Rev. Rul. 82-113

ISSUE

When does a taxpayer report interest earned on an All-Savers Certificate under the situations described below?

FACTS

Situation 1. On October 1, 1981, A, an individual on the cash receipts and disbursements method of accounting, purchased a qualified All-Savers Certificate. The interest income on the certificate was not credited or otherwise made available by the bank to A prior to the maturity of the certificate. A received $1,200 in interest in 1982 on the All-Savers Certificate. A does not file a joint return under Section 6013 of the Internal Revenue Code.

Situation 2. The facts are the same as in Situation 1 except that the interest income on the certificate is credited and made available by the bank to A at the end of each month. A was thus credited with $300 in interest in 1981 from the All-Savers Certificate and $900 in interest in 1982. Although $300 in interest was made available by the bank to A in 1981. A did not actually withdraw this interest in 1981.

Situation 3. The facts are the same as in Situation 2 except that A purchased the certificate on February 1, 1982. A was thus credited with $1,100 in interest in 1982 from the All-Savers Certificate and $100 in interest in 1983. Although $1,100 in interest was made available by the bank to A in 1982, A did not actually withdraw this interest in 1982.

In all situations, the All-Savers Certificates are subject to a substantial forfeiture provision for early withdrawal.

LAW AND ANALYSIS

Section 128(a) of the Code provides that gross income does not include any amount received by an individual during the taxable year as interest on a depository institution tax-exempt savings certificate ("All-Savers Certificate").

Section 128(b) of the Code provides, in part, that the aggregate amount excludable under section 128(a) for any taxable year shall not exceed the excess of (A) $1,000 ($2,000 in the case of a joint return under section 6013), over (B) the aggregate amount received by the taxpayer that was excludable under section 128(a) for any prior taxable year.

Section 128(f)(1) states that section 116, which excludes from gross income some interest received in 1981, shall not apply to the interest on any depository institution tax-exempt savings certificate.

Section 451(a) of the Code provides that the amount of any item of gross income received by the taxpayer will be included in the gross income of the taxpayer in the taxable year received unless, under the method of accounting used in computing taxable income, such amount is to be properly accounted for as of a different period.

Section 1.451-2(a) of the Income Tax Regulations provides that income, although not actually reduced to a taxpayer's possession, is constructively received by the taxpayer in the taxable year credited to the taxpayer's account, set apart for the taxpayer, or otherwise made available to be drawn upon at any time or so that it could have been drawn upon during the taxable year if notice of intention to withdraw had been given.

Section 1.451-2(b) of the regulations provides that the amount of dividends or interest credited on savings bank deposits or to shareholders of organizations such as building and loan associations or cooperative banks is income to the depositor or shareholder for the taxable year when credited. However, if any portion of the dividends or interest is not subject to withdrawal at the time credited, that portion is not constructively received and does not constitute income to the depositor or shareholder until the taxable year in which the portion first may be withdrawn.

Rev. Rul. 80-157, 1980-1 C.B. 186, provides that interest income on a 6-month non-negotiable time deposit certificate that is not credited or made available for the holder to withdraw before maturity of the certificate without penalty is not includible in the gross income of the holder prior to the redemption or maturity of the certificate. However, for certificates on which interest is credited monthly or quarterly, which can be withdrawn immediately without penalty, even though the principal cannot be withdrawn without penalty until maturity of the certificates, the interest must be included in the holder's gross income for the taxable year credited to the account of the holder or made available for withdrawal by the holder.

In Situation 1, the interest earned on the All-Savers Certificate is neither paid nor made available to A by the bank to withdraw prior to the maturity of the certificate. In Situation 2 and Situation 3, the interest actually earned on the All-Savers Certificate is made available to A by the bank monthly as earned.

HOLDINGS

In Situation 1, the $1,200 of interest earned by A on the All-Savers Certificate, when held to maturity, is reportable by A in 1982, the year the certificate matures. In 1982 A must include in gross income $200, the amount of interest earned by A that exceeds the limitations of section 128(b) of the Code.

In Situation 2, the $300 of interest earned and made available in 1981 to A is reportable by A in 1981. However, because the interest earned and made available does not exceed the limitations of section 128(b) of the Code, A may exclude it in 1981. In 1982 $900 of the interest earned is reportable by A and A must include in gross income $200 ($900 - $700, the balance of the $1,000 section 128(b) exclusion), the amount of interest earned by A in 1982 that exceeds the limitations of section 128(b) of the Code.

In Situation 3, the $1,100 of interest earned and made available in 1982 to A is reportable by A in 1982. Further, because the interest earned and made available exceeds the limitations of section 128(b) of the Code, A must include in gross income in 1982 $100 ($1,100 - $1000, the section 128(b) exclusion). In 1983, A must include $100 in gross income since the entire 128(b) exclusion was used in 1982.