Other Issues Affecting Bonds

<div class="Section1">According to IRS Publication 550, if a child is the owner of an E, EE, or I bond, the election to report interest annually may be made by the child or by the parent. The choice is made by filing a return showing all the interest earned throughout the year and stating that the child is electing to report interest each year. The child then does not have to file another return until he or she has enough gross income during a year to require filing.<div class="Section1"><br /> <br /> A child could elect to change from annual to deferred reporting under Revenue Procedure 89-46. This provision is not included in the current revenue procedure governing such elections.<a href="#_ftn1" name="_ftnref1">¹</a> However, Publication 550 states that neither the parent nor the child can change the way that interest is reported unless permission from the IRS is requested (in accordance with the procedures outlined in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7679">7679</a>). Thus, it appears that a child may make such election. If the election is available, the parent of a child making such an election may sign Form&nbsp;3115 on behalf of the child. <em><em>See</em> </em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="679">679</a> for an explanation of the taxation and filing requirements of children under age 14.<br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp; Rev. Proc. 2002-9, 2002-1 CB 327.<br /> <br /> </div></div><br />

<div class="Section1">A REMIC is a &ldquo;real estate mortgage investment conduit.&rdquo; In general, a REMIC is a fixed pool of real estate mortgages that issues multiple classes of securities backed by the mortgages and that has elected to be taxed as a REMIC. It can issue several different classes of &ldquo;regular interests&rdquo; and must issue one (and only one) class of &ldquo;residual interests.&rdquo;<a href="#_ftn1" name="_ftnref1">¹</a> A regular interest is a debt obligation (or is treated as one) and a &ldquo;residual interest&rdquo; participates in the income or loss of the REMIC.<a href="#_ftn2" name="_ftnref2">²</a> A REMIC is not treated as a separate taxable entity (unless it engages in certain prohibited transactions); instead, the income is taxable to the interest holders as explained in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7694">7694</a>.<a href="#_ftn3" name="_ftnref3">³</a><div class="Section1"><br /> <br /> Generally, entities that do not qualify as REMICs, but that issue multiple maturity debt obligations, the payments on which are related to payments on the mortgages and other obligations held by the entity, are classified as Taxable Mortgage Pools (TMPs).<a href="#_ftn4" name="_ftnref4">⁴</a> (Domestic building and loan associations are not considered TMPs.) TMPs are taxed as corporations.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp; IRC &sect;&nbsp;860D.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp; IRC &sect;&sect;&nbsp;860B, 860C.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp; IRC &sect;&sect;&nbsp;860A, 860F(a)(1).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;&nbsp; IRC &sect;&nbsp;7701(i)(2); Treas. Reg. &sect;&nbsp;301.7701(i)-1(b).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp;&nbsp; IRC &sect;&nbsp;7701(i).<br /> <br /> </div></div><br />

<div class="Section1">The IRS released regulations relating to the proper timing and source of income from fees received to induce the acquisition of noneconomic residual interests in REMICS. The regulations provide that an inducement fee must be included in income over a period reasonably related to the period during which the applicable REMIC is expected to generate taxable income (or net loss) allocable to the holder of the noneconomic residual interest. Under a special rule applicable upon disposition of a residual interest, if any portion of an inducement fee received with respect to becoming the holder of a noneconomic residual interest has not been recognized in full by the holder as of the time the holder transfers (or otherwise ceases to be the holder for federal income tax purposes) that residual interest in the applicable REMIC, the holder must include the unrecognized portion of the inducement fee in income at that time.</div><br /> <div class="Section1"><br /> <br /> The regulations set forth two safe harbor methods of accounting for inducement fees, and contain a rule that an inducement fee is income from sources within the United States.<a href="#_ftn1" name="_ftnref1">¹</a> The Service also released the procedures by which taxpayers can obtain automatic consent to change from any method of accounting for inducement fees to one of the two safe harbor methods.<a href="#_ftn2" name="_ftnref2">²</a> The Service reached a settlement with two entities that purportedly brokered noneconomic residual interests in a manner based on what the IRS perceived to be an overly aggressive interpretation of the tax laws.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.   Treas. Reg. §§ 1.446-6, 1.860C-1(d), 1.863-1(e), 1.863-1(f), 69 Fed. Reg. 26040 (5-11-2004).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.   Rev. Proc. 2004-30, 2004-1 CB 950.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.   IR-2004-97 (July 26, 2004).<br /> <br /> </div>

<div class="Section1">Zero coupon bonds are obligations payable without interest at a fixed maturity date and issued at a deep discount. Maturities can range from short-term to long-term. For tax purposes, they are considered original issue discount bonds, and the original issue discount is included in ordinary income depending on when issued, as explained in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7635">7635</a> and Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7650">7650</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7653">7653</a>.<a href="#_ftn1" name="_ftnref1">¹</a> In the case of a tax-exempt zero-coupon bond, the original issue discount is apportioned among holders as explained in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7651">7651</a>, but not included in income.<a href="#_ftn2" name="_ftnref2">²</a><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp; Rev. Rul. 75-112, 1975-1 CB 274.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp; Rev. Rul. 73-112, 1973-1 CB 47.<br /> <br /> </div></div><br />

<div class="Section1">In 2003, the Treasury Department extended the minimum holding period applicable to United States savings bonds from six to 12 months, effective with issues dated on and after February 1, 2003. The minimum holding period is the length of time from issue date that a bond must be held before it is eligible for redemption. Both Series EE and Series I savings bonds are affected. Series EE and Series I savings bonds bearing issue dates prior to February 1, 2003, retain the six-month holding period in effect when they were issued.<a href="#_ftn1" name="_ftnref1">¹</a></div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.   News Release (1-15-2003) at: https://home.treasury.gov/system/files/276/2003-q4-data-files.pdf.<br /> <br /> </div>

<div class="Section1">Patriot Bonds are regular Series EE Savings Bonds specially inscribed with the legend “Patriot Bond.” As with regular Series EE Savings Bonds, Patriot Bonds are sold at one-half of face value ($50, $75, $100, $200, $500, $1,000, $5,000, and $10,000). Patriot Bonds earn 90 percent of five-year Treasury security yields. Patriot Bonds increase in value monthly, but interest is compounded semiannually. Interest on Patriot Bonds is exempt from state and local income taxes; federal tax can be deferred until the bond is redeemed or it stops earning interest (in 30 years). Patriot bonds can be redeemed any time after six months for issue dates of January 2003 and earlier; bonds with issue dates on or after February 1, 2003, can be cashed any time after 12 months. Depending on interest rates, bonds may actually reach face value anywhere between 12 and 17 years. However, a three-month interest penalty is applied to bonds redeemed before five years. Patriot Bonds can be purchased in person at banks or credit unions, or on the Internet at: http:www.savingsbonds.gov.<a href="#_ftn1" name="_ftnref1">¹</a></div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.   Treasury Press Release, Treasury Department Unveils Patriot Bond on 3-Month Anniversary of September 11 Attacks (Dec. 22, 2001).<br /> <br /> </div>

<div class="Section1">Any &ldquo;excess inclusion&rdquo; (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7695">7695</a>) for any taxable year is not to be taken into account in determining the amount of any net operating loss (NOL) for the taxable year (i.e., in determining the loss for a &ldquo;loss year&rdquo;).<a href="#_ftn1" name="_ftnref1">¹</a> Any excess inclusion for a taxable year is not to be taken into account in determining taxable income for the taxable year for purposes of Subsection (a)(2)(B)(ii)(I) and the second sentence of IRC Section&nbsp;172(b)(2).<a href="#_ftn2" name="_ftnref2">²</a><div class="Section1"><br /> <br /> The Service has ruled that in computing an NOL for the taxable year, no excess inclusion is taken into account. If, during the same taxable year, a taxpayer both recognizes an excess inclusion and incurs an NOL, the excess inclusion may not be offset by the NOL and is not taken into account in determining the amount of the NOL that may be carried to another taxable year.<br /> <br /> The Service has further ruled that if an NOL is carried back or carried over to a taxable year in which an excess inclusion is recognized, the excess inclusion cannot be offset by the NOL carryback or carryover, and is not included in the calculation of taxable income for NOL absorption purposes.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp; IRC &sect;&nbsp;860E(a)(3)(A).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp; IRC &sect;&nbsp;860E(a)(3)(B), as amended by the 2020 CARES Act.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp; Rev. Rul. 2005-68, 2005-2 CB 853.<br /> <br /> </div></div><br />

<div class="Section1">A stripped bond is a bond issued with interest coupons where the ownership of any unmatured coupon is separated from the ownership of the rest of the bond.<a href="#_ftn1" name="_ftnref1">¹</a> It may be a Treasury, corporate, or municipal obligation. With respect to purchases after July 1, 1982, a coupon includes any right to interest.<a href="#_ftn2" name="_ftnref2">²</a></div><br /> <div class="Section1"><br /> <br /> In 2002, the Service released guidance on the application of the coupon stripping rules to certain fees payable out of mortgage payments received by mortgage pool trusts.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> In 2008, the Treasury Department lowered the minimum and multiple amounts of Treasury marketable notes, bonds, and Treasury Inflation-Protected Securities (TIPS) that may be stripped from $1,000 to $100. The change applies to all Treasury marketable securities eligible for stripping (notes, bonds, plus TIPS issued after January 15, 1985) outstanding on and after April 7, 2008.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.   IRC § 1286(e)(2).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.   IRC § 1286(e)(5).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.   Chief Counsel Notice CC-2002-016 (Jan. 24, 2002).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.   31 Uniform Offering Circular CFR Part 356, 73 Fed. Reg. 14937 (Mar. 20, 2008).<br /> <br /> </div>

<div class="Section1">A taxpayer who stripped bonds and then sold the bonds and retained the detached coupon properly allocated his or her entire basis to the stripped bonds and was not required, for purposes of determining loss, to allocate basis between the coupons detached and retained and the stripped bonds sold (as is required for transactions occurring after July 1, 1982).<a href="#_ftn1" name="_ftnref1">¹</a> However, the taxpayer was required to treat the coupon as a right to interest, so that on sale or redemption of the coupons, the entire proceeds would have been characterized as interest.<a href="#_ftn2" name="_ftnref2">²</a></div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.   TAM 8602006.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.   Rev. Rul. 58-275, 1958-1 CB 22.<br /> <br /> </div>

<div class="Section1"><br /> <br /> Ordinarily, an election made by the owner of an E, EE, or I bond to report interest annually applies to all E, EE, and I bonds then owned or subsequently acquired.<a href="#_ftn1" name="_ftnref1">¹</a> However, a taxpayer who reports interest annually may elect to change to deferred reporting with automatic consent of the IRS, provided certain requirements are met. To obtain <em>automatic consent</em> for the taxable year for which the change is requested, the taxpayer may file a <em>statement</em> in lieu of Form 3115.<a href="#_ftn2" name="_ftnref2">²</a> The statement must be identified at the top as follows: “CHANGE IN METHOD OF ACCOUNTING UNDER SECTION 6.01 OF THE APPENDIX OF REV. PROC. 2002-9.” The statement must set forth:<br /> <blockquote>(i) the Series E, EE, or I savings bonds for which the change in accounting method is requested;<br /> <br /> (ii) an agreement to report all interest on any bonds acquired during or after the year of change when the interest is realized upon disposition, redemption, or final maturity, whichever is earliest; and<br /> <br /> (iii) an agreement to report all interest on the bonds acquired before the year of change when the interest is realized upon disposition, redemption, or final maturity, whichever is earliest, with the exception of any interest income previously reported in prior taxable years.</blockquote><br /> The statement must include the name and Social Security number of the taxpayer underneath the heading.<a href="#_ftn3" name="_ftnref3">³</a> The change is effective for any increase in redemption price occurring after the beginning of the year of change for all Series E, EE, and I savings bonds held by the taxpayer on or after the beginning of the year of change.<a href="#_ftn4" name="_ftnref4">⁴</a> The taxpayer must attach the signed statement to his or her tax return for the year of the change, which must be filed by the due date (including extensions).<a href="#_ftn5" name="_ftnref5">⁵</a> (Alternatively, instead of filing the statement, the taxpayer can request permission to change from deferred reporting to annual reporting by filing Form 3115 and following the form instructions for an automatic change.) If the taxpayer is precluded from using the automatic consent procedure under Revenue Procedure 2002-9, above, the taxpayer must file Form 3115 in accordance with the regulations.<a href="#_ftn6" name="_ftnref6">⁶</a><br /> <br /> Taxpayers may switch from deferred reporting to annual reporting in any year without permission; however, an election under Revenue Procedure 2002-9 may not be made more than once in any five-year period.<a href="#_ftn7" name="_ftnref7">⁷</a> The year of change is <em>included</em> within the five-year prohibition regarding prior changes.<a href="#_ftn8" name="_ftnref8">⁸</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.   IRS Pub. 550.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.   Rev. Proc. 2002-9, 2002-1 CB 327, Appendix 6.01, as modified by Rev. Proc. 2013-20, 2013-1 CB 744; Rev. Proc.2008-52, 2008-2 CB 587.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.   IRS Pub. 550.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.   Rev. Proc. 2002-9, above, Appendix § 6.01.<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.   IRS Pub. 550.<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.   Rev. Proc. 2002-9, above, § 4.03.<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.   Rev. Proc. 2002-9, above, § 4.02(6); IRC § 454; 31 CFR § 351.8(b).<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.   Rev. Proc. 2002-9, above, § 4.02(6).<br /> <br /> </div>