[Code of Federal Regulations]
[Title 26, Volume 2]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.162-19]

[Page 791-792]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.162-19  Capital contributions to Federal National Mortgage 
Association.

    (a) In general. The initial holder of stock of the Federal National 
Mortgage Association (FNMA) which is issued pursuant to section 303(c) 
of the Federal National Mortgage Association Charter Act (12 U.S.C., 
section 1718) in a taxable year beginning after December 31, 1959, shall 
treat the excess, if any, of the issuance price (the amount of capital 
contributions evidenced by a share of stock) over the fair market value 
of the stock as of the issue date of such stock as an ordinary and 
necessary business expense paid or incurred during the year in which 
occurs the date of issuance of the stock. To the extent that a sale to 
FNMA of mortgage paper gives rise to the issuance of a share of FNMA 
stock during a taxable year beginning after December 31, 1959, such sale 
is to be treated in a manner consistent with the purpose for, and the 
legislative intent underlying the enactment of, the provisions of 
section 8, Act of September 14, 1960 (Pub. L. 86-779, 74 Stat. 1003). 
Thus, for the purpose of determining an initial holder's gain or loss 
from the sale to FNMA of mortgage paper, with respect to which a share 
of FNMA stock is issued in a taxable year beginning after December 31, 
1959 (irrespective of when the sale is made), the amount realized by the 
initial holder from the sale of the mortgage paper is the amount of the 
``FNMA purchase price''. The ``FNMA purchase price'' is the gross amount 
of the consideration agreed upon between FNMA and the initial holder for 
the purchase of the mortgage paper, without regard to any deduction 
therefrom as, for example, a deduction representing a capital 
contribution or a purchase or marketing fee. The date of issuance of the 
stock is the date which appears on the stock certificates of the initial 
holder as the date of issue. The initial holder is the original 
purchaser who is issued stock of the Federal National Mortgage 
Association pursuant to section 303(c) of the Act, and who appears on 
the books of FNMA as the initial holder. In determining the period for 
which the initial holder has held such stock, such period shall begin 
with the date of issuance.
    (b) Examples. The provisions of paragraph (a) of this section may be 
illustrated by the following examples:

    Example (1). A, a banking institution which reports its income on a 
calendar year basis, sold mortgage paper with an outstanding principal 
balance of $12,500 to FNMA on October 17, 1960. The FNMA purchase price 
was $11,500. A's basis for the mortgage paper was $10,500. In accordance 
with the terms of the contract, FNMA deducted $375 ($250 representing 
capital contribution and $125 representing purchase and marketing fee) 
from

[[Page 792]]

the amount of the purchase price. FNMA credited A's account with the 
amount of the capital contribution. A stock certificate evidencing two 
shares of FNMA common stock of $100 par value was mailed to A and FNMA 
deducted $200 from A's account, leaving a net balance of $50 in such 
account. The stock certificate, bearing an issue date of November 1, 
1960, was received by A on November 7, 1960. The fair market value of a 
share of FNMA stock on October 17, 1960, was $65, on November 1, 1960, 
was $67, and on November 7, 1960, was $68. A may deduct $66 the 
difference between the issuance price ($200) and the fair market value 
($134) of the two shares of stock on the date of issuance (November 1, 
1960), as a business expense for the taxable year 1960. The basis of 
each share of stock issued as of November 1, 1960 will be $67. See 
section 1054 and Sec. 1.1054-1. A's gain from the sale of the mortgage 
paper is $875 computed as follows:

Amount realized in FNMA purchase price........................   $11,500
A's basis in mortgage paper.........................   $10,500
Purchase and marketing fee..........................       125
                                                     ----------
                                                      ........    10,625
                                                               ---------
Gain on sale..................................................       875


    Example (2). Assume the same facts as in Example (1), and, in 
addition, that A sold to FNMA on December 15, 1960, additional mortgage 
paper having an outstanding principal balance of $12,500. FNMA deducted 
from the FNMA purchase price $250 representing capital contribution and 
credited A's account with this amount. A then had a total credit of $300 
to his account consisting of the $50 balance from the transaction 
described in Example (1) and $250 from the December 15th transaction. A 
stock certificate evidencing three shares of FNMA common stock of $100 
par value was mailed to A and FNMA deducted $300 from A's account. The 
stock certificate, bearing an issue date of January 1, 1961, was 
received by A on January 9, 1961. The fair market value of a share of 
FNMA stock on January 1, 1961, was $69. A may deduct $93, the difference 
between the issuance price ($300) and the fair market value ($207) of 
the three shares of stock on the date of issuance (January 1, 1961), as 
a business expense for the taxable year 1961. The gain or loss on the 
sale of mortgage paper on December 15, 1960, is reportable for the 
taxable year 1960.

[T.D. 6690, 28 FR 12253, Nov. 19, 1963]