Samantha and her son, Brent, are cash basis taxpayers. Samantha gave Brent a corporate bond with a face amount and fair market value of $10,000. On the date of the gift, March 31, 2018, the accrued interest on the bond was $100. On December 31, 2018, Brent collected $400 interest on the bond. Brent must include in gross income the $300 interest earned after the date of the gift.

Question

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As cash basis taxpayers, Samantha and Brent only report income when it is actually received. Since Brent received $400 interest on the bond after the date of the gift, he must include that amount in his gross income. However, the $100 accrued interest that was already earned on the bond at the time of the gift belongs to Samantha and is not included in Brent's gross income. Therefore, Brent must include the $300 interest earned after the date of the gift in his gross income.

Samantha and Her Son, Brent, Are Cash Basis Taxpayers