Rev. Rul. 54-143

Advice is requested regarding to whom interest (increment in value) earned on a United States savings bond, Series E, registered in the name of two natural persons in the alternative as coowners is income, for Federal income tax purposes, where the bond was purchased entirely with funds of one coowner but he gratuitously permits the other coowner to redeem the bond and retain as hers the entire proceeds. Advice is also requested regarding to whom interest earned on such a savings bond is income where its purchase price was contributed in part by a husband and in part by his wife and it was originally registered in their names in the alternative as coowners but, in order to effect a gift by the wife of her coownership therein to their daughter, is reissued so as to substitute her name as coowner in place of the wife, with the husband continuing as the other coowner.

The amounts and time of increases in redemption values of such savings bonds generally are indicated by tables of redemption values shown thereon. With respect to extended Series E bonds issued prior to May 1, 1942, the periodical increases in their redemption values after their original maturity are indicated in a table in Department Circular 885, C.B. 1951-2, 32. With respect to extended Series E bonds issued on or after May 1, 1942, the periodical increases in their redemption values after their original maturity are indicated in tables A and C in Department Circular 653 (3d Rev.) dated April 29, 1952, a copy of which may be obtained from any Federal Reserve Bank, or the Bureau of the Public Debt, Washington 25, D.C. Such increments in value do not accrue on the bonds ratably, but occur (become earned) only in specific amounts at the end of the first year held after their issue date (except where issued on or after May 1, 1952, the first increment occurs at the end of 6 months after issue date) and at the end of each following half-year period to original or extended maturity or earlier redemption (except where issued on or after May 1, 1952, the final increment period before original maturity is only 2 months). For example, in the case of a Series E savings bond purchased for $75 and bearing an issue date of May 1, 1941, the first, second, and third increments in value occurred (became earned) on May 1, 1942, November 1, 1942, and May 1, 1943, in the amounts of $0.50, $0.50, and $0.50, respectively; and, in the case of a Series E savings bond of the same issue price but bearing an issue date of May 1, 1952, the first, second, and third increments in value occurred on November 1, 1952, May 1, 1953, and November 1, 1953, in the amounts of $0.40, $0.80, and $1, respectively.

As provided with respect to such savings bonds in section 22(d) of the Second Liberty Bond Act (as amended by the Public Debt Act of 1941, C.B. 1941-1, 546), `For the purposes of taxation increment in value represented by the difference between the price paid and the redemption value received (whether at or before maturity) for savings bonds * * * shall be considered as interest.'

In I.T. 3301, C.B. 1939-2, 75, it was held that, where such savings bonds are registered in the names of two natural persons in the alternative as coowners, for example, `Mr. John Jones or Mrs. Mary Jones,' interest (increment in value) earned thereon is income, for Federal income tax purposes, of the coowner whose funds were used to purchase the bonds; and that, if the purchase price was furnished in part by each, the interest is income of each in proportion to his or her respective contribution to the purchase price, provided, however, that coowners who are husband and wife domiciled in a State having community property laws should ordinarily include one-half of the interest as each spouse's income if the bonds are held as community property.

It is held that, where such a savings bond registered in the names of two natural persons in the alternative as coowners was purchased entirely with the funds of one of the coowners, all the interest (increment in value) earned thereon is his income, even though he gratuitously permits the other coowner to redeem the bond (whether at or before its maturity) and retain as hers the entire proceeds. Such holding is consistent with holdings in O.D. 120, C.B. No. 1, 84 (1919); I.T. 3011, C.B. XV-2, 132 (1936); I.T. 3097, C.B. 1937-2, 219; Helvering v. Paul R. G. Horst , 311 U.S. 112, Ct. D. 1472, C.B. 1940-2, 206; and I.T. 3486, C.B. 1941-2, 76, regarding to whom assigned interest income is taxable for Federal income tax purposes.

It is further held that, where the purchase price of such a savings bond registered in the names of a husband and his wife in the alternative as coowners was contributed in part by each spouse and the bond is reissued in the names of the husband and their daughter in the alternative as coowners, the wife's coownership in the bond is then transferred to the daughter. Therefore, whether such transfer was for valuable consideration or as a gift, any interest (increment in value) that accrues (as earned) on the bond thereafter while the daughter remains such coowner is her income in proportion to the wife's contribution to the purchase price, whereas such proportion of any interest that had accrued on the bond before its reissue is income of the wife. Since the husband continued as the original other coowner, interest earned on the bond, whether it had accrued before the reissue or accrues thereafter while he so continues, is his income in proportion to his contribution to the purchase price.

For rules relative to when interest (increment in value) on such savings bonds is returnable, for Federal income tax purposes, see G.C.M. 15875, C.B. XIV-2, 100 (1935); Mimeograph 6327, C.B. 1948-2, 12; and D.C. 885, supra (the latter relating, inter alia , to Series E bonds held after their original maturity). In regard to by whom and when interest on such savings bonds held in trust by a bank is returnable, see I.T. 3575, C.B. 1942-2, 113.