Rev. Rul. 82-58

ISSUE

Is the interest earned on an All-Savers Certificate exempt from federal income tax under the circumstances described below?

FACTS

A, an individual taxpayer, purchased an All-Savers Certificate on October 1, 1981, with an annual investment yield of 12.61 percent. On December 15, 1981, A was declared to be incompetent by a court of competent jurisdiction. On December 16, 1981, A's All-Savers Certificate was redeemed, and the principal and accrued interest were withdrawn. Under the current rules of depository institution regulatory agencies, the early withdrawal penalty does not apply when the owner of the time deposit has died or been declared incompetent.

LAW AND ANALYSIS

Section 128(a) of the Internal Revenue 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.

Section 128(c)(1) of the Code provides in general that the term "depository institution tax-exempt savings certificate" means any certificate (1) that is issued by a qualified savings institution after September 30, 1981, and before January 1, 1983, (2) that has a maturity of one year, (3) that 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 (4) that is made available in denominations of $500.

Section 128(e)(1) provides in general that if any portion of a depository institution tax-exempt savings certificate is redeemed before the date it matures (1) section 128(a) will not apply to any interest on such certificate for the taxable year of redemption and any subsequent taxable year, and (2) there will be included in gross income for the taxable year of redemption the amount of any interest on the certificate excluded under section 128(a) for any preceding taxable year.

Section 128(f)(2) of the Code and section 5c.128-1(e)(1) of the Temporary Income Tax Regulations (see example 4) provide that the rules set forth in section 128(e)(1) of the Code will not apply if the All-Savers Certificate is acquired by the certificate holder's estate upon the death of the certificate holder. However, if the estate subsequently redeems the All-Savers Certificate before maturity, the early withdrawal penalty provisions of section 128(e)(1) will apply.

Similarly, the early withdrawal penalty provisions of section 128(e)(1) of the Code will not be applicable if the holder of an All-Savers Certificate is declared legally incompetent. However, if the certificate is subsequently redeemed before maturity, the early withdrawal penalty provisions of section 128(e)(1) are applicable. Accordingly, the interest earned on the All-Savers Certificate in this case will be includible in the holder's gross income in the year the certificate is redeemed.

HOLDING

The interest earned on the All-Savers Certificate that is redeemed prior to maturity and after the holder is declared incompetent is includible in the holder's gross income in the year the certificate is redeemed. Further, this interest is not excludable from gross income under section 116 of the Code. See section 5c.128-1(f) of the temporary regulations.