Relief for Israel Bond Holders

Israel bond holders may be relieved to learn that their failure to declare interest they never earned will probably not be considered a violation of U.S. tax law.

The House Ways and Means Committee approved last Friday legislation that would exempt holders of Israel bonds from a provision of the 1984 Deficit Reduction Act requiring lenders to pay tax on the full amount of interest that would accrue if the loans were made at prevailing market rates.

The “imputed interest provision” was aimed against those who make artificially low-interest loans as a legal means of tax evasion. Before the legislation, for example, wealthy parents could extend large amounts of money to their children in order to exploit the latter’s lower tax rates.

If Israel Bonds are not exempted from the 1984 act, holders would be required to pay tax on more income than they actually earn. A holder of a $1,000 bond, for example, would earn $40 at the bond’s interest rate of four percent. But he would be required to report the $100 in interest income he could have received if the bond had been issued at the current appoximate market rate of 10 percent.

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However, the House Ways and Means Committee approved a proposal sponsored by Rep. Charles Rangel (D. N.Y.) to exempt Israel Bonds from the 1984 law. Similar legislation has been introduced in the Senate Finance Committee by Pete Wilson (R. Cal.).

“It is clear that Congress never intended to include Israel Bonds in this particular tax law change, but today’s action by the Ways and Means Committee makes that crystal clear,” Charles Schumer (D. N.Y.), a cosponsor of the House bill, said on Friday.

“No one buys Israel Bonds as a tax shelter,” Schumer added. “American Jews and others buy these bonds out of a sense of devotion to the State of Israel and they do so with full understanding that they will get a relatively low rate of return for their investment. There is no reason that they should actually be penalized because they chose this form of philanthropy.”

Schumer stressed that failure to exempt the bonds would discourage taxpayers from buying them.

Passage by the full House and Senate exempting Israel Bonds from the Deficit Reduction Act appears to be essentially a matter at time. But, according to an aide in Schumer’s office, it could get bogged down in a debate over controversial tax reform legislation if a general tax reform bill is used as the context for the bonds exemption. The aide, however, added that the House would always have the option of passing a separate bill on the Israel Bonds question.

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