Rev. Rul. 55-278

Advice has been requested relative to the proper value to be used by A , for Federal gift tax purposes, where Series E United States savings bonds registered in the names of A and his son B in the alternative as coowners, which A had purchased in 1948 entirely with his own funds, were reissued in 1953 in the name of B alone in order to effect a gift to him of A's coownership therein. Advice has also been requested regarding to whom and when the interest (increment in value) that had accrued (as earned) on the bonds before their reissue is taxable, for Federal income tax purposes. A and B are domiciled in a State which does not have community property laws.

Section 1005 of the Internal Revenue Code of 1939 provides that `If the gift is made in property, the value thereof at the date of the gift shall be considered the amount of the gift,' and section 86.17 of Regulations 108 provides similarly. Section 86.19 of Regulations 108 provides, in part, that `The value at the date of the gift in the case of * * * bonds, within the meaning of the statute, is the fair market value per * * * bond on such date.' However, since Series E United States savings bonds are generally nonnegotiable and nontransferable, they are nonmarketable and, accordingly, have no particular `market' value. Although ownership therein is transferable by death and by reissue in certain cases (U.S.Savings Bond Regulations, Department Circular No. 530, 7th Rev., dated May 21, 1952), their only definitely indicated or ascertainable value is the amount at which they are redeemable by the United States Treasury. In Mim. 5109, C.B. 1940-2, 283, and Mim. 5202, C.B. 1941-2, 241, it was held, inter alia :

If `John Jones' purchases with his separate funds savings bonds and has them registered in his name and that of another individual in the alternative as coowners, for example, `John Jones or Mrs. Ella S. Jones,' there is no gift for Federal gift tax purposes, unless and until he during his lifetime gratuitously permits `Mrs. Ella S. Jones' to redeem them and retain the proceeds as her separate property, in which event a gift of the then redemption value of the bonds would be made. Of course, such bonds if not previously redeemed would on the death of `John Jones' be includible in his gross estate for estate tax purposes at their full redemption value.

In other words, such a coownership in Series E United States savings bonds as is here involved does not constitute a tenancy by the entirety (see sections 86.2(a)(6) and 86.19(h) of Regulations 108), tenancy in common, joint tenancy (see section 86.2(a)(5) of Regulations 108), nor ownership similar to a joint bank account (see section 86.2(a)(4) of Regulations 108). A acquired full beneficial ownership of the bonds at time of purchase. This benefical ownership would not be extinguished during A's lifetime until (1) A surrenders the bonds to B and gratuitously permits him to cash them and retain the proceeds or (2) the bonds are reissued in B's name alone. In the meanwhile, for all practical purposes B has only the hope or expectancy that either event ((1) or (2)) might occur. Therefore, it is held that the proper value to be used by A , for Federal gift tax purpose, with respect to his gift to B of his coownership in such bonds which he had purchased entirely with his own funds is their redemption value at the time they were reissued. The redemption values of such bonds during their original terms generally are indicated in tables on the bonds. The redemption values after the original maturities of Series E bonds issued prior to May 1, 1942, are indicated in table B in Department Circular 653 (3rd 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. The redemption values after the original maturities of Series E bonds issued on or after May 1, 1942, are indicated in tables A and C of that Circular.

In Revenue Ruling 54-143, C.B. 1954-1, it was held, inter alia , 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, any interest (increment in value) that had accrued (as earned) on the bond before its reissue is income, for Federal income tax purposes, of the wife in proportion to her contribution to the purchase price. Consistently, it is held that the interest (increment in value) that had accrued (as earned) on the bonds in the instant case before their reissue is all income of A . As indicated in section 39.42-6 of Regulations 118, and section 29.42-6 of Regulations 111, such interest (increment in value) does not accrue ratably between the dates on which the redemption values increase, but, as outlined in Revenue Ruling 54-143, supra , the increments occur (become earned) only in specific (fixed) amount at the end of certain periods.

In Revenue Ruling 54-143, supra , however, no question was presented or resolved regarding when , the interest (increment in value) held therein to be income of the wife was returnable by her, for Federal income tax purposes, if she had not already returned it as income on the accrual basis or pursuant to election under Code section 42(b). Although references were made in that Revenue Ruling to established general rules relative to when interest (increment in value) on such savings bonds is returnable under certain circumstances ordinarily involved, none included transfer of coownership in such bonds by reissue and realization of earned interest (increment in value) thereon by thus effecting a gift of it. The references were made for general information and because the rules apparently were, or would be, applicable to the interest income of the husband (who continued as original coowner), of the daughter (after she became coowner instead of the wife), and of the wife (to the extent she may already have properly returned it), and also to interest earned on a coowned bond held in the Revenue Ruling to be all income of one coowner, where he had purchased the bond entirely with his funds, even though he gratuitously permits the other coowner to redeem it and retain the entire proceeds. It is held that the interest (increment in value) that had accrued (as earned) on the bonds in the instant case before their reissue is all includible in A's gross income for his taxable year or period wherein he thus made a gift of it, except such interest as he has properly returned as income previously. A realized the benefit of such interest when he made the gift thereof, since it was then already earned and he could have realized its benefit in cash payment by obtaining redemption of the bonds but chose instead to realize its benefit in a gift thereof to B by causing the bonds to be reissued in the latter's name alone. See Helvering v. Paul R.G. Horst , 311 U.S. 112, Ct. D. 1472, C.B. 1940-2, 206. See, generally, I.T. 3357, C.B. 1940-1; 11; International Freighting Corporation , Inc. v. Commissioner , 135 Fed.(2d) 310, affirming 45 B.T.A. 716; and Isidore Brown, et ux. , v. Commissioner , 22 T.C. 147, affirmed 220 Fed.(2d) 12. Compare I.T. 3011, C.B. XV-2, 132 (1936); and I.T. 3097, C.B. 1937-2, 219.

The above holding is applicable where the reissue occurs during he extended maturity period of Series E bonds as well as where it occurs during their original term. See Code section 42(d), as added by section 2 of Public Law, 82d Cong., 66 Stat. 26, 26 U.S.C. 42, C.B. 1951-1, 182