## Facts

- Dora Apkin bought a series of United States Series E savings bonds between 1948 and 1959, with a total face value of $5,125 and a total purchase price of $3,843.75.
- The bonds were issued in co-ownership form, payable to Dora Apkin “or” her son, Philip Apkin.
- Dora never redeemed the bonds during her lifetime and died on May 5, 1979.
- At Dora’s death, Philip became the sole owner of the bonds by survivorship.
- Philip redeemed the bonds on June 23, 1981, receiving payment that included all interest accrued from the dates of purchase through redemption.
- The parties stipulated amounts reflecting bond value at Dora’s death and the amount received on redemption, and the court noted the figures suggested an unusual jump over the short post-death period, leaving the exact computations for later.
- On the Apkins’ 1981 joint federal income tax return, Philip and his wife Sarah did not report any of the savings bond interest.
- Dora had not reported any savings bond interest during her lifetime and did not file federal income tax returns in the relevant years because her income was below the filing threshold.
- The Commissioner issued a notice of deficiency for 1981, determining that the Apkins should have included the savings bond interest in income.
- Petitioners conceded they were taxable on the interest accruing after Dora’s death (from 1979 to redemption in 1981) but disputed inclusion of the interest that accrued before Dora’s death.
- The case was submitted to the Tax Court fully stipulated, presenting a legal question about who must report the pre-death accrued interest when the bonds are redeemed.

## Issues

1. Whether a surviving co-owner who redeems Series E savings bonds must include in gross income the portion of interest that accrued before the other co-owner’s death when the decedent never elected under I.R.C. § 454(a) to report the interest annually and never reported it.
2. Whether the decedent’s failure to file income tax returns (because of low income) can be treated as a substitute for, or equivalent of, a § 454(a) election so that the pre-death accrued interest is not taxed to the redeemer.

## Decision

- The Tax Court held that petitioners had to include in their 1981 gross income the savings bond interest that had accrued but had never been reported, including the portion accruing before Dora’s death.
- The court reasoned that Dora did not make a valid election under I.R.C. § 454(a) because the statute requires the election to be made on a tax return, and Dora filed no returns.
- Because no § 454(a) election was in place, the interest remained deferred and became taxable when the bonds were redeemed by the owner who received payment—here, Philip.
- The court directed that the deficiency be computed under Tax Court Rule 155 consistent with its holding and the parties’ concessions.

## Legal Principles

- Interest on U.S. Series E savings bonds is generally included in income when the bonds are redeemed, disposed of, or mature, unless the taxpayer has properly elected annual inclusion.
- A § 454(a) election to report savings bond interest annually must be made in the taxpayer’s income tax return; failing to file a return cannot create a valid election by implication.
- When savings bonds are held in co-ownership form and pass to the survivor by survivorship, previously deferred and unreported interest does not vanish at death; it is taxed when the survivor later redeems and receives the proceeds.
- The fact that the decedent may have had income low enough to avoid a filing requirement does not transfer the deferred interest to the decedent’s estate for tax-free treatment or exempt the redeemer from reporting the interest upon redemption.
- Where the parties stipulate the facts but computations depend on applying the court’s legal conclusion, the Tax Court may resolve the legal issue and leave the arithmetic to Rule 155 proceedings.

## Conclusion

Apkin v. Commissioner holds that when a decedent co-owned Series E savings bonds and never made a § 454(a) election (and never reported the bond interest), the surviving co-owner who later redeems the bonds must report the entire previously untaxed interest in the year of redemption, including interest that accrued before the decedent’s death, with the final tax amount computed under Rule 155.


Apkin v. Commissioner, 86 T.C. 692 (1986)