Saturday, April 20, 2024
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GiftLaw Note: Barry Bondowner owns Series EE bonds. He wants to convert them to Series HH bonds that are issued in the name of charity and receive a deduction for the donation. Barry does not want to recognize any accumulated interest income in the Series EE bonds as part of his charitable gift. Barry seeks a ruling regarding the tax consequences of this transaction.

Series EE (formerly Series E) are the most common type of savings bonds. Barry purchased them at a discount rate and was guaranteed a certain value at their maturity. The increase in value from the purchase price to maturity price reflects accumulated interest income. Accumulated interest income goes untaxed until the bonds are redeemed or disposed of unless Barry elects to recognize the interest income each year. Barry, like most taxpayers, has not made this election.

Barry may exchange Series EE bonds for Series HH (formerly Series H) bonds without paying tax on the accumulated interest income. However, annual interest generated by HH bonds is fully taxable each year. Any accrued Series EE bond interest will be reported when the Series H bonds mature or are otherwise disposed of.

Because Barry wants to exchange his Series EE bonds for Series HH bonds and give them to charity rather than keep them for himself, the IRS ruled in PLR 8010082 that he must pay tax on the accumulated interest income at the time of the exchange and contribution to charity. Since he will realize the accumulated bond interest, he will be able to deduct the full fair market value of his bonds in the year he contributes them to charity.

Editors Note: Treasury regulations greatly restrict the lifetime reissue of savings bonds. As a result, there is no way for a donor to transfer savings bonds to charity without first recognizing any accumulated interest income. In this way, savings bonds are like commercial annuities and other tax-deferred investments - there is no way to give them to charity during life without first recognizing any accumulated income. Review GiftLaw's Case of the Week series "Seeing Double with U.S. Savings Bonds" for more in-detail discussion of options for making charitable gifts with bonds.
Dear Sir or Madam:

This is in reply to your letter dated May 29, 1979, requesting a ruling regarding the donation of certain Series H bonds to a charitable organization.

You state that you now own certain Series E bonds, in your name alone, which you wish to donate to an organization to which a charitable contribution may be made pursuant to the provisions of section 170(c) of the Internal Revenue Code. You intend to effectuate your gift by converting the Series E bonds to Series H bonds which you will have issued in the name of the organization. You have never elected, and do not intend to elect, to treat the increment in value (interest) of your Series E bonds as income currently as permitted under section 454(a) of the Code.

A taxpayer owning Series E bonds may elect under section 454 of the Code to include interest on the bonds in gross income as it accrues; or the taxpayer may defer reporting the interest until the Series E bonds mature or are redeemed or otherwise disposed of.

Under the provisions of Treasury Department Circular No. 1036 (December 31, 1959), 1960-1 C.B. 855, a taxpayer who has elected to defer Series E bond interest may continue to defer the interest accrued on Series E bonds when he exchanges the bonds for Series H bonds (except to the extent of any cash representing interest received in the exchange), provided the Series H bonds are issued in his name as owner or coowner. The accrued Series E bond interest must be reported when the Series H bonds mature or are redeemed or otherwise disposed of.

Rev. Rul. 55-278, 1955-1 C.B. 471, involves the treatment of accrued interest on Series E bonds when the bonds are reissued to effect a gift. Bonds purchased entirely with the taxpayer's funds were originally issued in the name of the taxpayer and his son as coowners. The taxpayer wished to make a gift of his coownership in the bonds to his son, and had the bonds reissued in the name of the son alone. The Rev. Rul, holds that interest accrued on the bonds before their reissue is all includible in the taxpayer's gross income for the year in which the gift (reissue) is made, except for any interest the taxpayer previously reported. This holding is based on the fact that the taxpayer realized the benefit of the accrued interest when he made the gift, since he could have realized its benefit in cash by redeeming the bonds but chose instead to realize its benefit by making a gift.

Since you propose to have Series H bonds issued in the name of a charitable organization rather than in your own name, the deferral provisions of Circular 1036 are not applicable. As in the case of the taxpayer in Rev. Rul. 55-278, at the time your Series E bonds are exchanged for Series H bonds issued in the name of the organization, you will have realized the benefit of the interest accrued on your Series E bonds.

With regard to the question of the deductibility of the gift, section 170(a) of the Code allows as a deduction any charitable contribution payment of which is made within the taxable year. With certain exceptions not here pertinent, if a charitable contribution is made in property other than money, the amount of the contribution is the fair market value of the property at the time of contribution.

In accordance with the authorities cited above, it is concluded as follows:

1. The interest that has accrued on your Series E bonds before their exchange for Series H bonds issued solely in the name of the charitable organizaation is includible in your gross income for the taxable year in which you make your contribution.

2. The amount of the contribution to the charitable organization is the fair market value of the Series H bonds on the date of the contribution, and is deductible in the manner and to the extent provided by section 170 of the Code.

A copy of this letter should be enclosed with your federal income tax return for the year in which the bonds are reissued in the name of the charitable organization. A copy is enclosed for this purpose.

Sincerely yours,

Anthony Manzanares, Jr.
Chief, Individual Income Tax Branch



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