US Internal Revenue Service: p1212--2000

8/14/2019 US Internal Revenue Service: p1212--2000

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ContentsImportant Change .............................. 1

Important Reminder ........................... 2

Introduction ........................................ 2

Information in the OID List ............... 2

Debt Instruments Not on the OIDList ................................................ 3

Information for Brokers and OtherMiddlemen .................................... 3

Short-Term Obligations Redeemedat Maturity ................................ 3

Long-Term Debt Instruments .......... 3Certificates of Deposit .................... 4Bearer Bonds and Coupons ........... 4Backup Withholding ........................ 4

Information for Owners of OID DebtInstruments .................................. 5

Definitions ....................................... 5Form 1099OID .............................. 6How To Report OID ........................ 6Figuring OID on Long-Term Debt

Instruments .............................. 7Figuring OID on Stripped Bonds and

Coupons ................................... 12

How To Get Tax Help ......................... 15

Explanation of Section I ColumnHeadings ...................................... 16

Section IA: Corporate DebtInstruments Issued Before 1985 17

Section IB: Corporate DebtInstruments Issued After 1984 .. 20

Section IC: Inflation-Indexed DebtInstruments .................................. 58

Section II: Stripped Components ofU.S. Treasury andGovernment-SponsoredEnterprises ................................... 59

Section IIIA: Short-Term U.S.Treasury Bills .............................. 61

Section IIIB: Student LoanMarketing Association ................ 63

Section IIIC: Federal Home LoanBanks ............................................ 68

Section IIID: Federal NationalMortgage Association ................. 74

Section IIIE: Federal Farm CreditBanks ............................................ 79

Section IIIF: Federal Home LoanMortgage Corporation ................ 84

Section IIIG: Federal AgriculturalMortgage Corporation ................ 89

Important ChangePhotographs of missing children. TheInternal Revenue Service is a proud partnerwith the National Center for Missing and Ex-ploited Children. Photographs of missingchildren selected by the Center may appear

Departmentof theTreasury

InternalRevenueService

Publica tion 1212Cat. No. 61273T

List of OriginalIssue DiscountInstruments

For use in preparing

2000 Returns


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in this publication on pages that would other-wise be blank. You can help bring thesechildren home by looking at the photographsand calling 1800THELOST (18008435678) if you recognize a child.

Important Reminder

OID list no longer on electronicbulletin board (IRP-BBS). The ori-ginal issue discount (OID) list at the

end of this publication is no longer availableon the electronic bulletin board. You can nowdownload it with the rest of Publication 1212from our web site at www.irs.gov. Go to theForms and Publications page and selectForms and Publications by Dateor Forms andPublications by Number. Then select Publi-cation 1212 from the list. Also, be sure toselect SGML Text.

IntroductionThis publication has two purposes. Its primarypurpose is to help brokers and othermiddlemen identify publicly offered originalissue discount (OID) debt instruments theymay hold as nominees for the true owners,so they can file Forms 1099OID or Forms1099INT as required. The other purpose ofthe publication is to help owners of publiclyoffered OID debt instruments determine howmuch OID to report on their income tax return.

This publication contains a list of publiclyoffered OID debt instruments. The informationon this list comes from the issuers of the debt

instruments and from financial publicationsand is updated annually. (However, see DebtInstruments Not on the OID List, later.)

Brokers and other middlemen can rely onthis list to determine, for information reportingpurposes, whether a debt instrument was is-sued at a discount and the OID to be reportedon information returns. However, because theinformation in the list has generally not beenverified by the IRS as correct, the followingtax matters are subject to change upon ex-amination by the IRS.

The OID reported by owners of a debtinstrument on their income tax returns.

The issuer's classification of an instru-

ment as debt for federal income tax pur-poses.

Instructions for issuers of OID debt in-struments. Issuers of the types of publiclyoffered OID debt instruments listed in thispublication must, within 30 days after the is-sue date, report information about the instru-ments to the IRS on Form 8281, InformationReturn for Publicly Offered Original IssueDiscount Instruments. See the form in-structions for more information.

Issuers should report errors in andomissions from the list in writing at thefollowing address:

OID Publication ProjectW:CAR:MP:FP:P Room 5607Internal Revenue Service1111 Constitution Ave. NWWashington, D.C. 20224

REMIC and CDO information reporting re-quirements. Brokers and other middlemenmust follow special information reporting re-quirements for real estate mortgage invest-ment (REMIC) regular and collateralized debtobligations (CDO) interests. The rules areexplained in Publication 938, Real EstateMortgage Investment Conduits (REMICs)Reporting Information.

You can download Publication 938from our web site at www.irs.gov.Go to the Forms and Publications

page and select Forms and Publications byDateor Forms and Publications by Number.Then select Publication 938 from the list.

Holders of interests in REMICs and CDOsshould see chapter 1 of Publication 550 forinformation on REMICs and CDOs.

Comments and suggestions. We welcomeyour comments about this publication and

your suggestions for future editions.You can e-mail us while visiting our web

site at www.irs.gov/help/email2.html.You can write to us at the following ad-

dress:

Internal Revenue ServiceTechnical Publications BranchW:CAR:MP:FP:P1111 Constitution Ave. NWWashington, DC 20224

We respond to many letters by telephone.Therefore, it would be helpful if you wouldinclude your daytime phone number, includ-ing the area code, in your correspondence.

Useful ItemsYou may want to see:

Publication

515 Withholding of Tax on Nonresi-dent Aliens and Foreign Corpo-rations

550 Investment Income and Expenses

938 Real Estate Mortgage InvestmentConduits (REMICs) Reporting In-formation

Form (and Instructions)

W8 Certificate of Foreign Status

Schedule B (Form 1040) Interest andOrdinary Dividends

Schedule D (Form 1040) Capital Gainsand Losses

1096 Annual Summary and Transmittalof U.S. Information Returns

1099B Proceeds From Broker andBarter Exchange Transactions

1099INT Interest Income

1099OID Original Issue Discount

See How To Get Tax Help near the endof the text for information about getting publi-cations and forms.

Informationin the OID ListThe list has the following sections.

Section I. This section contains publicly of-fered, long-term debt instruments. SectionIA lists corporate debt instruments issuedbefore 1985. Section IB lists debt instru-ments issued after 1984. Section IC lists

inflation-indexed debt instruments issued af-ter January 5, 1997.For each publicly offered debt instrument

in Section I, the list contains the following in-formation.

The name of the issuer.

The CUSIP number.

The issue date.

The maturity date.

The issue price expressed as a percentof principal or of stated redemption priceat maturity.

The annual stated or coupon interestrate. (This rate is shown as 0.00 if no

annual interest payments are provided.)

The total OID up to January 1, 2000.(This information is not available for everyinstrument.)

For long-term instruments issued afterJuly 1, 1982, the daily OID for the accrualperiods falling in calendar years 2000 and2001.

The total OID per $1,000 of principal ormaturity value for calendar years 2000and 2001.

See Table 1 on the page preceding Sec-tion I-A for an explanation of these items.

Section II. This section contains strippedobligations available through the Departmentof the Treasury's STRIPS program andgovernment-sponsored enterprises such asthe Resolution Funding Corporation. Thissection also includes instruments backed byU.S. Treasury securities that represent own-ership interests in those securities.

The obligations listed in Section IIare ar-ranged by maturity date. The amounts listedare the total OID for calendar year 2000 per$1,000 of redemption price.

Section III. This section contains short-termdiscount obligations. Section IIIA listsTreasury bills (T-bills), which are short-termdiscount obligations issued by the U.S.Treasury Department. Sections IIIB throughIIIG contain short-term discount obligationsissued by the Student Loan Marketing Asso-ciation, Federal Home Loan Banks, the Fed-eral National Mortgage Association, FederalFarm Credit Banks, the Federal Home LoanMortgage Corporation, and the Federal Agri-cultural Mortgage Corporation.

The short-term obligations listed in thissection are arranged by maturity date. Foreach obligation, the list contains the CUSIPnumber, maturity date, issue date, issue price(expressed as a percent of principal), anddiscount to be reported as interest for calen-dar year 2000 per $1,000 of redemption price.Brokers and other middlemen should rely onthe issue price information in Section IIIonly

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if they are unable to determine the price ac-tually paid by the owner.

TIPBrokers and other middlemen can relyon the information in the OID list toprepare information returns for 2000.

However, if you own a listed debt instrument,you should not rely on this information todetermine (or compare) the OID to be re-ported on your tax return. The OID amountslisted are figured without reference to theprice or date at which you acquired the debtinstrument. For information about determiningthe OID to be reported on your tax return, seethe instructions for figuring OID under Infor-mation for Owners of OID Debt Instruments,later.

Debt InstrumentsNot on the OID ListThe list of debt instruments in this publicationdoes not contain the following items.

U.S. savings bonds. Certificates of deposit and other face-

amount certificates issued at a discount,including syndicated certificates of de-posit.

Obligations issued by tax-exempt organ-izations.

OID debt instruments that matured orwere entirely called by the issuer before2000.

Mortgage-backed securities and mort-gage participation certificates.

Long-term OID debt instruments issuedbefore May 28, 1969.

Short-term obligations, other than theobligations listed in Section III.

Original issue U.S. Treasury notes andbonds, other than Treasury inflation-indexed securities listed in Section I-C.These debt instruments are direct obli-gations of the U.S. Government. Gener-ally, they contain either de minimis or nodiscount at original issue. See U.S.Treasury Bills, Notes, and Bonds inchapter 1 of Publication 550 for more in-formation.

Debt instruments issued at a discount bystates or their political subdivisions.These debt instruments are not subjectto the OID information reporting rules.

REMIC regular interests and CDOs.

Commercial paper and banker's accept-ances issued at a discount.

Obligations issued at a discount by indi-viduals.

Foreign obligations not traded in theUnited States and obligations not issuedin the United States.

OID debt instruments for which no infor-mation was available or that were issuedin late 2000 after publication of this list.These will be included in the next revisionof the publication.

Information forBrokers andOther MiddlemenThe following discussions contain specific in-structions for brokers and middlemen whohold or redeem a debt instrument for theowner.

In general, you must file a Form 1099 for

the debt instrument if the interest or OID tobe included in the owner's income for 2000totals $10 or more. You also must file a Form1099 if you were required to deduct andwithhold tax, even if the interest or OID is lessthan $10. See Backup Withholding, later.

If you must file a Form 1099, furnish acopy to the owner of the debt instrument byJanuary 31, 2001. By February 28, 2001,(April 2, 2001, if you file electronically), fileall your Forms 1099 with the IRS accompa-nied by Form 1096.

For more information, including penaltiesfor failure to file (or furnish) required informa-tion returns or statements, see the In-structions for Form 1099, 1098, 5498, andW-2G.

Short-Term ObligationsRedeemed at MaturityIf you redeem a short-term discount obligationfor the owner at maturity, you must report thediscount as interest on Form 1099INT. (Ifyou sell the obligation for the owner beforematurity, you must file Form 1099B to reflectthe gross proceeds to the seller. Do not re-port the accrued discount to the date of saleon either Form 1099INT or Form 1099OID.)

When you redeem the obligation, use thepurchase price shown on the owner's copyof the purchase confirmation receipt or similarrecord, or the price shown in your transactionrecords, to determine the discount to be re-ported on Form 1099INT.

If the owner's purchase price cannot bedetermined, report the discount as if theowner had purchased the obligation at its or-iginal issue price. A special rule is used todetermine the original issue price for infor-mation reporting on U.S. Treasury bills listedin Section IIIA. Under this rule, you prepareForm 1099INT by using the noncompetitive(weighted average of accepted auction bids)discount price for the longest-maturity Treas-ury bill maturing on that date. This noncom-petitive discount price is the issue price (ex-pressed as a percent of principal) shown inSection IIIA.

A similar rule applies to the short-termdiscount obligations issued by the organiza-

tions listed in Section IIIB through SectionIIIG.

Information that supplements SectionIIIA is available on the Internet atwww.publicdebt.treas.gov.

Example 1. There are 13-week, 26-week,and 52-week T-bills maturing on the samedate as the T-bill being redeemed. The priceactually paid by the owner cannot be estab-lished by owner or middleman records. Youprepare Form 1099INT using the noncom-petitive discount price (expressed as a per-

cent of principal) in Section IIIA for a52-week bill maturing on the same date as theT-bill redeemed. The interest you report is thediscount (per $1,000 of principal) shown forthat obligation.

Long-Term DebtInstrumentsIf you hold a long-term OID debt instrumentas a nominee for the true owner, you gener-ally must file Form 1099OID.

You can rely on Section I of the OID listto determine the following for information re-porting purposes.

Whether an instrument has OID.

The OID to be reported on the Form1099OID.

In general, you must report OID on publiclyoffered, long-term debt instruments listed inSection I. You also may report OID on otherlong-term debt instruments.

Form 1099OID. Form 1099OID for 2000must show the following information.

Box 1. The OID for the actual dates theowner held the instruments during 2000.To determine the OID to report, see Fig-uring OID, next.

Box 2. The qualified stated interest paidor credited during the calendar year. In-terest reported here is not reported onForm 1099INT. The qualified stated in-terest on Treasury inflation-indexed se-curities may be reported in box 3 of Form1099INT instead.

Box 3. Any interest or principal forfeitedbecause of an early withdrawal that theowner can deduct from gross income.Do notreduce the amounts in boxes 1and 2 by the forfeiture.

Box 4. Any backup withholding for thisinstrument.

Box 5. The CUSIP number, if any. If thereis no CUSIP number, give a descriptionof the instrument, including the abbrevi-ation for the stock exchange, the abbre-viation used by the stock exchange forthe issuer, the coupon rate, and the yearof maturity (e.g., NYSE XYZ 12.50 2001).If the issuer of the instrument is otherthan the payer, show the name of theissuer in this box.

Box 6. The OID on a U.S. Treasury obli-gation for the part of the year the ownerheld the instrument.

Figuring OID. You can determine the OID

on a long-term debt instrument by using eitherof the following.

Section Iof the OID list.

The Income Tax Regulations.

Using Section I. If the owner held thedebt instrument for the entire calendar year,report the OID shown in Section Ifor the cal-endar year. Because OID is listed for each$1,000 of stated redemption price at maturity,you must adjust the listed amount to reflectthe instrument's actual stated redemptionprice at maturity. For example, if the instru-ment's stated redemption price at maturity is$500, report one-half the listed OID.

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If the owner held the debt instrument forless than the entire calendar year, figure theOID to report as follows.

1) Look up the daily OID for the first 2000accrual period during which the ownerheld the instrument.

2) Multiply the daily OID by the number ofdays in 2000 the owner held the instru-ment during that accrual period.

3) Repeat steps (1) and (2) for any re-maining 2000 accrual periods duringwhich the owner held the instrument.

4) Add the results in steps (2) and (3) todetermine the owner's OID per $1,000of stated redemption price at maturity.

5) If necessary, adjust the OID to reflect theinstrument's stated redemption price atmaturity.

Report the result in box 1 of Form 1099OID.If you use Section IC to figure the OID

on an inflation-indexed debt instrument, youmust attach the following statement to theForm 1099OID you send to the payee.

If you (the owner) purchased or sold aninflation-indexed debt instrument during the

calendar year (other than a purchase at ori-ginal issue), the OID reported to you maybe incorrect. To determine the correct OID,see Publication 1212.

Using the Income Tax Regulations. In-stead of using Section Ito figure OID, you canuse the regulations under sections 1272through 1275 of the Internal Revenue Code.For example, under the regulations, you canuse monthly accrual periods in figuring OIDfor a debt instrument issued after April 3,1994, that provides for monthly payments. (Ifyou use Section IB, the OID is figured using6month accrual periods.)

For a general explanation of the rules forfiguring OID under the regulations, see Fig-uring OID on Long-Term Debt Instruments

under Information for Owners of OID DebtInstruments, later.

Certificates of DepositIf you hold a bank certificate of deposit (CD)as a nominee, you must determine whetherthe CD has OID and the OID includible in theincome of the owner. You must file an infor-mation return showing the reportable interestand OID, if any, on the CD. These rules applywhether or not you sold the CD to the owner.Report OID on a CD in the same way as OIDon other debt instruments. See Short-TermObligations Redeemed at Maturityand Long-Term Debt Instruments, earlier.

Bearer Bonds and CouponsYou should report the interest paid on a cou-pon from a bearer bond on a Form 1099INTidentifying the payees (unless the payee is aforeign person) if both the following apply.

The coupon is presented to you for col-lection before the bond matures.

You do not hold the bond as a nomineefor the true owner.

Because you cannot assume the presenterof the coupon also owns the bond, you shouldnot report OID on the bond on Form1099OID. The coupon may have been

stripped (separated) from the bond andseparately purchased.

However, if a long-term bearer bond onthe OID list in this publication is presented toyou for redemption upon call or maturity, youshould prepare a Form 1099OID showingthe OID for that calendar year, as well as anycoupon interest payments collected at thetime of redemption.

Backup WithholdingIf you report OID on Form 1099OID or in-terest on Form 1099INT, you may be re-quired to apply backup withholding to the re-portable payment at a 31% rate. The backupwithholding tax is deducted at the time a cashpayment is made.

Backup withholding generally applies inthe following situations.

1) The payee does not give you a taxpayeridentification number (TIN).

2) The IRS notifies you that the payee gavean incorrect TIN.

3) The IRS notifies you that the payee issubject to backup withholding due topayee underreporting.

4) For debt instruments acquired after1983:

a) The payee does not certify, underpenalties of perjury, that he or sheis not subject to backup withholdingunder (3).

b) The payee does not certify, underpenalties of perjury, that the TINgiven is correct.

However, for short-term discount obli-gations (other than government obligations),bearer bond coupons, and U.S. savingsbonds, backup withholding applies only if thepayee does not give you a TIN.

Short-term obligations. Backup withholding

applies to OID on a short-term obligation onlywhen the OID is paid at maturity. However,backup withholding applies to any interestpayable before maturity when the interest ispaid or credited.

If the owner of a short-term obligation atmaturity is not the original owner and canestablish the purchase price of the obligation,the amount subject to backup withholdingmust be determined by treating the purchaseprice as the issue price. However, you canchoose to disregard that price if it would re-quire significant manual intervention in thecomputer or recordkeeping system used forthe obligation. If the purchase price of a listedobligation is not established or is disregarded,you must use the issue price shown in Sec-tion III.

Long-term obligations. If no cash paymentsare made on a long-term obligation beforematurity, backup withholding applies only atmaturity. The amount subject to backup with-holding is the OID includible in the owner'sgross income for the calendar year when theobligation matures. The amount to be with-held is limited to the cash paid.

Long-term registered obligations withcash payments. If a long-term registeredobligation has cash payments before matu-rity, backup withholding applies when a cashpayment is made. The amount subject tobackup withholding is the total of the qualifiedstated interest (defined later under

Definitions) and OID includible in the owner'sgross income for the calendar year when thepayment is made. If more than one cashpayment is made during the year, the OIDsubject to withholding for the year must beallocated among the expected cash paymentsin the ratio that each bears to the total of theexpected cash payments. For any payment,the required withholding is limited to the cashpaid.

Payee not the original owner. If thepayee is not the original owner of the obli-gation, the OID subject to backup withholdingis the OID includible in the gross income ofall owners during the calendar year (withoutregard to any amount paid by the new ownerat the time of transfer). The amount subjectto backup withholding at maturity of a listedobligation must be determined using the issueprice shown in Section I.

Long-term bearer obligations with cashpayments. If a long-term bearer obligationhas cash payments before maturity, backupwithholding applies when the cash paymentsare made. For payments before maturity, theamount subject to withholding is the qualifiedstated interest (defined later underDefinitions) includible in the owner's grossincome for the calendar year. For a paymentat maturity, the amount subject to withholding

is only the total of any qualified stated interestpaid at maturity and the OID includible in theowner's gross income for the calendar yearwhen the obligation matures. The requiredwithholding at maturity is limited to the cashpaid.

Sales and redemptions. If you report thegross proceeds from a sale, exchange, orredemption of a debt instrument on Form1099B, you may be required to withhold31% of the amount reported. Backup with-holding applies in the following situations.

The payee does not give you a TIN.

The IRS notifies you that the payee gavean incorrect TIN.

For debt instruments held in an accountopened after 1983, the payee does notcertify, under penalties of perjury, that theTIN given is correct.

Payments outside the United States toU.S. person. The requirement for backupwithholding and information reporting apply topayments of OID and interest made outsidethe United States to a U.S. person if you area U.S. person, a controlled foreign corpo-ration, or a foreign person at least 50% ofwhose income for the preceding 3-year periodis effectively connected with the conduct of aU.S. trade or business.

Payments to foreign person. The followingdiscussions explain the rules for backupwithholding and information reporting onpayments to foreign persons.

U.S.-source amount. Backup withhold-ing and information reporting are not requiredfor payments of U.S.-source OID, interest, orproceeds from sale or redemption of an OIDinstrument if the payee has given you proof(generally a Form W8 or an acceptablesubstitute) that the payee is a foreign person.A U.S. resident is not a foreign person. Forproof of the payee's foreign status, you canrely on Form W8 or on documentary evi-dence for payments made outside the UnitedStates to an offshore account or, in case ofbroker proceeds, a sale effected outside the

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United States. Form W8 does not relieveyou from information reporting and backupwithholding if you actually know the payee isa U.S. person.

For information about the 30% withholdingtax that may apply to payments ofU.S.-source OID or interest to foreign per-sons, see Publication 515.

Foreign-source amount. Backup with-holding and information reporting are not re-quired for payments of foreign-source OIDand interest made outside the United States.However, if the payments are made inside theUnited States, the requirements for backupwithholding and information reporting will ap-ply unless the payee has given you a FormW8 or acceptable substitute as proof that thepayee is a foreign person.

More information. See sections35a.99993,3A,4T, and 5 of the regu-lations for more information about backupwithholding and information reporting onforeign-source amounts or payments to for-eign persons.

CAUTION

!The above regulations have been re-moved and the regulations undersections 3406, 6045, and 6049 of the

Internal Revenue Code, relating to backupwithholding and information reporting, have

been amended, effective for payments madeafter 2000. See Treasury Decision 8734 (inCumulative Bulletin 19972), as modified byTreasury Decision 8804 (in Internal RevenueBulletin 199912) and Treasury Decision8881 (in Internal Revenue Bulletin 200023).

Information forOwners of OIDDebt InstrumentsThis section is for persons who prepare theirown tax returns. It discusses the income tax

rules for computing and reporting OID onlong-term debt instruments. It also includes asimilar discussion for stripped bonds andcoupons, such as zero coupon instrumentsavailable through the Department of theTreasury's STRIPS program andgovernment-sponsored enterprises such asthe Resolution Funding Corporation. How-ever, the information provided does not coverevery situation. More information can befound in the regulations under sections 1271through 1275 of the Internal Revenue Code.

Reporting OID. Generally, you report OIDas it accrues each year, whether or not youreceive any payments from the bond issuer.

Exceptions. The rules for reporting OID

on long-term instruments do not apply to thefollowing debt instruments.

U.S. savings bonds.

Tax-exempt obligations. (However, seeTax-Exempt Bonds and Coupons, later.)

Obligations issued by individuals beforeMarch 2, 1984.

Loans of $10,000 or less between indi-viduals who are not in the business oflending money. (The dollar limit includesoutstanding prior loans by the lender tothe borrower.) This exception does notapply if a principal purpose of the loan isto avoid any federal tax.

See chapter 1 of Publication 550 for in-formation about the rules for these and othertypes of discounted instruments such asshort-term and market discount obligations.Publication 550 also discusses rules forholders of REMIC interests and CDOs.

De minimis rule. You can treat OID as zeroif the total OID on a debt instrument is lessthan one-fourth of 1% (.0025) of the statedredemption price at maturity multiplied by thenumber of full years from the date of original

issue to maturity. Long-term instruments withde minimis OID are not listed in this publica-tion.

Example 2. You bought at issuance a10-year bond with a stated redemption priceat maturity of $1,000, issued at $980 with OIDof $20. One-fourth of 1% of $1,000 (the statedredemption price) times 10 (the number of fullyears from the date of original issue to matu-rity) equals $25. Under the de minimis rule,you can treat the OID as zero because the$20 discount is less than $25.

Example 3. Assume the same facts asExample 2, except the bond was issued at$950. You must report part of the $50 OIDeach year because it is more than $25.

Election to report all interest as OID.Generally, you can elect to treat all intereston a debt instrument acquired after April 3,1994, as OID and include it in gross incomeby using the constant yield method. See Fig-uring OID using the constant yield methodunder Debt Instruments Issued After 1984,later, for more information.

For purposes of this election, interest in-cludes stated interest, acquisition discount,OID, de minimis OID, market discount, deminimis market discount, and unstated inter-est, as adjusted by any amortizable bondpremium or acquisition premium. See section1.12723 of the regulations for more infor-mation.

Purchase after date of original issue. Adebt instrument you purchased after the dateof original issue may have premium, acquisi-tion premium, or market discount. (Theseterms are defined later.) If so, the OID re-ported to you on Form 1099OID may haveto be adjusted. For more information, seeShowing an OID adjustment under How ToReport OID, later.

Adjustment for premium. If your debtinstrument (other than a contingent paymentdebt instrument or an inflation-indexed debtinstrument) has premium, do not report anyOID as ordinary income. Your adjustment isthe total OID shown on your Form 1099OID.

Adjustment for acquisition premium.If your debt instrument has acquisition pre-mium, reduce the OID you report. Your ad-

justment is the difference between the OIDshown on your Form 1099OID and the re-duced OID amount figured using the rulesexplained later under Figuring OID on Long-Term Debt Instruments.

Adjustment for market discount. If yourdebt instrument has market discount that youchoose to include in income currently, in-crease the OID you report. Your adjustmentis the accrued market discount for the year.

See Market Discount Bonds in chapter 1of Publication 550 for information on how tofigure accrued market discount and include itin your income currently, and for other infor-mation about market discount bonds. If you

elect to use the constant yield method to fig-ure accrued market discount, also see Figur-ing OID on Long-Term Debt Instruments,later. The constant yield method of figuringaccrued OID, explained in those discussionsunder Figuring OID using the constant yieldmethod, is also used to figure accrued marketdiscount.

Sale, exchange, or redemption. Generally,you treat your gain or loss from the sale, ex-change, or redemption of a discounted bond

or other debt instrument as a capital gain orloss if you held the bond as a capital asset.If you sold the bond through a broker, youshould receive Form 1099B or an equivalentstatement from the broker. Use the Form1099B or other statement and your broker-age statements to complete Schedule D(Form 1040).

Your gain or loss is the difference betweenthe amount you realized on the sale, ex-change, or redemption and your basis in thedebt instrument. Your basis, generally, is yourcost increased by the OID you have includedin income each year you held it. To determineyour gain or loss on a tax-exempt bond, figureyour basis in the bond by adding to your costthe OID you would have included in incomeif the bond had been taxable.

See chapter 4 of Publication 550 for moreinformation about the tax treatment of the saleor redemption of discounted debt instruments.

Example 4. On November 1, 1997, Larry,a calendar year taxpayer, bought a corporatebond at original issue for $86,235.17. The15-year bond matures on October 31, 2012,at a stated redemption price of $100,000. Thebond provides for semiannual payments ofinterest at 10%. Assume the bond is a capitalasset in Larry's hands. The bond has$13,764.83 of OID ($100,000 stated redemp-tion price at maturity less $86,235.17 issueprice).

On November 1, 2000, Larry sold thebond for $90,000. Including the OID he will

report for the period he held the bond in 2000,Larry has included $1,214.48 of OID in in-come and has increased his basis by thatamount to $87,449.65. Larry has realized again of $2,550.35. All of Larry's gain is capitalgain.

DefinitionsThe following terms are used throughout thispublication. For your convenience, originalissue discount is defined first. The otherterms are listed alphabetically.

Original issue discount (OID). OID is aform of interest. It is the difference betweenthe stated redemption price and the issue

price. A debt instrument generally has OIDwhen it is issued for a price less than itsstated redemption price at maturity. All debtinstruments that pay no interest before matu-rity (for example, zero coupon bonds) arepresumed to be issued at a discount.

Accrual period. An accrual period is an in-terval of time used to measure OID. Thelength of an accrual period can be six months,a year, or some other period, depending onwhen the debt instrument was issued.

Acquisition premium. Acquisition premiumis the difference between the adjusted basisand the adjusted issue price. A debt instru-

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ment is purchased at an acquisition premiumif both the following apply.

It is not purchased at a premium.

Its adjusted basis immediately after pur-chase, including purchase at original is-sue, is greater than its adjusted issueprice.

Adjusted issue price. The adjusted issueprice of a debt instrument at the beginning ofan accrual period is used to figure the OID

allocable to that period. In general, the adjusted issue price at the beginning of the in-strument's first accrual period is its issueprice. The adjusted issue price at the begin-ning of any subsequent accrual period is thesum of the issue price and all the OIDincludible in income before that accrual periodminus any payment previously made on theinstrument, other than a payment of qualifiedstated interest.

Debt instrument. The term debtinstrument means a bond, debenture, note,certificate, or other evidence of indebtedness.It generally does not include an annuity con-tract.

Issue price. For instruments listed in SectionIA and Section IB, the issue price is theinitial offering price to the public (excludingbond houses and brokers) at which a sub-stantial amount of these instruments wassold.

Market discount. Market discount ariseswhen a debt instrument purchased in thesecondary market has decreased in valuesince its issue date, generally because of anincrease in interest rates. An OID bond hasmarket discount if your adjusted basis in thebond immediately after you acquired it (usu-ally its purchase price) was less than thebond's issue price plus the total OID that ac-crued before you acquired it. The marketdiscount is the difference between the issueprice plus accrued OID and your adjustedbasis.

Premium. A debt instrument is purchasedat a premium if its adjusted basis immediatelyafter purchase is greater than the total of allamounts payable on the instrument after thepurchase date, other than qualified stated in-terest. The premium is the difference betweenthe adjusted basis and the payable amounts.

Qualified stated interest. In general, qual-ified stated interest is stated interest that isunconditionally payable in cash or property(other than debt instruments of the issuer) atleast annually over the term of the instrumentat a single fixed rate.

Stated redemption price at maturity. Aninstrument's stated redemption price at ma-turity is the sum of all amounts (principal andinterest) payable on the instrument other thanqualified stated interest.

Yield to maturity (YTM). In general, theYTM is the discount rate that, when used infiguring the present value of all principal andinterest payments, produces an amount equalto the issue price of the bond. The YTM isgenerally shown on the face of the bond or inthe literature you receive from your broker.If you do not have this information, consultyour broker, tax advisor, or the issuer.

Form 1099OIDThe issuer of the debt instrument (or yourbroker, if you purchased or held the instru-ment through a broker) should give you acopy of Form 1099OID, or a similar state-ment, if the accrued OID for the calendar yearis $10 or more and the term of the instrumentis more than one year. Form 1099OIDshows all OID income in box 1 except OIDon a U.S. Treasury obligation, which isshown in box 6. It also shows, in box 2, anyqualified stated interest you must include in

income. (However, any qualified stated inter-est on Treasury inflation-indexed securitiesthat is not OID can be reported in box 3 ofForm 1099INT.) A copy of Form 1099OIDwill be sent to the IRS. Do not attach yourcopy to your tax return. Keep it for your rec-ords.

CAUTION

!If you are required to file a tax returnand you receive Form 1099OIDshowing taxable amounts, you must

report these amounts on your return. A 20%accuracy-related penalty may be charged forunderpayment of tax due to either of the fol-lowing reasons.

Negligence or disregard of rules andregulations.

Substantial understatement of tax.

Form 1099OID not received. If you heldan OID instrument for 2000 but did not re-ceive a Form 1099OID, refer to the laterdiscussions under Figuring OID on Long-Term Debt Instrumentsfor information on theOID you must report.

Refiguring OID. You must refigure the OIDshown in box 1 or box 6 of Form 1099OIDto determine the proper amount to include inincome if one of the following applies.

You bought the debt instrument at a pre-mium or at an acquisition premium.

The debt instrument is a stripped bondor coupon (including zero coupon instru-ments backed by U.S. Treasury securi-ties).

The debt instrument is a contingent pay-ment or inflation-indexed debt instrument.

See the discussions under Figuring OID onLong-Term Debt Instrumentsor Figuring OIDon Stripped Bonds and Coupons, later, for thespecific computations.

Refiguring interest. If you disposed of adebt instrument or acquired it from anotherholder between interest dates, see the dis-cussion under Bonds Sold Between InterestDates in chapter 1 of Publication 550 for in-formation about refiguring the interest shownin box 2 of Form 1099OID.

Nominee. If you are the holder of an OIDinstrument and you receive a Form 1099OIDthat shows your taxpayer identification num-ber and includes amounts belonging to an-other person, you are considered anominee. You must file another Form1099OID for each actual owner, showing theOID for the owner. Show the owner of theinstrument as the recipient and you as thepayer.

Complete Form 1099OID and Form 1096and file the forms with the Internal RevenueService Center for your area. You must also

give a copy of the Form 1099OID to the ac-tual owner. However, you are not required tofile a nominee return to show amounts be-longing to your spouse. See the Form 1099instructions for more information.

When preparing your tax return, follow theinstructions under Showing an OID adjust-mentin the next discussion.

How To Report OIDGenerally, you report your taxable interest

and OID income on line 2, Form 1040EZ; line8a, Form 1040A; or line 8a, Form 1040.

Form 1040 or Form 1040A required. Un-less you are a nominee for the actual ownerof the debt instrument, you must use Form1040 if you are reporting more or less OIDthan the amount shown on Form 1099OID.For example, if you paid a premium or anacquisition premium when you purchased thedebt instrument, you must use Form 1040because you will report less OID than shownon Form 1099OID. Also, you must use Form1040 if you were charged an early withdrawalpenalty.

You must use Form 1040 or Form 1040A(you cannot use Form 1040EZ) under eitherof the following conditions.

You received a Form 1099OID as anominee for the actual owner.

Your total interest and OID income for theyear was more than $400.

Where to report. List each payer's name (ifa brokerage firm gave you a Form 1099, listthe brokerage firm as the payer) and theamount received from each payer on line 1of Schedule 1 (Form 1040A) or line 1 ofSchedule B (Form 1040). Include all OID andperiodic interest shown in boxes 1, 2, and 6of any Form 1099OID you received for thetax year. Also include any other OID and in-terest income for which you did not receive a

Form 1099.

Showing an OID adjustment. If you useForm 1040 to report more or less OID thanshown on Form 1099OID, list the full OIDon line 1, Part I of Schedule B and follow theinstructions under (1) or (2), next.

If you use Form 1040A to report the OIDshown on a Form 1099OID you received asa nominee for the actual owner, list the fullOID on line 1, Part I of Schedule 1 and followthe instructions under (1).

1) If the OID, as adjusted, is less than theamount shown on Form 1099OID,show the adjustment as follows.

a) Under your last entry on line 1,

subtotal all interest and OID incomelisted on line 1.

b) Below the subtotal write NomineeDistribution or OID Adjustmentand show the OID you are not re-quired to report.

c) Subtract that OID from the subtotaland enter the result on line 20.

2) If the OID, as adjusted, is more than theamount shown on Form 1099OID,show the adjustment as follows.

a) Under your last entry on line 1,subtotal all interest and OID incomelisted on line 1.

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b) Below the subtotal write OID Ad-justment, and show the additionalOID.

c) Add that OID to the subtotal.

Figuring OIDon Long-Term DebtInstrumentsHow you figure the OID on a long-term debtinstrument depends on the date it was issued.

It also may depend on the type of the instru-ment. There are different rules for each of thefollowing debt instruments.

1) Corporate debt instruments issued after1954 and before May 28, 1969, andgovernment instruments issued after1954 and before July 2, 1982.

2) Corporate debt instruments issued afterMay 27, 1969, and before July 2, 1982.

3) Debt instruments issued after July 1,1982, and before 1985.

4) Debt instruments issued after 1984(other than debt instruments describedin (5) and (6)).

5) Contingent payment debt instrumentsissued after August 12, 1996.

6) Inflation-indexed debt instruments (in-cluding Treasury inflation-indexed secu-rities) issued after January 5, 1997.

Zero coupon instrument. The rules for fig-uring OID on zero coupon instruments backedby U.S. Treasury securities are discussedlater under Figuring OID on Stripped Bondsand Coupons, later.

Corporate Debt InstrumentsIssued After 1954 andBefore May 28, 1969,and Government Instruments

Issued After 1954 andBefore July 2, 1982For these instruments, you do not include OIDin income until the year the instrument is sold,exchanged, or redeemed. If a gain resultsand the instrument is a capital asset, the OIDis taxed as ordinary income. The balance ofthe gain is capital gain. If there is a loss onthe sale of the instrument, the entire loss isa capital loss and no OID is reported.

The gain taxed as ordinary income whenthe instrument is sold, exchanged, or re-deemed generally equals the followingamount:

number of full months youheld the instrument

number of full months fromdate of original issue todate of maturity

original issue

discount

X

Corporate Debt InstrumentsIssued After May 27, 1969, andBefore July 2, 1982If you hold these debt instruments as capitalassets, you must include part of the discountin income each year you own the instruments.For information about showing the correctOID on your tax return, see the discussionunder How To Report OID, earlier. Your ba-sis in the instrument is increased by the OIDyou include in income.

Form 1099OID. You should receive a Form1099OID showing OID for the part of theyear you held the bond. However, if you paidan acquisition premium, you may need to re-figure the OID to report on your tax return.See Acquisition premium, later.

Form 1099OID not received. If you held anOID instrument in 2000 but did not receive aForm 1099OID, refer to Section IA later inthis publication. The OID listed is for each$1,000 of redemption price. You must adjust

the listed amount if your debt instrument hasa different principal amount. For example, ifyou have an instrument with a $500 principalamount, use one-half of the listed amount tofigure your OID.

If you held the instrument the entire year,use the OID shown in Section IA for calen-dar year 2000. (If your instrument is not listedin Section IA, consult the issuer for infor-mation about the issue price, yield to maturity,and the OID that accrued for 2000.) If you didnot hold the instrument the entire year, figureyour OID using the following method.

1) Divide the OID shown for 2000 by 12.

2) Multiply the result in (1) by the numberof complete and partial months (for ex-

ample, 61

/2 months) you held the debtinstrument in 2000. This is the OID toinclude in income unless you paid anacquisition premium. The reduction foracquisition premium is discussed next.

Acquisition premium. If you bought thedebt instrument at an acquisition premium,figure the OID to include in income as follows.

1) Divide the total OID on the instrumentby the number of complete months, andany part of a month, from the date oforiginal issue to the maturity date. Thisis the ratable monthly portion.

2) Subtract from your cost the issue priceand the accumulated OID from the date

of issue to the date of purchase. (If theresult is zero or less, stop here. You didnot pay an acquisition premium.)

3) Divide the amount figured in (2) by thenumber of complete months, and anypart of a month, from the date of yourpurchase to the maturity date.

4) Subtract the amount figured in (3) fromthe amount figured in (1). This is the OIDto include in income for each month youhold the instrument during the year.

Example 5. On June 1, 1982, AcmeCorporation issued 20-year bonds at 90% ofthe principal amount. On February 1, 2000,you bought Acme bonds with a $10,000 prin-

cipal amount on the open market for $9,900.The amount you must include in income isfigured as follows:

You must include $39.60 ($3.60 11months) in income for 2000 because the ac-quisition premium reduces the ratablemonthly portion of OID.

Example 6. Assume the same facts asExample 5, except that you bought the bondsfor $9,844.04. In this case, your cost equalsthe original issue price plus accumulated OID.Therefore, you did not pay an acquisitionpremium. For 2000, include $45.87 ($4.17 11 months) of OID in income.

Example 7. Assume the same facts asExample 5, except that you bought the bondsfor $9,400. In this case, you must include$45.87 of OID in your 2000 income. You didnot pay an acquisition premium because youbought the bonds for less than the sum of theoriginal issue price plus accumulated OID.The bonds have market discount, which mustbe reported under the rules explained inchapter 1 of Publication 550.

Transfers during the month. If you buy orsell a debt instrument on any day other thanthe same day of the month as the date oforiginal issue, the ratable monthly portion ofOID for the month of sale is divided betweenthe seller and the buyer according to the

number of days each held the instrument.Your holding periodfor this purpose beginsthe day you obtain the instrument and endsthe day before you dispose of it.

Example 8. Assume the same facts asExample 5, except that you bought the bondson September 14, 1999, for $9,865.00($9,000 issue price plus $865 accumulatedOID) and sold them on March 14, 2000. Youfigure the OID to include in your 1999 incomeas follows:

You figure the OID to include in your 2000income as follows:

You increase your basis in the bonds bythe OID you include in income. Your basis inthe bonds when you sold them is $9,889.96($9,865 cost + $14.87 OID for 1999 and$10.09 OID for 2000).

Debt Instruments IssuedAfter July 1, 1982, andBefore 1985If you hold these debt instruments as capitalassets, you must include part of the OID inincome each year you own the instrumentsand increase your basis by the amount in-cluded. For information about showing thecorrect OID on your tax return, see How ToReport OID, earlier.

Form 1099. You should receive a Form1099OID showing OID for the part of theyear you held the bond. However, if you paidan acquisition premium, you may need to re-figure the OID to report on your tax return.See Figuring OID using the constant yieldmethod and the discussions on acquisitionpremium that follow, later.

Amount for September ($4.17 17 days 30 days) ........................................................ $ 2.36Amount for complete months Octoberthrough December ($4.17 3 months) ........ 12.51Total to include in 1999 income ................ $14.87

Amount for complete months Januarythrough February ($4.17 2 months) .......... $8.34Amount for March ($4.17 13 days 31 days) ........................................................ 1.75Total to include in 2000 income ................ $10.09

1) Ratable monthly portion ($1,000total OID 240 months) ........................... $4.17

2) Your cost ................................. $9,900.00Minus: Issue price ................... 9,000.00

$ 900.00Minus: Accumulated OID($4.17 212 months) .............. 884.04Acquisition premium ................ $ 15.96

3) Acquisition premium dividedby number of complete andpartial months from date ofpurchase to maturity date($15.96 28 months) ................................ 0.57

4) Line 1 minus line 3 ................................. $3.60

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Form 1099OID not received. If you heldan OID instrument during the year but did notreceive a Form 1099OID, refer to SectionIA later in this publication. The OID listed isfor each $1,000 of redemption price. Youmust adjust the listed amount if your debt in-strument has a different principal amount. Forexample, if you have an instrument with a$500 principal amount, use one-half of thelisted amount to figure your OID.

If you held the debt instrument the entireyear, use the OID shown in Section IA forcalendar year 2000. (If your instrument is notlisted in Section IA, consult the issuer forinformation about the issue price, yield tomaturity, and the OID that accrued for 2000.)If you did not hold the debt instrument theentire year, figure your OID using either of thefollowing methods.

Method 1.

1) Divide the total OID for 2000 by 366.

2) Multiply the result in (1) by the numberof days you held the debt instrument in2000.

This computation is an approximation andmay result in a slightly higher OID thanMethod 2.

Method 2.

1) Look up the daily OID for the first 2000accrual period you held the instrument.(See Accrual periodunder Figuring OIDusing the constant yield method, next.)

2) Multiply the daily OID by the number ofdays in 2000 you held the instrumentduring that accrual period.

3) If you held the instrument for part of both2000 accrual periods, repeat (1) and (2)for the second accrual period.

4) Add the results of (2) and (3). This is theOID to include in income for 2000, un-less you paid an acquisition premium.(The reduction for acquisition premium

is discussed later.)

Figuring OID using the constant yieldmethod. This discussion shows how to figureOID on debt instruments issued after July 1,1982, and before 1985, using a constant yieldmethod. OID is allocated over the life of theinstrument through adjustments to the issueprice for each accrual period.

Figure the OID allocable to any accrualperiod as follows.

1) Multiply the adjusted issue price at thebeginning of the accrual period by theinstrument's yield to maturity.

2) Subtract from the result in (1) any qual-

ified stated interest allocable to the ac-crual period.

Accrual period. An accrual period forany OID instrument issued after July 1, 1982,and before 1985 is each one-year period be-ginning on the date of the issue of the obli-gation and each anniversary thereafter, or theshorter period to maturity for the last accrualperiod. Your tax year will usually overlapmore than one accrual period.

Daily OID. The OID for any accrual periodis allocated ratably to each day in the accrualperiod. You must include in income the sumof the OID for each day that you hold the in-strument during the year. If your tax yearoverlaps more than one accrual period, you

must include the proper daily OID amounts foreach of the two accrual periods.

Figuring daily OID. The daily OID for theinitial accrual period is figured using thefollowing formula:

(ip ytm) qsi

p

The daily OID for subsequent accrualperiods is figured the same way except theadjusted issue price at the beginning of eachperiod is used in the formula instead of theissue price.

Example 9. On January 1, 1984, youbought a 20-year, 13% bond for $90,000 atoriginal issue. The redemption price of thebond is $100,000. The qualified stated inter-est is $13,000 (13% $100,000), which isunconditionally payable each year. The bondhas a yield to maturity of 14.5587%. The dailyOID for the first accrual period is figured asfollows:

($90,000.00 14.5587%)$13,000

366 (leap year)

=$102.83

366= $.28096

You would have included in income$.28096 for each day you held the bond dur-ing 1984. If you held the bond for all of 1984,you would have included OID of $102.83($.28096 366).

The following table shows the adjustedissue price, daily OID, and OID per accrualperiod through 2000.

The daily OID for the 18th accrual periodis figured as follows:

($96,413.64 14.5587%)$13,000

365

=$1,036.57

365= $2.83992

If you hold the bond for all of 2001, youwould include $1,036.57 in income ($2.83992 365).

Example 10. Assume the same facts asExample 9, except that you bought the bondat original issue on May 1, 1983. The dailyOID for the first accrual period (May 1, 1983

April 30, 1984) was $.28096, as figured in

Example 9. If you held the bond until the endof 1983, you would have included $68.84 inincome for 1983 ($.28096 245 days). If youcontinued to hold the bond, you would haveincluded in income, for 1984 through 1999,the following amounts of OID.

If you sold the bond on August 30, 2000,you would figure the amount to include in your2000 income as follows:

However, if you held the bond the entireyear of 2000, the total OID to report is$994.92 [$299.14 + $695.78 ($2.83992 245days)].

Acquisition premium on debt instrumentspurchased before July 19, 1984. If youbought the debt instrument at an acquisitionpremium before July 19, 1984, you figure thereduction of OID includible in income by re-ducing the daily OID by the daily acquisition

premium. Figure the daily acquisition pre-mium by dividing the total acquisition pre-mium by the number of days in the periodbeginning on your purchase date and endingon the day before the date of maturity.

Example 11. Assume the same facts asExample 10, except that you bought the bondfor $92,000 on May 1, 1984, after its originalissue on May 1, 1983. In this case, you paidmore for the bond than its $90,102.83 ad-

justed issue price ($90,000 + $102.83). Youpaid $1,897.17 ($92,000 $90,102.83) ac-quisition premium. The daily OID as reducedfor the acquisition premium for the accrualperiod May 1, 1984, to April 30, 1985, is fig-ured as follows:

Year

FirstAccrualPeriod

SecondAccrualPeriod Total

ip = issue price1984 .......... $.28096 $.32274

ytm = yield to maturity 121 days 245 days $113.07

qsi = qualified stated interest1985 .......... $.32274

$.36973

120 days 245 days $129.31p = number of days in accrual period

1986 .......... $.36973 $.42356 120 days 245 days $148.14

1987 .......... $.42356 $.48391 120 days 245 days $169.39

1988 .......... $.48391 $.55586 121 days 245 days $194.74

1989 .......... $.55586 $.63679 120 days 245 days $222.71

1990 .......... $.63679 $.72951 120 days 245 days $255.14

1991 .......... $.72951 $.83342 120 days 245 days $291.73

1992 .......... $.83342 $.95737 121 days 245 days $335.40

1993 .......... $.95737 $1.09677 120 days 245 days $383.59

1994 .......... $1.09677 $1.25644 120 days 245 days $439.44

1995 .......... $1.25644 $1.43541 120 days 245 days $502.45

1996 .......... $1.43541 $1.64890 121 days 245 days $577.66

1997 .......... $1.64890 $1.88896 120 days 245 days $660.67

1998 .......... $1.88896 $2.16397 120 days 245 days $756.85

1999 .......... $2.16397 $2.47224 120 days 245 days $865.38

Ac-crual

Period Year

AdjustedIssue

Price Daily OID

OID perAc-

crual

PeriodFirst accrual period: $2.47224 121 days(Jan 1 Apr 30) ........................................ $299.14

1 1984 $90,000.00 $.28096 $102.832 1985 90,102.83 .32274 117.80

Second accrual period: $2.83992 121days (May 1 Aug 29) .............................. 343.63

3 1986 90,220.63 .36973 134.954 1987 90,355.58 .42356 154.60

Total to include in 2000 income ............. $642.775 1988 90,510.18 .48391 177.116 1989 90,687.29 .55586 202.897 1990 90,890.18 .63679 232.438 1991 91,122.61 .72951 266.279 1992 91,388.88 .83342 305.0310 1993 91,693.91 .95737 349.4411 1994 92,043.35 1.09677 400.3212 1995 92,443.67 1.25644 458.6013 1996 92,902.27 1.43541 525.3614 1997 93,427.63 1.64890 601.8515 1998 94,029.48 1.88896 689.4716 1999 94,718.95 2.16397 789.8517 2000 95,508.80 2.47224 904.84

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The OID you would have included in in-come for 1984 is $12.09 ($.04933 245days).

Assuming you still owned the bond in2000, you would have reduced the total OIDfor each year (as determined in Example 10)by the allocable portion of the acquisitionpremium for that year. You would have in-cluded the following amounts of OID in in-come:

If you held the bond all of 2000, reduce thetotal OID for that year, $994.92 (as deter-mined in Example 10), by the allocable partof the acquisition premium for 2000, $100.07($.27341 366 days). The difference,$894.85, is the total OID to include in incomefor 2000.

Example 12. Assume the same facts asExample 11, except that you bought the bondfor $90,102.83. In this case, you bought thebond for an amount equal to the original issueprice plus accumulated OID. Therefore, youdid not pay an acquisition premium. Youwould have included $79.07 ($.32274 245days) in income for 1984. For the remainingyears, you would have included the amountsfigured in Example 10.

Example 13. Assume the same facts asExample 11, except that you bought the bondfor $89,500. You did not pay an acquisitionpremium because your cost was less than theadjusted issue price. You must include in in-come each year the amounts figured in Ex-ample 12. The bonds have market discount,which must be reported under the rules ex-plained in chapter 1 of Publication 550.

Acquisition premium on debt instrumentspurchased after July 18, 1984. If you boughtthe debt instrument at an acquisition premiumafter July 18, 1984, figure the reduction ofOID includible in income by reducing the dailyOID by the daily acquisition premium. How-ever, the method of figuring the daily acqui-sition premium is different from the methoddescribed in the preceding discussion. Tofigure the daily acquisition premium under thismethod, you multiply the daily OID by thefollowing fraction.

The numerator is the total acquisitionpremium.

1) Daily OID on date of purchase(2nd accrual period) .............................. $.32274

The denominator is the total OID re-maining for the instrument after yourpurchase date.

Example 14. Assume the same facts asExample 9, except that you bought the bondfor $99,000 on August 1, 2000, after its ori-ginal issue on August 1, 1983. In this case,you paid more for the bond than its$96,413.64 adjusted issue price ($90,000 +$6,413.64 accrued OID). You paid $2,586.36($99,000 $96,413.64) acquisition premium.The daily OID as reduced for the acquisitionpremium for the accrual period August 1,2000, to July 31, 2001, is figured as follows:

The total OID to include in income for2000 (August 1 December 31) is $121.15($0.79185 153 days).

If you hold the bond for all of 2001, multi-

ply the total OID for the year by 2.04807 andsubtract the result from the total OID. Thereduced amount is the total OID to be in-cluded in income for 2001.

Using Section IA to figure accumu-lated OID. If you bought your corporate debtinstrument in 2000 or 2001 and it is listed inSection IA, you can figure the accumulatedOID to the date of purchase by adding thefollowing amounts.

1) The amount from the Total OID to Jan-uary 1, 2000 column for your debt in-strument.

2) The OID from January 1, 2000, to thedate of purchase, figured as follows.

a) Multiply the daily OID for the firstaccrual period in 2000 by the num-ber of days from January 1 to thedate of purchase, or the end of theaccrual period if the instrument waspurchased in the second or thirdaccrual period.

b) Multiply the daily OID for eachsubsequent accrual period by thenumber of days in the period to thedate of purchase or the end of theaccrual period, whichever applies.

c) Add the amounts figured in (2a) and(2b).

Debt Instruments IssuedAfter 1984If you hold debt instruments issued after1984, you must report part of the discount ingross income each year that you own the in-struments. You must include the OID in grossincome whether or not you hold the instru-ment as a capital asset. Your basis in the in-strument is increased by the OID you includein income. For information about showing thecorrect OID on your tax return, see How ToReport OID, earlier.

Form 1099OID. You should receive a Form1099OID showing OID for the part of 2000you held the bond. However, if you paid an

acquisition premium, you may need to refig-ure the OID to report on your tax return. SeeFiguring OID using the constant yield methodand Acquisition premium, later.

You may also need to refigure the OID fora contingent payment or inflation-indexeddebt instrument on which the amount reportedon Form 1099OID is inaccurate. See Con-tingent Payment Debt Instruments orInflation-Indexed Debt Instruments, later.

Form 1099OID not received. If you held

an OID instrument in 2000 but did not receivea Form 1099OID, refer to Section IB laterin this publication. The OID listed is for each$1,000 of redemption price. You must adjustthe listed amount if your debt instrument hasa different principal amount. For example, ifyou have an instrument with a $500 principalamount, use one-half of the listed amount tofigure your OID.

Use the OID shown in Section IBfor thecalendar year if you held the instrument theentire year. (If your instrument is not listed inSection IB, consult the issuer for informationabout the issue price, yield to maturity, andthe OID that accrued for 2000.) If you did nothold the debt instrument the entire year, fig-ure your OID as follows.

1) Look up the daily OID amount for the first2000 accrual period in which you heldthe instrument. (See Accrual periodun-der Figuring OID using the constant yieldmethod, next.)

2) Multiply the daily OID amount by thenumber of days in 2000 you held the in-strument during that accrual period.

3) Repeat (1) and (2) for any remaining2000 accrual periods in which you heldthe instrument.

4) Add the results of (2) and (3). This is theOID to include in income for 2000, un-less you paid an acquisition premium.(The reduction for acquisition premium

is discussed later.)

Tax-exempt bond. If you own a tax-exemptbond, figure your basis in the bond by addingto your cost the OID you would have includedin income if the bond had been taxable. Youneed to make this adjustment to determine ifyou have a gain or loss on a later dispositionof the bond. Use the rules that follow to de-termine your OID.

Figuring OID using the constant yieldmethod. This discussion shows how to figureOID on debt instruments issued after 1984using a constant yield method. (The specialrules that apply to contingent payment debtinstruments and inflation-indexed debt instru-ments are explained later.) OID is allocatedover the life of the instrument through adjust-ments to the issue price for each accrual pe-riod.

Figure the OID allocable to any accrualperiod as follows.

1) Multiply the adjusted issue price at thebeginning of the accrual period by afraction. The numerator of the fraction isthe instrument's yield to maturity and thedenominator is the number of accrualperiods per year. The yield must bestated appropriately taking into accountthe length of the particular accrual pe-riod.

2) Acquisition premium .......... $1,897.17

3) Total days from purchasedate to maturity date [(365 19 years) + 4 days forleap years] ......................... 6,939

4) Line 2 line 3 ....................................... $.273415) Daily OID reduced for the acquisition

premium. Line 1 line 4 ..................... $.04933

1) Daily OID on date of purchase (18thaccrual period) ................................... $2.83992*

2) Acquisition premium ......... $2,586.363) Total OID remaining after

purchase date ($10,000 $6,413.64) ........................ 3,586.36

4) Line 2 line 3 .................. 0.721175) Line 1 line 4 .................................... 2.04807Year OID6) Daily OID reduced for the acquisi-

tion premium. Line 1 line 5 ......... $0.791851985 ........................................................... $ 29.521986 ........................................................... $ 48.35

(* As shown in Example 9.)1987 ........................................................... $ 69.601988 ........................................................... $ 94.671989 ........................................................... $122.921990 ........................................................... $155.351991 ........................................................... $191.941992 ........................................................... $235.331993 ........................................................... $283.801994 ........................................................... $339.651995 ........................................................... $402.661996 ........................................................... $477.591997 ........................................................... $560.881998 ........................................................... $657.061999 ........................................................... $895.13

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2) Subtract from the result in (1) any qual-ified stated interest allocable to the ac-crual period.

Accrual period. For debt instruments is-sued after 1984 and before April 4, 1994, anaccrual period is each 6-month period thatends on the day that corresponds to thestated maturity date of the debt instrumentor the date 6 months before that date. Forexample, a debt instrument maturing onMarch 31 has accrual periods that end onSeptember 30 and March 31 of each calendaryear. Any short period is included as the firstaccrual period.

For debt instruments issued after April3, 1994, accrual periods may be of any lengthand may vary in length over the term of theinstrument, as long as each accrual period isno longer than one year and all payments aremade on the first or last day of an accrualperiod. However, the OID listed for these debtinstruments in Section IB has been figuredusing 6-month accrual periods.

Daily OID. The OID for any accrual periodis allocated ratably to each day in the accrualperiod. Figure the amount to include in in-come by adding the OID for each day that youhold the debt instrument during the year.Since your tax year will usually overlap more

than one accrual period, you must include theproper daily OID for each accrual period thatfalls within or overlaps your tax year. If yourdebt instrument has 6-month accrual periods,your tax year will usually include one full6-month accrual period and parts of two other6-month periods.

Figuring daily OID. The daily OID for theinitial accrual period is figured using thefollowing formula.

(ip ytm/n)qsi

p

The daily OID for subsequent accrualperiods is figured the same way except thatthe adjusted issue price at the beginning ofeach period is used in the formula instead ofthe issue price.

Example 15. On January 1, 2000, youbought a 15-year, 10% bond of A Corporationat original issue for $86,235.17. According tothe prospectus, the bond matures on De-cember 31, 2014, at a stated redemptionprice of $100,000. The yield to maturity is12%, compounded semiannually. The bondprovides for qualified stated interest pay-ments of $5,000 on June 30 and December

31 of each calendar year. The accrual periodsare the 6-month periods ending on each ofthese dates. The daily OID for the first accrualperiod is figured as follows:

($86,235.17 .12/2)$5,000

182 days

=$174.11

182= $.95665

The adjusted issue price at the beginningof the second accrual period is the issue priceplus the OID previously includible in income($86,235.17 + $174.11), or $86,409.28. Thedaily OID for the second accrual period is:

($86,409.28 .12/2)$5,000

184 days

=$184.56

184= $1.00303

Since the first and second accrual periodscoincide exactly with your tax year, you in-clude in income for 2000 the OID allocable tothe first two accrual periods, $174.11($.95665 182 days) plus $184.56 ($1.00303 184 days), or $358.67. Add the OID to the$10,000 interest you report in 2000.

Example 16. Assume the same facts asExample 15, except that you bought the bondat original issue on May 1, 2000. Also, theinterest payment dates are October 31 andApril 30 of each calendar year. The accrualperiods are the 6-month periods ending oneach of these dates.

The daily OID for the first accrual period(May 1, 2000 October 31, 2000) is figuredas follows:

($86,235.17 .12/2)$5,000

184 days

=$174.11

184= $.94625

The daily OID for the second accrual pe-riod (November 1, 2000 April 30, 2001) is:

($86,409.28 .12/2)$5,000

181 days

=$184.56

181= $1.01967

If you hold the bond through the end of2000, you must include $236.31 of OID in in-come. This is $174.11 ($.94625 184 days)for the period May 1 through October 31 plus$62.20 ($1.01967 61 days) for the periodNovember 1 through December 31. The OIDis added to the $5,000 interest income paidon October 31, 2000. Your basis in the bondis increased by the OID you include in in-come. On January 1, 2001, your basis in theA Corporation bond is $86,471.48($86,235.17 + $236.31).

Short first accrual period. You mayhave to make adjustments if a debt instru-ment has a short first accrual period. For ex-ample, a debt instrument with 6-month ac-crual periods that is issued on February 15and matures on October 31 has a short firstaccrual period that ends April 30. (The re-maining accrual periods begin on May 1 orNovember 1.) For this short period, figure thedaily OID as described earlier, but adjust theyield for the length of the short accrual period.You may use any reasonable compoundingmethod in determining OID for a short period.Examples of reasonable compounding meth-

ods include continuous compounding andmonthly compounding (that is, simple interestwithin a month). Consult your tax advisor formore information about making this compu-tation.

The OID for the final accrual period isthe excess of the amount payable at maturity(other than a payment of qualified stated in-terest) over the adjusted issue price at thebeginning of the final accrual period.

Acquisition premium. If you bought thedebt instrument at an acquisition premium,multiply the daily OID by the following fractionto figure the daily acquisition premium thatreduces the daily OID.

The numerator is the acquisition pre-mium.

The denominator is the total OID re-maining for the instrument after yourpurchase date.

Example 17. Assume the same facts asExample 16, except that you bought the bondon November 1, 2000, for $87,000, after itsoriginal issue on May 1, 2000. The adjustedissue price on November 1, 2000, is$86,409.28 ($86,235.17 + $174.11). Under

these assumptions, you purchased the bondat an acquisition premium of $590.72 (yourcost, $87,000, less the adjusted issue price,$86,409.28) and you must reduce the dailyOID for any day you hold the bond.

The daily OID for the accrual period No-vember 1, 2000, through April 30, 2001, asreduced for the acquisition premium, is fig-ured as follows:

The total OID to include in income for2000 is $59.50 ($.97536 61 days).

Contingent Payment DebtInstrumentsThis discussion shows how to figure OID ona contingent payment debt instrument issuedafter August 12, 1996, that was issued forcash or publicly traded property. In general,a contingent payment debt instrument isa debt instrument that provides for one ormore payments that are contingent as to tim-ing or amount. If you hold a contingent pay-ment debt instrument, you must report OIDas it accrues each year.

Because the actual payments on a con-tingent payment debt instrument cannot beknown in advance, issuers and holders can-not use the constant yield method (discussedearlier under Debt Instruments Issued After1984) without making certain assumptionsabout the payments on the debt instrument.To figure OID accruals on contingent paymentdebt instruments, holders and issuers mustuse the noncontingent bond method.

Noncontingent bond method. Under thismethod, the issuer must construct a hy-pothetical noncontingent bond that has termsand conditions similar to the contingent pay-ment debt instrument. The issuer constructsthe payment schedule of the hypotheticalnoncontigent bond by projecting a fixedamount for each contingent payment. Hold-ers and issuers accrue OID on this hypothet-ical noncontingent bond using the constantyield method that applies to fixed paymentdebt instruments. When a contingent pay-ment differs from the projected fixed amount,the holders and issuers make adjustments totheir OID accruals. If the actual contingentpayment is larger than expected, both theissuer and the holder increase their OID ac-cruals. If the actual contingent payment issmaller than expected, holders and issuersgenerally decrease their OID accruals.

1) Daily OID on date of purchase (2ndaccrual period) .................................... $1.01967*

2) Acquisition premium ............. $590.723) Total OID remaining after

purchase date ($13,764.83 $174.11) ................................ 13,590.72

4) Line 2 line 3 ..................................... .043465) Line 1 line 4 ..................................... .04431

6) Daily OID reduced for the acquisi-tion premium. Line 1 line 5 ........... $0.97536

(* As shown in Example 16.)

ip = issue price

ytm = yield to maturity

n = number of accrual periods in one year

qsi = qualified stated interest

p = number of days in accrual period

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Form 1099OID. The amount shown in box1 of the Form 1099OID you receive for acontingent payment debt instrument may notbe the correct amount to include in income.For example, the amount may not be correctif the contingent payment was different fromthe projected amount. If the amount in box 1is not correct, you must figure the OID to re-port on your return under the following rules.For information on showing an OID adjust-ment on your tax return, see How To ReportOID, earlier.

Figuring OID. To figure OID on a contingentpayment debt instrument, you need to knowthe comparable yield and projected pay-ment schedule of the debt instrument. Theissuer must make these available to you.

Comparable yield. The comparable yieldis the yield on the hypothetical noncontingentbond that the issuer determines and con-structs at the time of issuance.

Projected payment schedule. Theprojected payment schedule is the paymentschedule of the hypothetical noncontingentbond. The schedule includes all fixed pay-ments due under the contingent payment debtinstrument and a projected fixed amount foreach contingent payment. The projected

payment schedule is created by the issuer. Itis used to determine the holder's interest ac-cruals and adjustments.

Steps for figuring OID. Figure the OIDon a contingent payment debt instrument intwo steps.

1) Figure the OID on the hypothetical non-contingent bond using the constant yieldmethod (discussed earlier under DebtInstruments Issued After 1984) that ap-plies to fixed payment debt instruments.Use the comparable yield as the yield tomaturity. Use the projected paymentschedule to determine the hypotheticalbond's adjusted issue price at the be-ginning of the accrual period. Do not

treat any amount payable as qualifiedstated interest.

2) Adjust the OID in (1) to account for ac-tual contingent payments. If the contin-gent payment is greater than theprojected fixed amount, you have apositive adjustment. If the contingentpayment is less than the projected fixedamount, you have a negative adjust-ment.

Net positive adjustment. A net positiveadjustment exists when the total of any posi-tive adjustments described in (2) above ex-ceeds the total of any negative adjustments.Treat a net positive adjustment as additional

OID for the tax year.Net negative adjustment. A net negative

adjustment exists when the total of any neg-ative adjustments described in (2) above ex-ceeds the total of any positive adjustments.Use a net negative adjustment to offset OIDon the debt instrument for the tax year. If thenet negative adjustment exceeds the OID onthe debt instrument for the tax year, you canclaim the excess as an ordinary loss. How-ever, the amount you can claim as an ordi-nary loss is limited to the OID on the debtinstrument you included in income in prior taxyears. You must carry forward any excess netnegative adjustment and treat it as a negativeadjustment in the next tax year.

Basis adjustments. In general, increaseyour basis in a contingent payment debt in-strument by the OID included in income. Yourbasis, however, is not affected by any nega-tive or positive adjustments. Decrease yourbasis by any noncontigent payment receivedand the projected contingent paymentscheduled to be received.

Treatment of gain or loss on sale or ex-change. If you sell a contingent paymentdebt instrument at a gain, your gain is ordi-

nary income (interest income), even if youhold the instrument as a capital asset. If yousell a contingent payment debt instrument ata loss, your loss is an ordinary loss to theextent of your prior OID accruals on the in-strument. If your loss exceeds your prior OIDaccruals and the instrument is a capital asset,treat the excess loss as a capital loss.

See section 1.12754 of the regulationsfor exceptions to these rules.

Premium, acquisition, and market dis-count. The rules for accruing premium, ac-quisition premium, and market discount donot apply to a contingent payment debt in-strument. See section 1.12754 of the regu-lations to determine how to account for these

items.

Inflation-Indexed DebtInstrumentsThis discussion shows how you figure OIDon certain inflation-indexed debt instrumentsissued after January 5, 1997. An inflation-indexed debt instrumentis generally a debtinstrument on which the payments are ad-

justed for inflation and deflation (such asTreasury inflation-indexed securities).

In general, if you hold an inflation-indexeddebt instrument, you must report as OID anyincrease in the inflation-adjusted principalamount of the instrument that occurs whileyou held the instrument during the tax year.

You must include the OID in gross incomewhether or not you hold the instrument as acapital asset. Your basis in the instrument isincreased by the OID you include in income.

Inflation-adjusted principal amount. Forany date, the inflation-adjusted principalamount of an inflation-indexed debt instru-ment is the product of the following.

The instrument's outstanding principalamount (determined as if there were noinflation or deflation over the term of theinstrument), multiplied by

The index ratio for that date.

Index ratio. This is a fraction, the nu-merator of which is the value of the referenceindex for the date and the denominator ofwhich is the value of the reference index forthe instrument's issue date.

A qualified reference index measuresinflation and deflation over the term of a debtinstrument. Its value is reset each month toa current value of a single qualified inflationindex (for example, the nonseasonally ad-

justed U.S. City Average All Items ConsumerPrice Index for All Urban Consumers (CPI-U),published by the Bureau of Labor Statisticsof the Department of Labor). The value of theindex for any date between reset dates isdetermined through straight-line interpolation.

The daily index ratios for Treasuryinflation-indexed securities are avail-able on the Internet at:

www.publicdebt.treas.gov.

Form 1099OID. The amount shown in box6 of the Form 1099OID you receive for aninflation-indexed debt instrument may not bethe correct amount to include in income. Forexample, the amount may not be correct ifyou bought the debt instrument (other thanat original issue) or sold it during the year. Ifthe amount shown in box 6 is not correct, youmust figure the OID to report on your returnunder the following rules. For informationabout showing an OID adjustment on your taxreturn, see How To Report OID, earlier.

Figuring OID. Figure the OID on aninflation-indexed debt instrument using oneof the following methods.

The coupon bond method, described inthe following discussion, applies if theinstrument is issued at par, all stated in-terest payable on the instrument is qual-ified stated interest, and the couponshave not been stripped from the instru-ment. This method generally applies, forexample, to Treasury inflation-indexed

securities. The discount bond methodapplies to

any inflation-indexed debt instrument thatdoes not qualify for the coupon bondmethod, such as a stripped instrument.This method is described in section1.12757(e) of the regulations.

Under the coupon bond method, figure theOID you must report for the tax year as fol-lows.

Debt instrument held at the end of thetax year. If you held the debt instrument atthe end of the tax year, your OID for the yearis:

1) The inflation-adjusted principal amount

for the first day on which you held theinstrument during the tax year subtractedfrom

2) The total of the following amounts.

a) The inflation-adjusted principalamount for the day after the last dayof the tax year.

b) Any principal payments you re-ceived during the year.

Debt instrument sold or retired duringthe tax year. If you sold the debt instrumentduring the tax year, or if it was retired, yourOID for the year is:

1) The inflation-adjusted principal amountfor the first day on which you held the

instrument during the tax year subtractedfrom

2) The total of the following amounts.

a) The inflation-adjusted principalamount for the last day on whichyou held the instrument during thetax year.

b) Any principal payments you re-ceived during the year.

Example 18. On February 6, 2000, youbought a 10-year, 3.375% inflation-indexeddebt instrument for $9,831. The stated prin-cipal amount is $10,000 and the inflation-adjusted principal amount for February 6,

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2000, is $10,010.40. You held the debt in-strument until September 1, 2000, when theinflation-adjusted principal amount was$10,116.50. Your OID for the 2000 tax yearis $106.10 ($10,116.50 $10,010.40). Yourbasis in the debt instrument on September1, 2000, was $9,937.10 ($9,831 cost +$106.10 OID for 2000).

Stated interest. Under the coupon bondmethod, you report any stated interest on thedebt instrument under your regular methodof accounting. For example, if you use the

cash method, you generally include in incomefor the tax year any interest payments re-ceived on the instrument during the year.

Deflation adjustments. If your calculationto figure OID on an inflation-indexed debt in-strument produces a negative number, youdo not have any OID. Instead, you have adeflation adjustment. A deflation adjustmentgenerally is used to offset interest incomefrom the debt instrument for the tax year. Thisoffset is shown as an adjustment on yourSchedule B (Form 1040), in the same manneras that used to show an OID adjustment. SeeHow To Report OID, earlier.

You decrease your basis in the debt in-strument by the deflation adjustment used to

offset interest income.

Example 19. Assume the same facts asExample 18, except that you bought the in-strument on July 1, 2000, when the inflation-adjusted principal amount was $10,111.40,and sold the instrument on August 1, 2000,when the inflation-adjusted principal amountwas $10,105.10. Because the OID calculationfor 2000 ($10,105.10 $10,111.40) producesa negative number (negative $6.30), you havea deflation adjustment. You use this deflationadjustment to offset the stated interest re-ported to you on the debt instrument.

Your basis in the debt instrument on Au-gust 1, 2000, is $9,824.70 ($9,831 cost $6.30 deflation adjustment for 2000).

Premiums on inflation-indexed debt in-struments. In general, any premium on aninflation-indexed debt instrument is deter-mined, as of the date you acquire the instru-ment, by assuming that there will be no fur-ther inflation or deflation over the remainingterm of the instrument. You allocate any pre-mium over the remaining term of the instru-ment by making the same assumption. Ingeneral, the premium allocable to a tax yearoffsets the interest otherwise includible in in-come for the year. If there is any excessallocable to the year, this excess generallyoffsets the OID on the instrument for the year.

Figuring OID on StrippedBonds and CouponsIf you strip one or more coupons from a bondand then sell or otherwise dispose of the bondor the stripped coupons, they are treated asseparate debt instruments issued with OID.The holder of a stripped bond has the right toreceive the principal (redemption price) pay-ment. The ho

Documents

US Internal Revenue Service: p1212--2000