Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 78-5

1978-1 C.B. 263

Sec. 1222
Sec. 1223

IRS Headnote

U.S. Treasury Notes and Bonds; determination of holding period. In determining the holding period for purposes of characterizing gain or loss as long-term or short-term, the acquisition date of U.S. Treasury Notes and Bonds sold at auction on the basis of yield is the date the Secretary of the Treasury, through news releases, gives notification of acceptance to successful bidders. The acquisition date of U.S. Treasury Notes sold through an offering on a subscription basis at a specified yield is the date the subscription is submitted.

Full Text

Rev. Rul. 78-5

Advice has been requested regarding how to determine the date of acquisition of United States Treasury Notes Series B-1986 and J-1979 and United States Treasury Bonds for purposes of characterizing gain or loss under section 1222 of the Internal Revenue Code of 1954.

Issuance of the Series B-1986 and J-1979 Notes and the Bonds are publicized by circulars. All are issued under the Second Liberty Bond Act.

The terms of the circulars for the Series J-1979 Notes and the Bonds are similar. Competitive and noncompetitive tenders are permitted within the limitations prescribed. The first paragraph of these circulars is headed "Invitation for Tenders." The circulars state that the Secretary of the Treasury "invites tenders" and that "[t]hose submitting competitive tenders will be advised of the acceptance or rejection thereof." They also state that "[i]n considering the acceptance of tenders, those with the lowest yields will be accepted" to the extent necessary to attain the amount offered. The circulars further provide that a coupon rate will be determined "[a]fter the determination is made as to which tenders are accepted" and that "[t]he Secretary of the Treasury expressly reserves the right to accept or reject any or all tenders, in whole or in part . . ."

Under normal procedures applicable when Treasury securities are sold through competitive bidding, bids are submitted by the public to the various Federal Reserve Banks. The Banks accept bids until the date and time specified in the circulars. At that time the bids are transmitted to the Department of the Treasury, Washington, D.C., which determines the bids that will be accepted. This information is then made available to bidders by publication of a news release.

The Series B-1986 Note circulars set the interest rate on the Notes at a specified percentage and do not provide for competitive tenders. The first paragraph of these circulars is headed "Offering of Notes" and states that the Secretary of the Treasury "offers" a specified amount thereof. These circulars specifically provide that subscriptions "accepting the offer" made therein will be received at Federal Reserve Banks and branches, and at the Bureau of Public Debt, Washington, D.C.

Section 1222(1) of the Code provides, in part, that the term "short-term capital gain" means gain from the sale or exchange of a capital asset held for not more than six months (nine months for taxable years beginning in 1977; one year for taxable years beginning after December 31, 1977), if and to the extent such gain is taken into account in computing gross income. A similar provision pertaining to short-term capital loss is set forth in section 1222(2).

Section 1222(3) of the Code provides, in part, that the term "long-term capital gain" means gain from the sale or exchange of a capital asset held for more than six months (nine months for taxable years beginning in 1977; one year for taxable years beginning after December 31, 1977), if and to the extent such gain is taken into account in computing gross income. A similar provision pertaining to long-term capital loss is set forth in section 1222(4).

In McFeely v. Commissioner, 296 U.S. 102, 107 (1935), XIV-2 C.B. 209 (1935), the United States Supreme Court equated the word "held" with "owned", stating: "In common understanding, to hold property is to own it. In order to own or hold one must acquire. The date of acquisition is, then, that from which to compute the duration of ownership or the length of holding."

For Federal income tax purposes acquisition occurs when the benefits and burdens of ownership pass or when title passes, whichever occurs earlier, and the holding period begins on the day following such date. See Rev. Rul. 54-607, 1954-2 C.B. 177.

The holding period for securities purchased over-the-counter or on a registered exchange begins on the day following the date on which the contract to purchase is made. Rev. Rul. 66-97, 1966-1 C.B. 190.

Rev. Rul. 69-263, 1969-1 C.B. 197, holds that the effective date of the exchange of outstanding Treasury Bonds for Treasury Notes pursuant to circulars similar to the circulars publicizing the issuance of the Series B-1986 Notes in the present case was the date on which the holder submitted a subscription.

The circulars for the Series J-1979 Notes and the United States Treasury Bonds are not proposals to sell the obligations at an established price but rather are proposals to sell them at prices to be established by competitive bidding. These circulars are solicitations for offers, and bids in response thereto are offers subject to the acceptance of the Secretary of the Treasury.

Accordingly, for purposes of characterizing gain or loss under section 1222 of the Code, the contract date and thus the date of acquisition of Series J-1979 Notes and the Bonds is the date that the Secretary of the Treasury, through issuance of a news release, gives notification of acceptance to the successful competitive and noncompetitive bidders. The circulars for the Series B-1986 Notes operate as an offer, to which the subscription in response operates as an acceptance. Therefore, a contract will be made upon the submission of such a subscription.

Accordingly, for purposes of characterizing gain or loss under section 1222 of the Code, the contract date and thus the acquisition date of the Series B-1979 Notes is the date of submission of the subscription in response to the circulars offering these securities.