Prior to the United States entry into World War II, taxpayer acquired certain Japanese bonds. In December 1941, pursuant to section 127(a) of the Internal Revenue Code of 1939, he suffered a war loss with respect to these investments and took the proper deduction. When trading restrictions on Japanese bonds were lifted in 1950, taxpayer enjoyed a war loss recovery. At that time, bonds of this type were being traded flat, the quoted price reflecting both principal and accrued but unpaid interest thereon to the date of recovery. As the defaulted interest coupons were paid on their extended maturity dates, in accordance with an agreement with the Japanese government, taxpayer reported the amounts received as ordinary income. Later, in an action by the taxpayer for a refund relating to these payments, held, judgment for plaintiff. Since recovery of war-lost bonds of a type which are being traded flat on the recovery date is analogous to a purchase of bonds flat, delayed payments of accrued but unpaid interest on such bonds are returns of capital to the extent of basis, and capital gains to the extent that they exceed basis.
Michigan Law Review,
Recovery of Accrued but Unpaid Interest on War-Lost Investments Taxed as Capital Gain to Extent It Exceeds Basis-Horst v. United States,
Mich. L. Rev.
Available at: https://repository.law.umich.edu/mlr/vol63/iss4/9