MLR

Son gets cash but Mom stuck with tax

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Taxpayers should keep up with the U.S. bonds they purchase and cash in – and their tax liability on the interest.

Mr. and Mrs. Lobs purchased ten $1,000 Series EE U.S. savings bonds for their son in mid-November 1992. The bonds were registered to both Mr. and Mrs. Lobs even though they purchased the bonds to provide for their son Joseph’s college education.

In 1995, the Lobses divorced. Mrs. Lobs received the 10 bonds in the divorce settlement.

During September 2010, Mrs. Lobs’s son needed some money. Mrs. Lobs cashed in the bonds, which were registered in both her and her ex-husband’s names.

The proceeds from the bonds were deposited in her checking account. A cashier’s check for $12,640 was immediately made payable to her son Joseph. Joseph cashed the check.

Mrs. Lobs timely filed a Form 1040 return for 2010 but did not include any interest income from the bond transaction on the return.

The IRS sent Mrs. Lobs a notice of deficiency in April 2013 determining that she had failed to report $7,640 of interest income. Mrs. Lobs timely filed a petition with the IRS claiming that the bonds belonged to her son, not to her, and that the interest on the bonds was not properly taxable to her.

The Internal Revenue Code states that interest income received by the taxpayer constitutes taxable gross income. In particular, interest on U.S. obligations, such as U.S. savings bonds, is fully taxable.

Registration of Series EE U.S. savings bonds is generally conclusive of actual ownership of, and interest in, such bonds. Savings bonds are usually not transferable and are payable only to the owner named on the bonds.

Mrs. Lobs cashed in the bonds and had the proceeds transferred to her checking account. The difference between the original purchase price and the amount of proceeds received became taxable income to her.

It doesn’t matter that Mrs. Lobs had meant to have her son’s name put on the bonds when they were originally purchased. The court can rule only on what happened.

The reality of the situation is that Mrs. Lobs was a registered co-owner of the bonds who was entitled to receive, and did in fact receive, the proceeds of the bonds upon their endorsement and surrender. Therefore the $7,640 is taxable to her as interest income (Ruth A. Lobs v. Commissioner, U.S. Tax Court, T.C. Summary Opinion 2015-17, March 3, 2015).