for monthly, quarterly, semi-annual, or annual payments by the purchaser of stipulated amounts over the life of the certificates. Upon maturity, the holder is entitled to receive the stated face amount of the certificate or may leave the matured value with the company for a period not in excess of 20 years and receive the aggregate accumulated interest and principal at the end of the 20-year period, or earlier, if he so elects. He may elect, prior to maturity, to receive the matured value in term installment payments over a period of four years or more, or to extend the certificate for an additional period of years during which the normal periodic payments will continue and at the end of the extended term he will receive an amount greater than the original face value of the certificate.

The acquiescence, C.B. 1944-5, has been withdrawn in the case of Commissioner v. George Peck Caulkins , I.T.C. 656, affirmed 144 Fed.(2d) 482, wherein it was held that the excess amount received by the taxpayer, pursuant to a contract with Investors Syndicate, over the aggregate payments made by him for Accumulative Installment Certificates constitutes capital gain within the meaning of section 117(f) of the Internal Revenue Code of 1939. However, the change in position of the Internal Revenue Service (disclosed by the nonacquiscence, C.B. 1955-1, 7, in the Caulkins case) was to be applied without retroactive effect to any amounts received upon redemption of Accumulative Installment Certificates purchased during the period beginning December 25, 1944, the date acquiescence in the Caulkins case was announced, and ending December 31, 1944. See Revenue Ruling 119, C.B. 1953-2, 95, as modified by Revenue Ruling 55-136, C.B. 1955-1, 213, as amended by the special announcement published in I.R.B. 1955-38, 28 /1/.

Section 42 of the 1939 Code provides that the amount of all items of gross income shall be included in the gross income for the taxable year in which received by the taxpayer unless, under methods of accounting permitted under section 41 of that Code, any such amounts are to be properly accounted for as of a different period.

Section 39.42-2 of Regulations 118 provides the general rules for applying the principle of constructive receipt, as follows:

INCOME NOT REDUCED TO POSSESSION.-Income which is credited to the account of or set apart for a taxpayer and which may be drawn upon by him at any time is subject to tax for the year during which so credited or set apart, although not then actually reduced to possession. To constitute receipt in such a case the income must be credited or set apart to the taxpayer without any substantial limitation or restriction as to the time or manner of payment, or condition upon which payment is to be made, and must be made available to him so that it may be drawn at any time, and its receipt brought within his own control and disposition. A book entry, if made, should indicate an absolute transfer from one account to another. If a corporation contingently credits its employees with bonus stock, but the stock is not available to such employees until some future date, the mere crediting on the books of the corporation does not constitute receipt.

Under the principle of constructive receipt, a taxpayer is deemed to have received income which is definitely limited with respect to amount and which is available to him without restriction or is set aside or credited to him. See section 39.42-3 of Regulations 118 for examples of constructive receipt.

I.T. 3963, C.B. 1949-2, 36, holds that the purchaser of an endowment policy who, prior to the maturity date, notifies the insurer of his election to receive the proceeds in installments does not constructively receive the total amount of the proceeds on the date of maturity. That ruling is not to be distinguished from the instant case merely because it deals with an insurance policy, but it is considered relevant and pertinent in deciding the constructive receipt question here involved.

Accordingly, it is held that a taxpayer who, prior to the maturity date of a face-amount certificate issued by Investors Syndicate, elects to make further payments and extends the maturity date of the certificate does not constructively receive, in the year such certificate would have originally matured, the amount which represents the difference between the cost of the certificate and its maturity value on that date.

Where the holder of an Accumulative Installment Certificate elects, prior to maturity, to be paid the proceeds of the certificate in installments, the holder thereof is not in constructive receipt of the total amount of the proceeds of the certificate on the maturity date and is not taxable upon any amount until he has first recovered the total amount paid for such certificate. Any amounts received upon redemption of certificates purchased during the period beginning December 25, 1944, and ending December 31, 1954, will, to the extent that they exceed the amount paid for such certificate, constitute capital gain within the meaning of section 117(f) of the 1939 Code. Where the certificate was purchased prior to December 25, 1944, any amount received in excess of the cost of the certificate constitutes ordinary income.

¹ See Revenue Ruling 56-299, page 603 of this Bulletin, superseding Revenue Ruling 55-136 as so modified.