The amount of the ratable monthly portion within the meaning of this subdivision reflects a purchase allowance provided under section 1232(a)(3)(B) where a purchase is made at a price in excess of the sum of the issue price plus the portion of original issue discount previously includible (regardless of whether included) in the gross income of all previous holders (computed, however, as to such previous holders without regard to any purchase allowance under this subdivision and without regard to whether any previous holder purchased at a premium).
Example: On February 22, 1970, A acquires an obligation of X Corporation for which February 1, 1970, is the date of original issue. B acquires the obligation on June 16, 1970. A does not choose to treat each month as having 30 days. Thus, A held the obligation for 33/4 months during 1970, i.e., one-fourth of February (7/28 days), March, April, May, one-half of June (15/30 days). The ratable monthly portion of original issue discount for the obligation is multiplied by 33/4 months to determine the amount included in A's gross income for 1970 pursuant to this paragraph.
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 |
Assume that A holds the bond for all of 1970 and 1971 and includes as interest in his gross income for each such year an amount equal to the ratable monthly portion, $20, multiplied by the number of months he held the bond each such year, 12 months, or $240. Accordingly, on January 1, 1972, A's basis in the bond will have increased under paragraph (c) of this section by the amount so included, $480 (i.e., $240 * 2), from his cost, $7,600, to $8,080. For results if A sells the bond on that date, see examples (1) and (2) of paragraph (a)(2) of § 1.1282-3 .
Since B purchased the bond, he determines under paragraph (a)(2)(ii) of this section the amount of the ratable monthly portion he must include as interest in his gross income in order to reflect the amount of his purchase allowance (if any). B determines that his ratable monthly portion is $10, computed as follows:
(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 | |
(6) Ratable monthly portion as computed in example (1) | $20 |
Since line (5) is lower than line (6), B's ratable monthly portion is $10. Accordingly, if B holds the bond for all of 1972, he must include $120 (i.e., ratable monthly portion, $10 * 12 months) as interest in his gross income.
(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 |
Since line (5) is lower than line (6), C's ratable monthly portion is $5. Accordingly, if C holds the bond for all of 1979, he must include $60 (i.e., ratable monthly portion, $5, * 12 months) as interest in his gross income. Upon maturity of the bond on January 1, 1980, C will receive $10,000 from M, which under paragraph (c) of this section will equal his adjusted basis (the sum of his cost, $9,940, plus original issue discount included as interest in his gross income, $60).
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 |
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 |
On January 1, 1971, C, a cash method taxpayer who uses the calendar year as his taxable year, opens a savings account in Z bank with a $10,000 deposit. Under the terms of the account, interest is made available semiannually at 6 percent annual interest, compounded semiannually. Since all of the interest on C's account in Z Bank is made available semiannually, the stated redemption price at maturity under paragraph (b)(1)(iii)(a) of § 1.1232-3 equals the issue price, and, therefore, no original issue discount is reportable by C under section 1232(a)(3). However, C must include the sum of $300 (i.e., 1/2 * 6% * $10,000) plus $309 (i.e., 1/2 * 6% * $10,300) or $609, of interest made available during 1971 in his gross income for 1971.
(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 |
Since the adjusted basis of the unredeemed portion exceeds the amount to be received for the unredeemed portion at maturity, D is allowed a deduction, in computing adjusted gross income, of $601.25 in 1975 and no further original issue discount is includible as interest in his gross income. In addition, D will decrease his basis in the unredeemed portion by $601.55, the amount of such adjustment, from $4,070.10 to $3,468.55.
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.
Example:
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 |
(1) | (2) | (3) | (4) | (5) | (6) | (7) |
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 |
Total original issue discount to be included as interest in F's gross income for 1971 | 44.19 |
(1) | (2) | (3) | (4) | (5) | (6) |
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 |
(1) | (2) | (3) | (4) | (5) | (6) |
Date of deposit | Ratable monthly portion | Months on deposit in 1971 | 1971 original issue discount (Col.2 * Col.3) | Months on deposit in 1972 | 1972 original issue discount (Col.2 * Col.5) |
2-1-71 | $0.5558 | 11 | $6.11 | 12 | $6.67 |
6-1-71 | 1.1005 | 7 | 7.70 | 12 | 13.21 |
12-1-71 | 2.7092 | 1 | 2.71 | 12 | 32.51 |
2-1-72 | 4.3122 | 11 | 47.43 | ||
3-1-72 | 4.3017 | 10 | 43.02 | ||
7-1-72 | 3.1935 | 6 | 19.16 | ||
8-1-72 | 1.3273 | 5 | 6.64 | ||
Total original issue discount includible as interest in gross income for taxable year | 16.52 | 168.64 |
Then any contingent interest credited to the depositor shall be treated as creating a separate obligation subject to the rules of subdivision (ii) of this subparagraph.
26 C.F.R. §1.1232-3A