90 T.C. 63">*63 OPINION

On August 24, 1987, decisions were entered in these cases pursuant to our opinion filed on March 27, 1986. Subsequently, petitioners filed a timely motion to vacate decisions which was denied on November 3, 1987. Petitioners have moved for an order fixing the amount of an appeal bond pursuant to Rule 192¹ and section 7485. ² Respondent requests us to fix the amount of the bond at $ 5,544,933. Petitioners do not dispute respondent's request as far as it goes, but claim that the amount of the bond should be reduced by $ 2,950,502 to reflect certain1988 U.S. Tax Ct. LEXIS 5">*6 claims for income tax refunds previously filed by petitioners with respondent. In addition, petitioners seek to use "stripped" U.S. Government bonds as collateral in lieu of a surety bond and ask us to require respondent to accept, 90 T.C. 63">*64 in lieu of such bond, a trust arrangement for certain bonds and Treasury bills.

1988 U.S. Tax Ct. LEXIS 5">*7 Section 7485 requires a bond "to protect the United States during the pendency of an appeal so that when the appeal becomes final, there will be adequate security for collection of the amounts finally determined to be owed." Estate of Kahn v. Commissioner, 60 T.C. 964">60 T.C. 964, 60 T.C. 964">967 (1973). Our customary practice is to set the appeal bond at the amount of the deficiency for which review is sought, plus additions to tax and interest running from the date the return was filed to a date 2 1/2 years after the appeal is required to be filed, limited of course by the statutory cap of twice the deficiency. Barnes Theater Ticket Service, Inc. v. Commissioner, 50 T.C. 28">50 T.C. 28, 50 T.C. 28">29 (1968). Any departure from this customary practice "must provide a means whereby the Internal Revenue Service is certain that it can collect the approved deficiency." 50 T.C. 28">50 T.C. 29.

Reducing the amount of the bond because petitioners have claims for refund pending with respondent would not be in keeping with the requirement of certainty. While it may well be that petitioners' claims, which are based on a step-up in basis under section 10151988 U.S. Tax Ct. LEXIS 5">*8 for gift taxes paid (which were required by our prior decisions, Poinier, Transferee v. Commissioner, 86 T.C. 478">86 T.C. 478 (1986)), are meritorious, we cannot be certain that that is the case. The right to such refunds does not flow automatically from our prior decisions. Respondent would still be entitled to audit the returns for the years covered by the claims for refund in order to determine the correctness of the reported costs and sales proceeds of the securities whose basis would be stepped up, ³ whether there might be other items of omitted income for the years involved and whether the claimed deductions for those years are allowable. Lewis v. Reynolds, 284 U.S. 281">284 U.S. 281 (1932). ⁴1988 U.S. Tax Ct. LEXIS 5">*10 Furthermore, respondent would appear to be entitled to offset against any refunds otherwise due petitioners, the amount of other taxes or other amounts owed by petitioners to the Government, the collection of 90 T.C. 63">*65 which is not barred by the statute of limitations. Sec. 6402. See 28 U.S.C. secs. 1346(c) and 1503; Cherry Cotton Mills, Inc. v. United States, 327 U.S. 536">327 U.S. 536 (1946);1988 U.S. Tax Ct. LEXIS 5">*9 Missouri Pacific Railroad v. United States, 168 Ct. Cl. 86">168 Ct. Cl. 86, 168 Ct. Cl. 86">88-89, 338 F.2d 668">338 F.2d 668, 338 F.2d 668">670 (1964); Luther v. United States, 225 F.2d 495">225 F.2d 495, 225 F.2d 495">498 (10th Cir. 1954). Finally, there may be other grounds upon which respondent could challenge the validity of petitioners' refund claims. Under the foregoing circumstances, we hold that the amount for which an appeal bond is required in this case may not be reduced by the amount of the claimed refunds of income taxes. ⁵ We also conclude that, under all the circumstances herein, we should reject petitioners' request that we direct respondent to act upon such claims for refund in order to provide a basis for allowing such offsets. ⁶

Petitioners also wish to deposit stripped U.S.1988 U.S. Tax Ct. LEXIS 5">*11 bonds ⁷ in lieu of a surety bond. Deposit of U.S. bonds or notes in lieu of sureties is authorized by section 7485(c)(2), which refers to the provisions of 31 U.S.C. section 9303 (1982). In relevant part, that section provides:

(a) If a person is required under a law of the United States to give a surety bond, the person may give a Government obligation as security instead of a surety bond. The obligation shall --

(1) be given to the official having authority to approve the surety bond;

(2) be in an amount equal at par value to the amount of the required surety bond; and

(3) authorize the official receiving the obligation to collect or sell the obligation if the person defaults on a required condition.

[31 U.S.C. sec. 9303(a) (1982).]

1988 U.S. Tax Ct. LEXIS 5">*12 The Secretary of the Treasury has issued regulations governing the deposit of U.S. Government bonds. Those 90 T.C. 63">*66 regulations provide: "Coupon bonds or notes shall have attached thereto all coupons unmatured at the date of such deposit, and all matured coupons should be detached." 31 C.F.R. sec. 225.3 (1987).

We are satisfied that this regulation is a reasonable interpretation of the statute and that therefore stripped bonds may not be used as collateral in lieu of a surety bond. We are reinforced in this conclusion by the facts that the regulation has been in effect since 1935 (see 31 C.F.R. pt. 225 (1987)), and that Congress reenacted the statute governing the use of Government obligations in lieu of surety bonds in 1982 in substantially the same form as the statute that had been in effect when the regulation was promulgated. Commissioner v. Estate of Noel, 380 U.S. 678">380 U.S. 678 (1965); Joseph Gann, Inc. v. Commissioner, 701 F.2d 3">701 F.2d 3 (1st Cir. 1983), affg. a Memorandum Opinion of this Court; Warner v. Commissioner, 69 T.C. 995">69 T.C. 995, 69 T.C. 995">998 (1978). Compare Act of June 30, 1926, ch. 712, 44 Stat. 1, 851988 U.S. Tax Ct. LEXIS 5">*13 (codified as amended at 6 U.S.C. sec. 15 (1976)), with Act of Sept. 13, 1982, Pub. L. 97-258, sec. 9303, 96 Stat. 877, 1046 (codified at 31 U.S.C. sec. 9303 (1982)).

We think that Congress allows U.S. Government obligations to be posted in lieu of a surety bond because the Government is able to cancel the entire obligation that it owes if the person posting the bond does not pay the debt he owes the Government. ⁸ Merely canceling the face amount of the bond, without also canceling future interest payments, does not serve Congress' goal. We recognize that the principal amount of the bond and the unmatured interest coupons could be separately discounted at the stated rate of the bond and only that portion of the value attributable to principal could be applied to the amount of the appeal bond. ⁹1988 U.S. Tax Ct. LEXIS 5">*15 This process would, however, increase the complexity of accepting U.S. Government bonds as collateral, both in making the calculations and in deciding on the proper dates on which to base the calculations (which is important because the value of the discounted principal payment 90 T.C. 63">*67 increases as the payment date 1988 U.S. Tax Ct. LEXIS 5">*14 nears). In this connection, if we required the deposit of additional bonds to make up for the discounted value of the stripped coupons, there would be a problem as to the disposition of bonds that remained after the application of bonds at face in the event that the deficiencies were not paid. Presumably, after such application, petitioners' liabilities would have been paid and any remaining bonds returned to them. Yet the Government would still be liable for the outstanding stripped coupons. Furthermore, we are unaware of any authority which would permit us to direct that the Government could, under such circumstances, retain the remaining bonds. Moreover, any attempt to make up the difference between the face value and the value of stripped bonds could run afoul of the limitation on the amount of a bond under section 7485. The foregoing complexities ¹⁰ support our conclusion that respondent's regulation is a reasonable interpretation of the statute.

As an alternative, petitioners ask that we require respondent to accept a trust arrangement of bonds (not clearly described) and Treasury bills. Obviously the use of non-U.S. Government obligations, e.g., corporate bonds, to fund the trust would not be acceptable. 60 T.C. 964">Estate of Kahn v. Commissioner, supra.The same would be true, in light of our prior reasoning, of stripped U.S. Government bonds. To the extent1988 U.S. Tax Ct. LEXIS 5">*16 that acceptable U.S. Government obligations would be used, they could be deposited directly with this Court (see sec. 7485), and a trust arrangement would be unnecessary.

In summary, we will fix the amount of the bond at $ 5,544,933 without any reduction for the claims for refund pending with respondent, and we will not accept stripped bonds or a trust arrangement as collateral in lieu of surety.

90 T.C. 63">*68 An appropriate order will be issued.