Cases: Honeywell, Inc. v. Commissioner, 87 T.C. 624 (1986)
Final rules 7
(a) General rule In the case of any bond, as defined in subsection (d), the following rules shall apply to the amortizable bond premium (determined under subsection (b)) on the bond:
Amended 1976
- 1976 Pub. L. 94-455 Pub. L. 94–455, § 1901(b)(1)(E)(iii), redesignated par. (4) as par. (3).
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(1) Taxable bonds In the case of a bond (other than a bond the interest on which is excludable from gross income), the amount of the amortizable bond premium for the taxable year shall be allowed as a deduction.
Amended 1976
- 1976 Pub. L. 94-455 Pub. L. 94–455, § 1901(b)(1)(E)(i), substituted “Taxable bonds” for “Interest wholly or partially taxable” after “(1)”.
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(2) Tax-exempt bonds In the case of any bond the interest on which is excludable from gross income, no deduction shall be allowed for the amortizable bond premium for the taxable year.
Amended 1976
- 1976 Pub. L. 94-455 Pub. L. 94–455, § 1901(b)(1)(E)(ii), substituted “Tax-exempt bonds” for “Interest wholly tax-exempt” after “(2)”.
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(3) Cross reference For adjustment to basis on account of amortizable bond premium, see section 1016(a)(5).
Amended 1976
- 1976 Pub. L. 94-455 Pub. L. 94–455, § 1901(b)(1)(E)(iii), redesignated par. (4) as (3). Former par. (3), relating to adjustment of credit or deduction for interest partially tax-exempt, was struck out.
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(b) Amortizable bond premium
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(1) Amount of bond premium For purposes of paragraph (2), the amount of bond premium, in the case of the holder of any bond, shall be determined—
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(A) with reference to the amount of the basis (for determining loss on sale or exchange) of such bond,
Amended 1958, 1976, 2014
- 2014 Pub. L. 113-295 Pub. L. 113–295, § 221(a)(29)(A), amended subpar. (B) generally. Prior to amendment, subpar. (B) read as follows:
- 2014 “(i) with reference to the amount payable on maturity or on earlier call date, in the case of any bond other than a bond to which clause (ii) applies, or and
- 2014 “(ii) with reference to the amount payable on maturity (or if it results in a smaller amortizable bond premium attributable to the period to earlier call date, with reference to the amount payable on earlier call date), in the case of any bond described in subsection (a)(1) which is acquired after December 31, 1957, and”.
- 1976 Pub. L. 94-455 Pub. L. 94–455, § 1951(b)(5)(A)(i), struck out cl. (iii) relating to certain bonds acquired before 1958.
- 1958 Pub. L. 85-866 Pub. L. 85–866, § 13(a)(1), substituted “, in the case of any bond other than a bond to which clause (ii) or (iii) applies” for “(but in the case of bonds described in subsection (c)(1)(B) issued after January 22, 1951, and acquired after January 22, 1954, only if such earlier call date is a date more than 3 years after the date of such issue), and”, designated such provision as cl. (i), and added cl. (ii) and (iii).
(i) with reference to the amount payable on maturity (or if it results in a smaller amortizable bond premium attributable to the period before the call date, with reference to the amount payable on the earlier call date), in the case of a bond described in subsection (a)(1), and
Amended 1976
- 1976 Pub. L. 94-455 Pub. L. 94–455, § 1951(b)(5)(A)(ii), substituted “clause (ii) applies, or” for “clause (ii) or (iii) applies” after “bond to which” and inserted “and” at the end.
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(ii) with reference to the amount payable on maturity or on an earlier call date, in the case of a bond described in subsection (a)(2).
Amended 1976
- 1976 Pub. L. 94-455 Pub. L. 94–455, §§ 1901(b)(1)(E)(iv), 1951(b)(5)(A)(iii), substituted “subsection (a)(1)” for “subsection (c)(1)(B)” after “bond described in” and “and” for “or” after “1957”.
(C) with adjustments proper to reflect unamortized bond premium, with respect to the bond, for the period before the date as of which subsection (a) becomes applicable with respect to the taxpayer with respect to such bond.
In no case shall the amount of bond premium on a convertible bond include any amount attributable to the conversion features of the bond.
(2) Amount amortizable The amortizable bond premium of the taxable year shall be the amount of the bond premium attributable to such year. In the case of a bond to which paragraph (1)(B)(i) applies and which has a call date, the amount of bond premium attributable to the taxable year in which the bond is called shall include an amount equal to the excess of the amount of the adjusted basis (for determining loss on sale or exchange) of such bond as of the beginning of the taxable year over the amount received on redemption of the bond or (if greater) the amount payable on maturity.
Amended 1958, 1976, 2014
- 2014 Pub. L. 113-295 Pub. L. 113–295, § 221(a)(29)(B), substituted “paragraph (1)(B)(i)” for “paragraph (1)(B)(ii)”.
- 1976 Pub. L. 94-455 Pub. L. 94–455, § 1951(b)(5)(A)(iv), struck out “or (iii)” after “paragraph (1)(B)(ii)”.
- 1958 Pub. L. 85-866 Pub. L. 85–866, § 13(a)(2), substituted “In the case of a bond to which paragraph (1)(B)(ii) or (iii) applies and which has a call date,” for “In the case of a bond described in subsection (c)(1)(B) issued after January 22, 1951, and acquired after January 22, 1954, which has a call date not more than 3 years after the date of such issue,” in second sentence.
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(3) Method of determination
Amended 1986
- 1986 Pub. L. 99-514 Pub. L. 99–514, § 1803(a)(11)(A), amended par. (3) generally. Prior to amendment, par. (3) read as follows: “The determinations required under paragraphs (1) and (2) shall be made—
“(A) in accordance with the method of amortizing bond premium regularly employed by the holder of the bond, if such method is reasonable;
“(B) in all other cases, in accordance with regulations prescribing reasonable methods of amortizing bond premium prescribed by the Secretary.”
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(A) In general Except as provided in regulations prescribed by the Secretary, the determinations required under paragraphs (1) and (2) shall be made on the basis of the taxpayer’s yield to maturity determined by—
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(i) using the taxpayer’s basis (for purposes of determining loss on sale or exchange) of the obligation, and
(ii) compounding at the close of each accrual period (as defined in section 1272(a)(5)).
(B) Special rule where earlier call date is used For purposes of subparagraph (A), if the amount payable on an earlier call date is used under paragraph (1)(B)(i) in determining the amortizable bond premium attributable to the period before the earlier call date, such bond shall be treated as maturing on such date for the amount so payable and then reissued on such date for the amount so payable.
Amended 1976, 2014
- 2014 Pub. L. 113-295 Pub. L. 113–295, § 221(a)(29)(B), substituted “paragraph (1)(B)(i)” for “paragraph (1)(B)(ii)”.
- 1976 Pub. L. 94-455 Pub. L. 94–455, § 1906(b)(13)(A), struck out “or his delegate” after “Secretary”.
(4) Treatment of certain bonds acquired in exchange for other property
Amended 1986
- 1986 Pub. L. 99-514 Pub. L. 99–514, § 1803(a)(12)(A), added par. (4).
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(A) In general If—
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(ii) the basis of such bond is determined (in whole or in part) by reference to the basis of such other property,
for purposes of applying this subsection to such bond while held by such person, the basis of such bond shall not exceed its fair market value immediately after the exchange. A similar rule shall apply in the case of such bond while held by any other person whose basis is determined (in whole or in part) by reference to the basis in the hands of the person referred to in clause (i).
(B) Special rule where bond exchanged in reorganization Subparagraph (A) shall not apply to an exchange by the taxpayer of a bond for another bond if such exchange is a part of a reorganization (as defined in section 368). If any portion of the basis of the taxpayer in a bond transferred in such an exchange is not taken into account in determining bond premium by reason of this paragraph, such portion shall not be taken into account in determining the amount of bond premium on any bond received in the exchange.
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(c) Election as to taxable bonds
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(1) Eligibility to elect; bonds with respect to which election permitted In the case of bonds the interest on which is not excludible from gross income, this section shall apply only if the taxpayer has so elected.
Amended 1976
- 1976 Pub. L. 94-455 Pub. L. 94–455, § 1901(b)(1)(E)(v), substituted “In the case of bonds the interest on which is not excludible from gross income, this section shall apply only if the taxpayer has so elected” for “This section shall apply with respect to the following classes of taxpayers with respect to the following classes of bonds only if the taxpayer has elected to have this section apply” after “election permitted”, and struck out subpars. (A) and (B) relating to partially tax-exempt, and wholly taxable, bonds.
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(2) Manner and effect of election The election authorized under this subsection shall be made in accordance with such regulations as the Secretary shall prescribe. If such election is made with respect to any bond (described in paragraph (1)) of the taxpayer, it shall also apply to all such bonds held by the taxpayer at the beginning of the first taxable year to which the election applies and to all such bonds thereafter acquired by him and shall be binding for all subsequent taxable years with respect to all such bonds of the taxpayer, unless, on application by the taxpayer, the Secretary permits him, subject to such conditions as the Secretary deems necessary, to revoke such election. In the case of bonds held by a common trust fund, as defined in section 584(a), the election authorized under this subsection shall be exercisable with respect to such bonds only by the common trust fund. In case of bonds held by an estate or trust, the election authorized under this subsection shall be exercisable with respect to such bonds only by the fiduciary.
Amended 1976, 2004
- 2004 Pub. L. 108-357 Pub. L. 108–357, § 413(c)(2)(B), which directed amendment of par. (2) by striking out “, or foreign personal holding company”, was executed by striking out “or foreign personal holding company” after “the common trust fund”, to reflect the probable intent of Congress.
- 2004 Pub. L. 108-357 Pub. L. 108–357, § 413(c)(2)(A), struck out “, or by a foreign personal holding company, as defined in section 552” after “section 584(a)”.
- 1976 Pub. L. 94-455 Pub. L. 94–455, § 1906(b)(13)(A), struck out “or his delegate” in three places after “Secretary”.
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(d) Bond defined For purposes of this section, the term “bond” means any bond, debenture, note, or certificate or other evidence of indebtedness, but does not include any such obligation which constitutes stock in trade of the taxpayer or any such obligation of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or any such obligation held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business.
Amended 1986
- 1986 Pub. L. 99-514 Pub. L. 99–514, § 1803(a)(11)(B), struck out “issued by any corporation and bearing interest (including any like obligation issued by a government or political subdivision thereof),” after “evidence of indebtedness,”.
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(e) Treatment as offset to interest payments Except as provided in regulations, in the case of any taxable bond—
Amended 1986, 1988
- 1988 Pub. L. 100-647 Pub. L. 100–647 substituted “Treatment as offset to interest payments” for “Treatment as interest” in heading and amended text generally. Prior to amendment, text read as follows: “Except as provided in regulations, the amount of any amortizable bond premium with respect to which a deduction is allowed under subsection (a)(1) for any taxable year shall be treated as interest for purposes of this title.”
- 1986 Pub. L. 99-514 Pub. L. 99–514, § 643(a), added subsec. (e) and redesignated former subsec. (e) as (f).
(1) the amount of any bond premium shall be allocated among the interest payments on the bond under rules similar to the rules of subsection (b)(3), and
(2) in lieu of any deduction under subsection (a), the amount of any premium so allocated to any interest payment shall be applied against (and operate to reduce) the amount of such interest payment.
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For purposes of the preceding sentence, the term “taxable bond” means any bond the interest of which is not excludable from gross income.
(f) Dealers in tax-exempt securities For special rules applicable, in the case of dealers in securities, with respect to premium attributable to certain wholly tax-exempt securities, see section 75.
Amended 1986
- 1986 Pub. L. 99-514 Pub. L. 99–514, § 643(a), added subsec. (e) and redesignated former subsec. (e) as (f).