• Par Value
  is the face value of the bond, i.e., the value the bond was assigned when
  the issuer created it.
• Market value
  is the price for which a bond can be bought or sold at any give time after
  it is issued and before it is redeemed in the process known as secondary
  market trading. The prices of bonds in the secondary market depend on the
  overall level of interest rates. Prices of existing bonds rise when the
  general level of interest rates falls, and prices fall when the general
  level of interest rates rises. Individual bond prices can rise relative to
  their peers in the secondary market if the creditworthiness of the
  borrower improves, or they can lose ground relatively if the creditworthiness
  of the borrower deteriorates.
• Redemption value
  is the amount of money that the issuer will return to the investor on the
  specified maturity date. Redemption value is generally not affected by
  changes in the secondary market price.
• Maturity date
  is the date set for repayment of the bond's principal; it is normally
  established at the time the bond is issued. A conventional bond
  is issued for a fixed period. A callable
  bond can be redeemed at the initiative of the issuer
  whenever the call conditions specified in the bond are met. A putable bond
  can be redeemed at the initiative of the investor whenever the specified
  put conditions are met. A convertible
  bond is one that can be exchanged for common stock at
  specified times.
• Coupon value
  is the cash amount of the interest payment made to the investor each year.
  In most cases, the coupon value never changes throughout the life of the
  bond, regardless of any changes in secondary market value of the bond.
• Coupon yield
  is the value of the interest payment given to the investor each year
  expressed as a percentage of the original par value of the bond. This
  figure does not change during the life of the bond.
• Current yield
  is the value of a bond's interest payment expressed as a percentage of its
  current trading price in the secondary market. Current yield is actually
  the primary basis for defining a bond's trading price in the secondary
  market because current yields on existing bonds need to maintain their
  relationships with market averages. To keep yields synchronized with the
  market, trading prices are adjusted. Lowering a bond's price has the
  effect of increasing its current yield because the coupon payment would be
  divided into a smaller market value. Increasing a bond's price has the
  effect of lowering the current yield because the coupon payment would be
  divided into a larger market value.

1. A bond ladder is a portfolio of bonds whose
   maturity dates are evenly staggered so that a constant proportion of the bonds
   can be redeemed at par value each year. As a portfolio management strategy,
   bond laddering may help you maintain a relatively consistent stream of income
   while managing your exposure to potential losses caused by interest rate
   volatility and market inefficiency.
2. A perpetual bond ladder may be most useful for
   a trust or endowment. It can conserve investment capital indefinitely and
   provide continuously predictable cash flow.
3. A fixed-term bond ladder will provide a steady
   cash flow for a predetermined number of years. It can be expanded as the
   planning horizon changes or it can be allowed to expire when its last bond
   matures.
4. A bond ladder can be liquidated if needs or
   circumstances change, but the process of selling bonds prior to maturity can
   introduce added elements of instability and cost, as the value of the bonds may
   not equal their face value.

On October 13 the Democratic members of the House Ways and Means Committee sent a letter to Joint Select Committee Co-Chairs Rep. Jeb Hensarling (R-TX) and Sen. Patty Murray (D-WA).  The Democratic members stated, "Ultimately, the Joint Select Committee and the Congress must take a balanced approach if we are to truly address our deficit and debt."

Democratic members note that federal receipts for the past three years have been "about 15% of the economy."  This is the lowest level in the past six decades.  In their view, the deficit reduction plan cannot be solved "through spending cuts alone."  They further observe that President Obama has published specific tax revenue proposals to assist the Joint Select Committee in their task.

The three principles that should govern revenue increases in their view are "job creation, fairness and fiscal responsibility."

On October 13, most of the Republican members of the Senate Finance Committee released their proposal.  They suggest that there be a revenue-neutral comprehensive tax reform.  Individual tax rates would be reduced to three brackets and a substantial exemption.  The top individual and corporate rates would both be 25%.

Sen. John McCain (R-AZ) stated, "We need to create a simplified tax system to keep money in the hands of consumers."

Editor's Note: As the Joint Select Committee continues to seek to create a compromise acceptable to at least seven of the 12 members, it is probable that both parties and the White House will continue to advocate their respective solutions.  Given the substantial potential reductions for the Department of Defense and Medicare if the Supercommittee cannot craft an agreement, it still seems probable that there will be a bipartisan compromise by the November 23 deadline.

Protective Claims for Estate Tax Refunds

In Rev. Proc. 2011-48; 2011-42 IRB 527(17 Oct 2011), the IRS published guidance on the filing and recovery of estate taxes if there is a protective claim for an estate tax refund.

In T.D. 9468 (October 2009), the IRS published final regulations on protective estate refund claims.  The amount of an estate claim or expense will be deductible only when it is actually paid.  Amounts that are potentially payable and therefore could qualify for a Sec. 2053 deduction must be the subject of a protective claim for refund.

Rev. Proc. 2011-48 sets forth specific requirements for filing the protective claim and subsequently receiving a refund.

First, the claim must be filed within the appropriate period of limitation under Sec. 6511(a).  If the claim is filed during that time, it then must identify the claim or expense and describe in reasonable detail the reasons and contingencies surrounding the claim.

After the contingencies are resolved and the claim is paid, then Reg. 20-2053-1(d)(5)(i) requires the estate fiduciary to give notice to the IRS.

Under the Rev. Proc., the specific filing requirement is "facts sufficient to apprise the Commissioner of the exact basis of the claim."  The fiduciary who files the Form 706 is the individual who is required to file Schedule PC or Form 843.  Each claim must be separately listed and described.  The claim when paid may include related ancillary expenses such as attorneys' fees, court costs, appraisal fees and accounting fees.

If the IRS determines that the filing has failed to meet "preliminary procedural requirements for a valid claim," it may reject the claim.  However, the timely filed protective claim may give the fiduciary an opportunity to cure a defective claim based on reasonable substantiation.

The revenue procedure specifies that the IRS may be notified of the resolution of a claim by filing a supplemental and signed Form 706.  Rev. Proc. 2011-48 applies to protective claims filed for estates of individuals passing away on or after October 20, 2009.

Charitable Deductions for Unreimbursed Expenditures

In Twana L. Bradley v. Commissioner; T.C. Summ. Op. 2011-120; No. 3564-10S (11 Oct 2011), the Tax Court permitted some unreimbursed charitable deductions and denied other expenditures.

Ms. Bradley was a volunteer cheerleading coach for a youth football and cheerleading league that was initially identified as the Muhammad Ali Youth Football and Cheerleaders League.  Subsequently it appeared that the proper organization name was the Muhammad Ali Yellowjackets.  Bradley was a volunteer cheerleading coach and her ex-husband coached the youth football team.  They expended various amounts for a bus rental, pizzas, party supplies and auto trips to support the team.

Following an IRS audit, the Tax Court reviewed the various unreimbursed deductions.  The Court noted that a deductible amount must be "to a qualified entity organized and operated exclusively for an exempt purpose, no part of the net earnings of which inures to the benefit of any private individual."  Sec. 170(c)(2).

While the initial organization was not identified as tax exempt in IRS Publication 78, the organization known as the Yellowjackets Cheerleaders was a qualified charity.  Therefore, the Court determined that the gifts could be potentially deductible.

The contribution for $660 for a charter bus rental is deductible under Reg. 1.170A-13(a) if there are adequate records.  In addition, because the gift was over $250, Sec. 170(f)(8)(A) requires a contemporaneous written acknowledgement by the charity.

While the substantiation for $660 did show the date and amount of the gift, there was no written acknowledgement from Yellowjackets Cheerleaders.  Therefore, that deduction was denied.

Contributions for the party supplies are subject to Reg. 1.170A-13(a) requirements that they be substantiated by a cancelled check, a receipt from the donee organization or "other reliable written records."  Because Bradley did not have a cancelled check or receipt, she offered the payment receipts for the various amounts.  These included the names of the payees, the dates of the payments and the amounts of the payments.  The Court determined that this information met the "reliable written record" standard and qualified for deduction.

Finally, the taxpayer and her ex-husband had traveled four times per week to the practices.  Based on mapquest.com records, she claimed 1,857.6 miles were driven to support the team practices and games.

The Court noted that Reg. 1.170A-13(a)(2) allowed vehicle deductions to be supported by "reliable written records."  The Mapquest mileage and record of practices and games was deemed sufficient to support the 14 cents per mile charitable deduction.

Applicable Federal Rate of 1.4% for October – Rev. Rul. 2011-22; 2011-41 IRB 1 (18 Sept. 2011)

The IRS has announced the Applicable Federal Rate (AFR) for October of 2011.  The AFR under Sec. 7520 for the month of October will be 1.4%.  The rates for September of 2.0% or August of 2.2% also may be used.  The highest AFR is beneficial for charitable deductions of remainder interests.  The lowest AFR is best for lead trusts and life estate reserved agreements.  With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable.  During 2011, pooled income funds in existence less than three tax years must use a 2.8% deemed rate of return. Federal rates are available by clicking here.