1.1232-3A—Inclusion as interest of original issue discount on certain obligations issued after May 27, 1969.
(a) Ratable inclusion as interest—
(1) General rule.
Under section 1232(a)(3), the holder of any obligation issued by a corporation after May 27, 1969 (other than an obligation issued by or on behalf of the United States or a foreign country, or a political subdivision of either) shall include as interest in his gross income an amount equal to the ratable monthly portion of original issue discount multiplied by the sum of the number of complete months and any fractional part of a month such holder held the obligation during the taxable year. For increase in basis for amounts included as interest in gross income pursuant to this paragraph, see paragraph (c) of this section. For requirements for reporting original issue discount, see section 6049(a) and the regulations thereunder.
(2) Ratable monthly portion of original issue discount—
(i) General rule.
Except when subdivision (ii) of this subparagraph applies, the term ratable monthly portion of original issue discount means an amount equal to the original issue discount divided by the sum of the number of complete months (plus any fractional part of a month) beginning on the date of original issue and ending the day before the stated maturity date of such obligation.
(ii) Reduction for purchase allowance.
With respect to an obligation which has been acquired by purchase (within the meaning of subparagraph (4) of this paragraph), the term ratable monthly portion of original issue discount means the lesser of the amount determined under subdivision (i) of this subparagraph or an amount equal to:
(a) The excess (if any) of the stated redemption price of the obligation at maturity over its cost to the purchaser divided by
(b) The sum of the number of complete months (plus any fractional part of a month) beginning on the date of such purchase and ending the day before the stated maturity date of such obligation.
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(iii) Ratable monthly portion upon carryover to new obligation.
In any case in which there is a carryover of original issue discount under paragraph (b)(1)(iv) of § 1.1232-3 from an obligation exchanged to an obligation received in such exchange, the ratable monthly portion of original issue discount in respect of the obligation received shall be computed by dividing the amount of original issue discount carried over by the sum of the number of complete months (plus any fractional part of a month) beginning on the date of the exchange and ending the day before the stated maturity date of the obligation received.
(iv) Cross references.
For definitions of the terms original issue discount and date of original issue, see subparagraphs (1) and (3) respectively, of § 1.1232-3(b). For definition of the term premium, see paragraph (d)(2) of § 1.1232-3.
(a) A complete month and a fractional part of a month commence with the date of original issue and the corresponding day of each succeeding calendar month (or the last day of a calendar month in which there is no corresponding day),
(b) If an obligation is acquired on any day other than the date a complete month commences, the ratable monthly portion of original issue discount for the complete month in which the acquisition occurs shall be allocated between the transferor and the transferee in accordance with the number of days in such complete month each held the obligation,
(c) In determining the allocation under (b) of this subdivision, any holder may treat each month as having 30 days,
(d) The transferee, and not the transferor, shall be deemed to hold the obligation during the entire day on the date of acquisition, and
(e) The obligor will be treated as the transferee on the date of redemption.
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(4) Purchase.
For purposes of this section, the term purchase means any acquisition (including an acquisition upon original issue) of an obligation to which this section applies, but only if the basis of such obligation is not determined in whole or in part by reference to the adjusted basis of such obligation in the hands of the person from whom it was acquired or under section 1014(a) (relating to property acquired from a decedent).
(b) Exceptions—
(1) Binding commitment.
Section 1232(a)(3) shall not apply to any obligation issued pursuant to a written commitment which was binding on May 27, 1969, and at all times thereafter.
(2) Exception for 1-year obligations.
Section 1232(a)(3) shall not apply to any obligation in respect of which the period between the date of original issue (as defined in paragraph (b)(3) of § 1.1232-3) and the stated maturity date is 1 year or less. In such case, gain on the sale or exchange of such obligation shall be included in gross income as interest to the extent the gain does not exceed an amount equal to the ratable monthly portion of original issue discount multiplied by the sum of the number of complete months and any fractional part of a month such taxpayer held such obligation.
(3) Purchase at a premium.
Section 1232(a)(3) shall not apply to any holder who purchased the obligation at a premium (within the meaning of paragraph (d)(2) of § 1.1232-3 ).
(4) Life insurance companies.
Section 1232(a)(3) shall not apply to any holder which is a life insurance company to which section 818(b) applies. However, ratable inclusion of original issue discount as interest under section 1232(a)(3) is required by an insurance company which is subject to the tax imposed by section 821 or 831.
(c) Basis adjustment.
The basis of an obligation in the hands of the holder thereof shall be increased by any amount of original issue discount with respect thereto included as interest in his gross income pursuant to paragraph (a) of this section. See section 1232(a)(3)(E). However, the basis of an obligation shall not be increased by any amount that was includible as interest in gross income under paragraph (a) of this section, but was not actually included by the holder in his gross income.
(d) Examples.
The provisions of paragraphs (a) through (c) of this section may be illustrated by the following examples:
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Original issue discount (stated redemption price, $10,000, minus issue price, $7,600) | $2,400 | |
Divide by: Number of months from date of original issue to stated maturity date | 120 | months |
Ratable monthly portion | $20 |
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(1) Stated redemption price at maturity | $10,000 | |
(2) Minus: B's cost | $9,040 | |
(3) Excess | $960 | |
(4) Divide by: Number of months from date of purchase to stated maturity date | 96 | months |
(5) Tentative ratable monthly portion | $10 | |
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(6) Ratable monthly portion as computed in example (1) | $20 |
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(1) Stated redemption price at maturity | $10,000 | |
(2) Minus: C's cost | $9,940 | |
(3) Excess | $60 | |
(4) Divide by: Number of months from date of purchase to stated maturity date | 12 | months |
(5) Tentative ratable monthly portion | $5 | |
(6) Ratable monthly portion as computed in example (1) | $20 |
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Amount of original issue discount carried over | $2,000 | |
Divide by: Number of complete months beginning on January 1, 1973, and ending on December 31, 1982 | 120 | months |
Ratable monthly portion | $16.67 |
(e) Application of
(1) In general.
Under paragraph (d) of § 1.1232-1, the term other evidence of indebtedness includes certificates of deposit, time deposits, bonus plans, and other deposit arrangements with banks, domestic building and loan associations, and similar financial institutions.
(2) Adjustments where obligation redeemed before maturity—
(i) In general.
If an obligation described in subparagraph (1) of this paragraph is redeemed for a price less than the stated redemption price at maturity from a taxpayer who acquired the obligation upon original issue, such taxpayer shall be allowed as a deduction, in computing adjusted gross income, the amount of the original issue discount he included in gross income but did not receive (as determined under subdivision (ii) of this subparagraph). The taxpayer's basis of such obligation (determined after any increase in basis for the taxable year under section 1232(a)(3)(E) by the amount of original issue discount included in the holder's gross income under section 1232(a)(3)) shall be decreased by the amount of such adjustment.
(ii) Computation.
The amount of the adjustment under subdivision (i) of this subparagraph shall be an amount equal to the excess (if any) of (a) the ratable monthly portion of the original issue discount included in the holder's gross income under section 1232(a)(3) for the period he held the obligation, over (b) the excess (if any) of the amount received upon the redemption over the issue price. Under paragraph (b)(1)(iii)(a) of § 1.1232-3, if any amount based on a fixed rate of simple or compound interest is actually payable or will be treated as constructively received under section 451 and the regulations thereunder at fixed periodic intervals of 1 year or less during the term of the obligation, any such amount payable upon redemption shall not be included in determining the amount received upon such redemption.
(iii)
Partial redemption. (a) In the case of an obligation (other than a single obligation having serial maturity dates), if a portion of the obligation is redeemed prior to the stated maturity date of the entire obligation, the provisions of this subdivision shall be applied and not the provisions of subdivision (ii) of this subparagraph. In such case, the adjusted basis of the unredeemed portion of the obligation on the date of the partial redemption shall be an amount equal to the adjusted basis of the entire obligation on that date minus the amount paid upon the redemption.
(b) If the adjusted basis of the unredeemed portion (as computed under (a) of this subdivision) is equal to or in excess of the amount to be received for the unredeemed portion at maturity, no gain or loss shall be recognized at the time of the partial redemption but the holder shall be allowed a deduction, in computing adjusted gross income for the taxable year during which such partial redemption occurs, equal to the amount of such excess (if any), and no further original issue discount will be includible in the holder's gross income under section 1232(a)(3) over the remaining term of the unredeemed portion. In such case, the holder shall decrease his basis in the unredeemed portion (as computed under (a) of this subdivision) by the amount of such adjustment.
(c) If the adjusted basis of the unredeemed portion (as computed under (a) of this subdivision) is less than the redemption price of the unredeemed portion at maturity, a new computation shall be made under paragraph (a) of this section (without regard to the exception for one-year obligations in paragraph (b)(2) of this section) of the ratable monthly portion of original issue discount to be included as interest in the gross income of the holder over the remaining term of the unredeemed portion. For purposes of such computation, the adjusted basis of the unredeemed portion shall be treated as the issue price, the date of the partial redemption shall be treated as the issue date, and the amount to be paid for the unredeemed portion at maturity shall be treated as the stated redemption price.
(3) Examples.
The application of section 1232 to obligations to which this paragraph applies may be illustrated by the following examples:
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Adjusted basis January 1, 1973 | $4,500 |
Increase under section 1232(a)(3)(E) | 250 |
Subtotal | 4,750 |
Decrease under subparagraph (b)(2) of this paragraph | 90 |
Basis upon redemption | 4,660 |
Amount realized upon redemption | 4,660 |
Gain or loss | 0 |
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(1) Adjusted basis of obligation at time of partial redemption | $14,070.10 |
(2) Amount paid upon redemption | 10,000.00 |
(3) Adjusted basis of unredeemed portion (line (1) less line (2)) | 4,070.10 |
(4) Amount to be paid for unredeemed portion at maturity (December 31, 1980) | 3,468.55 |
(5) Adjustment in computing adjusted gross income (excess of line (3) over line (4)) | 601.55 |
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(4) Renewable certificates of deposit—
(i) In general.
The renewal of a certificate of deposit shall be treated as a purchase of the certificate on the date the renewal period begins regardless of any requirement pursuant to the terms of the certificate that the holder give notice of an intention to renew or not to renew. Thus, for example, in the case of a certificate of deposit for which a renewal period begins after December 31, 1970, such renewal shall be treated as a purchase after such date whether or not the initial period began before such date.
(ii) Computation.
For purposes of computing the amount of original issue discount to be ratably included as interest in gross income under section 1232(a)(3) in respect of a renewable certificate of deposit for the initial period or any renewal period, the following rules apply:
(a) The issue price on the date any renewal period begins is considered to be in the case of a certificate of deposit initially purchased:
(1) After December 31, 1970, the adjusted basis of the certificate on the date such period begins,
(2) Before January 1, 1971, the amount the adjusted basis would have been on the date such period begins had the holder included all amounts of original issue discount as interest in gross income that would have been includible if section 1232(a)(3) had applied to the certificate from the date of original purchase.
Thus, if under the terms of the certificate, no amount is forfeited upon a failure to renew, then the issue price on the date any renewal period begins is considered to be the amount which would have been received by the holder on such date had it not been renewed.
(b) The date of original issue for any renewal period shall be considered to be the date it begins.
(c) The date of maturity for the initial period or any renewal period shall be considered to be the date it ends.
(d) The stated redemption price at maturity for the initial period or any renewal period shall be considered to be the maximum amount which would be received at the end of any such period, without regard to any reduction resulting from withdrawal prior to maturity or failure to renew at any renewal date.
(iii) Application of 1-year rule.
For purposes of paragraph (b)(2) of this section (relating to nonapplication of section 1232(a)(3) to any obligation having a term of 1 year or less), the period between the date of original issue (as defined in paragraph (b)(3) of § 1.1232-3) of a renewable certificate of deposit and its stated maturity date shall include all renewal periods with respect to which, under the terms of the certificate, the holder may either take action or refrain from taking action which would prevent the actual or constructive receipt of any interest on such certificate until the expiration of any such renewal period whether or not the original date of issue is prior to January 1, 1971.
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Original issue discount (stated redemption price, $12,667.60, minus issue price, $11,255.09) | $1,412.51 |
Divided by: Number of months from renewal to maturity date | 24 months |
Ratable monthly portion | $58.85 |
(5) Time deposit open account arrangements—
(i) In general.
The term time deposit open account arrangement means an arrangement with a fixed maturity date where deposits may be made from time to time and ordinarily no interest will be paid or constructively received until such fixed maturity date. All deposits pursuant to such an arrangement constitute parts of a single obligation. The amount of original issue discount to be ratably included as interest in the gross income of the depositor for any taxable year shall be the sum of the amounts separately computed for each deposit. For this purpose, the issue price for a deposit is the amount thereof and the stated redemption price at maturity is computed under paragraph (b)(1)(iii)(d) of § 1.1232-3.
(ii) Obligations redeemed before maturity.
In the event of a partial redemption of a time deposit open account before maturity, the following rules, in addition to subparagraph (2) of this paragraph, shall apply:
(a) If, pursuant to the terms of the withdrawal, the amount received by the depositor is determined with reference to the principal amount of a specific deposit and interest earned from the date of such deposit, then such terms shall control for the purpose of determining which deposit was withdrawn.
(b) If (a) of this subdivision (ii) does not apply, then the withdrawal shall be deemed to be of specific deposits together with interest earned from the date of such deposits, on a first-in, first-out basis.
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(1) | (2) | (3) | (4) | (5) | (6) | (7) |
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Date of $100 deposit | Months to maturity | Redemption price at maturity | Original issue discount (Col.3−$100) | Ratable monthly portion (Col.4÷Col.2) | Months on deposit in 1971 | 1971 original issue discount (Col.5×Col.6) |
1-1-71 | 59 | $133.73 | $33.73 | $0.5717 | 12 | $6.86 |
2-1-71 | 58 | 133.07 | 33.07 | .5702 | 11 | 6.27 |
3-1-71 | 57 | 132.42 | 32.42 | .5688 | 10 | 5.69 |
4-1-71 | 56 | 131.77 | 31.77 | .5673 | 9 | 5.11 |
5-1-71 | 55 | 131.12 | 31.12 | .5658 | 8 | 4.53 |
6-1-71 | 54 | 130.48 | 30.48 | .5644 | 7 | 3.95 |
7-1-71 | 53 | 129.84 | 29.84 | .5630 | 6 | 3.38 |
8-1-71 | 52 | 129.20 | 29.20 | .5615 | 5 | 2.81 |
9-1-71 | 51 | 128.56 | 28.56 | .5600 | 4 | 2.24 |
10-1-71 | 50 | 127.93 | 27.93 | .5586 | 3 | 1.68 |
11-1-71 | 49 | 127.30 | 27.30 | .5571 | 2 | 1.11 |
12-1-71 | 48 | 126.68 | 26.68 | .5558 | 1 | 0.56 |
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Total original issue discount to be included as interest in F's gross income for 1971 | 44.19 |
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(1) | (2) | (3) | (4) | (5) | (6) |
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Date of deposit | Months to maturity | Amount of deposit | Redemption price at maturity | Original issue discount (Col.4−Col.3) | Ratable monthly portion (Col.5÷Col.2) |
2-1-71 | 48 | 100 | $126.68 | $26.68 | 0.5558 |
6-1-71 | 44 | 200 | 248.42 | 48.42 | 1.1005 |
12-1-71 | 38 | 500 | 602.95 | 102.95 | 2.7092 |
2-1-72 | 36 | 800 | 955.24 | 155.24 | 4.3122 |
3-1-72 | 35 | 800 | 950.56 | 150.56 | 4.3017 |
7-1-72 | 31 | 600 | 699.00 | 99.00 | 3.1935 |
8-1-72 | 30 | 250 | 289.82 | 39.82 | 1.3273 |