Rev. Rul. 64-302

Advice has been requested whether previously unreported increment in value (hereinafter referred to as interest) on United States savings bonds is includible in the Federal income tax return of the owner at the time of transfer to a trust under the circumstances described below.

A exchanged Series E United States savings bonds, on which the interest had not been reported for Federal income tax purposes, for a Series H bond, and elected to continue to defer reporting the interest accumulated on the Series E bonds.

A then had the Series H bond reissued in the name of a trustee of a trust he created. The trust will terminate after a period of 10 years and the corpus of the trust will revert to A . The trust instrument provides that the unreported interest income on the bond transferred in trust shall be allocated to corpus and upon the occurrence of a taxable event with respect to that interest income during the term of the trust, the interest income shall be taxable to the grantor as income held or accumulated for future distribution to him within the provisions of sections 677(a)(2) and 671 of the Internal Revenue Code of 1954.

The owners of Series E bonds have been granted the privilege of exchanging those bonds for Series H bonds and continuing to defer the reporting of interest on the bonds exchanged to the taxable year in which the Series H bonds are disposed of, are redeemed, or have reached final maturity, whichever is earlier. (1959 Treasury Department Circular No. 1036, C.B. 1960-1,855.)

A grantor having a reversionary interest in trust corpus is treated as the owner of any income of the trust which is allocable to corpus (as income held or accumulated for future distribution to him) and will be taxable on such income. (Sections 677(a)(2) and 671 of the Code.)

Whether the unreported interest on the Series E bonds, exchanged for a Series H bond, is required to be included in the Federal income tax return of the owner, at the time of the transfer of the Series H bond to the trust under the circumstances outlined above, depends on whether the Series H bond may be considered to have been `disposed' of within the meaning of the statute and the regulations.

In Revenue Ruling 58-2, C.B. 1958-1, 236, it is held that since the taxpayer did not realize the benefit of the interest at the time of the transfer of Series E bonds to a revocable trust, the taxpayer was not required to include in his gross income, for Federal income tax purposes, the amount accumulated to the date of transfer. Under the provisions of section 676 of the Code (pertaining to revocable trusts) the taxpayer (grantor) was still considered the owner of the bonds.

The Revenue Ruling holds, in essence, that there was no `disposition' of the bonds when they were transferred to the revocable trust.

In the instant case the taxpayer (grantor) is considered the owner under section 677(a)(2) of the Code of that portion of the trust corpus which represents the accumulated and unreported interest income on the Series E bonds exchanged for the Series H bond transferred in trust but which, by reason of the taxpayer's method of accounting or a relief provision of the Code, was not reported by the grantor as income for Federal income tax purposes. On the termination of the trust the entire corpus will revert to the taxpayer (grantor). Consequently, the Series H bond is not considered to have been `disposed' of when transferred to the trust.

It is the position of the Service that the reissuance of a Series H bond (received upon exchange of Series E bonds on which the reporting of interest has been deferred), in the name of a trustee, where the corpus will revert to the grantor and any previously unreported interest income is allocable to corpus, will not result, for Federal income tax purposes, in a taxable event at the time of such reissuance. Accordingly, the grantor will not be required to include in his gross income, for Federal income tax purposes, in the taxable year or period when reissuance of the Series H bond is effected, previously unreported interest that had accumulated on the Series E bonds so exchanged. He should include that interest in his gross income for the taxable year in which the Series H bond is disposed of, is redeemed, or reaches final maturity, whichever is earlier.