Rev. Rul. 62-140

In November 1960, a taxpayer purchased, for $1 each, rights issued by a corporation entitling him, upon payment of $99, to subscribe to a debenture to be issued by such corporation. On December 1, 1960, the taxpayer subscribed for such debenture which was issued on December 10, 1960. The debenture contained a clause providing that its holder might receive one share of common stock of the issuing corporation upon surrender of the debenture, accompanied by payment of $50. The taxpayer presented the debenture, accompanied by payment of $50 and received one share of common stock. Held , (a) No gain or loss was realized upon the surrender of the debenture and payment of $50 for a share of common stock in accordance with the terms contained in the debenture. (b) Each share of stock acquired has a split holding period for purposes of determining long-term or short-term capital gain or loss, that part of the taxpayer's property in each share of stock which is attributable to his ownership of the debenture to be treated as held beginning with and including the date on which the right to acquire the debenture was exercised, in accordance with section 1223(6) of the Internal Revenue Code of 1954 and section 1.1223-1(f) of the Income Tax Regulations, and that part of the taxpayer's property in each share of stock which is attributable to the additional cash investment required for the acquisition of the stock to be treated as held beginning with the date following the date of acquisition. See I.T. 3287, C.B. 1939-1 (Part 1), 138, and I.T. 3705, C.B. 1945, 174.

It will be necessary to determine the portion of the taxpayer's property in the stock which is attributable to each component of the investment where the stock is disposed of at a time when, in accordance with holding (b) above, there may be both long-term and short-term capital gain or loss from disposition. For example, assume that the fair market value of one share of stock on the date of conversion is $200. Of the taxpayer's $150 basis for each share of stock, $100 is his basis for that portion attributable to his ownership of the debenture and $50 is his basis for that portion attributable to the additional cash investment. Since the market value of the stock was $200 on the date of conversion, it may fairly be said that the portion of such value attributable to his ownership of the debenture was $150. ($200, the fair market value of the stock at the date of conversion less $50, the amount of cash required to effect the conversion.) Thus, 150/200 of the taxpayer's property in the stock is attributable to his ownership of the debenture and 50/200 of the taxpayer's property in the stock is attributable to his additional cash investment. If the stock is disposed of at a time when the split holding period is relevant in determining his tax liability, these fractions will be applied to the amount realized to determine the portions of the amount realized attributable to the above components of his investment, which have a basis of $150 and $50 respectively. The following table illustrates the manner of computing the gain or loss attributable to the taxpayer's ownership of the debenture (long-term) and his gain or loss attributable to the additional cash investment (short-term), assuming the amounts realized shown on line one from the disposition of the stock:

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