On January 1, 2017, Faye gave Todd, her son, a 36-month certificate of deposit she purchased December 31, 2015, for $8,638 . Faye gave Todd 1,000 shares of ABC, Inc, on December 2, 2017 . The certificate had a maturity value of $10,000 and the yield to
maturity was 5%. On November 30, 2017, ABC, Inc, had declared a dividend of $1.00 payable to stockholders of record on December 5th. How much interest and dividends should Todd include in his gross income for 2017?
Todd must report $454 of interest income and no dividends. The certificate of deposit is an original issue discount instrument. Therefore, Faye should have reported $432 (.05 × $8,638) of interest income in 2016, and thus the adjusted basis of the CD is $9,070 ($8,638 + $432). Todd must report interest income for 2017 calculated as follows: $454 (.05 × $9,070). The dividends had been declared before Todd received the stock. According to the IRS in this case, the income belongs to Faye since she was the owner of the stock when the dividend was declared and she assigned to Todd the right to receive it.
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