Rev. Rul. 66-45

Advice has been requested with respect to the application of section 1.451-2 of the Income Tax Regulations relating to constructive receipt of interest earned on nonnegotiable savings certificates described below.

A bank issued interest-bearing nonnegotiable sabings certificates in multiples of $100. The bank agreed to pay the face amount of the certificate, with interest, to the holder at the end of 1 year, provided the holder made written demand for such payment on or before the expiration of such year.

If written demand was not made, the certificate remained in force and was redeemable at the end of each 6-month period thereafter. The bank was obligated to pay the face amount of the certificate, with interest, at the expiration of any such period within which demand for payment was made.

No crediting of interest on this certificate was made until the holder presented it for redemption, at which time the bank paid the face amount and all earned interest. The certificate could be redeemed only at the end of the first year or any subsequent 6-month period within which the holder made demand for payment and surrendered the certificate.

Section 1.451-2(a) of the regulations, as amended by Treasury Decision 6723, C.B. 1964-1 (Part 1), 73, provides that income although not actually reduced to a taxpayer's possession is constructively received by him in the taxable year in which it is credited to his account, set apart for him, or otherwise made available so that he may draw upon it at any time, or so that he could have drawn upon it during the taxable year if notice of intention to withdraw had been given. However, income is not constructively received if the taxpayer's control of its receipt is subject to substantial limitations or restrictions.

The phrase `or otherwise made available' was added to the first sentence of paragraph (a) of section 1.451-2 of the regulations to make it clear that it is a right of withdrawal during the taxable year, rather than the formal setting apart or crediting of income, which causes such income to be constructively received.

Section 1.451-2(a)(3) of the regulations provides that a requirement that the earnings may be withdrawn only upon a withdrawal of all or part of the deposit or account is not a substantial limitation or restriction on the taxpayer's control over the receipt of such earnings.

It is further provided in section 1.451-2(a)(4) of the regulations that a requirement that notice be given prior to withdrawal is also not a substantial limitation.

Accordingly, interest on nonnegotiable savings certificates issued by a bank, which is not credited periodically to a certificate holder but paid only upon the surrender and redemption of the certificates, is includible in the gross income of the holder, employing the cash receipts and disbursements method of accounting, in each taxable year in which the holder either has the right to redeem the certificate or could have had such right through making written demand for payment.

The provisions of Revenue Procedure 64-24, C.B. 1964-1 (Part 1), 693, relating to closing arrangements for interest earned on deposits or accounts opened before November 15, 1962, apply to interest on these nonnegotiable savings certificates.

Revenue Ruling 60-145, C.B. 1960-1, 182, to the extent that it is in conflict with the result required by section 1.451-2 of the regulations as explained above, is hereby modified.