Q: This year, I inherited 22 POD Series E savings bonds purchased in 1956, 1957, 1958 and 1960, each with a present cash-in value of around $2,000. Is the amount between the purchase price and the cash-in value taxable as accrued interest? Or does it fall under "death claims" like an insurance policy?

A: For the other readers, let me explain first that "POD" stands for "payable on death" and is the established form to designate a beneficiary on a Series E or EE bond.

The answer to your question has several caveats. If the original owner -- the person from whom you inherited the bonds -- had been reporting the interest each year as it accrued, the personal representative (executor or administrator of the estate) should have filed a "final tax return" for the deceased, on which the interest earned from the last tax return to the date of death was reported as income.

If the original owner had been deferring the tax on the accruing interest, then the personal representative should have included on the final return all of the accrued interest from the date of purchase to the date of death.

In either case, the value of the bonds on the date of death (including accrued interest to that date) should have been included on any estate or inheritance tax return that was due. If the estate was too small to require the filing of such a return, then a presumption is made that the bonds were a part of the estate. You are liable, then, only for interest earned after the date of death.

But if no final income tax return was filed, then the person who inherits the bonds is responsible for the income tax due on the accrued interest. Again, there are two possibilities. If the original owner had been reporting the interest income yearly, you are only responsible for interest since the last report. If tax liability on the interest was deferred, you are then liable for tax on all the interest accrued since the date of purchase.

Regardless of whether you have the reporting responsibility for all of the interest or only a part of it, you have the option of reporting the income each year or deferring the tax liability until you dispose of the bonds (or until final maturity, if you continue to hold them).

Q: I own some shares in a mutual fund, with dividends and capital gains reinvested and all shares held by the fund. I had to sell some shares recently, and I have received conflicting advice about what my cost basis should be. One friend said to sell them in the order purchased, while another said to use the average price. Can you clarify who is correct?

A: Both your friends are right. When you sell shares of an individual stock -- that is, not mutual fund shares -- you either must identify the specific shares sold or use the "first-in-first-out" method (selling them in the order purchased).

With mutual fund shares, there is a third option. You may use the average price if the shares were left in the custody of the fund and they were acquired at different prices. (Both conditions apply in your case.)

There are two methods for calculating the average price. The "double category" method splits the total holding into those shares owned long enough to qualify for long-term treatment and those eligible for short-term handling, then calculates an average cost for each group.

The simpler "single category" method simply divides the total number of shares by the total cost to get an average price to be applied to all the shares. Even using this method, of course, you would have to account for long-term and short-term gains or losses separately on Schedule D.

You may use whichever method you prefer; but when you report the gain or loss, you must indicate on Schedule D the method used. And if you select either average-cost method, you must use the same method on all future sales of that mutual fund unless you get prior approval of the IRS to change to either the "identified shares" or "first-in-first-out" method.