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    donation of bonds

    I've got a situation where a person has a bunch of old government bonds that no longer pay interest. Is it possible to donate them to charity and take the FMV deduction and NOT pay tax on the interest and let the charity convert the bonds to cash? This tip works well for highly appreciated stock, would it work here.

    Mahalo

    #2
    TTB, page 6-7 says:

    Reporting options for cash method taxpayers. Cash method
    taxpayers can report the interest on series EE, series E, and series
    I bonds in either of the following ways.
    Method 1. Postpone reporting the interest until the earlier
    of the year in which the bonds are cashed or disposed
    of or the year in which they mature.
    Method 2. Choose to report the increase in
    redemption value as interest each year.
    Taxpayers must use the same method for all
    series EE, series E, and series I bonds owned.

    This statement from TTB is supported by IRS Pub 550, page 7, third column under “Reporting options for cash method taxpayers.”

    Note that when you postpone reporting the interest, the taxable interest is reported in the earlier year in which they are cashed, OR the year they mature. In other words, since the bonds have matured, the interest is taxable in that year even though the taxpayer has yet to cash them in. Therefore, you could not defer or avoid paying tax on the interest by donating them to charity after they have matured.

    Comment


      #3
      It it even possible to donate savings bonds?

      I've got a situation where a person has a bunch of old government bonds that no longer pay interest. Is it possible to donate them to charity and take the FMV deduction and NOT pay tax on the interest and let the charity convert the bonds to cash?
      I didn't think it was even possible to transfer US savings bonds to another party.

      Comment


        #4
        1099-int

        I had an older customer who payroll deducted for savings bonds every week since they started in 1942. At some point in the 1980s, these things began totally maturing and quit paying interest. The market value of his accumulated bonds was over $500,000.

        His bank didn't inform him that he had dozens of these completely endowed bonds. The man died in 1996 and his wife started taking inventory. When she found out about this, she was absolutely furious at the bank. Over a two year period she cashed out some $90,000 of these older bonds and continued to cash them out as they endowed. She received a 1099-INT from the bank for everything she cashed out.

        Bees Knees may very well be right about the reporting elections. But I can tell you the banks do not observe this kind of reporting for either option. They will invariably issue a 1099-INT in the year the owner cashes out the bonds.

        What are the reporting options for the taxpayer if this interest has been previously reported? I guess he can save tax returns for a dozen years to show the auditor when IRS matches the 1099 to his personal return. I would like to find a way to avoid this scenario before examination. There might be hope - the 1099 has a separate box for "U S Savings Bonds." Maybe this field escapes their matching program. Does anyone have a solution?

        Comment


          #5
          Savings Bonds

          This is something that I looked into a few years ago and actually emailed Tres.gov from their Savings Bond site.

          Here is the reply
          We have read your info on the web site and are terribly confused.

          Mother, Alice purchased bonds with deceased husband. Bonds are now recorded in her name along with her son, (he was added as co-owner upon husband passing).

          Can we remove Alice as a co-owner and rename into son and his spouse, without a taxable event.
          Or, can we remove Alice and put just into son's name without a taxable event??

          Then later can we add another co-owner without a taxable event.

          Example: Current registration Alice and Son as co-owners (joint tenants)
          Remove Alice (not deceased and reissue into names of Son alone or reissue with the names of Son and his spouse as co-owner Blood\marriage relationship.

          No taxable event, no income tax due on reisssue???

          Answer:

          No, you cannot remove Alice if she is still living without it being a
          taxable event for her. Should Alice pass away, then Son could remove
          her name, elevate himself to owner and he could add a second named coowner or beneficiary on the bond without a taxable reissue.

          I hope this answers your question.

          -Savbonds
          When Dad passed away, Son's name was added as co-owner and no taxable event, but as you can see, while Mom is still alive (at 97.5) we can do nothing. So what we have been doing is redeeming a few each year as she is in the 10% tax bracket and it helps to pay for her assisted care.

          Sandy

          Comment


            #6
            Good post

            This was a very good question and series of post. In conclusion, it appear the answer is NO, you cannot give a US bond to charity, or for that matter to anyone else. It is non-negotiable.

            Comment


              #7
              Originally posted by Golden Rocket View Post
              Bees Knees may very well be right about the reporting elections. But I can tell you the banks do not observe this kind of reporting for either option. They will invariably issue a 1099-INT in the year the owner cashes out the bonds.

              What are the reporting options for the taxpayer if this interest has been previously reported? I guess he can save tax returns for a dozen years to show the auditor when IRS matches the 1099 to his personal return. I would like to find a way to avoid this scenario before examination. There might be hope - the 1099 has a separate box for "U S Savings Bonds." Maybe this field escapes their matching program. Does anyone have a solution?
              A 1099 issued for whatever reason does not make it automatically a taxable event for the receiver. The bank may very well issue a 1099-INT to the recipient of the cash, even though the recipient already paid tax on the income. Another example is me paying you on December 31, 2007 for electrical work you do to my office. I write out the check, mail it, and you receive it on January 3rd, 2008. I take a tax deduction for the expense in 2007, issue you a 2007 1099-MISC, and you report the income on your 2008 Schedule C.

              Nothing wrong with that. It is done all the time.

              However, to avoid IRS letters of unreported income, you need to acknowledge receipt of the 1099 for the year it was issued, and attach a letter of explanation as to why the income is not reported on that tax return.

              I usually enter the income from the 1099 and then zero it out as a negative on the next line, as electronic filing is not very good for attaching letters of explanation. If IRS ever audits the return and wants to know what the negative amount is for, then I provide proof why the income from the 1099 was not taxable in that year and the negative amount was entered merely to zero it out.
              Last edited by Bees Knees; 09-05-2007, 08:42 AM.

              Comment


                #8
                Originally posted by Bees Knees View Post
                A 1099 issued for whatever reason does not make it automatically a taxable event for the receiver. The bank may very well issue a 1099-INT to the recipient of the cash, even though the recipient already paid tax on the income. Another example is me paying you on December 31, 2007 for electrical work you do to my office. I write out the check, mail it, and you receive it on January 3rd, 2008. I take a tax deduction for the expense in 2007, issue you a 2007 1099-MISC, and you report the income on your 2008 Schedule C.

                Nothing wrong with that. It is done all the time.
                Bees

                If the check was available to the electrician on 12/31, I think you need to be concerned about constructive receipt. Take a look at Rev Ruling 68-126. Not the exact same fact pattern but close enough to make me think the taxpayer has 2007 income under your scenario.

                Comment


                  #9
                  Only a problem if BK told him the check would be ready or called and offered the option to pick it up.

                  Comment


                    #10
                    I said I mailed it.

                    That means rocket man left me the bill when he left on the 31st when he did the job, and later that afternoon I decided to write out the check and run it to the post office so that I could get a tax deduction before the end of the year.

                    Comment


                      #11
                      Originally posted by Bees Knees View Post
                      I said I mailed it.

                      That means rocket man left me the bill when he left on the 31st when he did the job, and later that afternoon I decided to write out the check and run it to the post office so that I could get a tax deduction before the end of the year.
                      If the recipient had NO opportunity to receive the check before mailing I'm not so sure it's that simple. Merely mailing the check on December 31 MAY not give rise to the deduction. I think you may run afoul of the relation back doctrine. Also, suppose you had no cash in the bank when you mailed that check - would that make any difference?

                      In Rev Ruling 73-99, the IRS gives two situations regarding the mailing of payroll checks (I think mailing of 1099s is close enough on point) on the last day of the month. If the workers had no opportunity to receive the checks before mailing there is a different conclusion in tax consequences than when they had an opportunity to receive them before mailing. Let us know your thoughts.

                      Comment


                        #12
                        Don’t know why this needs to be an issue.

                        Rocket Man comes and does some work for me on Dec 31st. He leaves me a bill. Since he left without getting paid and left me the bill, he assumes I may take up to a month to pay him. If he expected payment on Dec 31, he would not have left without getting paid.

                        I decide after he leaves to write out a check to pay him. He lives far enough away where driving back to my place to pick up the check is not reasonable. The 41¢ postage method is a far more reasonable way to handle this.

                        IRS Pub 538, page 14, under Cash Method:

                        Income
                        Under the cash method, you include in your gross income
                        all items of income you actually or constructively receive
                        during the tax year. If you receive property and services,
                        you must include their fair market value in income.
                        Constructive receipt. Income is constructively received
                        when an amount is credited to your account or made
                        available to you without restriction. You need not have
                        possession of it….

                        OK, did Rocket Man actually receive the check on Dec. 31? No, he left before I decided to pay his bill. Was payment made available to him on Dec. 31? No it is unreasonable to expect him to drive 60 miles back to my place to pick up the check simply to save 41¢ postage. Was the money credited to his account on Dec. 31? No the post office did not deliver the check to him until Jan. 3rd.

                        Therefore, under the cash method of accounting, Rocket Man did not constructively receive payment until it arrived in the mail. There is no court case, rev rul, or any other citation you can give that says Rocket Man could have driven 60 miles to receive his check to save me 41¢ postage, and therefore he must of had constructive receipt at the moment I decided to pay him. On the other hand, if Rocket Man received the check in the mail on Dec. 31 but decided not to deposit it until Jan 3rd, that would be a different matter.

                        Now lets consider me making payment by writing out the check and dropping it in the mail box before the end of the business day on December 31, 2007.

                        IRS Pub 538, page 14, under Cash Method:

                        Expenses
                        Under the cash method, you generally deduct expenses in
                        the tax year in which you actually pay them….

                        In reading through the entire section in Pub 538 under the cash method, nothing says the recipient has to have constructive receipt of the money in order for it to be considered actually paid by the payer. There is also no court case, rev rul, or any other citation you can give that says actual payment occurs when the bank takes the money out of my account to cover the check. There is also no court case, rev rul, or any other citation you can give that says I have to guess just when the post office might pick up my check out of the mail box and proceed to deliver the thing to the payer. For all I know, the post office left the thing in the mailbox for a week. Who cares? Not my problem, as long as the check left my hands and is in the process of being delivered.

                        Did I pay the expense on Dec. 31?

                        Yes, I wrote out the check and dropped it in the mail.
                        Last edited by Bees Knees; 09-06-2007, 09:01 AM.

                        Comment


                          #13
                          Originally posted by New York Enrolled Agent View Post
                          I Also, suppose you had no cash in the bank when you mailed that check - would that make any difference?
                          Yes........

                          Comment


                            #14
                            Originally posted by Bees Knees View Post
                            Did I pay the expense on Dec. 31?

                            Yes, I wrote out the check and dropped it in the mail.
                            The point I'm trying to make is that dating a check and mailing it on December 31 MAY NOT be controlling. You apparently insist that it is. I would suggest you read the Rev Ruling 73-99 I cited - it clearly shows (IMO) that merely writing & mailing is not sufficient. Always or never are tough words to use in tax discussions.

                            You might also wanted to look at a TC case Estate of Gagliardi. This will also show that the date on a check does NOT always control. I will not exasperate you any further - otherwise, I may run the risk of being "jainened" ( a new word in the tax lexicon).

                            Comment


                              #15
                              Narrow Rulings

                              NYEA, with respect to your obvious grasp on taxation, both of your cites are specific, rather than general situations.

                              In one of them, the issuer dies. In the other, wages are involved where the issuer had opportunity to make the funds available to persons showing up at his facility every day.

                              We are making things hard out of simple here. Like you said, when someone implies "always", all anyone has to do is to contrive a situation where mainstream becomes awkward to apply, and presto!! instant tax guru!!

                              By the way, most of us laymen consider you one of the most helpful and authoritative sources on the forum. No one wants to get into a "Tastes Great!" "Less Filling!" shootout. I don't run the board, but I seriously doubt anyone will be removed for simply speaking their peace. I wish you would post more often than you do.
                              Last edited by Snaggletoof; 09-06-2007, 03:52 PM.

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