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federal

Reserve

bank of

DALLAS. TEXAS

Dallas

75222

Circular No. 81-181
September 15, 1981
ALL SAVERS CERTIFICATE

TO ALL MEMBER BANKS
AND OTHERS CONCERNED IN THE
ELEVENTH FEDERAL RESERVE DISTRICT:
In an attem pt to assist member banks in implementing the All
Savers Certificates which are authorized beginning October 1, 1981, under the
Economic Recovery Tax Act of 1981 (P.L. 97-34), this circular is addressing
questions that have been raised concerning the ability of depositors to convert
existing time deposits (including six-month money market certificates) to the
new tax-exempt All Savers Certificates.
Under Section 217.4(d)(5) of Regulation Q, any outstanding deposit
may be converted to an All Savers Certificate or any other deposit at the
same institution without imposition of the early withdrawal penalty on the
outstanding deposit if:
(1)

the depositor and the member bank agree to a conversion;

(2)

the original maturity of the new deposit is equal to or exceeds
the remaining maturity on the outstanding deposit; and

(3)

the rate paid on the new deposit does not exceed the lower
of (a) the rate being paid on the outstanding deposit, or (b) the
regulatory ceiling rate, if any, applicable to the new deposit
category at the time of conversion.

The Board's current rule provides that any amendment of an existing time
deposit contract that results in an increase in the rate of interest paid or in
a reduction of the maturity of the deposit constitutes a payment of the time
deposit before maturity, thereby subjecting such a deposit to the Regulation
Q early withdrawal penalty.
The question has been raised concerning the rate that may be paid
when a depositor converts a portion of an outstanding money market
certificate to an All Savers Certificate if such a conversion results in a money
market certificate with a remaining balance of less than $10,000.

B a n k s a n d o t h e r s a r e e n c o u r a g e d to u s e t h e fo llo w in g in c o m in g W A T S n u m b e r s in c o n t a c t in g th is Bank:
1-800-442-7 140 ( in tr a s t a te ) a n d 1-800-527-9 200 (in terstate). F o r c a lls p l a c e d lo cally, p l e a s e us e 651 plus th e
e x te n s io n refe rred to ab ove.

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)

A member bank may pay the money market certificate rate on a
deposit only if the deposit possesses a continuing balance of $10,000 or more
and otherwise satisfies the regulations applicable to money market cer­
tificates. If, after conversion of a portion of a money market certificate to
another deposit, the remaining balance on the original deposit is not $10,000
or more, the maximum rate of interest a member bank can pay on the deposit
from the day of conversion is the ceiling rate of interest for time deposits of
under $10,000 with maturities equal to the original maturity period of the
money market certificate.
If a member bank chooses to lend its depositor the amount needed
to bring the remaining money market certificate balance up to $10,000, and
uses the money market certificate as collateral for the loan, Section 217.4(f)
of Regulation Q requires that the rate of interest on the loan shall be at least
1 percent per annum in excess of the rate of interest being paid on the money
market certificate. Under the Internal Revenue Code, a taxpayer loses the
All Savers Certificate Tax exemption if his All Savers Certificate is used as
collateral for a loan.
Enclosed are copies of the Depository Institutions Deregulation
Committee's press release and rules relating to the issuance of All Savers
Certificates by depository institutions and the Internal Revenue Service's
News Release and Revenue Ruling regarding the tax consequences of programs
that link All Savers Certificates with repurchase agreements and similar
investment packages.
Questions regarding the All Savers Certificate should be directed
to this Bank's Legal Department, Extension 6171.
Additional copies of the circular will be furnished upon request to
the Department of Communications, Financial and Community Affairs of this
Bank, Extension 6289.
Sincerely yours,

William H. Wallace
First Vice President

DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE PRESS RELEASE
COMPTROLLER OF THE CURRENCY FEDERAL DEPOSrr INSURANCE CORPORATION FEDERAL HO VIE LOAN BANK BOARD
FEDERAL RESERVE BOARD___________ NATIONAL CREDrT UNION ADMINISTRATION____________TREASURE DEPARTMENT

September 3, 1981

DIDC ADOPTS ALL SAVERS CERTIFICATE REGULATIONS
The Depository Institutions Deregulation Committee (DIDC)
today adopted regulations authorizing depository institutions to
issue one*-year, tax exempt All Savers Certificates (ASCs).
The DIDC, acting in accordance with the Economic Recovery
Tax Act of 1981, stipulated that the ASCs must:
(1) have an annual investment yield equal to 70 percent of
the average investment yield for 52-week U.S. Treasury bills;
(2) be offered in denominations of $500, but can also be
offered in any other denominations;
(3) only be issued from October 1, 1981 through December 31,
1982; and
(4) have a maturity of one year.
The ASCs will be subject to existing rules for other types
of deposits including rules regarding premiums, early
withdrawals, and broker's or finder's fees.
Depository institutions must give ASC buyers notice of the
tax implications of interest earned.
There is a lifetime
exclusion from gross income for interest earned on ASCs of $1,000
($2,000 in the case of a joint return).
A depository institution's executive officer will have to
certify that the institution has satisfied the qualified
residential and agricultural financing provision required by the
Tax Act.
As stated above, the ASCs must have an average investment
yield equal to 70 percent of the average investment yield of
52-week U.S. Treasury bills.
Normally these are auctioned every
four weeks on a Thursday.
The average investment yield will be
announced with the results of every 52-week bill auction.
Seventy percent of this will become the offering yield for all
ASCs issued starting Monday of the following week.
That offering
yield will remain unchanged until the week after the next auction
of 52-week Treasury bills four weeks later.

3

For example, the auction of 52-week U.S. Treasury bills on
August 6, 1981 resulted in an average price of 85.296 per 100.
The average investment yield on such 52-week bills would be 17.29
percent, 70 percent of which is 12.10 percent.
An investor
depositing $1,000 in an ASC subject to this yield requirement
would receive $121.00 in interest upon maturity of the deposit.
Withdrawals of earned interest on ASCs are permitted, but an
individual who withdraws interest during the deposit term will
receive a lower total amount of interest than if periodic
interest earned were left on account and only withdrawn at ASC
maturity.
This is because the effect of compounding does not
take place on any withdrawn interest amounts.
Since ASCs cannot be offered until October 1, 1981, the
first auction that will determine the yield on ASC will be the
auction on September 3, 1981.
Early Withdrawal; Under existing rules, which also hold for
ASCs, the withdrawal of all or part of the principal of an ASC
would result in a penalty equal to three months' interest (at the
nominal rate) on the amount withdrawn.
In addition, the Tax Act
provides that an early withdrawal of any portion of the principal
will eliminate the tax-exempt status of the ASC.
Premiums: The value of premiums offered to increase the
effective yield on ASCs (including shipping, warehousing,
packaging and handling costs for merchandise) cannot exceed $10
for deposits of less than $5,000 or $20 for deposits of $5,000 or
m o r e .)
Denominations; An institution is required to accept ASC
deposits in multiples of $500 but may accept deposits in any
other amount.
It could accept a deposit for $247, for example,
or $1,386.45 or any other amount.
Commissioner of the IRS, Roscoe L. Egger, Jr., says IRS has
reviewed pertinent portions of the DIDC final rules and finds
them consistent with the applicable provisions of the Internal
Revenue Code.

Contact:

Robert Don Levine — 566-5158
Marlin Fitzwater — 566-5252

4

TITLE 12— BANKS AND BANKING
CHAPTER XII— DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE
PART 1204— INTEREST ON DEPOSITS
Qualified Tax-Exempt Savings Certificates

AGENCY:

Depository Institutions Deregulation Committee.

ACTION:

Final Rules.

SUMMARY:
The Depository Institutions Deregulation Committee
("Committee") has established a new category of time deposit
in order to permit depositors to take advantage of the Federal
income tax benefits applicable to interest earned on qualified
tax-exempt savings certificates, the so-called All-Savers
Certificates ("ASCs"), and in order to help depository institu­
tions reduce their costs of funds and increase their deposit
flows. The Economic Recovery Tax Act of 1981 ("Tax Act"),
with certain restrictions, authorizes a maximum lifetime
exclusion of $1,000 ($2,000 in the case of a joint return)
from gross income for interest earned on ASCs, which (1) are
issued from October 1, 1981 through December 31, 1982, (2)
have a maturity of one year, (3) are available in denominations
of $500 and any other denomination determined by the depository
institution and (4) have an annual investment yield equal to
70 percent of the average investment yield for the most recent
auction of 52-week U.S. Treasury bills prior to the calendar
week in which the ASCs are issued.
The Committee also required
that certain notice regarding the tax implications of ASCs
be given to a depositor prior to the purchase of an ASC.
EFFECTIVE DATE:

October 1, 1981

FOR FURTHER INFORMATION CONTACT:
Rebecca Laird, Senior
Associate General Counsel, Federal Home Loan Bank Board
(202/377-6446), F. Douglas Birdzell or Joseph A. DiNuzzo,
Counsels, Federal Deposit Insurance Corporation (202/389-4324
or 389-4237), Daniel Rhoads, Attorney, Board of Governors of
the Federal Reserve System (202/452-3711), Allan Schott or
Elaine Boutilier, Attorney-Advisors, Treasury Department
(202/566-6798 or 566-8737), David Ansell, Attorney, Office
of the Comptroller of the Currency (202/447-1880).
SUPPLEMENTARY INFORMATION:
Title III of the Tax Act, Public
Law 97-34, 95 Stat. 172, (26 U.S.C. §128) provides that up to
certain maximum dollar limitations and under certain restrictions,
an individual's gross income (for Federal income tax purposes)
does not include interest earned on qualified ASCs.
In general,
the Tax Act authorizes a lifetime exclusion from gross income of
$1,000 for an individual return and $2,000 for a joint return,

5

i.e. , regardless of how much interest is earned on all ASCs, and
regardless of during which taxable years interest on ASCs is
earned, no more than a total of $1,000 ($2,000 in the case of a
joint return) can be excluded from gross income for all taxable
years.
However, interest earned on a particular ASC may not be
excluded from gross income, if (1) any portion of the principal
of that ASC is redeemed prior to its maturity, or (2) any portion
of that ASC is used as collateral or security for a loan.
In order for interest to qualify for exclusion from gross
income under the Tax Act, an ASC must meet several requirements.
First, ASCs may be issued only during the period beginning on
October 1, 1981, and ending on December 31, 1982.
Second, the
certificates must have a maturity period of one year.
Third,
the certificate must have an annual investment yield equal to 70
percent of the average annual investment yield on 52-week Treasury
bills.
Fourth, the issuing institution must provide that ASCs are
available in denominations of $500.
The Tax Act imposes limitations on the issuing institution
with respect to the use of deposit funds derived from ASCs.
Generally, for commercial banks, mutual savings banks and savings
and loan associations, the Tax Act requires that at least 75
percent of the lesser of: (1) the proceeds from ASCs issued during
a calendar quarter or (2) "qualified net savings", be used to
provide "qualified residential financing" by the end of the sub­
sequent calendar quarter.
If an institution fails to meet the
"qualified residential financing" requirement by the end of any
calendar quarter, it may not issue additional ASCs until the
requirement is satisfied.
The term "qualified net savings" is the amount by
which deposits into passbook savings accounts, 6-month money
market certificates, 30-month small saver certificates, time
deposits of less than $100,000, and ASCs exceed the amount
withdrawn or redeemed from such accounts measured at the
beginning and end of each calendar quarter.
"Qualified residential financing" is any of the following:
(a) Any loan secured by a lien on a single-family
or multifamily residence;
(b)
any secured or unsecured qualified home improve­
ment loan?
(c)
any mortgage on a single-family or multi­
family residence that is insured or guaranteed by
the Federal, State or local government or any
instrumentality thereof;

6

(d)

any loan to acquire a mobile home;

(e)
any loan for the construction or rehabilitation
of a single-family or multifamily residence;
(f)
any mortgage secured by single-family or multi­
family residences purchased on the secondary market,
but only to the extent such purchases exceed sales of
such assets;
(g)
any security issued or guaranteed by the Federal
National Mortgage Association, the Government National
Mortgage Association, or the Federal Home Loan Mortgage
Corporation, or any security issued by any other person
if such security is secured by mortgages, but only
to the extent such purchases exceed sales of such assets;
and
(h)

any loan for agricultural purposes.

The Tax Act defines single-family residence to include stock in
a cooperative housing corporation, as defined in section 216
of the Internal Revenue Code, and 2, 3, and 4 family residences.
The Tax Act does not, however, authorize depository
institutions to offer ASCs; such determinations were left to
the relevant regulatory agencies.
In this regard, the Com­
mittee is empowered by its enabling statute, The Depository
Institutions Deregulation Act (12 U.S.C. §3501 et se q ), to
prescribe rules governing "the establishment of classes of
deposits or accounts", at all Federally insured commercial
banks, mutual savings banks and savings and loan associations.
In conformance with the provisions of the Tax Act, the Com­
mittee has authorized depository institutions to offer nonnegotiable ASCs with the following characteristics:
(1)

A maturity of one year,

(2)

Available in denominations of $500, and

(3)

An annual investment yield equal to 70 percent
of the average annual investment yield on 52-week
U.S. Treasury bills auctioned immediately preceding
the calendar week in which the ASC is issued.

The Tax Act provides that ASCs have a maturity of one year
and there is no language in the legislative history or the
statute to indicate any flexibility on this question.
Accordingly,
ASCs must have a maturity of exactly one year.
It would be possible,
however, for institutions, as part of their contract with
depositors, to provide for the automatic renewal of ASCs,
just as is permissible for any other time deposit.

7

The Tax Act states that ASCs are to be "made available
in denominations of $500." There is no language in the statute
or its legislative history to indicate that ASCs are to be
issued only in denominations of $500, or only in denominations
of $500 or more.
Thus, the Committee has concluded that
depository institutions offering ASCs are required to make
them available in denominations of $500, but are permitted
to offer ASCs in any other denomination, including denomin­
ations of more or less than $500.
However, a depository
institution may establish its own maximum deposit amount above
$500.
Accordingly, an institution offering ASCs is required
to
accept ASC deposits for $500 and may issue them in multiples
of
$500, such as $1,000, $1,500 and so on, but is
not required
to accept ASC deposits in other amounts.
A depository institution
is not required to issue individual certificates for each
$500 of a deposit.
At the same time, an institution is
permitted to accept ASC deposits in any other amount.
For
example, a depository institution could accept an ASC deposit
in the amount of $247.00 or $1,386.45.
With respect to the yield, ASCs must have an annual invest­
ment yield to maturity equal to 70 percent of the
average
investment yield of the most recently auctioned 52-week U.S.
Treasury bills.
The most recent auction is the one occurring
immediately preceding the week in which the ASC is issued.
Normally, 52-week U.S. Treasury bills are auctioned every
four weeks, on a Thursday.
The results of the auction are
announced by the Treasury Department late in the day on the
auction date.
The average investment yield determined by
that auction would be applicable for all ASCs issued beginning
the next week, which would normally begin on a Monday.
Beginning September 3, 1981, the Treasury Department will
include the average annual investment yield to maturity for
52-week U.S. Treasury bills (rounded to the nearest one-hundredth
of a percentage point) as part of the auction announcement.
The annual investment yield should not be confused with the
bank discount rate or the investment rate (equivalent couponissue yield), both of which are included in the Treasury
Department's auction announcement.
Unlike other time deposits regulated by the Committee,
the yield on ASCs must be equal to 70 percent of the average
annual investment yield on 52-week Treasury bills, rather
than be the maximum permissible rate payable on such deposits.
Thus, all depository institutions must provide the same
yield to maturity on ASCs and there is no differential in
favor of thrift institutions.
Since the yield on ASCs must be
equal to 70 percent of the yield on 52-week U.S. Treasury bills
determined at a specific auction, ASCs are fixed-rate instru­
ments.
At their discretion Institutions may credit interest
earned periodically during the term of an ASC deposit.
Periodic crediting, however, would require that the nominal
interest rate be decreased with increased periodicity of
8

compounding.
The total amount of interest credited on ASCs
at maturity will not vary with different methods of compound­
ing, provided that no interest is withdrawn during the term
of the deposit.
Withdrawals are permitted, but an individual
who withdraws interest during the deposit term will receive
a lower total amount of interest than if periodic interest
earned were left on account and only withdrawn at ASC maturity,
because the effect of compounding does not take place on any
withdrawn interest amounts.
The auction of 52-week U.S. Treasury bills on August 6,
1981, resulted in an average price of 85.296 per 100.
The
annual investment yield on such 52-week bills would be 17.29
percent, 70 percent of which, 12.10 percent, would be the
annual investment yield that institutions are required to
pay on ASCs.
An investor depositing $1,000 in an ASC subject
to this yield requirement must receive $121.00 in interest
upon maturity of the deposit if all principal and any interest
credited by compounding is maintained on deposit for the
entire one-year term of the certificate.
If, however, an
institution permits a depositor to withdraw interest prior to
to maturity, the amount of interest paid at any given time
may only be that amount then credited to the depositor's
account based on the periodicity of compounding employed.
Accordingly, institutions paying or crediting interest on a
quarterly basis in the above illustration would pay $28.97
per quarter, which is an annualized nominal interest rate of
11.59 percent.
Such interest, if left in the account and
compounded quarterly, would accumulate to $121.00 at the end
of the one-year term of the certificate.
Similarly, monthly
payments of interest would be $9.56 at a nominal rate of
11.48 percent.
Different payments or crediting of interest
would have to be adjusted accordingly. 1/

J / The formula used to derive the nominal interest rate at
L
which interest can be paid and credited is as follows:

d/365

r

where:

100 x

c =

the annual investment yield required to be paid
on the ASCs (in percent per annum);

d =

the average number of days in a compounding period
(365 day year)

I =

the amount of interest that can be paid during
a compounding period per dollar on balance in
the account at the beginning of said period; and

365 X I
d

9

The Committee has also determined that all of its other
rules relating to time and savings deposits are applicable to
ASCs.
For example, interest may be paid to a depositor prior to
maturity of the ASC, provided that interest is not prepaid as
provided in the Committee's rules (12 C.F.R. §§1204.101 and
1204.111).
In addition, the withdrawal of any portion of the
ASC (although not the interest earned on the ASC) would result
in imposition of an early withdrawal penalty equal to 3 months
interest at the nominal interest rate on the amount withdrawn.
(12 C.F.R. §1204.103).
Furthermore, any brokers' or finders'
fees paid in connection with an ASC must be included as part of
the yield on the deposit (12 C.F.R. §1204.110).
With respect to premiums, questions have been raised
regarding the permissibility of offering premiums for ASC
deposits because of a discussion which took place on the
floor of the House of Representatives during consideration
of the Tax Act (See Congressional Record, July 29, 1981, page
H 5139).
In that discussion, it was concluded that "substantial
premiums or other inducements" should not be used to increase
the yield on ASCs.
The Committee previously determined that,
within certain limitations, premiums given to attract deposits
are considered promotional or advertising expenses rather
than the payment of interest.
For the same reason, the
Committee has determined that premiums, under existing limi­
tations, should not be viewed as increasing the yield on
ASCs.
Thus, premiums may be offered in connection with ASCs
under the limitations of the Committee's existing rules (12
C.F.R. §1204.109).
In order to avoid any misunderstandings regarding the
tax consequences of the interest earned on a particular ASC,
the Committee required depository institutions to provide
customers with the following notice prior to the issuance of
an ASC:
"The Economic Recovery Tax Act of 1981 authorizes
a maximum lifetime exclusion from gross income for
Federal income tax purposes of $1,000 ($2,000 in the
case of a joint return) for interest earned by

(Footnote V c o n ' t . )
r *

the corresponding nominal rate of interest
(365-day basis, in percent per annum).

For institutions using continuous compounding, the nominal
interest rate would be defined as: r = 100 [In (1 + (c/100))],
where "In" signifies the natural logarithm of the expression
that follows it.

10

individuals on tax-exempt savings certificates.
Regardless of how much interest is earned on this
or any other tax-exempt savings certificate,
including interest earned on such certificates from
other institutions, and regardless of during which
taxable years that interest is earned, no more than a
total of $1,000 ($2,000 in the case of a joint return)
can be excluded from federal gross income for all
taxable years.
Furthermore, interest earned on a
specific certificate cannot be excluded from federal
gross income if (1) that certificate is used as col­
lateral for any loan, or (2) any part of the principal
of that certificate is redeemed or disposed of prior to
maturity.
The notice is intended to indicate to depositors that they
have ultimate responsibility for the tax consequences of an
ASC.
Several requests were submitted to the Committee asking
that depositors with six-month money market certificates be
permitted to convert their deposits to ASCs, without imposition
of any early withdrawal penalty.
Because the Federal Reserve
Board, Federal Deposit Insurance Corporation and Federal Home
Loan Bank Board under their respective individual authorities
have already addressed the circumstances under which existing
deposits may be converted to ASCs, the Committee has determined
that it is not necessary for the Committee to act on the
requests.
Also, in order to avoid any confusion or uncertainty
with respect to certain terms which are used in the Tax Act,
the Committee has made interpretations of such terms.
First,
the Committee has defined the term "qualified net savings"
to include any interest or dividends credited to deposit
accounts, since such interest is part of each customer's
deposit funds.
Second, the aggregate amount of "qualified residential
financing" that a depository institution is to have invested
at the end of a relevant quarter is to be determined net of
repayments and paydowns of such assets over the relevant
quarter, but sales of such assets may not be netted.
Thus,
an institution is not required to reinvest all of the previous
quarter's mortgage loan payments of principal in addition to
the requisite amount of the "qualified net savings" or ASCs
for the previous quarter.
For example, suppose that during
quarter one, qualified net savings increased by $1,500,000—
resulting in a requirement that qualified residential financing
be increased in quarter two by $1,125,000 (75 percent of
$1,500,000).
Suppose also that the depository institution
ended quarter one with $5,000,000 of qualified residential

11

financing assets, during quarter two had repayments of principal
and complete payoffs of qualified residential financing assets
of $750,000 and qualified residential financing asset sales of
$500,000.
To meet its qualified residential financing requirement
for quarter two of $1,125,000, the institution would be required
to have outstanding at the end of quarter two qualified resi­
dential assets of at least $5,375,000 ($5,000,000 plus $1,125,000
minus $750,000).
That is, in addition to the required investment
in qualified residential financing of 75 percent of last quarter's
qualified net savings, the institution would have to make up by
the end of the current quarter any sales of qualified residential
financing assets during that quarter.
It would not have to make
up the current quarter's amortization of qualified residential
financing from principal repayments and paydowns.
If the latter
had to be reinvested, qualified residential investment in a
quarter would exceed 75 percent of the previous quarter's qualified
net savings.
Third, the Tax Act does not provide a definition of the term
"loan for agricultural purposes" and the legislative history
does not provide guidance on the matter.
In such circumstances,
the Committee determined to establish a definition on the basis
of analogous terms described in the instructions to the Call
Report for Insured Commercial Banks.
Accordingly, a "loan for
agricultural purposes" is defined to include all "loans to finance
agricultural production and other loans to farmers" (Schedule A,
item 4) and "real estate loans secured by farmland" (Schedule A,
item 1(b)).
Finally, the exigencies of the housing finance
business may make it extremely difficult for depository insti­
tutions actually to make investments in eligible loans within
the quarter for which the qualified residential financing require­
ment is determined.
Many mortgages close more than three months
after the loan commitment is made and construction loan disburse­
ments may be spread over several quarters.
Since fulfillment of
a commitment would achieve the desired residential financing,
the Committee has determined that a firm commitment to make a
loan that is described in the Tax Act as "qualified residential
financing" will be treated as a qualified investment in the
quarter the firm commitment is made.
Under the Tax Act, failure to comply with the qualified
residential financing requirement for any calendar quarter
precludes an institution from issuing ASCs during the next
quarter until the requirement is satisfied.
The Committee has
determined to enforce this requirement through a certification
procedure.
An executive officer of the depository institution
is to certify that the institution has complied with the
qualified residential financing requirement, as set out in the
Tax Act.
A specific certification form is not required, but
it should include appropriate documentation, as determined by
the depository institution.
In addition, if institutions
provide for automatic renewal of an ASC, depositors should be

12

notified in writing at least 15 days in advance of the maturity
date in the event the depository institution cannot renew
the ASC because of its failure to satisfy the residential
financing requirement.
Because immediate action is necessary to implement a
program determined to be in the nation's interest by the
Congress, and because of limitations on the Committee's
discretionary authority, the Committee has not made any
findings under the Regulatory Flexibility Act (5 U.S.C. §601
e t . s e g .).
For the same reason, the Committee finds that
the prior notice opportunity for public comment and deferred
effective date provisions of 5 U.S.C. §553 are not necessary
in taking this action and that good cause exists for not
complying with those provisions or the publication provisions
of section 1201.6 of the Committee's regulations (12 C.F.R.
§1 2 0 1 .6 ).
Pursuant to its authority under the Depository Institutions
Deregulation Act (12 U.S.C. §3501 et. se g .) , the Committee
amends part 1204 — Interest on Deposits (12 C.F.R. Part 1204)
by adding a new section 116, to read as follows:
§1204.116---Tax-Exempt Savings
Certificates.
(a) A commercial bank, savings and loan
association, or mutual savings bank may
pay interest on a non-negotiable tax-exempt
savings certificate ("ASC") provided that the time
deposit has an original maturity of exactly
one year, is available in denominations of
$500 and any other denomination at the
discretion of the depository institution,
and has an annual investment yield to
maturity equal to 70 percent of the average
annual investment yield on the most recent
auction of 52-week U.S. Treasury bills
prior to the calendar week in which the ASC is
issued.^/

A/ When institutions credit interest more frequently than
annually, the computation of interest must be adjusted to reflect
the effects of compounding so that the annual investment yield to
the depositor remains at the rate stipulated by law.
Specifically,
the formula used to derive the nominal interest rate at which
interest can be credited is as follows:
d/365
-

x

1

I

13

(b)
A depository institution must provide each
depositor the following notice, in a form that
the depositor may retain at the time of opening
a deposit under this subsection:
The Economic Recovery Tax Act of 1981
authorizes a lifetime exclusion from
gross income for federal income
tax purposes of up to $1,000 ($2,000 in
the case of a joint return) for interest
earned on tax-exempt savings certificates.
Regardless of how much interest is earned
on this or any other tax-exempt savings
certificate, including interest earned on
such certificates from other institutions,
and regardless of during which taxable years
that interest is earned, no more than a total
of $1,000 ($2,000 in the case of a joint
return) can be excluded from federal gross
income for all taxable years.
Furthermore,
interest earned on a specific certificate
cannot be excluded from federal gross income
if (A) that certificate is used as collateral
for any loan, or (B) any part of the principal
of that certificate is redeemed or disposed
of prior to maturity.

(Footnote 1/con1td.)
where:

c

= the annual investment yield required to be paid on
the ASCs (in percent per annum);
d = the average number of days in a compounding period
(365 day y e a r );
I = the amount of interest earned during
a (365 day year)
compounding period per dollar in the
account at
the beginning of the period; and
r = the corresponding nominal rate of interest (365day basis, in percent per annum).

For institutions using continuous compounding, the nominal interest
rate would be defined as:
r = 100 [In (1 + (c/100))], where "In"
signifies the natural logarithm of the expression that follows it.

14

(c) (1) A depository institution may not issue
ASCs after March 31/ 1982, under this section
unless an executive officer of the depository
institution certifies, in a form determined by
the institution, that the institution has complied
with the "qualified residential financing" requirement
set out in 26 U.S.C. §128.
The certification must
be maintained by the institution in its files and
must be available to the institution's primary
supervisory agency upon request.
The certification
shall include appropriate supporting documentation,
as determined by the depository institution.
(2)
A depository, institution issuing ASCs
during any calendar quarter must use at least
75 percent of the lesser of:
(a)
the proceeds from ASCs issued during a
calendar quarter, or
(b)

"qualified net savings",

to provide "qualified residential financing" by the
end of the subsequent calendar quarter and may not
issue additional ASCs until the 75 percent require­
ment is satisfied.
(3)
For purposes of determining compliance
with the "qualified residential financing"
requirement, the following applies:
(A) the term "qualified net savings"
includes interest or dividends credited to deposit
accounts;
(B) the amount of "qualified residential
financing" is to be determined net of repayment of
principal and paydowns, but sales of such assets
may not be netted;
(C) the term "any loan for agricultural
purposes" is defined to have the same meaning as
items described in the instructions to the Report
of Condition of all Insured Commercial Banks,
schedule A, item 4 "Loans to Finance Agricultural
Production and Other Loans to Farmers, and schedule
A, item 1(b) "Real Estate Loans Secured by Farmland",
and
(D) "qualified residential financing"
includes a firm commitment to purchase any assets
eligible for such investment.

15

(d)
If a depository institution provides for automatic
renewal of an ASC, depositors must be notified in writing
at least 15 days in advance of the maturity of an ASC in
the event the depository institution cannot renew the
ASC because of its failure to satisfy the residential
financing requirement.
Failure to give such notice
shall not result in automatic renewal of the ASC.
(e)

This section expires January 1, 1983.

By Order of the Committee, September 3, 1981.

Gordon Eastburn
Acting Executive Secretary

16

News

Internal Revenue Service
Public Affairs Division
Washington, DC 20224

For R»l«aa«:

Media Contact: Tel. (202 ) 566-4024
Copies:
Te) (202 ) 566-4054

11:00 a.m.
9/3/81

Washington, D.C. —

IR-81-101
The Internal Revenue Service today

announced a ruling on "All Savers' Certificates" to aid
purchasers in determining the tax status of interest received
and to assist depository institutions participating in the
program.
The Economic Recovery Tax Act of 1981 excludes from tax
up to $1,000 of interest, $2,000 on a joint return, from
qualifying one-year "All Savers' Certificates" issued during
the period October 1, 1981, through December 31, 1982.
Qualifying certificates must have a maturity of one year and
have an investment yield equal to 70 percent of the yield on
52-week Treasury bills issued before the certificate issue
date.
On August 29, 1981, the IRS responding to statements
in advertisements by some financial institutions announced
that it had substantial doubt as to the income tax consequences
of certain investment packages that specifically link highyield, short-term investments with the "All Savers' Certificates".
The announcement also said the IRS was studying the issue and
shortly would announce its findings.
In issuing its earlier announcement and today's ruling
the IRS is interpreting the provisions of the Act relating to
"All Savers' Certificates" in a manner consistent with the
Congressional intent to limit the interest rate that depository
institutions are authorized to pay.

17

The IRS, in announcing its ruling, emphasized that "All
Savers' Certificates" whose purchase is not contractually
linked to any other investments or benefits qualify for the
tax-free interest benefit provided for under the 1981 Act.
In any situation, however, where purchase of an "All Savers'
Certificate'1 entitles the purchaser to benefits not available
to non-purchasers, purchasers are receiving an amount in excess
of that permitted in the law.

Accordingly, the certificate

does not qualify for the exclusion.
For those taxpayers who have already purchased investment
packages that require the reinvestment of the funds from a
repurchase agreement into an "All Savers' Certificate", the
ruling holds that these certificates will not qualify for the
tax-free interest benefit.

Howev

the benefit is restored

and the certificate will qualify if the financial institution
gives the purchaser a reasonable and realistic opportunity to
recover the principal and interest from the repurchase agreement
at maturity without penalty.
Similarly, by eliminating any penalty for failure to re­
invest the funds from a repurchase agreement in an "All Savers'
Certificate", the financial institution can restore the tax-free
benefit to.purchasers of financial packages that carry a penalty
provision.
The IRS also stressed that the interest from any investments
linked with "All Savers' Certificates" is taxable income.

18

Revenue Ruling 81-218, attached, addresses nine fact
situations concerning "All Savers' Certificates".

Further

guidance will be made available through the issuance of
regulations and, if necessary, additional rulings.
Rev. Rul. 81-218 will also be published in Internal Revenue
Bulletin No. 1981-37 on September 14, 1981.

19

Part I
Section 128.— Interest on Certain Savings Certificates (Also
Sections 6049(a)(1), 6652(a)(1);

1.6049-1, 3 0 1 .6652-l(a)(1)(iii)).

Rev. Rul. 81-218.

ISSUE
Do the "All Savers' Certificates" made available to individual
taxpayers under the situations described below qualify as deposi­
tory institution tax-exempt savings certificates, the interest on
which,

subject to applicable dollar limitations, is exempt from

federal income tax under section 128 of the Internal Revenue
Code, as added by the Economic Recovery Tax Act of 1981, Pub.
Law No. 97-34, section 301, 95 Stat. 172?
FACTS
Situation 1 .

On October 1, 1981, A, an individual taxpayer,

purchases for $500 an All Savers'
institution.

Certificate from a qualified

All Savers' Certificates are certificates issued by

qualified institutions after September 30, 1981, and before
January 1, 1983, having a maturity of 1 year, and an investment
yield equal to 70 percent of the average investment yield for the
most recent auction of United States Treasury bills with maturities
of 52 weeks.

These certificates are available in denominations

of $500 and such other denominations as are authorized by deposi­
tory institution regulatory agencies.

All Savers' Certificates

are insured by government agencies and pay interest at such
intervals as are authorized by depository institution regulatory
agencies.

At maturity, A will receive all principal and any

accrued but unpaid interest on the All Savers' Certificate.

21

Situation 2 .

On September 10, 1981, B, an individual tax­

payer, enters into a repurchase agreement with Z ,
institution.

a qualified

Generally, a repurchase agreement is an arrange­

ment between a customer and a financial institution under which
the customer buys certain securities from the institution that
the institution agrees to repurchase from the customer at a
higher price on a certain date in the future.

The repurchase

agreement, which is generally available to Z's customers,
provides that Z will repurchase the securities from B at a price
which will provide B an annual rate of interest on B's
funds of 25 percent until October 1, 1981.

The agreement between

Z and B also provides that funds from the repurchase agreement
will automatically be reinvested in an All Savers' Certificate on
October 1, 1981, unless B gives instructions to Z at any time
prior to that date either to remit B's funds on October 1, 1981,
or to have B's funds reinvested on that date in other investments
offered by Z.

B may elect, without penalty, to have his funds

remitted on October 1, 1981, or reinvested on that date.
Situation 3 .

On October 1, 1981, C, an individual taxpayer,

enters into a repurchase agreement with Y, a qualified institution.
Y's agreement with C provides that Y will repurchase the securities
from C at such a price as to provide C an annual rate of interest
on C's funds of 15%, until November 1, 1981, if C elects on or before
November 1, 1981, to reinvest in an All Savers' Certificate.
Alternatively, Y's agreement provides that Y will repurchase the

22

the securities at such a price as to provide C an annual rate of
interest of only 12% until November 1, 1981, if C does not elect to
reinvest in an All Savers' Certificate.

On November 1; 1981, C

elects to reinvest in an All Savers' Certificate.
Situation 4 .

On August 17, 1981, D, an individual taxpayer,

enters into a repurchase agreement with X, a qualified institution.
The repurchase agreement provides that X will repurchase the securi­
ties from D at such a price as to provide D an annual rate of
interest on D's funds of 30% until October 1, 1981.

X's agreement

with D further provides that on October 1, 1981, D's funds will
automatically be reinvested in an All Savers' Certificate, without
any other investment option being made available to D.

X' 6

repurchase agreements that provide an annual rate of interest
of 30% are not available to taxpayers who do not agree to automatic
reinvestment in an All Savers'
Situation 5 .

Certificate.

On October 1, 1981, E, an individual taxpayer,

purchases an All Savers' Certificate issued by W, a qualified institu­
tion.

W's agreement with E provides that upon maturity of the All

Savers' Certificate, the amount on account will, at E's option, either
be remitted to E or will be used to enter into a repurchase agree­
ment which will provide interest to E on E's funds at the annual
rate of 25% for a 60 day period.

The option to enter into future

repurchase agreements with W providing such a return is not
available without charge to taxpayers Who do not agree to
purchase an All Savers' Certificate.

23

Situation 6 .

On October 1, 1981, F, an individual taxpayer,

purchases from V, a qualified institution, an All Savers' Certificate
and enters into a 30-day repurchase agreement, which will provide
a return to F on F's funds at the annual interest rate of 25%,
over the 30-day period.

V's repurchase agreements that provide

such a return are not available to taxpayers who do not simultan­
eously purchase an All Savers' Certificate.
Situation 7 .

On October 1, 1981, G j an individual taxpayer,
__

purchases from U, a qualified institution, an All Savers' Certificate
for $10,000.

In advertisements, U has offered to waive certain

standard loan origination fees or to charge a reduced rate of
interest on consumer or mortgage loans made to purchasers of All
Savers' Certificates in denominations over $10,000.
Situation 8 .

On October 1, 1981, H, an individual taxpayer,

purchases from T, a qualified institution, an All Savers' Certificate
for $4,000.

In addition, H receives from T a premium of the type

not regarded as interest under applicable depository institution
regulations.

The value of the premium does not exceed the amount

regarded as de minimis under existing depository institution
regulations.
Situation 9 .

On August 26, 1981, J purchases for $10,000 a

six-month money market certificate with an annual interest rate of
16.104% from S ,

a qualified institution.

On October 1 ,

1981, J

"rolls over" the principal and accumulated interest from the
money market certificate, without penalty, into an All Savers'
Certificate.

Assume that the auction of 52-week U.S. Treasury

24

bills in the week before October 1, 1981, results in an average
annual investment yield on such bills of 17.29%, 70% of Which, or
12.10%,, would be the annual investment yield on the "All Savers'
Certificate.
LAW AND ANALYSIS
Section 128(a) of
not

the Code

include any amount received

provides that gross income does
by any individual during the tax­

able year as interest on a depository institution tax-exempt
savings certificate.
Section 128(b) of the Code provides that the amount exclud­
able from an individual's income under section 128(a) in any taxable
year shall be limited to the excess of $1,000 ($2,000 in the case of
a joint return) over the aggregate amount excludable by the individual
for prior taxable years.
Section 128(c) of
institution tax-exempt

the Code

provides that the term "depository

savings certificate" means

any certificate

that (A) is issued by a qualified institution after September 30, 1981,
and before January 1, 1983,

(B) has a maturity of 1 year,

(C) has

an investment yield equal to 70 percent of the average investment
yield for the most recent auction (before the week in which the
certificate is issued) of United States Treasury bills with maturities
of 52 weeks, and (D) is made available in denominations of $500.
Section 6049(a)(1) of the Code provides that every person who
makes payments of interest aggregating $10 or more to any other
person during any calendar year must file an information return
reporting the payments.

Section 6049(b) defines interest to include

25

interest on deposits made with persons carrying on the banking
business and amounts paid by a mutual savings bank, savings and loan
association, cooperative bank, homestead association, credit union,
or similar organization.
In Situation 1, the All Savers' Certificate meets the require­
ments of section 128 of the Code and the interest exclusion is
available.
In Situation 2, because B has a realistic opportunity to
have the funds from the repurchase agreement remitted or reinvested
without penalty on October 1, 1981, B can have the benefit of
the higher yield repurchase agreement without agreeing to purchase
the All Savers' Certificate.
and All Savers'

Accordingly, the repurchase agreement

Certificate are independent investments, the

All Savers* Certificate meets the requirements of section 128 of
the Code, and the
In Situation

interest exclusion is available.
3, C can only have the benefit of the higher

yield repurchase agreement by agreeing to purchase an All Savers'
Certificate.

The repurchase agreement and All Savers' Certificate are

contractually linked and, for purposes of section 128 of the Code,
are treated as one investment with a maturity in excess of one
and an investment

year

yield in excess of 70% of the average investment

yield for the most recent auction of United States Treasury bills
with maturities of 52 weeks.

The certificate fails to satisfy

26

either the maturity or yield requirements of section 128(c) of the
Code and the interest exclusion is not available.
Xp Situations 4, 5, 6 and 7, benefits are made available to
purchasers of All Savers' Certificates that are not made available
to other individuals, thus linking these benefits to purchase of
such certificates.

By purchasing their All Savers' Certificates,

D, E, F, and G, respectively, receive benefits in excess of 70%
of the average investment yield for the most recent auction 6f
United States Treasury bills with maturities of 52 weeks.

Further,

in Situation 4, the investment has a maturity of more than one
year.

Therefore, the requirements of section 128 of the Code

are not met in Situations 4, 5, € and 7, and the interest exclusion
is not available.
In Situation 8, the premium received by H has a de minimis
value that is not regarded as interest under applicable depository
institution regulations.
convenience,

As a matter of administrative

such nominal premiums will not be included

in determining the investment yield of All Savers' Certificates.
Accordingly, the All Savers' Certificate meets the requirements
of section 128 of the Code and the interest exclusion is available.
In Situation 9, under the current rules of depository institu­
tion regulatory agencies, a "roll over" from a six-month money market
certificate into a deposit contract having a lower or equal interest
rate and a longer or equal term does not subject the taxpayer to a
penalty.

Further, any individual who purchases a six-month

27

money market certificate always has the option of holding the
certificate to maturity or of "rolling over" the certificate
without penalty into other deposit contracts under regulatory
agency rules of general applicability.

Accordingly, since the

two investments are not contractually linked, and since J's
purchase of an All Savers' Certificate does not entitle him to
benefits not generally available to other individuals, the All
Savers' Certificate meets the requirements of section 128 of the
Code and the interest exclusion is available.

HOLDINGS
The All Savers' Certificates described in Situations 1, 2, 8
and 9 qualify as depository institution tax-exempt savings
certificates and the interest paid thereon is exempt from federal
income tax under section 128 of the Code, subject to the limitations
therein prescribed.

The All Savers' Certificates described in

Situations 3, 4, 5, 6 and 7 do not qualify as depository institu­
tion tax-exempt savings certificates and the interest paid there­
on i6 not exempt from federal income tax under section 128.
Further, issuers of All Savers' Certificates must report on
Forms 1096 and 1099, in accordance with the accompanying instruc­
tions, all payments of interest over $10, even though the recipient
of the interest income may be able to exclude all or part of
the interest from income.

Failure to file the requisite forms

could subject the payer to a penalty under section 6652(a)(1) of
the Code for each failure.

28


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102