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Conversion Office for German Foreign Debts ($1000 Bond ) Uncancelled - 1936  

Conversion Office for German Foreign Debts ($1000 Bond ) Uncancelled - 1936

Product #: GermanForeignDebts

Normal Price: $495.00
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PRODUCT DESCRIPTION  
Beautifully engraved uncancelled certificate $1000 Bond from the Conversion Office for German Foreign Debts ( Konversionskasse fur Deutsche Auslandsschulden ) issued in 1936. This historic document was printed by Reichsdruckerei and has an ornate border around it with a vignette of 2 workers and an embossed seal with elaborate water mark in the paper. This item contains printed signatures and is over 79 years old. Written in English and German. Embossed seal with Swastika.

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Certificate Vignette


The following Internal Revenue Service - Revenue Ruling was issued in 1954 regarding dollar denominated German bonds issued prior to WWII.

Rev. Rul. 54-501

1954-2 C.B. 197

Sec. 1002

Sec. 1033

Sec. 1223

Sec. 1331

Caution: Modified by Rev. Rul. 63-59

IRS Headnote

Discussion of various questions pertaining to recoveries in respect of war losses relating to certain German prewar dollar bonds and the subsequent exchange of such bonds for new bonds of the Federal Republic of Germany.

Full Text

Rev. Rul. 54-501

Advice is requested relative to recoveries of certain prewar German dollar bonds and exchanges of such bonds for new bonds of the Federal Republic of Germany.

At the end of World War II, various issues of German external debt were outstanding, including dollar bonds issued or guaranteed by the German Reich and bonds issued by German states. Service on those bonds had been suspended on various dates prior to the war. On December 11, 1941, following the declaration of war by the United States against Germany, the Securities and Exchange Commission requested securities exchanges and securities dealers throughout the United States to cease handling transactions in German bonds. Until recently those restrictions had not been removed and because of them there has been no market for German dollar bonds in this country for more than 12 years. German dollar bonds have sporadically and to a limited extent been traded during that period in Switzerland on an over-the-counter basis and, after the war, in some other European countries. However, German dollar bonds have not been listed or traded on any European securities exchange and no well established market for them has existed in any country.

In 1951 the Federal Republic of Germany (hereinafter referred to as Federal Republic) accepted its liability for the prewar external debt of the German Reich, including debts of other issuers subsequently to be declared liabilities of the Reich, and confirmed its desire to resume payments thereon. Thereafter, the Governments of the United States, United Kingdom and France established the Tripartite Commission on German Debts, for the purpose of preparing a plan for the orderly overall settlement of German external debts. An international conference on German External Debts was held in London from February 28, 1952 to August 8, 1952, among the Federal Republic, the Tripartite Commission, and representatives of other interested governments and of creditor and debtor interests. As a result of the London conference, a settlement plan was agreed upon, which is embodied in an agreement dated February 27, 1953, between the various interested governments, and which is known as the London Agreement on German External Debts 1953 (hereinafter called the London Agreement). The ratification or approval of the London Agreement by the Federal Republic and the Governments of the United States, the United Kingdom and France has been completed and it is now in effect.

The London Agreement and Annex I thereto provide that the Federal Republic will undertake to pay and transfer certain specified amounts in respect of the principal of and interest on the outstanding German dollar bonds of the following five issues (hereinafter called Old Bonds):

(1) German External Loan 1924, 7 percent. Bonds, due October 15, 1949 (the Dawes Loan).

(2) German Government International 5 1/2 percent Loan 1930, 5 1/2 percent. Bonds, due June 1, 1965 (the Young Loan).

(3) The Free State of Prussia 6 1/2 percent Sinking Fund Bonds, External Loan of 1926, due September 15, 1951.

(4) The Free State of Prussia 6 percent Sinking Fund Bonds, External Loan of 1927, due October 15, 1952.

(5) Conversion Office for German Foreign Debts, 3 percent Dollar Bonds, due January 1, 1946 (10 Year Bonds of 1936).

Such undertaking is to be carried out by offers of several issues of new dollar bonds of the Federal Republic (hereinafter called New Bonds), representing the amounts so specified in the London Agreement, in exchange for outstanding Old Bonds and, in certain cases, for accrued unpaid interest on such Old Bonds. Except as indicated in the London Agreement, the terms of the original contracts of the Old Bonds will be maintained. The issuance of the New Bonds and the undertakings of the Federal Republic to be contained in the proposed exchange offers have been duly authorized by the `Law Concerning the Agreement on German External Debts dated February 27, 1953,' of the Federal Republic, enacted August 27, 1953.

Substantial amounts of the original issues of the Old Bonds had been repatriated prior to 1945. In the confusion that existed in Germany during the latter days of the war, many of those repatriated bonds which had not yet been cancelled were lost or looted. For that reason, it has been necessary for the Federal Republic to establish a procedure for the validation of Old Bonds in order to assure that those lost or looted bonds cannot be circulated or otherwise presented as valid and outstanding obligations. The New Bonds will be offered in exchange only for Old Bonds and appurtenant coupons which are legally outstanding at the date of exchange and which shall have been validated pursuant to the procedure for validation established under the `Law for the Validation of German Foreign Currency Bonds,' of the Federal Republic dated August 25, 1952, and regulations issued thereunder, except that Fractional Certificates for Conversion Office for German Foreign Debts, 3 percent Dollar Bonds, due January 1, 1946, will not require validation. The application of that procedure in the United States is based on an agreement between the Government of the United States and the Federal Republic, dated February 27, 1953, which established a board for the validation of German dollar bonds. This board has authority to validate Old Bonds and appurtenant coupons which were held outside of Germany on January 1, 1945, its denial of validation being subject to review. A further agreement between the Governments of the United States and the Federal Republic, dated April 1, 1953, provides that external pre-war German Dollar Bonds therein referred to, including the Old Bonds and appurtenant coupons, shall not be enforceable unless they shall be validated in accordance with the procedure referred to above. The United States Senate has advised and consented to the ratification of this agreement, and it has entered into force.

The proposed exchange offers of New Bonds for the validated Old Bonds provide substantially as follows:

(a) New Bonds will be issued in amounts equal to the principal amount of Old Bonds surrendered for exchange, except that in the case of the 10 Year Bonds of 1936 the New Bonds will be issued in an amount equal to the principal amount of the bonds exchanged plus one-third of the arrears of interest thereon from January 1, 1941 to December 31, 1952.

(b) New Bonds will be issued in amounts equal to the arrears of interest represented by coupons due to and including October 15, 1944, in the case of the 1924 Loan Bonds and December 1, 1944, in the case of the 1930 Loan Bonds.

(c) Talons will be issued (to be attached to the New Bonds issued in exchange for the 1924 and 1930 Loan Bonds) representing the right to receive, upon reunification of Germany, bonds similar to the 1924 and 1930 Loan Bonds for the arrears of interest due from October 15, 1944, to October 15, 1952, in the case of the 1924 Loan Bonds and from December 2, 1944, to December 1, 1952, in the case of the 1930 Loan Bonds. The New Bonds issued in exchange for the 1924 and 1930 Loan Bonds will bear interest from October 15, 1952, and December 1, 1952, respectively. New Bonds issued for the Ten Year Bonds of 1936 will bear interest from January 1, 1953.

(d) New Bonds will be issued only in denominations of $1,000, $500, and $100. Amounts of bonds of less than $100 will be represented by Script Certificates.

(e) Coupons appurtenant to Prussia Bonds are to be retained by the holders. Coupons appurtenant to validated Prussia Bonds, bearing due dates from March 15, 1933, to and including October 15, 1936, will be paid, on and after 20 years after maturity thereof, at the rate of 50 percent of the face amount thereof. The amount and date of payment of coupons appurtenant to validated Prussia Bonds bearing due dates on and after March 15, 1937 (and of interest from September 15, 1951, to October 1, 1952, on the Prussia Bonds of 1926) will be subject to negotiation after territories formerly belonging to the Free State of Prussia and now outside the territory of the Federal Republic shall be joined to the Federal Republic.

Any coupons appurtenant to 1924 Loan Bonds and 1930 Loan Bonds matured after 1944, which will not be accepted for exchange, will be returned to the holder. Subject to validation requirements, such returned coupons and coupons due during such years which are retained by the holder will represent the right, corresponding to the right represented by the talons described above, to receive bonds similar to the respective New Bonds, upon reunification of Germany, for so much of the arrears of interest, recalculated at the applicable rate for said period, as is represented by such coupons.

In the event that any interest shall become payable on Prussia Bonds of the External Loan of 1926 in respect of the period September 15, 1951 to October 1, 1952, after negotiation as aforesaid, the coupon appurtenant to such Bonds due September 15, 1951, will be treated as also representing interest payable for such additional period.

The scrip certificates to be issued in lieu of amounts of less than $100 of certain New Bonds will be in bearer form, transferable by delivery. They will be exchangeable, at any time on or prior to March 1, 1960 (or at any time prior to the expiration of 2 years after the exchange offers shall terminate, whichever shall be later), upon surrender in amounts aggregating $100 or more, at the office of the respective authenticating agent, for New Bonds of the issue called for thereby, carrying interest from the original interest accrual date of such bonds, in an aggregate principal amount equal to the highest multiple of $100 represented by the scrip certificates so surrendered. A new scrip certificate of like tenor will be issued for any excess. After the expiration of the period during which scrip certificates may be exchanged for New Bonds any remaining New Bonds reserved for exchange for scrip certificates will be sold by the respective authenticating agent and the net proceeds of such sale, together with interest accumulated on such Bonds, will thereafter be paid in cash pro rata to the holders of the remaining scrip certificates, upon surrender thereof at the office of the respective authenticating agent. Scrip certificates which shall not be so surrendered in exchange for cash on or prior to March 1, 1962 (or prior to the expiration of 4 years after the exchange offers shall terminate, whichever shall be later), will become void. Scrip certificates for 1936 Conversion Bonds will not be exchangeable for New Bonds after January 1, 1963, and will be void in any event after January 1, 1965.

All New Bonds will be direct obligations of the Federal Republic. Principal and interest will be payable in New York City in such coin or currency of the United States as at the time of payment is legal tender for public and private debts, and will be payable free of all taxes imposed or to be imposed by the Federal Republic or any successor government, or by any political subdivision thereof.

On January 11, 1954, the Securities and Exchange Commission issued an order removing the restrictions against trading in Old Bonds which are validated.

The Internal Revenue Service held that in accordance with the provisions of section 127(a)(2) of the Code the cost or other basis of all German Government bonds and all bonds issued by municipalities, States or other political subdivisions of Germany were deductible for Federal income tax purposes as of December 11, 1941, the date the United States declared war against Germany.

The questions with respect to which advice is requested are set forth below. The answers thereto are based on the foregoing facts and circumstances.

(A) On which date will the holder of an Old Bond who acquired it on or prior to December 11, 1941, be deemed, pursuant to section 127 of the Internal Revenue Code, to have received a recovery for Federal income tax purposes?

Inasmuch as only Old Bonds which had been acquired prior to December 11, 1941, come under the provisions of section 127 of the Internal Revenue Code, including the provisions of subsection (c) thereof involving the recovery of property which was deemed to have been destroyed or seized under subsection (a), and inasmuch as there could be no question in regard to the validation of such bonds, it is held that all Old Bonds which had been acquired prior to December 11, 1941, and which were held on January 11, 1954, the date the restrictions against trading in such bonds were removed, were recovered on the latter date, within the meaning of subsection (c) of the Code. The fact that a bond is not validated until after January 11, 1954, is not sufficient grounds for postponing the recovery date inasmuch as the subsequent validation would simply confirm the fact that the bond was valid on the recovery date.

(B) What is the valuation of the Old Bonds as of January 11, 1954, for the purpose of determining the amount of the recovery income realized?

Inasmuch as the market quotations on the Old Bonds for the first day of trading were substantially lower than the quotations for the two succeeding days, it is held that the quotations for the first day of trading did not represent the actual fair market value of those bonds on January 11, 1954. It is believed that the average of the quotations for the first three days of trading more nearly reflects such fair market value. Accordingly, it is held that the fair market value of the bonds set forth above, was as follows on January 11, 1954 (computed to the nearest 1/8 th of a point):

German External Loan Bonds of 1924 86 7/8

German Govt. International Loan Bonds of 1930 79 1/2

Prussia Bonds for 1926 68 3/8

Prussia Bonds for 1927 69 3/8

Conversion Office Bonds 71 1/2

The fair market value of German External Loan Bonds of 1924, at the time of the recovery of such bonds, should be reduced to reflect any coupons due on October 15, 1941 and to and including October 15, 1944, which are missing. No reduction should be made for coupons due prior to October 15, 1941, inasmuch as it appears that all coupons due on and before April 15, 1941, were paid, and therefore such coupons were not legally outstanding at the time of the recovery.

The reduction in the fair market value of German External Loan Bonds of 1924, caused by missing coupons, should be determined on the basis of the fair market value of German External Loan 1924-Federal Republic of Germany-Funding Issue 1953, 3 per cent Bonds, due October 15, 1972, which are issued in exchange for coupons due October 15, 1941 and to and including October 15, 1944. A pro rata part of such fair market value should be deducted for each coupon missing.

In the absence of information in regard to the fair market value, if any, of the talons issued in connection with the New Bonds no adjustment should be made for any missing coupons due after October 15, 1944.

The fair market value of German Government International Loan Bonds of 1930, at the time of the recovery of such bonds, should be reduced to reflect any coupons due on December 1, 1941, and to and including December 1, 1944, which are missing. No reduction should be made for coupons due prior to December 1, 1941, inasmuch as it appears that all coupons due on and before June 1, 1941, were paid, and therefore such coupons were not legally outstanding at the time of the recovery.

The reduction in the fair market value of the bonds should be made in the manner set forth above with respect to the German Extenal Loan Bonds of 1924.

In the absence of information in regard to the fair market value, if any, of the talons issued in connection with the New Bonds, no adjustment should be made for any missing coupons due after December 1, 1944.

Coupons appurtenant to the Prussia Bonds of 1926 and 1927 bearing due dates from March 15, 1933 to and including October 15, 1936, have a fair market value equal to 50 percent of their face amount.

No adjustments are required with respect to coupons appurtenant to Prussia Bonds of 1926 and 1927, due on and after March 15, 1937, or due prior to March 15, 1933, which are missing.

Coupons appurtenant to the Conversion Office Bonds bearing due dates from July 1, 1941 to and including December 31, 1952, had a fair market value equal to one-third of the fair market value on January 11, 1954, of a corresponding face amount of 10-year Bonds of 1936-Federal Republic of Germany-Conversion and Funding Issue 1953-Three Percent, Dollar Bonds, due January 1, 1963.

No adjustments are required with respect to coupons appurtenant to Conversion Office Bonds due prior to July 1, 1941.

The fair market value of Fractional Certificates for Conversion Office Bonds on January 11, 1954, should be determined on the basis of the fair market value of the Old Bonds which they represent.

(C) Will the new holding period for such Old Bond, for the purposes of section 117 of the Code, begin on the recovery date?

The holding period, within the meaning of section 117 of the Code, for Old Bonds acquired prior to December 11, 1941, which are recovered, will run from the date of the recovery (January 11, 1954).

(D) How will the tax basis for such Old Bonds be determined?

In cases where holders of Old Bonds do not elect to have the provisions of section 127(c)(3) of the Code apply to the recovery of such bonds acquired prior to December 11, 1941, the basis of the bonds recovered, determined under the provisions of section 127(d)(1) of the Code, will be an amount equal to the fair market value of the bonds as of the date of the recovery, reduced by the amount, if any, by which such fair market value exceeds the deduction allowable in 1941, and increased by that portion of the amount of the recovery, which, under section 127(c) of the Code, is treated as a recognized gain from an involuntary conversion of property within the meaning of section 112(f) of the Code.

In cases where bondholders elect to have the provisions of section 127(c)(3) of the Code apply to the recovery of Old Bonds acquired prior to December 11, 1941, the basis of the bonds recovered, determined under the provisions of section 127(d)(2) of the Code, will be an amount equal to the value at which the bonds are included in the amount of the recovery under the provisions of section 127(c)(3)(A) of the Code, or the cost or other basis of the Old Bonds, reduced by such part, if any, of the gain recognized under section 127(c)(3)(C) of the Code which is not recognized as provided in section 112(f) of the Code.

(E) What is the tax basis of an Old Bond acquired by the present holder after December 11, 1941?

Holders of Old Bonds acquired subsequent to December 11, 1941, did not sustain deductible losses in 1941 under the provisions of section 127(a) of the Code as the result of the declaration of war against Germany. Therefore, the provisions of section 127(c) of the Code relating to the recovery of war losses, and the provisions of section 127(d) of the Code relating to the basis of property recovered, are not applicable in cases of such bondholders. The basis of Old Bonds acquired subsequent to December 11, 1941, is the cost of the bonds or other basis provided by section 113 of the Code. The holding period of such bonds runs from the date the bonds were acquired.

(F) How is the effective date of the exchange to be determined?

Inasmuch as Old Bonds which are not validated may not be exchanged for New Bonds, it is held that in no case does the effective date of the exchange occur prior to the date the Old Bond is validated. In cases where holders of Old Bonds surrendered their bonds for validation on or prior to January 11, 1954, and at the same time agreed to the exchange of such bonds for New Bonds pending the validation of the Old Bonds, in which cases the Old Bonds were not returned to the holders thereof, the exchanges became effective on January 11, 1954, immediately following the recovery of the Old Bonds, or on the date the validation was completed, whichever was later. In cases where holders of Old Bonds surrender their bonds for validation subsequent to January 11, 1954, and at the same time agree to the exchange change of such bonds for New Bonds pending the validation of the Old Bonds, in which cases the Old Bonds are not returned to the holders thereof, the exchanges become effective the date the validation is completed. In cases where Old Bonds are surrendered for validation subsequent to January 11, 1954, with instructions that they be returned to the holders thereof upon completion of the validation and before they are submitted to the appropriate Exchange Agent for exchange, the exchanges become effective the date the bonds are received by the Exchange Agent accompanied by the appropriate Letter of Transmittal.

(G) Will the holder of such an Old Bond on the recovery date be deemed to have received a recovery, whether or not such bond shall be exchanged pursuant to the exchange offer described above?

A holder of an Old Bond acquired prior to December 11, 1941, will be deemed to have realized a recovery on the recovery date whether or not such bond is exchanged pursuant to the exchange offer.

(H) What is the procedure relative to an Old Bond acquired prior to December 11, 1941, which is not validated?

In the event that an Old Bond acquired prior to December 11, 1941, is not validated a deductible loss will not be sustained by the holder of the bond because of the denial of validation. In such a case the bondholder will be permitted to file a claim for refund of any income tax paid by him for 1954 which resulted from erroneously including in his gross income for that year an amount alleged to have been realized as recovery income.

(I) What is the valuation of the New Bonds for the purpose of determining the gain or loss realized upon the exchanges of the Old Bonds for New Bonds?

For the reasons set forth in (B) above, it is held that the quotations for the first day of trading do not reflect the correct fair market value of the bonds on January 11, 1954. It's held that the fair market value of the New Bonds was as follows on January 11, 1954.

German External Loan 1924 --

Federal Republic of Germany --

Extension Issue 1953, 5.5%

Dollar Bonds, due October 15, 1969 71 7/8

German External Loan 1924 --

Federal Republic of Germany --

Funding Issue 1953 - 3% Bonds, due October 15, 1972 45 5/8

German Govt. International Loan 1930 --

Federal Republic of Germany -- Extension Issue 1953 --

5% Bonds, due June 1, 1980 66 1/4

German Govt. International Loan 1930 --

Federal Republic of Germany -- Funding Issue 1953 --

3% Bonds, due December 1, 1972 48 5/8

It is held further that the Federal Republic of Germany-Prussia Conversion Issue 1953-4 percent Bonds, due October 1, 1972, had a fair market value of 60 7/8 on January 11, 1954. Such value should be used for all dates to and including February 2, 1954.

Ten Year Bonds of 1936-Federal Republic of Germany-Conversion and Funding Issue 1953, 3 percent Bonds, due January 1, 1963, had a fair market value of 61 1/4 on January 11, 1954. Such value should be used for all dates to and including April 14, 1954.

The fair market value of the above-mentioned New Bonds for dates subsequent to those mentioned should be determined by using the mean of the high and low quotations for the day on which a particular exchange takes place, or the mean of the high and low quotations for the date nearest to the date of exchange, in the event there are no quotations on the date of the exchange.

The fair market value of German External Loan 1924-Federal Republic of Germany-Extension Issue 1953-5 1/2 percent Bonds, due October 15, 1969, and German Government International Loan 1930-Federal Republic of Germany-Extension Issue 1953-5 percent Bonds, due June 1, 1980, on the effective dates of the exchanges, should not be reduced because of any talons which may not be attached to the said bonds. This position is taken inasmuch as there is no information available from which to determine the fair market value of the talons.

The fair market value of the scrip certificates issued in connection with the New Bonds should be determined on the basis of the fair market value of the New Bonds with respect to which the scrip certificates are issued.

(J) What will be the tax effect of the exchange of the Old Bonds for the New Bonds?

The exchange of the Old Bonds, including those acquired subsequent to December 11, 1941, will come under the provisions of section 112(a) of the Code. Gain or loss will be realized by holders of Old Bonds acquired prior to December 11, 1941, measured by the difference between the basis of such bonds established under the provisions of section 127(d) of the Code, and the fair market value of the assets received in the exchange as described above. Gain or loss will be realized by holders of Old Bonds acquired subsequent to December 11, 1941, measured by the difference between the cost or other basis of the Old Bonds established under the provisions of section 113 of the Code and fair market value of the assets received in the exchange as described above.

The gain or loss realized upon the exchange of the Old Bonds, including those acquired subsequent to December 11, 1941, will represent capital gain or capital loss under the provisions of section 117 of the Code. However, in cases where the Old Bonds were acquired prior to December 11, 1941, interest income will be realized to the extent that the fair market value of the assets received in the exchange is in excess of such principal and the interest accrued and unpaid on the Old Bonds since the date of the recovery. In cases where Old Bonds were acquired subsequent to December 11, 1941, interest income will be realized to the extent that the fair market value of the assets received in the exchange is in excess of the principal of the Old Bonds but not in excess of such principal and the interest accrued and unpaid on such bonds since the date of their acquisition.

(K) What will be the effect for Federal income tax purposes if the holder of an Old Bond does not make an election under section 127(c)(5) of the Code, relating to tax adjustments measured by prior benefits?

If the holder of an Old Bond acquired prior to December 11, 1941, does not make an election under the provisions of section 127(c)(5) of the Code the recovery will be measured by the fair market value of the Old Bond on the recovery date, which will reflect the fair market value of the scrip certificates which will be issued, the fair market value, if any, of the talons issued pursuant to the plan, the fair market value of the rights to interest accrued on the New Bonds, the fair market value of any rights received to later collect accrued and unpaid interest on the Old Bonds, and in the case of the Prussia Bonds, the right to collect 50 percent of the coupons bearing due dates from March 15, 1933 to October 15, 1936. The recovery will be includible in the gross income of the bondholder for the year of the recovery to the extent that it exceeds the portion, if any, of the deduction allowable in 1941 as a war loss under the provisions of section 127(a)(2) of the Code which did not result in a reduction of the bondholder's tax liability for that year. Recoveries in excess of such amount will be treated as ordinary income until such excess equals the amount of the bondholder's allowable deduction in 1941 which did result in a reduction of his tax liability for that year. Recoveries, if any, in excess of a bondholder's allowable deduction in 1941 will be treated as gain on an involuntary conversion of property as a result of its destruction or seizure and will be recognized or not recognized as provided by section 112(f) of the Code. Since in the instant case the Old Bonds, as a result of their destruction or seizure, were, in the exchange, involuntarily converted into property similar or related in service or use to the property so converted, within the meaning of section 112(f)(1) of the Code, no gain is recognized on the portion of the recovery income to which the provisions of section 112(f)(1) of the Code are applicable. In cases where bondholders acquired Old Bonds prior to December 11, 1941, but did not claim the deductions allowable in 1941 it will be held that the entire amount of the cost or other basis of such bonds represented allowable deductions which did not result in the reduction of the bondholders' tax liability for that year.

(L) What will be the tax effect if the holder of an Old Bond does make an election under section 127(c)(5) of the Code?

If, pursuant to a bondholder's election under section 127(c)(5) of the Code, the provisions of section 127(c)(3) of the Code are applicable to the recovery, the fair market value of the Old Bond at the time of the recovery will, at the option of the bondholder, be considered an amount equal to the cost or other basis of the Old Bond as of December 11, 1941. In that event the amount of the recovery is not includible in gross income until the bondholder has recovered an amount equal to his allowable deduction in 1941, whether or not such allowable deduction resulted in a reduction of his tax liability for that year. Instead of including such amount in gross income, there will be added to, and assessed and collected as a part of the bondholder's tax liability for the year of the recovery, an adjustment on account of any tax benefit in 1941 resulting from the fact that the loss from destruction or seizure of the bond was an allowable deduction. The amount of such adjustment will be the total increase in the tax liability of the bondholder which would result by decreasing the allowable loss for 1941 by an amount equal to that portion of the amount of the recovery which is not included in gross income for the year of the recovery. The portion of the amount of the recovery which is in excess of the allowable deduction for 1941 is includible in gross income for the year of the recovery as gain on an involuntary conversion of property as a result of its destruction or seizure and will be recognized or not recognized as provided by section 112(f) of the Code. Since in the instant case the Old Bonds, as a result of their destruction or seizure, were, in the exchange, involuntarily converted into property similar or related in service or use to the property so converted, within the meaning of section 112(f)(1) of the Code, no gain is recognized on the portion of the recovery income to which the provisions of section 112(f)(1) of the Code are applicable.

(M) During what period is the holder of an Old Bond entitled to make an election under section 127(c)(5) of the Code?

Section 39.127(c)-1(d)(2) of Income Tax Regulations 118 states that if a taxpayer realizes a recovery during any taxable year ending after October 20, 1951, the date of the enactment of the Revenue Act of 1951, unless such taxable year ends on or before March 31, 1953, the election under section 127(c)(5) of the Code must be made by the taxpayer not later than the expiration of 6 months from the last day prescribed by law for the filing of his income tax return for the year of the recovery.

(N) What is the tax basis of the New Bonds?

The basis of the New Bonds and the other assets received in the exchange will be measured by their fair market values as of the effective date of the exchange.

(O) What recovery date will be recognized relative to the exchange?

In all cases where Old Bonds acquired prior to December 11, 1941, are exchanged for New Bonds it will be considered that the recovery was realized prior to the exchange even though, in some cases, the two transactions may occur simultaneously. Also, in all cases the gain or loss realized upon the exchange of Old Bonds will be determined as of the effective date of the exchange.

(P) What treatment will be accorded to scrip certificates, talons, and interest accrued on the Old Bonds?

The right to interest accrued and unpaid on the Old Bonds will be considered a part of such bonds, and the scrip certificates which will be issued in lieu of amounts of less than $100.00 of certain New Bonds, the talons which will be issued pursuant to the plan, the rights to interest accrued on the New Bonds, the rights to later collect accrued and unpaid interest on the Old Bonds, and in the case of the Prussia Bonds, the right to collect 50 percent of the coupons bearing due dates from March 15, 1933 to October 15, 1936, will be considered parts of the New Bonds received.

(Q) What is the tax effect for purposes of section 112 of the Code of the retention by the holders of coupons appurtenant to the Prussia Bonds?

In determining the gain or loss from the exchange of Old Prussia Bonds for New Bonds no adjustments will be made in the basis of such Old Bonds for coupons appurtenant thereto bearing due dates from March 15, 1933 to and including October 15, 1936, which are retained by the holders of the Old Bonds, or for coupons due on or after March 14, 1937, appurtenant to Old Prussia Bonds which also will be retained by the holders of the Old Bonds.

(R) Under the exchange offer, will the amounts received relative to interest accrued on the Old Bonds constitute interest income?

Any amounts received pursuant to the exchange offers which represent interest accrued on the Old Bonds subsequent to the recovery date, or on the New Bonds subsequent to the exchange date will be treated as ordinary interest income.



Product #: GermanForeignDebts

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Rated A+