Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 69-64

1969-1 C.B. 85

Sec. 263

IRS Headnote

Amounts paid directly to a bondholder by the corporation's shareholders in consideration for the surrender of bonds to the corporation are capital investments, and must be added to the basis of the shareholders' stock; S.M. 2611 superseded.

Full Text

Rev. Rul. 69-64 /1/

The outstanding stock of a company was owned by the taxpayer, his brother, and other members of their families. Bonds of the company in the principal amount of 200x dollars were owned by taxpayer's mother. She surrendered her bonds to the corporation in accordance with an agreement under which she was to be paid the sum of 10x dollars a year for life by the company or its shareholders. In the current year the taxpayer paid to his mother the sum of 1.25x dollars representing his pro rata share of the annual payment made to her in consideration of her canceling and surrendering the bonds to the company.

Held, since the bonds were surrendered to the corporation and since the primary liability for the payment of the annuity was assumed by the corporation, the amount paid by the taxpayer represents a payment on behalf of the corporation. Such amount is an investment in the capital of the corporation, increasing the cost of the stock, and is not an allowable deduction in determining the taxpayer's income.

S.M. 2611, C.B. III-2, 160 (1924) is superseded, since the position set forth therein is restated under the current statute and regulations in this Revenue Ruling.

/1/ Prepared pursuant to Rev. Proc. 67-6, C.B. 1967-1, 576.