D. Stussy <kd6lvw[at]kd6lvw.ampr.org> wrote:
- quote -

So you've changed your stand, and interest must be
proportional to the amount of money, but not necessarily to
the amount of time?

But that isn't the case either: for instance, many banks
give higher interest rates for deposits (or balances) in
excess of some amount, so depositing twice the amount earns
more than twice the interest in the same time. Therefore,
interest isn't directly proportional to amount.

Seth

<< -------------------------------------------------> << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org > << ------------------------------------------------->

Seth Breidbart wrote:
- quote -

.....And that's why it's not a payment for the use of money -
i.e. interest. It's not dependent in any way on the AMOUNT
of the money used.

<< -------------------------------------------------> << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org > << ------------------------------------------------->

Arthur Kamlet wrote:
- quote -

That's different because it is specifically allowed. That
is a charge under the lending contract for periods that were
expected to be realized (and recognized had they occurred)
and is therefore still a payment for the use of money over a
given time period - it's still part of the debt. The time
period might not have been recognized, but the amount of the
"penalty" is still computed as "the use of money, based on
its balance, over unit time."

[Although you change from income to expense, the definition
still works.]

<< -------------------------------------------------> << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org > << ------------------------------------------------->

"Arthur Kamlet" <kamlet[at]panix.com> wrote:
- quote -

I guess you should have been paying gift tax . . .

<< -------------------------------------------------> << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org > << ------------------------------------------------->

D. Stussy <kd6lvw[at]kd6lvw.ampr.org> wrote:
- quote -

And all this time I've been deducting a prepayment penalty
on a mortgage as interest. Where did I go wrong.

__
Art Kamlet ArtKamlet [at] AOL.com Columbus OH K2PZH

<< -------------------------------------------------> << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org > << ------------------------------------------------->

D. Stussy <kd6lvw[at]kd6lvw.ampr.org> wrote:
- quote -

But the bonus is the same whether I take a 3-year CD or a
5-year CD, so it isn't proportional to the time.

- quote -

With what am I buying the toaster? For how much?

I give the bank $500. They give me a $5 toaster; if that's
a purchase, then a year later when I close the account and
the bank gives me $505, $10 of that must have been interest.

Seth

<< -------------------------------------------------> << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org > << ------------------------------------------------->

Seth Breidbart wrote:
- quote -

That is still a "ratio per unit time" - even if there is
only one unit of that time. Look at how you defined your
question and the answer should be obvious.

- quote -

But that doesn't make it interest either. It's a PURCHASE!

<< -------------------------------------------------> << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org > << ------------------------------------------------->

"D. Stussy" <kd6lvw[at]bde-arc.ampr.org> wrote:
- quote -

nonsense. boy, you really are fixated on your
misunderstanding, aren't you?

"Interest is the compensation allowed by law or fixed by the parties for the
use or forbearance or detention of money." Beach v. Peabody, 188 Ill. 75,
Shealy v. U.S., D.C.S.C., 37 F.2d 918, 919.

<< -------------------------------------------------> << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org > << ------------------------------------------------->

Christopher Green wrote:
- quote -

You've probably hit it on the head, Chis. I checked
instructions for 1099's and nowhere does it address this
issue for 1099-int.

ChEAr$,
Harlan Lunsford

<< -------------------------------------------------> << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org > << ------------------------------------------------->

D. Stussy <kd6lvw[at]kd6lvw.ampr.org> wrote:

- quote -

So if a bank offers a 1% higher rate for the first year on a
CD (of any length one year or more), that isn't interest
either because the 1% doesn't recur?

Pre-paid interest has suddenly ceased being interest,
because it's one-time? It might not even be directly
proportional to the amount of the loan; consider conforming
vs. non-conforming mortgages.

- quote -

Interest is a fee paid for borrowing money.

Gifts are voluntary. "If you give me something (the use of
your money) I'll give you this toaster" isn't a gift.

Seth

<< -------------------------------------------------> << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org > << ------------------------------------------------->

- quote -

And this toaster is certainly *not* a gift....
Quid pro quo and all that other stuff...
Generosity? Uh....

<< -------------------------------------------------> << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org > << ------------------------------------------------->

LoTax wrote:
- quote -

I will concede that the IRS has said that it should be
reported as interest, based on this and other responses.
However, given that, I don't see where the IRS has the
authority to disregard IRC Section 274(b) in arriving at its
conclusion. [It's not OID either - section 163(e), because
there's no proration over time.]

If the item received for the act of opening the account (a
"one-time" event) is not based on the value of the account,
it lacks TWO characteristics that true interest possesses.

Unless the bank is going to give me a toaster every month
(and a better one when I have a higher average balance), the
ruling is nonsense. A gift isn't interest, prepaid or
otherwise.

<< -------------------------------------------------> << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org > << ------------------------------------------------->

BRaskinCPA wrote:
- quote -

I disagree that it could be interest. The amount of
interest would be DIRECTLY proportional to the size of the
account and the length of time it is open. Here, the bank is
giving a FLAT AMOUNT and ONE TIME ONLY. If it can't be
reduced to a percentage (or ratio) over time, it's not
interest. Interest reoccurs over each unit of time; this
does not.

Think about something else that is similar: property tax.
To qualify, it has to have three qualities: 1) Based on
the value of the property being taxed, 2) Imposed at a
regular interval (usually, a year), and 3) [which doesn't
matter in its parallel to interest income] be imposed by a
governmental unit. Now, define interest: Qualities #1 & #2
of a property tax seem to apply to interest also....

- quote -

Does your bank prepare your tax return for you? :-)

If I were to get the same toaster [e.g. $50 value] for
opening a new account with an initial balance of $100.00 as
opposed to $100,000.00, it is clear that the toaster is not
based on the value of the balance on deposit, and therefore
it cannot be called interest. It is a business gift by one
party for forming the relationship.

<< -------------------------------------------------> << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org > << ------------------------------------------------->

CBotella wrote:
- quote -

1) You didn't receive a toaster (or other non-cash item), and;
2) The amount you received wasn't above the $25/person-year
business gift limit.

Your receipt of CASH was much different than what the
original post was about.

<< -------------------------------------------------> << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org > << ------------------------------------------------->

Christopher Green wrote:
- quote -

In lieu of what interest (that would have been received had
the gift not been given)? I don't see where the account
holder is forgoing the receipt of any interest income to get
the gift.

<< -------------------------------------------------> << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org > << ------------------------------------------------->

raskincpa[at]aol.com (BRaskinCPA) wrote:

[snip]
- quote -

I think it's the Federal Reserve, actually. There's a part
of Regulation Q, which otherwise deals with interest on
demand deposit accounts, that defines premiums for opening
an account to be interest if they exceed certain small
amounts. In some circles, it's known as the "toaster rule".

--
Chris Green

<< -------------------------------------------------> << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org > << ------------------------------------------------->

"Rich Carreiro" <rlcarr[at]animato.arlington.ma.us> wrote:
- quote -

I am somewhat certain this classification is required by
6049(b).

--
David M. Woods, EA, ChFC, CLU
Woods Financial Services
Norwood, MA 02062
www.woods-financial.com

<< -------------------------------------------------> << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org > << ------------------------------------------------->

"D. Stussy" <kd6lvw[at]bde-arc.ampr.org> wrote:
- quote -

IRS feels otherwise, and I'm gonna go with them on this.
Here's what they say, in their publication 550:

"Gift for opening account. If you receive noncash gifts or
services for making deposits or for opening an account in a
savings institution, you may have to report the value as
interest.

"For deposits of less than $5,000, gifts or services valued
at more than $10 must be reported as interest. For deposits
of $5,000 or more, gifts or services valued at more than $20
must be reported as interest. The value is determined by the
cost to the financial institution.

"Example.

"You open a savings account at your local bank and deposit
$800. The account earns $20 interest. You also receive a $15
calculator. If no other interest is credited to your account
during the year, the Form 1099–INT you receive will show $35
interest for the year. You must report $35 interest income
on your tax return."

So, maybe it isn't interest; whatever; but it's to be
reported as interest....

<< -------------------------------------------------> << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org > << ------------------------------------------------->

"D. Stussy" <kd6lvw[at]bde-arc.ampr.org> wrote:
- quote -

The bank has it right. For example, ING Direct gives $10 or
$25 to people who refer other account holders. This is
credited to the account and is properly treated as interest.
The person who opened the account also receives some money
after the account is (I think) 30 days old. Once again, this
is treated as interest income to the recipient.

Gary

--
<-------------------------------Figure X out which X letters to remove to X e-mail me.

<< -------------------------------------------------> << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org > << ------------------------------------------------->

D. Stussy wrote:
- quote -

"In general, a payment from a bank or other financial
institution to a depositor when an account is opened reduces
issue price of the account (in effect, the depositor's
basis) and results in original issue discount. Reg. Section
1.1273-2(g)(2). However, for administrative convenience, the
IRS has said that, starting in 2000, gifts received for
opening a bank account or adding to an existing account are
not considered interest and, therefore, are not includible
in gross income, do not reduce the depositor's basis, and
are not required to be reported as interest, as long as the
value of the gift does not exceed $10 for a deposit of less
than $5,000 or $20 for a deposit of $5,000 or more." (From
Kleinrock's Analysis) Rev Proc 2000-30 has a pretty good
explanation.

Phoebe

<< -------------------------------------------------> << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org > << ------------------------------------------------->