Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 69-19

1969-1 C.B. 197

Sec. 1002

IRS Headnote

A United States citizen sustains a capital loss upon the voluntary exchange of his rights to receive economic re-equipment bonds authorized by Brazilian Law No. 1474 for treasury letters authorized by Law No. 4506.

Full Text

Rev. Rul. 69-19

Advice has been requested whether the taxpayer, a citizen of the United States, sustained a capital loss upon his voluntary exchange of certain "rights" arising from Brazilian Law No. 1474 for treasury letters authorized by Brazilian Law No. 4506. Article 3 of Brazilian Law 1474 established a "tax" of 15 percent to be withheld on royalties in addition to the general income tax. This additional 15 percent "tax" was to constitute a special fund to be used for the execution of a program for developing basic industries and agriculture. The payment of this "tax" gave the taxpayer a right to receive interest-bearing economic re-equipment bonds that were to be issued by the Brazilian government. These bonds were to be redeemed by the government in 20 annual installments commencing in the year of issuance.

The additional "tax" imposed by Article 3 is not considered to be a tax since the amounts are refundable with interest. Rev. Rul. 59-70, C.B. 1959-1, 186. The additional "tax" was, thus, not an allowable deduction for Federal income tax purposes when paid and therefore the amount thereof was correctly entered on the instant taxpayers' books as an asset representing an amount paid for a right. No economic re-equipment bonds had been distributed by 1964, the year Brazilian Law No. 4506 was passed. This law permitted creditors to (1) accept treasury letters, that were then valued at 20 percent of the nominal value of the right to receive economic re-equipment bonds, in exchange for their right or (2) await the issuance of the bonds. A decision to accept the treasury letters was irrevocable. The treasury letters could be immediately converted to cash. The taxpayer, in the instant case, exchanged his right to receive economic re-equipment bonds for the treasury letters.

The right involved is a capital asset in that the underlying economic re-equipment bonds would have been a capital asset in the hands of the taxpayer. The treasury letters are also capital assets in the hands of the taxpayer.

Accordingly, the instant taxpayer's voluntary exchange of the right to receive the economic re-equipment bonds authorized by Brazilian Law No. 1474 for the treasury letters authorized by Brazilian Law No. 4506 resulted in a capital loss.