Valuing Savings Bonds . . .
Valuation discounts are an important tax-saving consideration when planning an estate, but don't expect to get any discounts when it comes to Series E Savings Bonds.

The IRS ruled that the fair market value of those bonds isn't subject to a discount for lack of marketability or a discount for the taxes due on accrued interest.

The ruling came after an estate took a discount claiming a lack of marketability when it calculated

The IRS Analysis

  In making its ruling, the IRS considered: 

    Internal Revenue Code Section 2031, which says the value of a  gross estate includes the value at time of death of all  property, real or personal, tangible or intangible.
   Treasury Regulations Section 20.2031-1(b), which states that the value of property in an estate is its fair market value at the time of death, unless the executor chooses an alternative method under Section 2032.
   Applicable case law.
   IRS Revenue Ruling 55-278, in which the IRS ruled that the redemption value of Series E bonds at the time they were reissued as a gift is the proper value to be used by the original purchaser for federal gift tax purposes.  In the current case, the estate argued that the IRS interpretation in the earlier case contravened the definition of willing buyer in Section 20.2031. 

  The estate relied on two cases for its claims:  

   Eisenberg v. Commissioner, and Estate of Davis v. Commissioner.
the bonds' fair market value. The estate claimed that a willing buyer would take the "built-in income tax liability" into account in determining a price for the bonds. The definition of a willing buyer should stand, the estate argued, even though only the U.S. Treasury could redeem the bonds.

The IRS disagreed. The bonds are not marketable because they are generally not negotiable and not transferable. That means they have no particular market value. The only definite value they have is their redemption price. (IRS Technical Advice Memorandum 200303010)  

The IRS cited a case in which the Supreme Court considered the value of shares in a mutual fund that were included in a decedent's gross estate. The shares were not traded on exchanges or over-the-counter but were sold by the investment fund through a principal underwriter and redeemed by the fund at prices related to the net asset value.

In that case, U.S. v. Cartwright, the court said the value of the fund shares was determined by the fair market value at the time of death, and the value is the price the shares would change hands between a willing buyer and seller.

The Court recognized that the mutual fund was under an obligation to redeem its shares at the redemption price and that the stock couldn't be sold publicly. As a result, the fund was the only willing buyer and the redemption price was the value to be used in reporting the funds in the gross estate of the decedent.

Applying the mutual funds case to the savings bond issue, the IRS said "the only willing buyer is the United States government" and "by contractual arrangement, the bonds will be redeemed by the United States Treasury at the redemption price."

The IRS concluded the estate can't discount the bonds. Under the tax code, the accrued interest must be included in gross income in the taxable year when the debt is redeemed or in the taxable year of final maturity, whichever is earlier.

When calculating valuation discounts for estate planning purposes, consult with our office to ensure you get the best tax results, while taking into account all court and IRS rulings.