(dissenting).
I have great respect for my brethren on this court, for their learning in the law, for their impartiality, for their judicial acumen, but, after all, in common with all mankind, they are not infallible, as I think the majority opinion demonstrates.
I disagree with the opening sentence of the majority opinion: I do not think the war loss provisions of the 1939 and 1954 Internal Revenue Codes have anything to do with this case. What we are concerned with here is not the debt owed plaintiffs at the outbreak of the war, but the interest that accumulated on that debt during the war. The war loss provisions were not concerned with this interest. These provisions permitted a deduction of the debt as it existed at the outbreak of war and prescribed how, after the war was over, taxable income should be computed on any recovery of the debt deducted. It had nothing to say of income accrued in the interim and paid after the war.
So long as the war lasted there were, of course, no payments of interest on the bonds owned by plaintiffs nor any payments of principal thereon, but, of course, the taxpayers continued to hold them until the war was over, although, *885for income tax purposes, they deducted from their income a portion of the cost of the bonds, as securities on property .seized or destroyed by the enemy, as they were entitled to do under section 127 of the Internal Revenue Code of 1939.
During the war there was no trading in these bonds, but in 1948 trading in the Italian bonds was resumed, and in 1950 trading in the Japanese bonds was resumed. To each of the Japanese bonds there were attached coupons for interest. Of course, none of those that had matured during the war had been paid when trading was resumed, but later they were honored and paid.
The taxpayers included the amount paid on the coupons in default in their income tax returns for the years in which payments were received, as ordinary in■come. Later, however, they filed claims for refund on the theory that the ■amounts received were not ordinary in■come nor were they income at all, but a return of capital.
The issue is a very simple one under the facts of this case. It is simply a case ■of a creditor holding bonds on which the debtor defaulted but which he later hon■ored and redeemed. When default on the Japanese bonds occurred, the creditor could take no action against the debt- or; he could only hold them and hope they would be honored later, in whole or in part. This is just what happened. 'They were honored later and the coupons in default were paid in full.
As the case has been stated, there can be no doubt that the payments on the defaulted coupons were payments of interest and returnable as ordinary income.
The fact that the taxpayers deducted from their income a portion of the cost of the bonds, for income tax purposes, makes no difference. This was vis a vis the taxpayers and the United States Government ; it had no effect on the creditor-debtor relationship. The debtor was still liable on the bonds and on the coupons attached to them according to the tenor of them and remained so liable, except that, by agreement after the war, the time for payment of them was extended for 10 years.8 Hence, when a defaulted coupon was paid, interest on the bonds was paid exactly as if it had been paid when the coupon matured, and in each case the taxpayers are required to report the interest received as ordinary income.
The case becomes complicated only when taxpayers seek to have their liability determined as if they had purchased the bonds on the date trading in them was resumed. This is the injection of a hypothesis contrary to the facts in this case. Taxpayers did not purchase their bonds; they already had them, and their liability must be determined on this basis. The war loss provisions treated the bonds as having been destroyed only for the purpose of the tax deduction and the computation of income resulting from the recovery upon them. The Congress knew taxpayers would hold on to their bonds and that interest would accrue in the interim, but as to this interest, no change in the law was made. Everyone, I assume, would agree that under the law prior to the enactment of war loss provisions, taxpayers would be taxable on the income on the bonds when they received it.
What taxpayers are seeking to do in this case is to convert what was interest before the war into principal after the war. This cannot be done, as was held by the District Court for the Southern District of Ohio and the Court of Appeals of the 6th Circuit in Shafer v. United States, 204 F.Supp. 473 (1962), aff’d 312 F.2d 747 (1963). That case also involved coupons on Japanese bonds in default during the war, but later honored and paid. The only difference between that case and this one is that the taxpayer in Shafer sold the defaulted coupons, but it was held that the amount he received for them was ordinary in*886come to him. It necessarily follows that a taxpayer, who holds on to his bonds and himself receives payment of the coupons in default, must report the receipt as ordinary income.
Before the war these Japanese bonds held by plaintiffs represented a capital asset in their hands, and the coupons attached thereto evidenced their right to receive a certain amount of income on this capital asset. The character of the bonds and the coupons never lost their identity; they remained principal, on the one hand, and income, on the other. The same is true of corporate bonds in default: what was principal before the default was principal thereafter, and what was income before was income thereafter. This was recognized in Fisher v. Commissioner, 209 F.2d 513 (6th Cir. 1954), the court holding that the holder of corporate bonds in default who sold them “flat” was obliged to apportion the sales price between the principal of the bonds and the coupons attached to them, and that he was obliged to report as ordinai*y income the amount received for the coupons.
The taxpayer in United States v. Lang-ston, 308 F.2d 729 (5th Cir. 1962), differed from the taxpayers here in that he was not the holder but the purchaser of bonds. He had purchased bonds on which the interest coupons were in default at a “flat” price and later sold them “flat.” The decision, however, is in point in its treatment of income accrued on the bonds during the period the taxpayer held them but which was not paid before he sold them. Relying on the decision in Fisher, the court held that, while receipts of interest income during the holding period on account of coupons that had matured prior to purchase were a return of capital, the taxpayer must allocate the price he received for the bonds between the interest coupons that had matured prior to his purchase (together with the principal of the bonds) and interest coupons that matured during the time he held the bonds. As to the latter, the taxpayer must treat his receipts as ordinary income.
On the identical facts that were present in the Langston case, the Second Circuit agreed fully with the Fifth Circuit’s disposition of it. In Jaglom v. Commissioner, 303 F.2d 847 (2d Cir. 1962), the court held that that portion of the proceeds from the “flat” sale of defaulted bonds which is allocable to interest accrued while the taxpayer held the bonds is taxable as ordinary income. “A distinction has arisen,” the court said,, “between an income producing capital asset and the income which it produces. Gains arising from the sale of such an asset which has appreciated in value are capital gains, but gains flowing from the sale of an accrued right to collect the income from such an asset are not. Thus the right to collect ordinary income is not transmuted into capital gain by its sale.” Id., 303 F.2d at 848. The court also relied on the fact that since the purchaser could treat interest payments that accrued while the taxpayer held the bond as a return of capital, these interest payments would never be taxed as ordinary income unless they were so taxed to the taxpayer. This payment to him represented, in part, compensation for his having held the bonds for a period of time and thus was money paid for the use of money and ordinary interest income.
See also Commissioner v. First State Bank, 168 F.2d 1004, 7 A.L.R.2d 738 (5th Cir. 1948).
If plaintiffs had sold their bonds after the war at the “flat” price, the purchasers would have paid no income tax on the transaction until after they sold them. When they sold them their income would have been the difference between the “flat” price they paid for them and what they got for them. But plaintiffs, if they had sold the bonds at the “flat” price, would have sold not only their principal but also what was income to them. On the authority of the above cases, they would have had to allocate the “flat” price they received between principal and income. If plaintiffs paid no tax on what necessarily was income, no tax on it would be paid by anyone.
*887It is not possible to determine plaintiffs’ tax liability as if they were the purchasers of bonds. The basis for taxation of the seller and the purchaser is entirely different; one can not be equated with the other.
That the bonds, for which taxpayers claimed a war loss deduction, took on a new basis when they reacquired value is of no moment in the determination of tax liability arising from the payment of the coupons in default. It is of importance only when the taxpayers dispose of them. Then their gain or loss is measured by the difference between the new basis and the price for which sold. The acquisition of a new basis certainly does not transform a holder of bonds into a purchaser of what he already had. Taxpayers’ liability is that of the holder of bonds previously in default but later honored and redeemed.
I am of the opinion plaintiffs are taxable on amounts received on coupons in default when they agreed to the proposal for an extension of time for payment of bonds and coupons, as ordinary income, and, hence, that their claims for refund were properly disallowed.
. Section 127 (c) of the Internal Revenue Code has no application to the issue presented in this case. The amount of the recovery on the bonds was less than the unused portion of the allowable war loss deduction, and, hence, taxpayers had no income arising from their recovery of value.