Internal Revenue Service
Revenue Ruling
Rev. Rul. 64-104
1964-1 C.B. 223
Sec. 454
Sec. 691
Caution: Distinguished by Rev. Rul. 68-145
IRS Headnote
An individual died owning Series E United States savings bonds. He also
owned Series H United States savings bonds which he had acquired in
exchange for Series E bonds. The decedent employed the cash receipts and
disbursements method of accounting and had not made the election, under
section 454(a) of the Internal Revenue Code of 1954, to report the increase
in redemption price of the Series E bonds each year as it accrued. Held ,
(1) the unreported increment in value reflected in the redemption price of
the Series E bonds as of the date of the decedent's death, (2) the
unreported increment in value of the Series E bonds which constituted a
part of the consideration paid for Series H bonds, and (3) interest, if
any, payable on the Series H bonds but not received as of the date of the
decedent's death, constitute income in respect of a decedent under section
691(a) of the Code.
Full Text
Rev. Rul. 64-104
Advice has been requested regarding the applicability of section 691 of the
Internal Revenue Code of 1954 to (1) the unreported increment in value of
Series E United States savings bonds, (2) the unreported increment in value
of Series E bonds which had proviously constituted a portion of the
consideration paid for Series H United States savings bonds, and (3) the
interest on Series H bonds, under the circumstances described below.
A decedent died owning Series E United States savings bonds. He also owned
Series H United States savings bonds which he had acquired in exchange for
other Series E bonds in a transaction pursuant to the provisions of section
1037(a) of the Code. The decedent had regularly filed his income tax
returns employing the cash receipts and disbursements method of accounting
and had not made an election under section 454(a) of the Code to report the
increment in value of the Series E bonds occurring prior to or within the
taxable year of such an election and as it accrued in each taxable year
thereafter.
Section 691(a) of the Code provides the general rule that the amount of all
items of gross income in respect of a decedent which are not properly
includible in respect of the taxable period in which falls the date of his
death or a prior period shall be included in the gross income, for the
taxable year received, of (1) the estate of the decedent, if the right to
receive the amount is acquired by the decedent's estate from the decedent;
(2) the person who, by reason of the death of the decedent, acquires the
right to receive the amount, if the right to receive the amount is not
acquired by the decedent's estate from the decedent; or (3) the person who
acquires from the decedent the right to receive the amount by bequest,
devise or inheritance, if the amount is received after a distribution by
the decedent's estate of such right.
Section 1.691(a)-1(b) of the Income Tax Regulations defines the term
`income in respect of a decedent,' in general, as amounts to which a
decedent was entitled as gross income but which were not properly
includible in computing his taxable income for the taxable year ending with
the date of his death or for a previous taxable year under the method of
accounting employed by the decedent. Thus, income in respect of a decedent
includes all accrued income of a decedent who reported his income by use of
the cash receipts and disbursements methods.
An owner of Series E bonds employing the cash receipts and disbursements
method of accounting, who has not made the election under section 454(a) of
the Code, shall include the increment in value of such bonds in his gross
income when the bonds are disposed of, are redeemed or have reached final
maturity, whichever is earlier.
Where an individual acquires Series H bonds in exchange for Series E bonds
under section 1037(a) of the Code, with respect to which Series E bonds he
has not made and does not make the election provided by section 454(a) of
the Code, the unreported increment in value of such Series E bonds at the
time of the exchange will not be recognized for Federal income tax purposes
until the Series H bonds so acquired are disposed of, are redeemed or have
reached final maturity, whichever is the earlier. See section 339.1 of
Treasury Department Circular No. 1036, C.B. 1960-1, 855. However, interest
paid on the Series H bonds is subject to Federal income tax for the taxable
year in which received.
The increment in value of Series E bonds does not accrue ratably between
the dates on which the redemption values increase, but, as outlined in
Revenue Ruling 54-143, C.B. 1954-1, 12, at 13, the increments occur (become
earned) only in specific (fixed) amounts at the end of certain periods. See
also section 1.454-1(a)(2) of the regulations; Revenue Ruling 58-435, C.B.
1958-2, 370; and Revenue Ruling 55-278, C.B. 1955-1, 471.
Likewise, interest on Series H bonds does not accrue ratably between the
dates on which the interest is payable but only becomes earned on the date
the interest is payable. See section 315.32(h) of the United States
Treasury Department Regulations Governing United States Savings Bonds,
contained in Treasury Department Circular No. 530, Eighth Revision,
December 26, 1957, as amended.
The increment in value of Series E bonds actually earned as of the date of
the decedent's death, the increment in value of the Series E bonds included
in the issue price of the Series H bonds, and any interest due and payable
on the Series H bonds on the date of the decedent's death, represent
amounts to which the decedent in the instant case was entitled as gross
income. However, because the decedent employed the cash receipts and
disbursements method of accounting and had not made the election under
section 454(a) of the Code, these amounts were not properly includible in
his gross income in computing his taxable income for the taxable year
ending with the date of his death or for a previous taxable year.
Accordingly, it is held that in the instant case, (1) the unreported
increment in value reflected in the redemption value of the Series E bonds
as of the date of the decedent's death, (2) the unreported increment in
value of the Series E bonds which constituted a part of the consideration
paid for the Series H bonds, and (3) interest, if any, payable on the
Series H bonds but not received as of the date of the decedent's death,
constitute income in respect of a decedent under section 691(a) of the
Code.
Therefore, the unreported increment in value of the Series E bonds still
held by the decedent at his death in this case should be returned as income
for the taxable year in which the bonds are disposed of, are redeemed or
have reached final maturity, whichever is earlier, by the estate of the
decedent, or by the person entitled to the bonds by bequest or inheritance
or by reason of the death of the decedent.
However, if the recipient so acquiring the Series E bonds makes, or has
made, the election provided in section 454(a) of the Code he should include
in gross income for such year all of the unreported increment in value of
all Series E bonds held by him, including those acquired from the decedent.
Thereafter, he should report in each taxable year the increment in value
actually accruing within such taxable year.
The unreported increment in value attributable to the Series E bonds, which
by reason of the exchange constituted a part of the consideration paid for
the Series H bonds, should be returned as income for the taxable year in
which the Series H bonds are disposed of, are redeemed or have reached
final maturity, whichever is earlier, by the estate of the decedent or by
the person entitled to the bonds by bequest or inheritance or by reason of
the death of the decedent unless such taxpayer has previously returned such
increment as income by reason of having made an election under section
454(a) of the Code in a year prior to that in which the bonds are disposed
of, redeemed or reach final maturity.
Interest, if any, payable on the Series H bonds but not received as of the
date of the decedent's death should be returned as income, for the taxable
year received, by the estate of the decedent or by the person entitled to
the bonds by bequest or inheritance or by reason of the death of the
decedent.
Under section 691(c)(1) of the Code, the person who includes the foregoing
amounts in gross income under section 691(a)(1) of the Code shall be
allowed, as a deduction for the same taxable year, the portion of the
Federal estate tax on the decedent's estate attributable to the inclusion
therein of the net value of the right to receive such amount. The method of
computing the amount of the deduction is prescribed in section 691(c)(2) of
the Code. A special rule is provided in section 691(c)(1)(B) of the Code
for the computation of the amount allowable as a deduction in the case of
estates or trusts where the items described in section 691(a)(1) of the
Code are properly paid, credited, or to be distributed to the beneficiaries
during the taxable year.
It should be noted that increases in the redemption price of the Series E
bonds occurring after the date of the decedent's death, and interest which
becomes payable on the Series H bonds after the date of the decedent's
death, do not constitute income in respect of a decedent. Such amounts,
however, constitute ordinary income includible in the gross incomes of the
respective recipients in the instant case under section 61(a) of the Code.
