What is Interest (I.R.C. 103)

September 17, 2015

CCA 201537022:  Developer includes costs of improvements in basis of lots sold.  Developer also receives a bond from the district and bond interest payments.  Developer treats interest payments as tax-exempt interest and does not reduce basis of lots sold correspondingly.  IRS determines that this is inconsistent treatment.  Interest payments, given the Developer’s treatment of costs, will be treated as ordinary income that is taxable to the Developer.  See also Rev. Proc. 92-29.

Rescission (Rev. Rul. 80-58)

September 1, 2015

See Rev. Rul. 80-58.  No gain is recognized under section 1001 of the Code on the sale of land by a taxpayer who accepts reconveyance of the land and returns the buyer’s funds in the taxable year of the sale.  If the reconveyance occurs after the taxable year of sale, the seller reports the sale in the taxable year of sale and acquires a new basis in the property when it is reconveyed equal to the amount paid for the reconveyance.  Query whether this analysis can apply to rescind bond redemptions.

Also consider a slightly related situation in private letter ruling 9507010 (dated November 14, 1994).  This is an important ruling relating to a frequently discussed issue, namely, whether proceeds of bonds must be used directly for payment of debt service on a prior issue to enable the bonds to qualify as refunding bonds.  In other words, may there be a gap of some sort between the refunding bonds and the bonds that are treated as the refunded bonds?  The ruling holds, in the context of timing necessitated by GNMA procedures, that bonds are refunding bonds even though the proceeds are used to reimburse a bank for prepayment of a GNMA security where the GNMA security prepayment was used to redeem the prior issue.