Internal Revenue Service
Revenue Ruling

TaxLinks.com   sm

 Rev. Rul. 72-46

1972-1 C.B. 50

Sec. 163
Sec. 1232

IRS Headnote

The failure to exercise warrants issued with installment notes as part of investment units does not affect the amount of original issue discount determined when the obligations were issued.

Full Text

Rev. Rul. 72-46

On December 31, 1968, the taxpayer, a corporation, sold investment units consisting of 5-year installment notes in the face amount of 3,000x dollars with attached warrants entitling the holders to acquire shares of the taxpayer's common stock. The warrants were to expire December 31, 1970. The taxpayer received 2,850x dollars for the notes with the attached warrants. For purposes of section 1.1232-3(b) of the Income Tax Regulations the notes at the time of their issuance had a value of 2,500x dollars resulting in an original issue discount of 500x dollars and the warrants (options) had a value of 350x dollars. The taxpayer began to amortize and deduct the original issue discount in accordance with the provisions of section 1.163-3 of the regulations. However, the warrants expired without being exercised by the holders of the notes.

Held, the fact that the warrants that were issued as part of an investment unit were never exercised has no affect on the amount of the original issue discount, which is determined as of the time of the issuance of the obligations. For the treatment of gain or loss upon failure to exercise an option (warrant) see section 1234 of the Internal Revenue Code of 1954, and the regulations thereunder.