donation of bonds

[Bees Knees]

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).

Nobody on this message board has ever been banned for arguing tax law with me, or anyone else. There are two general categories of people who have been banned from using this board: 1) Those who have posted spam; 2) Those who have ignored private emails from the board sponsors asking them to refrain from certain behavior. If you are not posting spam, or if you are not receiving private emails warning you to stop doing something, then you have no fear of being banned.

In regards to your two citations, Rev Rul 73-99 applies to employee wages. The basic tax law concept in this Revenue Ruling is that an employer is considered to have paid wages when the employee has “constructive receipt” of those wages.

You cannot apply this ruling to other areas of income tax law. The ruling says in part:

“For Federal employment tax purposes, wages are paid by an employer at the time they are actually or constructively paid, with certain exceptions not material here. Wages are constructively paid when they are credited to the account or set apart for an employee so that they may be drawn upon by him at any time although not then actually reduced to possession. To constitute payment in such a case the wages must be credited to or set apart for the employee without any substantial limitation or restriction as to the time or manner of payment or condition upon which payment is to be made, and must be made available to him so that they may be drawn upon at any time, and their payment brought within his own control and disposition. See sections 31.3121(a)-2, 31.3301-4, and 31.3402(a)-1(b) of the Employment Tax Regulations.”

Note that this revenue ruling says for Federal employment tax purposes. Federal employment taxes are not Federal income taxes. They are similar, but not the same. How many times have we talked about issues on this board where you cannot apply the principle of one set of tax rules to another? In this case, the Revenue Ruling specifically applies to Federal employment tax law. You cannot take the principle out of context and apply it to other areas of the law. That would be like saying because the self-employment tax rules under Section 1402 exclude rentals from real estate, then rentals from real estate must also be excluded from income taxes. Of course we know that is not true. Likewise, a principle or rule from Section 3121 and 3301 cannot be applied to other areas of tax law, unless those other areas say the principle behind Sections 3121 and 3301 apply.

Likewise, Gagliardi deals with the completed gift rules under the Federal Estate and Gift Tax laws. Again, you cannot apply the principle of one law to another, unless it specifically says so.

Accounting rules for Cash and Accrual taxpayers fall under Sections 446 – 448. Find a court case or Rev Rul that talks about these code sections where the principle of constructive receipt for the recipient determines when the payer gets the deduction.

[Snaggletoof]

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.

[New York Enrolled Agent]

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).

[Davc]

I Also, suppose you had no cash in the bank when you mailed that check - would that make any difference?

Yes........

[Bees Knees]

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.

[New York Enrolled Agent]

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.

[Bees Knees]

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.

[Davc]

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

[New York Enrolled Agent]

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.

[Bees Knees]

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.

[John of PA]

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.

[S T]

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

[Golden Rocket]

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?

[DonPriebe]

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.

[Bees Knees]

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.