Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 60-25

1960-1 C.B. 283

Full Text

Rev. Rul. 60-25 /1/

An exchange of nonmarketable United States 2 3/4 percent Treasury Bonds, Investment Series B-1975-80, for Federal National Mortgage Association four percent mortgages guaranteed by the Veterans' Administration constitutes a taxable exchange for Federal income tax purposes.

The exchange of United States 2 3/4 percent Treasury Bonds for Federal National Mortgage Association-owned mortgages was authorized by the Secretary of Treasury on October 21, 1959, and published in the Federal Register for October 21, 1959, 24 F.R. 8507.

A bond owner will realize gain or loss on the exchange to the extent of the difference between the basis of the bonds given and the fair market value of the mortgages received. Gain or loss on the exchange will be reported as capital gain or loss if the bonds were `capital assets' in the hands of the bondholders. However, where a bank qualifies under the provisions of sections 581 and 582(c) of the Internal Revenue Code of 1954, losses will be considered as ordinary losses.

The basis for mortgages acquired will be the fair market value of the mortgages received solely in exchange for the bonds plus the cash adjustment, if any, paid to the Federal National Mortgage Association at the time of the exchange.

In the event there is little or no trading to establish a market value of the four percent mortgages, one method of determining the fair market value is by reference to similar mortgages bearing different rates of interest which are currently being traded. Appropriate adjustment would be required for differences in interest rates and/or other factors. Under this arrangement, in no case would the fair market value of the mortgages be considered to be less than the market value of the 2 3/4 percent Treasury Bonds. The fair market value of these bonds, which under the issuance terms could have been converted into 1 1/2 percent Treasury five-year notes, will be considered to be equal to the fair market value of such notes.

That portion of each monthly payment received by the new mortgage holder which is considered as interest will be reported as ordinary income. In addition, that portion of the monthly payment of the principal which bears the same ratio as the difference, between the remaining unpaid balance of the mortgage and the basis of the mortgage at the time of the exchange, bears to the unpaid balance at the time of the exchange, will be reported as ordinary income.

/1/ Based on Technical Information Release 190, dated November 23, 1959.