Rev. Rul. 81-218

ISSUE

Do the "All Savers' Certificates" made available to individual taxpayers under the situations described below qualify as depository institution tax-exempt savings certificates, the interest on which, subject to applicable dollar limitations, is exempt from federal income tax under section 128 of the Internal Revenue Code, as added by the Economic Recovery Tax Act of 1981, Pub. Law No. 97-34, section 301, page 256, 307, this Bulletin, 95 Stat. 172?

FACTS

Situation 1. On October 1, 1981, A, an individual taxpayer, purchases for $500 an All Savers' Certificate from a qualified institution. All Savers' Certificates are certificates issued by qualified institutions after September 30, 1981, and before January 1, 1983, having a maturity of 1 year, and an investment yield equal to 70 percent of the average investment yield for the most recent auction of United States Treasury bills with maturities of 52 weeks. These certificates are available in denominations as are authorized by depository institution regulatory agencies. All Savers' Certificates are insured by government agencies and pay interest at such intervals as are authorized by depository institution regulatory agencies. At maturity, A will receive all principal and any accrued but unpaid interest on the All Savers' Certificate.

Situation 2. On September 10, 1981, B, an individual taxpayer, enters into a repurchase agreement with Z, a qualified institution. Generally, a repurchase agreement is an arrangement between a customer and a financial institution under which the customer buys certain securities from the institution that the institution agrees to repurchase from the customer at a higher price on a certain date in the future. The repurchase agreement, which is generally available to Z's customers, provides that Z will repurchase the securities from B at a price which will provide B an annual rate of interest on B's funds of 25 percent until October 1, 1981. The agreement between Z and B also provides that funds from the repurchase agreement will automatically be reinvested in an All Savers' Certificate on October 1, 1981, unless B gives instructions to Z at any time prior to that date either to remit B's funds on October 1, 1981, or to have B's funds reinvested on that date in other investments offered by Z. B may elect, without penalty, to have his funds remitted on October 1, 1981, or reinvested on that date.

Situation 3. On October 1, 1981, C, an individual taxpayer, enters into a repurchase agreement with Y, a qualified institution. Y's agreement with C provides that Y will repurchase the securities from C at such a price as to provide C an annual rate of interest on C's funds of 15 percent, until November 1, 1981, if C elects on or before November 1, 1981, to reinvest in an All Savers' Certificate. Alternatively, Y's agreement provides that Y will repurchase the securities at such a price as to provide C an annual rate of interest of only 12 percent until November 1, 1981, if C does not elect to reinvest in an All Savers' Certificate. On November 1, 1981, C elects to reinvest in an All Savers' Certificate.

Situation 4. On August 17, 1981 D, an individual taxpayer, enters into a repurchase agreement with X, a qualified institution. The repurchase agreement provides that X will repurchase the securities from D at such a price as to provide D an annual rate of interest on D's funds of 30 percent until October 1, 1981. X's agreement with D further provides that on October 1, 1981, D's funds will automatically be reinvested in an All Savers' Certificate, without any other investment option being made available to D. X's repurchase agreements that provide an annual rate of interest of 30 percent are not available to taxpayers who do not agree to automatic reinvestment in an All Savers' Certificate.

Situation 5. On October 1, 1981, E, an individual taxpayer, purchases an All Savers' Certificate issued by W, a qualified institution. W's agreement with E provides that upon maturity of the All Savers' Certificate, the amount on account will, at E's option, either be remitted to E or will be used to enter into a repurchase agreement which will provide interest to E on E's funds at the annual rate of 25 percent for a 60 day period. The option to enter into future repurchase agreement with W providing such a return is not available without charge to taxpayers who do not agree to purchase an All Savers' Certificate.

Situation 6. On October 1, 1981, F, an individual taxpayer, purchases from V, a qualified institution, an All Savers' Certificate and enters into a 30-day repurchase agreement, which will provide a return to F on F's funds at the annual interest rate of 25 percent, over the 30-day period. V's repurchase agreements that provide such a return are not available to taxpayers who do not simultaneously purchase an All Savers' Certificate.

Situation 7. On October 1, 1981, G, an individual taxpayer, purchases from U, a qualified institution, an All Savers' Certificate for $10,000. In advertisements, U has offered to waive certain standard loan origination fees or to charge a reduced rate of interest on consumer or mortgage loans made to purchasers of All Savers' Certificates in denominations of $10,000 or more.

Situation 8. On October 1, 1981, H, an individual taxpayer, purchases from T, a qualified institution, an All Savers' Certificate for $4,000. In addition, H receives from T a premium of the type not regarded as interest under applicable depository institution regulations. The value of the premium does not exceed the amount regarded as de minimis under existing depository institution regulations. Situation 9. On August 26, 1981, J purchases for $10,000 a six-month money market certificate with an annual interest rate of 16.104 percent from S, a qualified institution. On October 1, 1981, J "rolls over" the principal and accumulated interest from the money market certificate, without penalty, into an All Savers' Certificate. Assume that the auction of 52-week United States Treasury bills in the week before October 1, 1981, results in an average annual investment yield on such bills of 17.29 percent, 70 percent of which, or 12.10 percent, would be the annual investment yield on the All Savers' Certificate.

LAW AND ANALYSIS

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

Section 128(b) of the Code provides that the amount excludable from an individual's income under section 128(a) in any taxable year shall be limited to the excess of $1,000 ($2,000 in the case of a joint return) over the aggregate amount excludable by the individual for prior taxable years.

Section 128(c) of the Code provides that the term "depository institution tax-exempt savings certificate" means any certificate that (A) is issued by a qualified institution after September 30, 1981, and before January 1, 1983, (B) has a maturity of 1 year, (C) has an investment yield equal to 70 percent of the average investment yield for the most recent auction (before the week in which the certificate is issued) of United States Treasury bills with maturities of 52 weeks, and (D) is made available in denominations of $500.

Section 6049(a)(1) of the Code provides that every person who makes payments of interest aggregating $10 or more to any other person during any calendar year must file an information return reporting the payments. Section 6049(b) defines interest to include interest on deposits made with persons carrying on the banking business and amounts paid by a mutual savings bank, savings and loan association, cooperative bank, homestead association, credit union, or similar organization.

In Situation 1, the All Savers' Certificate meets the requirements of section 128 of the Code and the interest exclusion is available.

In Situation 2, because B has a realistic opportunity to have the funds from the repurchase agreement remitted or reinvested without penalty on October 1, 1981, B can have the benefit of the higher yield repurchase agreement without agreeing to purchase the All Savers' Certificate. Accordingly, the repurchase agreement and All Savers' Certificate are independent investments, the All Savers' Certificate meets the requirements of section 128 of the Code, and the interest exclusion is available.

In Situation 3, C can only have the benefit of the higher yield repurchase agreement by agreeing to purchase an All Savers' Certificate. The repurchase agreement and All Savers' Certificate are contractually linked and, for purposes of section 128 of the Code, are treated as one investment with a maturity in excess of one year and an investment yield in excess of 70 percent of the average investment yield for the most recent auction of the United States Treasury bills with maturities of 52 weeks. The certificate fails to satisfy either the maturity or yield requirements of section 128(c) of the Code and the interest exclusion is not available.

In Situations 4, 5, 6 and 7, benefits are made available to purchasers of All Savers' Certificates that are not made available to other individuals, thus linking these benefits to purchase of such certificates. By purchasing their All Savers' Certificates, D, E, F, and G, respectively, receive benefits in excess of 70 percent of the average investment yield for the most recent auction of United States Treasury bills with maturities of 52 weeks. Further, in Situation 4, the investment has a maturity of more than one year. Therefore, the requirements of section 128 of the Code are not met in Situations 4, 5, 6, and 7, and the interest exclusion is not available.

In Situation 8, the premium received by H as a de minimis value that is not regarded as interest under applicable depository institution regulations. As a matter of administrative convenience, such nominal premiums will not be included in determining the investment yield of All Savers' Certificates. Accordingly, the All Savers' Certificate meets the requirements of section 128 of the Code and the interest exclusion is available.

In Situation 9, under the current rules of depository institution regulatory agencies, a "roll over" from a six-month money market certificate into a deposit contract having a lower or equal interest rate and a longer or equal term does not subject the taxpayer to a penalty. Further, any individual who purchases a six-month money market certificate always has the option of holding the certificate to maturity or of "rolling over" the certificate without penalty into other deposit contracts under regulatory agency rules of general applicability. Accordingly, since the two investments are not contractually linked, and since J's purchase of an All Savers' Certificate does not entitle J to benefits not generally available to other individuals, the All Savers' Certificate meets the requirements of section 128 of the Code and the interest exclusion is available.

HOLDINGS

The All Savers' Certificate described in Situations 1, 2, 8 and 9 qualify as depository institution tax-exempt savings certificates and the interest paid thereon is exempt from federal income tax under section 128 of the Code, subject to the limitations therein prescribed. The All Savers' Certificates described in Situations 3, 4, 5, 6 and 7 do not qualify as depository institution tax-exempt savings certificates and the interest paid thereon is not exempt from federal income tax under section 128.

Further, issuers of All Savers' Certificates must report on Forms 1096 and 1099, in accordance with the accompanying instructions, all payments of interest over $10, even though the recipient of the interest income may be able to exclude all or part of the interest from income. Failure to file the requisite forms could subject the payer to a penalty under section 6652(a)(1) of the Code for each failure.