Internal Revenue Service
Revenue Ruling
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smRev. Rul. 75-21
1975-1 C.B. 367
Section 62 -- Adjusted Gross Income
Section 165 -- Deduction for Losses
Section 451 -- Year of Inclusion
Section 1232 -- Bonds and Other Indebtedness (R)
Section 6049 -- Interest Payment Info. Returns
IRS Headnote
Forfeiture of interest on premature withdrawal from a time savings account; computation of interest and forfeiture. Examples illustrate alternate methods of computing interest to be reported by a financial institution on Form 1099-INT, and the amount of forfeiture deductible by a depositor, for the year of a depositor's premature withdrawal of funds from a time savings account upon which interest had been previously paid or credited; Rev. Rul. 73-511 clarified and modified.
Full Text
Rev. Rul. 75-21 [fn1]
The Internal Revenue Service has been asked to clarify Rev. Rul. 73-511, 1973-2 C.B. 402 by giving examples of the correct amount of interest to be reported on Form 1099-INT (Statement for Recipients of Interest Income) by financial institutions and the correct amount of loss (forfeiture) deductible by the depositor under section 165 of the Internal Revenue Code of 1954 and, for taxable years beginning after December 31, 1972, under section 62 in arriving at adjusted gross income.
Rev. Rul. 73-511 holds that financial institutions must report on an information return, Form 1099-INT, the gross amount of interest paid or credited to a depositor during the year when a premature withdrawal by the depositor of the principal amount of a time savings account results in the forfeiture of a portion of the interest previously paid or credited.
Further, while the gross amount of income paid or credited to the depositor must be included in the depositor's gross income, in the case of an individual depositor, Rev. Rul. 73-511 holds that the forfeiture is generally allowable as a loss deduction under section 165 of the Code, provided the taxpayer itemizes deductions.
For taxable years beginning after December 31, 1972, section 62 of the Code, as amended by Pub. L. No. 93-483, section 6, 93rd Cong., 2nd Sess. (Oct. 26, 1974), allows the loss (forfeiture) resulting from premature withdrawal of funds from a time savings account that is deductible under section 165 to be deducted in arriving at adjusted gross income.
For purposes of Rev. Rul. 73-511, the term "financial institution" includes, but is not limited to, a bank, mutual savings bank, savings and loan association, building and loan association, cooperative bank, homestead association, credit union, or similar organization.
For purposes of Rev. Rul. 73-511, the term "time savings account" includes all forms of savings on which interest is payable at least annually, whether or not the interest is at a fixed or variable rate, and on which a penalty or forfeiture of interest may occur.
Rev. Rul. 73-511 concerns interest that is payable at least annually and is, therefore, actually or constructively received under section 451 of the Code and the regulations thereunder. The Revenue Ruling does not concern interest earned on a time savings account that is subject to the ratable inclusion rules of section 1232(a)(3).
For purposes of Rev. Rul. 73-511, interest to be reported on Form 1099-INT and the amount of loss (forfeiture) deductible by the depositor may be computed by using either of the following methods:
(1) Gross Income and Loss (Forfeiture)
This method requires that interest be computed to the date of premature withdrawal. The loss (forfeiture) deductible by the depositor is the total penalty.
(2) Modified Income and Loss (Forfeiture)
This method requires that interest be computed to the last date withdrawable interest was credited to the depositor's account. The loss (forfeiture) deductible by the depositor is the total penalty less the amount of interest earned on the account from the last date withdrawable interest was credited to the date of premature withdrawal.
Only one of the above methods may be used for any calendar year.
The following examples show the amount of interest income and loss (forfeiture) to be reported under both methods:
EXAMPLE 1:
Facts:
Face amount $5,000. Maturity 4 years. Date account opened
7-1-74; closed 11-1-74.
Rate: 7% if held to maturity, 5%-Passbook rate if redeemed early
(less 90 days at 5%)--simple interest paid or made available to
the depositor quarterly at 7%.
Interest:
Paid or credited
(7-1 to 9-30 at 7%) _____________ $ 87.50
Unpaid but accrued
(10-1 to 11-1 at 7%) ____________ 29.17
-------
Gross Income for 1974 _____________ $116.67
Less: Interest
(10-1 to 11-1 at 7%) __________ 29.17
-------
Modified Income ___________________ $ 87.50
=======
Loss: (Forfeiture)
2% (7%-5%) from 7-1 to 11-1 _______ $ 33.34
90 days at 5% _____________________ 62.50
-------
Gross Loss (Forfeiture) ___________ $ 95.84
Loss: Interest
(10-1 to 11-1 at 7%) __________ 29.17
-------
Modified Loss (Forfeiture) ________ $ 66.67
=======
Reporting: Form 1099-INT for 1974 MODIFIED GROSS
Interest Income A _________________________ $ 87.50 $116.67
======= =======
Amount of Loss (Forfeiture) _______________ $ 66.67 $ 95.84
======= =======
EXAMPLE 2:
Facts:
Face amount $6,000. Maturity 2 years. Date account opened
11-1-73; closed 3-1-74.
Rate 61/2% if held to maturity, 51/4%-Passbook rate if redeemed
early (less 90 days at 51/4%)--Simple interest paid or made
available to depositor quarterly at 61/2%.
Amount Shown on Form 1099-INT for 1973: $ 65.00
=======
Interest:
Paid or credited in 1974 __________ --0--
Unpaid but accrued in 1974
(1-1 to 3-1 at 61/2%) ____________ 65.00
-------
Gross Income for 1974 _____________ $ 65.00
Less: Interest
(1-1 to 3-1 at 61/2%) _________ $ 65.00
-------
Modified Income ___________________ --0--
=======
Loss: (Forfeiture)
11/4% (61/2%-51/4%) from
11-1-73 to 3-1-74 _______________ $ 25.00
90 days at 51/4% __________________ 78.75
-------
Gross Loss (Forfeiture) ___________ $103.75
-------
Less: Interest
(1-1 to 3-1 at 61/2%) ___________ 65.00
Modified Loss (Forfeiture) ________ $ 38.75
=======
Reporting: Form 1099-INT for 1974 MODIFIED GROSS
Interest Income ___________________________ $ --0-- $ 65.00
======= =======
Amount of Loss (Forfeiture) _______________ $ 38.75 $103.75
======= =======
EXAMPLE 3:
Facts:
Face amount $2,000. Maturity 4 years. Date account opened
1-1-74; closed 2-28-74.
Rate 7% if held to maturity, 5% passbook rate if redeemed early
(/*/less 90 days at 5%)--Simple interest paid or made available
to the depositor quarterly at 7%.
Interest:
Paid or credited __________________ $ --0--
Unpaid but accrued
(1-1 to 2-28) at 7% _____________ 22.63
------
Gross Income for 1974 _____________ $ 22.63
Less: Interest
(1-1 to 2-28 at 7%) ___________ $ 22.63
-------
Modified Income ___________________ --0--
=======
Loss: (Forfeiture)
2% (7%-5%) from 1-1 to 2-28 _______ $ 6.47
/*/59 days at 5% __________________ 16.16
------
Gross Loss (Forfeiture) ___________ $ 22.63
Less: Interest
(1-1 to 2-28 at 7%) ___________ 22.63
-------
Modified Loss (Forfeiture) ________ --0--
=======
* If the certificate has been outstanding for less than 90 days,
this portionn of the penalty is all interest at the passbook rate.
Reporting: Form 1099-INT for 1974 MODIFIED GROSS
Interest Income __________________________ $ --0-- $ 22.63
======= =======
Amount of Loss (Forfeiture) _______________ $ --0-- $ 22.63
======= =======
EXAMPLE 4:
Facts:
Face amount $10,000. Maturity 2 years. Date account opened
1-1-73; closed 2-28-74.
Rate 6%--Less 90 days interest if redeemed early--Simple
interest paid or made available to the depositor quarterly
at 6%.
Amount Shown on 1099-INT for 1973: $600.00
=======
Interest:
Paid or accrued in 1974 ___________ $ --0--
Unpaid but accrued in 1974
(1-1 to 2-28) ___________________ 100.00
-------
Gross Income for 1974 _____________ $100.00
Less: Interest (1-1 to 2-28) ____ 100.00
-------
Modified Income ___________________ --0--
=======
Loss: (Forfeiture)
Gross Loss (Forfeiture)
90 days interest at 6% __________ $150.00
Less: Interest (1-1 to 2-28) __ 100.00
-------
Modified Loss (Forfeiture) ________ $ 50.00
=======
Reporting: Form 1099-INT for 1974 MODIFIED GROSS
Interest Income ___________________________ --0-- $100.00
======= =======
Amount of Loss (Forfeiture) _______________ $ 50.00 $150.00
======= =======
EXAMPLE 5:
Facts:
Face amount $5,000. Maturity 4 years. Date account opened
7-1-74; closed 11-15-74.
Rate: 7% if held to maturity, 5%-Passbook rate if redeemed
early (less 90 days at 5%)--Simple interest paid or made
available to the depositor monthly at 7%.
Interest:
Paid or credited
(7-1 through 10-31 at 7%) _______ $116.67
Unpaid but accrued
(11-1 to 11-5 at 7%) ____________ 14.38
-------
Gross Income for 1974 _____________ $131.05
Less: Interest
(11-1 to 11-15 at 7%) _________ 14.38
-------
Modified Income ___________________ $116.67
=======
Loss: (Forfeiture)
2% (7%-5%) from 7-1 to 11-15 ______ $ 37.54
90 days at 5% _____________________ 62.50
-------
Gross Loss (Forfeiture) $100.04
Less: Interest
(11-1 to 11-15 at 7%) _________ 14.38
-------
Modified Loss (Forfeiture) ________ $ 85.66
=======
Reporting: Form 1099-INT for 1974 MODIFIED GROSS
Interest Income ___________________________ $116.67 $131.05
======= =======
Amount of Loss (Forfeiture) _______________ $ 85.66 $100.04
======= =======
EXAMPLE 6: Facts: Face amount $5,000. Maturity 4 years. Date account opened 7-1-74; closed 11-15-74. Rate: 7% if held to maturity, 5%-Passbook rate if redeemed early (less 90 days at 5%)--simple interest paid or made available to the depositor quarterly at 7%. At depositor's option, interest could have been paid monthly without withdrawing principal if depositor had opened a monthly mail account.
Reporting: Since the depositor could have received interest monthly had he so elected, he constructively received the interest monthly. Therefore, whether or not the depositor elects to open a monthly mail account, the answer to Example 5 also applies to Example 6.
Under section 6049 of the Code and the regulations thereunder, a Form 1099-INT must be filed in any case when the interest income is $10 or more.
Financial institutions must indicate to their depositors the method of reporting being used. On Form 1099-INT, financial institutions should indicate the amount of loss (forfeiture) deductible by the depositor.
In examples 2, 3 and 4, under the modified method, a Form 1099-INT need not be filed for 1974. However, it is recommended that financial institutions file Form 1099-INT and furnish a copy to their depositor even though the income is zero in order to provide the amount of loss (forfeiture) deductible.
This Revenue Ruling is intended to provide administrative guidelines to financial institutions for the reporting of interest paid or credited to a depositor during the year when a premature withdrawal by the depositor of the principal amount of a time savings account results in a penalty being assessed against the depositor. Although the Service will accept either the modified or gross method of reporting such interest, this Revenue Ruling is not to be regarded as a statement of the Service's position that either method will be legally correct in a particular situation.
Rev. Rul. 73-511 is hereby clarified with respect to the amount of interest to be reported on Form 1099-INT by financial institutions and modified with respect to the loss (forfeiture) deductible by the depositor for taxable years beginning after December 31, 1972.
[fn1] Also released as TIR-1323, dated Dec. 26, 1974.