# Petition — General Foods Corp. v. United States

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition
- **Published:** January 1, 1976
- **Citation:** 429 U.S. 867

## Text

IN THE
Supreme Couwt of the United States

OcToBerR TERM, 1975

GENERAL Foops Corroration, Petitioner,
Vv.

Unirep Srares, Respondent.

ee

PETITION FOR WRIT OF CERTIORARI TO THE
UNITED STATES COURT OF CLAIMS

Davip I. GRANGER
Harotp LD), Murry, Jr.
CLirrorp, WARNKE, GLASs,
McILwaIn & FINNEY
815 Connecticut Avenue, N.W.
Washington, D.C. 20006

Press or Byron S. AdAMsS Parrtntine, INC., WASHINGTON, D. C.

Page
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Questions Prosemted ....cccccccscccccccscccccccves 2
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Reasons for Granting the Writ ............000e00e0 4
I. The Court of Claims decision disregards the
Congressional intent with respect to Section 1232
of The Internal Revenue Code of 1954 ........ 5
Il. The Court of Claims erred in refusing jurisdic-
tion over General Foods’ claim of unlawful dis-
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—

Exhibit “B”

Refund of Taxes Illegally, Erroneously or Excessively

Collected.
1 Refund of Amount Paid for Stamps Unused, or Used in

Please Type or Print Plainly
Fill in applicable items—Attach letter size sheets
if space is not sufficient

gift, or income taxes).

Error or Excess.
[1] Abatement of Tax Assessed (not applicable to estate,

North Street
City, Town, State, Postal Zip Code

13-0762680

General Foods Corporation (A Delaware Corporation)
e. District in which return (if any) was filed

Number and street
White Plains, New York 10602

25
b. If an employer, enter employer identification number

Name of taxpayer or purchaser of stamps

00°000°0SL'06$ = LO'LOF'LEL‘06$

250 Park Avenue, New York 17, N. Y. and
250 North Street ,White Plains, N. Y. 10602
e. Period—if for tax reported on annual basis, prepare
separate form for each taxable year
From April 1, 1958 to March 31, 1959

f. Kind of tax

Manhattan District, New York
d. Name and address shown on return, if different from

General Foods Corporation

above
Income

moe ea ; S[PI0],

00°000'0¢L rat ~~ .

00°000'000'L poh hag . Mo gy a RA, Uorwdod.410,) pury su10dg
00°000°000'S = OU'000'886'T sg, ZL g/# /e re pne ‘di0,) [eosoutuo)-pavyuroyy
00°000'000'G (00 000"886'T 1» BL 8¢/¢ /e pe fren OUT “OY Unjosy wEETTTT AY
00';000'000'L = OO 00S" E66 oy gc /; y 4 66/6l WONVAOdIO,) SAOpILY [LLoLoUTUO
00°000°000'L ER CLL ZG ” 18 cafe & 82/ 66/GL ‘ouy ‘Xuvdwog xy SUAL}Y . _
00°000°000'2 CULL ESG'T ” = th 82/ 61/EL UOlBAOdI0,) WURdoooy SUL OR) NURTY ae.
00°000'000'Z ZULLLERG'L " e0 hed 8¢/ “Y ~ Auvduoy O0IBGOT ~ Sen
00'000'000°8 $6E'C) 62 . is , “/ SUG WOlRIOdIO,) Buiyor, (
00'000°000'Z pen bread 20: a 6s) 9t/ & 8¢/CL/EL Uotyesod.o, ) vouBjddoy fame aes
00 000'0U0"'E LE FOR CRE 'Z ” po 68/ 91/8 8¢/CT/2I Auevduwo,) 000RqO IL spjouaoy = A
00'000'000'°E E8OLZERG'Z aes 9) 8¢/t /6l 8f/9 /OL Auedwo,) qUSULSoAU] nat HR.
00°000'000'Z ZZ" L60°986'L ” “- —— $- 85/6 1/6 uolpe10ds0,y WUBI dD Sulu poRpuULyy poe
00°000'000'Z 22160986" * “ 8e/I cl 8¢/C1/G UwoljRsod.o,) wUR ooo Sulanjousuuryy ao A
00'000'000'T ZL6C9'£66 ” se 8e/ Cl/ cl 8¢/C1/6 uorRi0ds0,) surypeg ceneant
00'000'000'Z LL'98F'ER6'T ” ~ Ad /ol 8¢/LL/6 Sueduto,) ue) pene’.
60°000°000'T ES'ULZ EGG » _ 8¢/S1/eL 8/6 /6 Aueduio,) Ooovqoy, splousoy op -
00°000'000'T 18°98&E66 ” oe 8S/ Slal 8c/t /G UOI}41OdIO) eouRydavoy s10j0]Y [eau =
00°000°009 LUFOL66E : CF yy 8¢/F /6 WoLVB10d40,) vUR\doooy Bur Apovpnueyy Mole
00'000°000'T 88°020'866 r» = $ t 6 89/83/L UOHZRIOdIO) soURdooy SUOJOTY [L Jottan)
00°000°000°T == & 800" 866 » 2S 4 ~ 82/6 /2 HoH BEd.) euRdoooY SIOJO]Y [RAoUEH)
00°000°000'ES 8999 EGG'Z4 aie a _ r /6 80/6 /L WOK LIOdIO) Ytpeay [etodouutuo,

Oe PL¢ 8o/F /6 8¢/6 /L WorjRa0d.10,) dU jdoodwy Suranjoujnuey yes 4
uotjdwopay aug — no — : TY AMopoy
UO Spdv2d01.g dsvyouNng Surpjoy uwonduopay — osnyau nd bie

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SALON ALVAOdUO) JO NOLLA NAGY OL Lom.

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ISAY MLA NOMLVINYOGNT

NOILVHOdUO)) SAOOY TIVUAINAN

(PenuyU0D) Vy, TIqQTYyxXy

22a

Exhibit “B” (Continued)

g. Amount of assessment
$53,769,046.40

Dates of payment
December 15, 1958, March 16, 1959, June 15, 1959,
September 15, 1959, November 8, 1965

i. Amount to be refunded (if income tax, complete compu-
tation below)
$208,291.

k. The claimant believes that this claim should be allowed
for the following reasons :

See Rider Attached

Computation of Income Tax Refund Income Tax
Se SO UE Sndecovecucdoldesdncecdevuwus —0—
2. Estimated tax paid .....................6. 19,564,000
3. Tax paid with original return .............. 34,436,000
4. Any additional income tax paid ............ 345,638
d. Total tax paid (Add lines 1-4) ............. 54,345,638
6. Less : Your computation of correct tax ..... 53,560,755
7. Amount of overpayment ................... 784,883
8. Amount previously refunded .............. 576,592
9. Net overpayment (Enter in item 1 above)... 208,291

Under penalties of perjury, I declare that this claim, in-
cluding any accompanying schedules and statements, has
been examined by me and to the best of my knowledge and
belief it is true and correct.

EN iid even unndeenis secu
Dated October 31, 1967 Treasurer

23a
Exhibit “B” (Continued)

GENERAL Foops CorPorATION
(A Delaware Corporation)

River AtracHep To CLam For Rerunp or Feperat INcoME
TAXES FOR THE J'AXABLE YEAR Apri 1, 1958 To Marcu
31, 1959

Claimant, not a dealer in securities, reported in its in-
come tax return for the fiscal year beginning April 1, 1958
and ended March 31, 1959 short-term capital gain of
$608,598.99, resulting from the redemption at maturity of
non-interest-bearing corporation notes originally issued at
a discount and purchased by the claimant, and held for six
months or less.

Upon review of the claimant’s income tax return for its
taxable year beginning April 1, 1958 and ended March 31,
1958, claimant was assessed a tax deficiency of $345,638
plus interest. Part of this deficiency was the result of
treating the above-described $608,598.99 as interest income
rather than as short-term capital gain.

Claimant contends that Section 1232(a)(2) of the Inter-
nal Revenue Code of 1954 applies only to discounted notes
held for more than six months and that since there is no
specific provision within Section 1232(a) (2) for discounted
notes held for six months or less, gain from redemption
of such notes should be accorded short-term eapital gain
treatment.

Claimant therefore respectfully requests a refund of
$208,291, or such greater amount as may be legally re-
funded, together with interest thereon, representing that
part of the previously assessed deficiency attributable to
treating as interest income the $608,598.99 gain from re-
demption at maturity of non-interest bearing corporation
notes originally issued at a discount and held for six months
or less.

24a
Exhibit “C”
Service CENTER
NortH-ATLantic REGION
Date: March 1, 1971 In reply refer to:

General Foods Corporation
(A Delaware Corporation)
250 North St.

White Plains, NY 10602

Social Security Number or Employer Identification
Number: 13-0762680

Document Locator Number: CR000

Type of Tax: 1120-Corporation Income Return
Period Ending: March 1959

Amount Claimed: $208,291.00

Date Claim Received: November 6, 1967

Dear Taxpayer:

We have examined your claim for an adjustment of your
taxes. I am sorry to tell you that we cannot allow your
claim for the reasons stated below. This decison rests on
certain provisions of the internal revenue laws and regula-
tions.

This letter is your legal notice that your claim is dis-
allowed in full.

If you wish to begin suit or proceedings for the recovery
of any taxes, penalties, or other moneys for which this no-
tice of disallowance is issued, the law requires you to do so
within 2 years from the mailing date of this letter.

Sincerely yours,

/s/ ¥. 1. Boswirr
Director
Reasons for disallowance:

Full disallowance of claim per Appellate determination.

25a
Exhibit “D”

IN THE UNITED STATES COURT OF CLAIMS

No. 321-69

—_——_—— — -——

Botse Cascape Corporation and Supsipiary COMPANIEs,
Plaintiffs
v.
Unirep States or America, Defendant

Response to Plaintiffs’ Interrogatories

Oct. 15, 1970

Donald W. Bacon, being duly sworn, responds to plain-
tiffs’ interrogatories as follows:

1. I hold the positon of Assistant Commissioner, Com-
pliance, Internal Revenue Service.

2. Plaintiffs’ Interrogatory 1 reads as follows:

State whether the Commissioner of Internal Reve-
nue requires payment of United States income taxes
under sections 871(a)(1) and 881(a) of the Internal
Revenue Code of 1954 with respect to original issue
discount on bonds or other evidences of indebtedness
issued after December 31, 1954, where such bonds or
other evidences of indebtedness are he!d by a nonresi-
dent alien individual or foreign corporation for a pe-
riod of not more than six months and such original
issuc discount is from United States sources but is not
effectively connected with the conduct of a trade or
business within the United States.

26a

3. Plaintiffs’ interrogatory 3 reads as follows:

State whether the Commissioner of Internal Reve-
nue requires withholding of United States income
taxes under section 1441 and 1442 of the Internal
Revenue Code of 1954 with respect to original issue
discount on bonds or other evidences of indebtedness
issued after December 31, 1954, where such bonds or
other evidences of indebtedness are held by a non-
resident alien individual or foreign corporation for a
period of not more than six months and such original
issue discount is from United States sources but is not
effectively connected with the conduct of a trade or
business within the United States.

4. My answer to these two interrogatories is as fol-

lows:

To the best of my knowledge and belief the Commis-
sioner did not require during the years in suit, 1955
through 1958, the payment of United States income
taxes under sections 871(a)(1) and 881(a) of the Inter-
nal Revenue Code of 1954, or the withholding of United
States income taxes under sections 1441 and 1442
of the Internal Revenue Code of 1954, with respect
to original issue discount on bunkers’ acceptances and
commercial paper, where such instruments were sold
or redeemed by nonresident alien individuals or cor-
porations, nor was the payment of tax or withholding
required with respect to the discount element of United
States Treasury bills when they were sold by such
persons. However, upon the redemption of Treasury
bills by nonresident aliens both the payment of tax and
withholding was required.

/s/ Donatp W. Bacon
Donald W. Bacon

27a

Exhibit “E”
IN THE UNITED STATES COURT OF CLAIMS

No. 321-69

Boise Cascape Corporation and Sussipiary CoMPANIEs,
Plaintiffs

Vv.

Unirep Srates or America, Defendant

Response to Plaintiffs’ Interrogatories
(Filed March 8, 1971)

Donald W. Bacon, being duly sworn, responds to plain-

tiffs’ interrogatories as follows:

1. I hold the position of Assistant Commissioner, Com-

plianece, Internal Revenue Service.

2. Plaintiffs’ interrogatory 1 reads as follows:

State whether the Commissioner of Internal Reve-
nue requires payment of United States income taxes
under sections 871(a)(1) and 881(a) of the Internal
Revenue Code of 1954 with respect to original issue
discount on bonds or other evidences of indebtedness
issued after December 31, 1954, where such bonds or
other evidences of indebtedness are held by a non-
resident alien individual or foreign corporation for
a period of not more than six months and such orig-
inal issue discount is from United States sources but
is not effectively connected with the conduct of a trade
or business within the United States.

28a

3. Plaintiffs’ interrogatory 3 reads as follows:

State whether the Commissioner of Internal Reve-
nue requires withholding of United States income taxes
under section 1441 and 1442 of the Internal Revenue
Code of 1954 with respect to original issue discount on
bonds or other evidences of indebtedness issued after
December 31, 1954, where such bonds or other evi-
cdences of indebtedness are held by a nonresident alien
individual or foreign corporation for a period of not
more than six months and such original issue discount
is from United States sources but is not effectively
connected with the conduct of a trade or business with-
in the United States.

4. My answer to these two interrogatories is as follows:

To the best of my knowledge and belief the Com-
missioner does not presently require the payment of
United States income taxes under sections 871(a)(1)
and 881(a) of the Internal Revenue Code of 1954, or
the withholding of United States income taxes under
sections 1441 and 1442 of the Internal Revenue Code
of 1954, with respect to original issue discount on
bankers’ acceptances and commercial paper issued
prior to May 28, 1969, where such instruments are sold
or redeemed by nonresident alien individuals or cor-
porations, nor is the payment of tax or withholding
required with respect to the discount element of United
States Treasury bil's which are sold by such persons.
However, upon the redemption of Treasury bills by
nonresident aliens both the payment of tax and with-
holding is required.

/s/ Doxatp W. Bacon
Donald W. Bacon

29a

INTERNAL Revenve Cope or 1954
§ 871. Tax on nonresident alien individuals

(a) No United States business and gross income of
not more than $15,400.

(1) Imposition of tax.—Except as otherwise pro-
vided in subsection (b) there is hereby imposed
for each taxable year, in lieu of the tax imposed
by section 1, on the amount received, by every non-
resident alien individual not engaged in trade or busi-
ness within the United States, from sources within
the United States, as interest (except interest on
deposits with persons carrying on the banking busi-
ness), dividends, rents, salaries, wages, premiums,
annuities, compensations, remunerations, emoluments,
or other fixed or determinable annual or periodical
gains, profits, and income (including amounts describ-
ed in section 402(a)(2), section 631(b) and (ec), and
section 1235, which are considered to be gains from

12In the view I take of the case, this conclusion renders moot
two subsidiary points raised by the parties. First, plaintiff
argues that defendant’s treatment of original issue discount in the
present case is so different from the treatment accorded such dis-
count in the hands of nonresident aliens and foreign corporations
as to be illegally discriminatory in favor of foreign persons and
against United States persons. However, should my view of the
law prevail, there is no such disvrimination, and the question be-
comes moot. Secondly, while coneeding that gain attributable to
original issue discount on evidences of indebtedness held for more
than 6 months is taxed only in the year realized through sale or
exchanee (Df’s Brief, p. 24), defendant contends that on short-
term evidences of indebtedness held by accrual basis taxpayers
(such as plaintiffs), the original issue discount is taxable on a
ratably aecrued basis in the same manner as ordinary interest
income. Tlowever, my treatment of such discount as short-term
canital gain places the question within the general scope of
defendant’s concession that discount on longer term evidences of
indebtedness is taxable only when realized, thus eliminating the
question.

30a

the sale or exchange of capital assets), a tax of 30
percent of such amount.

(2) Capital gains of eliens temporarily present in
the United States.—In the case of a nonresident alien
individual not engaged in trade or business in the
United States, there is hereby imposed for each tax-
able year, in addition to the tax imposed by para-
graph (1)—

(A) if he is present in the United States for a
period or periods aggregating less than 90 days
during such taxable year—a tax of 30 percent of
the amount by which his gains, derived from sources
within the United States, from sales or exchanges of
capital assets effected during his presence in the
United States exceed his losses, allocable to sources
within the United States, from such sales or ex-
changes effected during such presence; or

(B) if he is present in the United States for a
period or periods aggregating 90 days or more dur-
ing such taxable year—a tax of 30 percent of the
amount by which his gains, derived from sources
within the United States, from sales or exchanges
of capital assets effected at any time during such
year exceed his losses, allocable to sources within
the United States, from sales or exchanges effected
at any time during such year.

For purposes of this paragraph gains and losses shall
be taken into account only if, and to the extent that,
they would be recognized and taken into account if
such individual were engaged in trade or business in
the United States, except that such gains and losses
shall be computed without regard to section 1202
(relating to deduction for capital gains) and such

a

3la

losses shall be determined without the benefits of the
capital loss carryover provided in section 1212.

(b) No United States business and gross income of more
than $15,400.—A nonresident alien individual not engaged
in trade or business within the United States shall be tax-
able without regard to subsection (a) if during the taxable
year the sum of the aggregate amount received from the
sources specified in subsection (a)(1), plus the amount by
which gains from sales or exchanges of capital assets
exceed losses from such sales or exchange (determined in
accordance with subsection (a)(2)) is more than $15,400,
except that—

(1) the gross income shall include only income from
the sources specified in subsection (a)(1) plus any
gain (to the extent provided in subchapter P; see.
1201 and following, relating to capital gains and losses)
from a sale or exchange of a capital asset if such gain
would be taken into account were the tax being de-
termined under subsection (a) (2);

(2) the deductions (other than the deduction for
charitable contributions and gifts provided in section
873(c)) shall be allowed only if and to the extent that
they are properly allocable to the gross income from
the sources specified in subsection (a), except that any
loss from the sale or exchange of a capital asset shall
be allowed (to the extent provided in subchapter P
without the benefit of the capital loss carryover pro-
vided in section 1212) if such loss would be taken into
account were the tax being determined under sub-
section (a) (2);

(3) the taxes imposed by this subtitle (under section
1, or under section 1201(b)) shall, in no ease, be less
than 30 percent of the sum of—

(A) the aggregate amount received from the
sources specified in subsection (a)(1), plus

32a

(B) the amount, determined under subseection
(a)(2), by which gains from sales or exchanges of
capital assets exceed losses from such sales or ex-
changes.

(c) United States business——A nonresident alien indi-
vidual engaged in trade or business within the United
States shall be taxable without regard to subsection (a).
For purposes of part I, this section, sections 881 and 882,
and chapter 3, the term ‘‘engaged in trade or business
within the United States’’ includes the performance of
personal services within the United States at any time
within the taxable year, but does not include the perform-
ance of personal services—

(1) for a nonresident alien individual, foreign
partnership, or foreign corporation, not engaged in
trade or business within the United States, or

(2) for an office or place of business maintained by
a domestic corporation in a foreign country or in a
possession of the United States,

by a nonresident alien individual temporarily present in
the United States for a period or periods not exceeding
a total of 90 days during the taxable year and whose com-
pensation for such services does not exceed in the aggre-
gate $3,000. Such term does not include the effecting,
through a resident broker, commission agent, or custodian,
of transactions in the United States in stocks or securities,
or in commodities (if of a kind customarily dealt in or an
organized commodity exchange, if the transaction is of the
kind eustomarily consummated at such place, and if the
alien, partnership, or corporation has no office or place of
business in the United States at any time during the tax-
able year through which or by the direction of which such
transactions in commodities are effected).

33a
(d) Doubling of tax.—

For doubling of tax on citizens of certain foreign
countries, see section 891.

§ 881. Tax on foreign corporations not engaged in business
in United States.

(a) Imposition of tax.—In the case of every foreign
corporation not engaged in trade or business within the
United States, there is hereby imposed for each taxable
year, in lieu of the taxes imposed by section 11, a tax of
30 percent of the amount received from sources within the
United States as interest (except interest on deposits with
persons carrying on the banking business), dividends,
rents, salaries, wages, premiums, annuities, compensations,
remunerations, emoluments, or other fixed or determinable
annual or periodical gains, profits, and income (including
amounts described in section 631(b) and (ce) which are con-
sidered to be gains from the sale or exchange of capital
assets).

(b) Doubling of tax.—

For doubling of tax on corporations of certain
foreign countries, see section 891,

§ 1441. Withholding of tax on nonresident aliens

(2) General rule——Except as otherwise provided in
subsection (c), all persons, in whatever capacity acting
(including lessees or mortgagors of real or personal prop-
erty, fiduciaries, employers, and all officers and employees
of the United States) having the control, receipt, custody,
disposal, or payment of any of the items of income speci-
fied in subsection (b) (to the extent that any of such items
constitutes gross income from sources within the United
States), of any nonresident alien individual, or of any
partnership not engaged in trade or business within the

34a

United States and composed in whole or in part of non-
resident aliens, shall (except in the cases provided for in
section 1451 and except as otherwise provided in regula-
tions prescribed by the Secretary or his delegate under
section 874) deduct and withhold from such items a tax
equal to 30 percent thereof.

(b) Income items.—The items of income referred to
in subsection (a) are interest (except interest on deposits
with persons carrying on the banking business paid to
persons not engaged in business in the United States),
dividends, rent, salaries, wages, premiums, annuities,
compensations, remunerations, emoluments, or other fixed
or determinable annual or periodical gains, profits, and
income, and amounts described in section 402(a)(2), sec-
tion 631(b) and (ec), and section 1235, which are considered
to be gains from the sale or exchange of capital assets.

(c) Exceptions.—

(1) Dividends of foreign corporations.—No deduction
or withholding under subsection (a) shall be required in
the case of dividends paid by a foreign corporation unless
(A) such ecrporation is engaged in trade or business within
the United States, and (B) more than 85 percent of the
gross income of such corporation for the 3-year period
ending with the close of its taxable year preceding the
declaration of such dividends (or for such part of such
period as the corporation has been in existence) was de-
rived from sources within the United States as determined
under part I of subchapter N of chapter 1.

(2) Owner unknown.—The Secretary or his delegate
may authorize the tax under subsection (a) to be deducted
and withheld from the interest upon any securities the
owners of which are not known to the withholding agent.

(3) Bonds with extended maturity dates—The deduc-
tion and withholding in the case of interest on bonds,
mortgages, or deeds of trust or other similar obligations

35a

of a corporation, within subsections (a), (b), and (e) of
section 1451 were it not for the fact that the maturity date
of such obligations has been extended on or after January
1, 1934, and the liability assumed by the debtor exceeds
2714 percent of the interest, shall not exceed the rate of
271% percent per annum.

(4) Compensation of certain aliens.—Under regula-
tions prescribed by the Secretary or his delegate, there
may be exempted from deduction and withholding under
subsection (a) the compensation for personal services of
nonresident alien individuals who enter and leave the
United States at frequent intervals.

(5) Special items.—In the case of amounts described
in section 402(a)(2), section 631(b) and (c), and section
1235, which are considered to be gains from the sale or
exchange of capital assets, the amount required to be de-
ducted and withheld shall, if the amount of such gain is
not known to the withholding agent, be such amount, not
exceeding 30 percent of the proceeds from such sale or
exchange, as may be necessary to assure that the tax de-
ducted and withheld shall not be less than 30 percent of
such gain.

(d) Alien resident of Puerto Rico.—For purposes of
this section, the term ‘‘nonresident alien individual’’ in-
cludes an alien resident of Puerto Rico.

§ 1442. Withholding of tax on foreign corporations

In the case of foreign corporations subject to taxation
under this subtitle not engaged in trade or business within
the United States, there shall be deducted and withheld at
the source in the same manner and on the same items of
income as is provided in section 1441 or section 1451 a tax
equal to 30 percent thereof; except that, in the case of in-
terest described in section 1451 (relating to tax-free cove-

36a

nant bonds), the deduction and withholding shall be at the
rate specified therein.

Section 1232, as amended by the Tax Reform Act of 1969,
Pub.L.No. 91-172, 83 Stat. 487:

Sec. 1232. Bonds and Other Evidences of Indebtedness.

(a) General Rule—For purposes of this subtitle,
in the case of bonds, debentures, notes or certificates or
other evidences of indebtedness, which are capital assets
in the hands of the taxpayer, and which are issued by any
corporation, or by any government or political subdivision
thereof—

(1) Retirement.—Amounts received by the holder on
retirement of such bonds or other evidences of indebt-
edness shall be considered as amounts received in ex-
change therefor (except that in the case of bonds or
other evidences of indebtedness issued before January
1, 1955, this paragraph shall apply only to those issued
with interest coupons or in registered form, or to those
in such form on March 1, 1954).

(2) Sale or Exchange.—

(A) Corporate Bonds Issued After May 27, 1969.—
Except as provided in subparagraph (C), on the sale
or exchange of bonds or other evidences of indebted-
ness issued by a corporation after May 27, 1969, held
by the taxpayer more than 6 months, any gain real-
ized shall (except as provided in the following sen-
tence) be considered gain from the sale or exchange
of a capital asset held for more than 6 months. If
at the time or original issue there was an intention
to call the bond or other evidence of indebtedness
before maturity, any gain realized on the sale or ex-
change thereof which does not exceed an amount
equal to the original issue discount (as defined in
subsection (b)) reduced by the portion of original is-

37a

sue discount previously includible in the gross in-
come of any holder (as provided in paragraph (3)

(B)) shall be considered as gain from the sale or
exchange of property which is not a capital asset.

(B) Corporate bonds issued on or before May 27,
1969, and government bonds.—Except as provided in
subparagraph (C), on the sale or exchange of bonds
or other evidences of indebtedness issued by a gov-
ernment or political subdivision thereof after De-
cember 31, 1954, or by a corporation after December
31, 1954, and on or before May 27, 1969, held by the
taxpayer more than 6 months, any gain realized
which does not exceed—

(i) an amount equal to the original issue dis-
count (as defined in subsection (b)), or

(ii) if at the time of original issue there was
no intention to call the bond or other evidence of
indebtedness before maturity, an amount which
bears the same ratio to the original issue dis-
count (as defined in subsection (b)) as the number
of complete months that the bond or other evi-
dence of indebtedness was held by the taxpayer
bears to the number of complete months from the
date of original issue to the date of maturity,

shall be considered as gain from the sale or ex-
change of property which is not a capital asset.
Gain in excess of such amount shall be considered
gain from the sale or exchange of a capital asset
held more than 6 months.

(C) Exceptions.—This paragraph shall not apply
to—

(i) obligations the interest on which is not
ineludible in gross income under section 103 (re-
lating to certain governmental obligations), or

38a

(ii) any holder who has purchased the bond or
other evidence of indebtedness at a premium.

(D) Double inclusion in income not required.—
This section shall not require the inclusion of any
amount previously includible in gross income.

(3) Inclusion in income of original issue discount on
corporate bonds issued after May 27, 1969.—

(A) General rule—There shall be included in the
gross income of the holder of any bond or other
evidence of indebtedness issued by a corporation
after May 27, 1969, the ratable monthly portion of
original issue discount multiplied by the number of
complete months (plus any fractional part of a
month determined in accordance with the last sen-
tence of this subparagraph) such holder held such
bond or other evidence of indebtedness during the
taxable year. Except as provided in subparagraph
(B), the ratable monthly portion of original issue
discount shall equal the original issue discount (as
defined in subsection (b)) divided by the number of
complete months from the date of original issue to
the stated maturity date of such bond or other evi-
dence of indebtedness. For purposes of this section,
a complete month commences with the date of origi-
nal issue and the corresponding day of each succeed-
ing calendar month (or the last day of a calendar
month in which there is no corresponding day) ; and,
in any case where a bond or other evidence of indebt-
edness is acquired on any other day, the ratable
monthly portion of original issue discount for the
complete month in which such acquisition occurs
shall be allocated between the transferor and the
transferee in accordance with the number of days in
such complete month each held the bond or other
evidence of indebtedness.

39a

(B) Reduction in case of any subsequent holder.—
For purposes of this paragraph, the ratable monthly
portion of original issue discount shall not include
an amount, determined at the time of any purchase
after the original issue of such bond or other evi-
dence of indebtedness, equal to the excess of —

(i) the cost of such bond or other evidence of
indebtedness incurred by such holder, over

(ii) the issue price of such bond or other evi--
dence of indebtedness increased by the portion of
original discount previously includible in the gross
income of any holder (computed without regard
to this subparagraph).

divided by the number of complete months (plus any
fractional part of a month commencing with the date
of purchase) from the date of such purchase to the
stated maturity date of such bond or other evidence
of indebtedness.

(C) Purchase defined—For purposes of subpara-
graph (B), the term ‘‘purchase’’ means any acquisi-
tion of a bond or other evidence of indebtedness,
but only if the basis of the bond or other evidence of
indebtedness is not determined in whole or in part
by reference to the adjusted basis of such bond or
other evidence of indebtedness in the hands of the
person from whom acquired, or under section 1014
(a) (relating to property acquired from a decedent).

(D) Exceptions.—This paragraph shall not apply
to any holder—

(i) who has purchased the bond or other evi-
dence of indebtedness at a premium, or

( ii) which is a life insurance company to which
section 818(b) applies.

40a

(E) Basis adjustments.—The basis of any bond
or other evidence of indebtedness in the hands of
the holder thereof shall be increased by the amount
included in his gross income pursuant to subpara-
graph (A).

(b) Definitions.—

(1) Original issue discount.—For purposes of subsection
(a), the term ‘‘original issue discount’? means the differ-
ence between the issue price and the stated redemption
price at maturity If the original issue discount is less
than one-fourth of 1 percent of the redemption price at
maturity multiplied by the number of complete years to
maturity, then the issue discount shall be considered to be
zero. For purposes of this paragraph, the term ‘‘stated
redemption price at maturity’? means the amount fixed by
the last modification of the purchase agreement and in-
cludes dividends payable at that time.

(2) Issue price.—In the case of issues of bonds or other
evidences of indebtedness registered with the Securities
and Exchange Commission, the term ‘‘issue price” means
the initial offering price to the public (excluding bond
houses and brokers) at which price a substantial amount
of such bonds or other evidences of indebtedness were sold.
In the ease of privately placed issues of bonds or other
evidence of indebtedness, the issue price of each such bond
or other evidence of indebtedness is the price paid by the
first buver of such bond increased by the amount, if any,
of tax paid under section 4911 (and not credited, refunded,
or reimbursed) on the acquisition of such bond or evidence
of indebtedness by the first buyer. For purposes of this
paragraph, the terms ‘‘initial offering price’’ and ‘‘price
paid by the first buyer’’ include the aggregate payments
made by the purchaser under the purchase agreement, in-
cluding modifications thereof. In the case of a bond or
other evidence of indebtedness and an option or other se-

4la

curity issued together as an investment unit, the issue
price for such investment unit shall be determined in ac-
cordance with the rules stated in this paragraph. Such
issue price attributable to each element of the investment
unit shall be that portion thereof which the fair market
value of such element bears to the total fair market value
of all elements in the investment unit. The issue price of
the bond or other evidence of indebtedness included in such
investment unit shall be the portion so allocated to it. In
the case of a bond or other evidence of indebtedness, or an
investment unit as described in this paragraph (other than
a bond or other evidence of indebtedness or an investment
unit issued pursuant to a plan of reorganization within the
meaning of section 368(a)(1) or an insolvency reorganiza-
tion within the meaning of section 371, 373, or 374), which
is issued for property and which—

(A) is part of an issue a portion of which is traded
on an established securities market,

(B) is issued for stock or securities which are traded
on an established securities market,

the issue price of such bond or other evidence of indebted-
ness or investment unit, as the case may be, shall be the

- fair market value of such property. Except in cases to

which the preceding sentence applies, the issue price of a
bond or other evidence of indebtedness (whether or not
issued as a part of an investment unit) which is issued for

property (other than money) shall be the stated redemp-
tion price at maturity.

(3) Issue date.—In the case of issues of bonds or other
evidences of indebtedness registered with the Securities
and Exchange Commission, the term ‘‘date of original
issue’? means the date on which the issue was first sold to
the public at the issue price. In the case of privately placed
issues of bonds or other evidences of indebtedness, the term
‘“‘date of original issue” means the date on which each

42a

such bond or other evidence of indebtedness was sold by
the issuer,

(c) Bond with Unmatured Coupons Detached.—If a bond
or other evidence of indebtedness issued at any time with
interest coupons—

(1) is purchased after August 16, 1954, and before
January 1, 1958, and the purchaser does not receive all
the coupons which first become payable more than 12
months after the date of the purchase, or

(2) is purchased after December 31, 1957, and the
purchaser does not receive all the coupons which first
become payable after the date of the purchase,

then the gain on the sale or other disposition of such evi-
dence of indebtedness by such purchaser (or by a person
whose basis is determined by reference to the basis in the
hands of such purchaser) shall be considered as gain from
the sale or exchange of property which is not a capital
asset to the extent that the fair market value (determined
as of the time of the purchase) of the evidence of indebted-
ness with coupons attached exceeds the purchase price.
If this subsection and subsection (a)(2)(A) apply with
respect to gain realized on the sale or exchange of any evi-
dence of indebtedness, then subsection (a)(2)(A) shall
apply with respect to that part of the gain to which this
subsection does not apply.

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385004_0157%3A1. Public record. Not legal advice.