Internal Revenue Service
Revenue Ruling
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smRev. Rul. 59-44
1959-1 C.B. 205
Sec. 1091
IRS Headnote
Bonds of different local housing authorities, issued under agreement with the Federal Public Housing Administration, are not `substantially identical' securities within the meaning of section 1091 of the Internal Revenue Code of 1954.
Full Text
Rev. Rul. 59-44
Advice has been requested whether bonds issued by different local housing authorities under agreement with the Federal Public Housing Administration are `substantially identical' securities within the meaning of section 1091 of the Internal Revenue Code of 1954.
A taxpayer sold certain securities, namely:
Los Angeles, California, Housing Authority 2 3/8 percent bonds, due November 1, 1979;
Boston Massachusetts, Housing Authority 2 3/8 percent bonds, due April 1, 1982; and
Kansas City, Missouri, Housing Authority 2 1/2 percent bonds, due December 1, 1969.
Within 30 days of the sale, he purchased the following securities:
Dallas, Texas, Housing Authority 2 3/8 percent bonds, due December 1, 1980;
Jersey City, New Jersey, Housing Authority 2 3/8 percent bonds, due April 1, 1982; and
Memphis, Tennessee, Housing Authority 2 1/2 percent bonds, due July 1, 1969.
Section 1091 of the Code provides, in part, as follows:
(a) DISALLOWANCE OF LOSS DEDUCTION.-In the case of any loss claimed to have been sustained from any sale or other disposition of shares of stock or securities where it appears that, within a period beginning 30 days before the date of such sale or disposition and ending 30 days after such date, the taxpayer has acquired (by purchase or by an exchange on which the entire amount of gain or loss was recognized by law), or has entered into a contract or option so to acquire, substantially identical stock or securities, then no deduction for the loss shall be allowed under section 165(c)(2); nor shall such deduction be allowed a corporation under section 165(a) unless it is a dealer in stocks or securities, and the loss is sustained in a transaction made in the ordinary course of its business. (Italics supplied.)
It appears that whether the respective bonds sold and purchased in the instant case are `substantially identical securities' within the meaning of section 1091 of the Code depends primarily upon whether the Public Housing Administration (an instrumentality of the Federal Government) is common primary obligor on all the bonds involved although they were issued by various local public housing agencies under state housing authority laws.
Under the United States Housing Act of 1937, as amended, 42 U.S.C. 1403, Congress created an agency of the United States now known as the Public Housing Administration (PHA) to assist the several states and their political subdivisions in developing low-rent housing projects. Under the various state housing authority laws, the local public housing agency (the local authority) is created as a distinct political subdivision of cities, counties, etc. The local authority is empowered to contract with PHA in meeting Federal statutory requirements for obtaining necessary financial assistance in issuing bonds and incurring indebtedness. Financial assistance is rendered by PHA to the local authority under an agreement known as an `Annual Contributions Contract.' In addition, the local authority executes a `Bond Resolution' which constitutes a contract between itself and the holders of its bonds. Both the Annual Contributions Contract and the Bond Resolution are standard-form agreements prepared by PHA.
Each bond provides that the local authority for value received promises to pay the bearer, or registered holder, the principal amount of the bond plus interest. Each bond further provides that such bond and all other bonds of the issue of which it is a part are secured by (1) a first pledge of a specific portion of the annual contributions payable to the local authority and (2) by a first pledge of and lien on the rents, revenues, fees and income of the local authority derived from the operation of such projects. Under the indenture the bond is not a debt of the city, county, state or any of its political subdivisions, nor is it payable out of any funds or properties other than those of the local authority.
The Annual Contributions Contract provides, in part, for a loan to the local authority of up to 90 percent of the development cost of the project and obligates PHA to pay a fixed annual contribution equal to the level debt service on the bonds established under the contract, such contribution to be reduced by the amount of the net rental revenues derived by the local authority from operating the project. Thus, its annual contribution may vary from zero to the full level debt service on the bonds concerned. The faith of the United States is pledged to the payment of the annual contribution. As to the rights of third parties under the contract, the PHA covenants and agrees therein with and for the benefit of the holders from time to time of the bonds and of interest claims thereupon, that it will pay the annual contributions pledged as security for such bonds and interest pursuant to the contract, and it provides that, to enforce performance by the PHA of this covenant, such holders, as well as the local authority, shall have the right to proceed against the PHA by action at law or in equity.
The Bond Resolution sets forth the contract between the local authority and the bondholders and also recites the covenants and agreements to be performed by the local authority for the benefit, protection and security of the bondholders. The Resolution specifically provides that the bonds issued thereunder shall be direct and general obligations of the local authority, the full faith and credit of which are pledged for the punctual payment of the principal of and interest on said bonds, and shall be additionally secured in the manner provided in the Resolution. In the more important covenants of the Resolution, the local authority agrees (1) not to transfer, mortgage, or otherwise encumber the projects; (2) to collect rentals at rates to produce revenues which, together with the accruing annual contributions, will be sufficient to pay the principal and interest on the bonds, meet operating expenses and discharge all other obligations; (3) not to issue any other obligations; (4) to pay all charges, assessments, etc., imposed; and (5) to insure the projects. The Resolution also provides that the bondholders may, by suit in law or equity, compel the local authority to (1) perform its covenants in the Resolution, (2) perform its part of the Annual Contributions Contract, and (3) fullfill all duties imposed upon it. Furthermore, the holders of 20 percent or more of the principal amount of the bonds may, upon default of the local authority to pay any installment of principal or interest, by suit require it and its officers to account as if it and its officers were trustees of an express trust.
Manifestly, holders of these local authority bonds derive considerable comfort from the fact that the faith of the United States is pledged to the payment of all annual contributions which may become due from the PHA under pertinent contracts. However, the Internal Revenue Service is following decisions wherein the Tax Court of the United States has declined to characterize the Governmenmt as primary obligor in certain cases which involved similar types of Federal Government supported financing and guarantees. In Brann & Stuart Company , 9 T.C. 614, acquiescence, CB 1948-2, 1, the Tax Court held that the obligation to repay advances made by certain banks to the petitioner to enable it to perform Government war contracts was `indebtedness' of the petitioner, within the meaning of section 719(a)(1) of the Internal Revenue Code of 1939, so that they represented `borrowed invested capital' to it, even though the petitioner had assigned to the banks its rights to receive payments from the Government under the contracts. The Commissioner of Internal Revenue argued that the alleged borrowed capital items should be disallowed because they actually represented advances by the bank on the faith and credit of the United States Government and that, while the indebtedness for the advances was in form that of the petitioner, it was in substance and reality that of the United States Government. McDonnell Aircraft Corporation v. Commissioner , 16 T.C. 189, appeal dismissed, 191 Fed.(2d) 733, involved financing arrangements in making so-called `V-Loans' under which the Government guaranteed 90 percent of the loan. The Tax Court refused to adopt the Commissioner's position that the petitioner was not entitled to the allowance of borrowed capital on account of advances made pursuant to such financing arrangements except to the extent that the petitioner was reasonably relied upon as obligor for the unguaranteed portion of the advances. In the instant case, it reasonably appears that the local authorities have very substantial credit standings of their own, insofar as the bonds involved are concerned, in view of their ownership of the housing projects and the requirement that the net revenues derived therefrom become a part of the debt service fund for payment of bond principal and interest. Moreover, the differing respective credit standings of the various local authorities are reflected by the varying prices for which the bonds are sold as well as the varying interest rates they yield.
In the instant case it also appears that the various local authorities are separate political entities unassociated with each other and with no secondary liability with respect to each other's bonds. The case is, therefore, distinguishable from the situation involved in Issue 3 in Marie Hanlin, et al., Executors of the Estate of Belle C. Hershman Martinek v. Commissioner , 38 B.T.A. 811, nonacquiescence C.B. 1939-1 (Part 1), 55, affirmed, 108 Fed.(2d) 429. There it was held that bonds of the Federal Land Bank of Louisville sold were not `subtantially identical,' within the meaning of the `wash sales' provisions (section 118) of the Revenue Act of 1932, with bonds of the Federal Land Bank of St. Louis and the Federal Land Bank of Wichita, respectively, purchased. The Board of Tax Appeals reached its such decision on the ground that those Federal Land Banks were not alike liable on the individual bonds of each other because one bank's liability on the bonds of another was only contingent and not joint and several. The Court of Appeals grounded its affirmance thereof on physical differences in collateral security underlying the bonds of the respective Federal Land Banks concerned, although stating that they were `at least secondarily liable on each other's bonds, 12 U.S.C.A. sec. 872.' Accordingly, the Service's nonacceptance of such decision is not controlling in the instant case.
In view of the foregoing, it is concluded that in the instant case the Federal Government is not common primary obligor on the bonds involved of the local authorities concerned and that each of such authorities is a separate and distinct entity, independent of the others, and the primary obligor itself on the bonds involved issued by it. Therefore, it is held that the bonds involved of each of the local authorities concerned are not `substantially identical,' within the meaning of the `wash sales' provisions (section 1091) of the Code, with those involved of any of the other local authorities concerned.