IRS drags All-Saver 'incentives' from under tax shelter

The eye-catching ads promised everything but a Rolls-Royce and breakfast in bed on Sundays: "$2,000 tax free! Up to 25 percent interests!" "Get 20 percent interest, up front, in cash!" "Earn 36 percent annual interest now!"

The ads announced special incentives, offered by banks and thrift institutions, available only to customers who agreed to automatically invest in tax-free All-Savers certificates when they become legal Oct. 1.

But now the Internal Revenue Service (IRS) has ruled that the depository institutions must let you have the option of taking only the special incentive. Otherwise the All-Savers portion of the package loses its tax free status.

"As long as the customer has a choice, as long as there is no contractual linkage -- that would be all right," says Gerald Portney, IRS assistant commissioner.

If you've already invested in one of these flashy deals, your bank or thrift must notify you of the change, letting you have the option of taking the short-term interest (often based on retail repurchase agreements) only.

"If they individually notify each customer, we'll be satisfied with that," said Kenneth Gideon, IRS chief counsel.

But IRS officials, when announcing the ruling here Thursday, did not definitely rule out the use of advertising as "adequate notice."

And those who have bought into the agreements could conceivably not get what they paid for.

"The IRS doesn't have the authority for making the decoupling mandatory," says Roscoe Egger, IRS commissioner.

In other words, if your bank or thrift doesn't bother to change the agreement , they won't get sued by the government. You'll just lose your tax exemption on the brand-new, crisp All-Savers.

If that comes to pass, IRS counsel says the matter must be settled "between the taxpayer and the institution."

Egger said the IRS did not issue an immediate ruling when ads for the deals first appeared because "it really didn't come to our attention until last week."

"Nobody should underestimate the imagination of the marketplace," he said.

The All-Savers certificate -- centerpiece of this ingenious offers -- was created by Reagan omnibus tax bill. It pays 70 percent of a 1-year T-bill rate, tax free. Insitututions that offer them must invest 75 percent of the funds they get in home mortgages, or agricultural loans.

Thursday's T-bill auction set yields for the first batch of All-Savers. Wall Street bond experts predicted the Treasury securities would go for around 15 percent on discount -- meaning an All-Savers bought Oct. 1 would pay about 10.5 percent.

Eggers said he hoped the IRS ruling would clear some doubts lingering around uses of All-Savers, and encourage money to flow into the certificates.