bond interest

[L.S.]

Deceased individual (2009) held some hh bonds with deferred interest jointly with his son and same amount with his daughter. These bonds were cashed after death by the son & daughter and now they have each received 1099-Int from Bureau of Public Debt with the son's ss number and daughter's ss number. I want to show this interest in the deceased final 1040 income tax return. I know this will create a problem with the matching of interest amount and ss numbers. I am considering issuing 1099's from each of them to the deceased ss number for the exact amount reported and then file the 1099 & 1096. Comments or concerns, please.

[mcb39]

I don't think that you have the option to choose. And, in any event, wouldn't the interest income pass through to them on the K-1 and they would still have to pay the tax. Also, check your state laws because in WI bond interest is exempt from state tax.

[jainen]

>>hh bonds with deferred interest<<

Series HH bonds do not themselves defer interest, but they were only issued in exchange for E and EE bonds. Assuming it was not reported annually, accrued interest from the original E and EE bonds continues to be deferred until the HH bonds mature. I presume (but don't know for sure) that you still have the option to report that interest on the decedent's final return, subject to the percentage of ownership. Since that treatment is inconsistent with the 1099, I recommend you disclose your position on Form 8275 or a similar statement.

In my opinion, if you treated it instead as income in respect of a decedent the recipient could avoid double taxation by claiming a deduction to the extent it increased the estate tax.

[L.S.]

jainen,

Yes, I do understand the deferred interest issue and this interest was not reported annually. And I do know that I can report it in the decedent's final return which is what I will be doing and I expect to hear some correspondence from the IRS

There will not be an estate tax return necessary in this case so I believe the double taxation issue you stated would only be a problem if an estate tax return is filed as well as the 1041.

ok, jainen - hit me with your best shot!

[jainen]

>>Yes, I do understand the deferred interest issue and this interest was not reported annually. And I do know that I can report it in the decedent's final return which is what I will be doing and I expect to hear some correspondence from the IRS<<

Okay, then what exactly is your question? In my opinion advance disclosure might head off those letters, but if your clients are prepared to deal with them it's just as well.