Information for Brokers & Other Middlemen

The following discussions contain specific instructions for brokers and middlemen who hold or redeem a debt instrument for the owner.

In general, you must file a Form 1099 for the debt instrument if the interest or OID to be included in the owner's income for 2001 totals $10 or more. You also must file a Form 1099 if you were required to deduct and withhold tax, even if the interest or OID is less than $10. See Backup Withholding, later.

If you must file a Form 1099, furnish a copy to the owner of the debt instrument by January 31, 2002. By February 28, 2002, (April 1, 2002, if you file electronically), file all your Forms 1099 with the IRS, accompanied by Form 1096.

For more information, including penalties for failure to file (or furnish) required information returns or statements, see the 2001 General Instructions for Form 1099, 1098, 5498, and W-2G.

Short-Term Obligations Redeemed at Maturity

If you redeem a short-term discount obligation for the owner at maturity, you must report the discount as interest on Form 1099-INT.

To figure the discount, use the purchase price shown on the owner's copy of the purchase confirmation receipt or similar record, or the price shown in your transaction records.

If you sell the obligation for the owner before maturity, you must file Form 1099-B to reflect the gross proceeds to the seller. Do not report the accrued discount to the date of sale on either Form 1099-INT or Form 1099-OID.

If the owner's purchase price cannot be determined, figure the discount as if the owner had purchased the obligation at its original issue price. A special rule is used to determine the original issue price for information reporting on U.S. Treasury bills (T-bills) listed in Section III-A. Under this rule, you treat as the original issue price of the T-bill the noncompetitive (weighted average of accepted auction bids) discount price for the longest-maturity T-bill maturing on the same date as the T-bill being redeemed. This noncompetitive discount price is the issue price (expressed as a percent of principal) shown in Section III-A.

A similar rule is used to figure the discount on short-term discount obligations issued by the organizations listed in Section III-B through Section III-G.

Example 1. There are 13-week and 26-week T-bills maturing on the same date as the T-bill being redeemed. The price actually paid by the owner cannot be established by owner or middleman records. You treat as the issue price of the T-bill the noncompetitive discount price (expressed as a percent of principal) shown in Section III-A for a 26-week bill maturing on the same date as the T-bill redeemed. The interest you report on Form 1099-INT is the discount (per $1,000 of principal) shown in Section III-A for that obligation.

Long-Term Debt Instruments

If you hold a long-term OID debt instrument as a nominee for the true owner, you generally must file Form 1099-OID. For this purpose, you can rely on Section I of the OID list to determine the following information.

• Whether an instrument has OID.
• The OID to be reported on the Form 1099-OID.

In general, you must report OID on publicly offered, long-term debt instruments listed in Section I. You also may report OID on other long-term debt instruments.

Form 1099-OID. On Form 1099-OID for 2001, show the following information.

• Box 1. The OID for the actual dates the owner held the instruments during 2001. To determine this amount, see Figuring OID, next.
• Box 2. The qualified stated interest paid or credited during the calendar year. Interest reported here is not reported on Form 1099-INT. The qualified stated interest on Treasury inflation-indexed securities may be reported in box 3 of Form 1099-INT instead.
• Box 3. Any interest or principal forfeited because of an early withdrawal that the owner can deduct from gross income. Do not reduce the amounts in boxes 1 and 2 by the forfeiture.
• Box 4. Any backup withholding for this instrument.
• Box 5. The CUSIP number, if any. If there is no CUSIP number, give a description of the instrument, including the abbreviation for the stock exchange, the abbreviation used by the stock exchange for the issuer, the coupon rate, and the year of maturity (for example, NYSE XYZ 12.50 2002). If the issuer of the instrument is other than the payer, show the name of the issuer in this box.
• Box 6. The OID on a U.S. Treasury obligation for the part of the year the owner held the instrument.

Figuring OID. You can determine the OID on a long-term debt instrument by using either of the following.

• Section I of the OID list.
• The income tax regulations.

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

If the owner held the debt instrument for less than the entire calendar year, figure the OID to report as follows.

1. Look up the daily OID for the first 2001 accrual period during which the owner held the instrument.
2. Multiply the daily OID by the number of days in 2001 the owner held the instrument during that accrual period.
3. Repeat steps (1) and (2) for any remaining 2001 accrual periods during which the owner held the instrument.
4. Add the results in steps (2) and (3) to determine the owner's OID per $1,000 of stated redemption price at maturity.
5. If necessary, adjust the OID in (4) to reflect the instrument's stated redemption price at maturity.

Report the result in box 1 of Form 1099-OID.

Using the income tax regulations. Instead of using Section I to figure OID, you can use the regulations under sections 1272 through 1275 of the Internal Revenue Code. For example, under the regulations, you can use monthly accrual periods in figuring OID for a debt instrument issued after April 3, 1994, that provides for monthly payments. (If you use Section I-B, the OID is figured using 6-month accrual periods.)

For a general explanation of the rules for figuring OID under the regulations, see Figuring OID on Long-Term Debt Instruments under Information for Owners of OID Debt Instruments, later.

Certificates of Deposit

If you hold a bank certificate of deposit (CD) as a nominee, you must determine whether the CD has OID and any OID includible in the income of the owner. You must file an information return showing the reportable interest and OID, if any, on the CD. These rules apply whether or not you sold the CD to the owner. Report OID on a CD in the same way as OID on other debt instruments. See Short-Term Obligations Redeemed at Maturity and Long-Term Debt Instruments, earlier.

Bearer Bonds and Coupons

If a coupon from a bearer bond is presented to you for collection before the bond matures, you generally must report the interest on Form 1099-INT. However, do not report the interest if either of the following apply.

• You hold the bond as a nominee for the true owner.
• The payee is a foreign person. See Payments to a foreign person under Backup Withholding, later.

Because you cannot assume the presenter of the coupon also owns the bond, you should not report OID on the bond on Form 1099-OID. The coupon may have been "stripped" (separated) from the bond and separately purchased.

However, if a long-term bearer bond on the OID list in this publication is presented to you for redemption upon call or maturity, you should prepare a Form 1099-OID showing the OID for that calendar year, as well as any coupon interest payments collected at the time of redemption.

Backup Withholding

If you report OID on Form 1099-OID or interest on Form 1099-INT for 2002, you may be required to apply backup withholding to the reportable payment at a rate of 30%. (For 2001, the rate was 30.5% for payments after August 6 and 31% for earlier payments.) The backup withholding tax is deducted at the time a cash payment is made.

Backup withholding generally applies in the following situations.

1. The payee does not give you a taxpayer identification number (TIN).
2. The IRS notifies you that the payee gave an incorrect TIN.
3. The IRS notifies you that the payee is subject to backup withholding due to payee underreporting.
4. For debt instruments acquired after 1983:
1. The payee does not certify, under penalties of perjury, that he or she is not subject to backup withholding under (3).
2. The payee does not certify, under penalties of perjury, that the TIN given is correct.

However, for short-term discount obligations (other than government obligations), bearer bond coupons, and U.S. savings bonds, backup withholding applies only if the payee does not give you a TIN or gives you an obviously incorrect number for a TIN.

Short-term obligations. Backup withholding applies to OID on a short-term obligation only when the OID is paid at maturity. However, backup withholding applies to any interest payable before maturity when the interest is paid or credited.

If the owner of a short-term obligation at maturity is not the original owner and can establish the purchase price of the obligation, the amount subject to backup withholding must be determined by treating the purchase price as the issue price. However, you can choose to disregard that price if it would require significant manual intervention in the computer or recordkeeping system used for the obligation. If the purchase price of a listed obligation is not established or is disregarded, you must use the issue price shown in Section III.

Long-term obligations. If no cash payments are made on a long-term obligation before maturity, backup withholding applies only at maturity. The amount subject to backup withholding is the OID includible in the owner's gross income for the calendar year when the obligation matures. The amount to be withheld is limited to the cash paid.

Registered long-term obligations with cash payments. If a registered long-term obligation has cash payments before maturity, backup withholding applies when a cash payment is made. The amount subject to backup withholding is the total of the qualified stated interest (defined earlier under Definitions) and OID includible in the owner's gross income for the calendar year when the payment is made. If more than one cash payment is made during the year, the OID subject to withholding for the year must be allocated among the expected cash payments in the ratio that each bears to the total of the expected cash payments. For any payment, the required withholding is limited to the cash paid.

Payee not the original owner. If the payee is not the original owner of the obligation, the OID subject to backup withholding is the OID includible in the gross income of all owners during the calendar year (without regard to any amount paid by the new owner at the time of transfer). The amount subject to backup withholding at maturity of a listed obligation must be determined using the issue price shown in Section I.

Bearer long-term obligations with cash payments. If a bearer long-term obligation has cash payments before maturity, backup withholding applies when the cash payments are made. For payments before maturity, the amount subject to withholding is the qualified stated interest (defined earlier under Definitions) includible in the owner's gross income for the calendar year. For a payment at maturity, the amount subject to withholding is only the total of any qualified stated interest paid at maturity and the OID includible in the owner's gross income for the calendar year when the obligation matures. The required withholding at maturity is limited to the cash paid.

Sales and redemptions. If you report the gross proceeds from a sale, exchange, or redemption of a debt instrument on Form 1099-B for 2002, you may be required to withhold 30% of the amount reported. (For 2001, the backup withholding rate was 30.5% for payments after August 6 and 31% for earlier payments.) Backup withholding applies in the following situations.

• The payee does not give you a TIN.
• The IRS notifies you that the payee gave an incorrect TIN.
• For debt instruments held in an account opened after 1983, the payee does not certify, under penalties of perjury, that the TIN given is correct.

Payments outside the United States to U.S. person. The requirements for backup withholding and information reporting apply to payments of OID and interest made outside the United States to a U.S. person, a controlled foreign corporation, or a foreign person at least 50% of whose income for the preceding 3-year period is effectively connected with the conduct of a U.S. trade or business.

Payments to foreign person. The following discussions explain the rules for backup withholding and information reporting on payments to foreign persons.

U.S.-source amount. Backup withholding and information reporting are not required for payments of U.S.-source OID, interest, or proceeds from a sale or redemption of an OID instrument if the payee has given you proof (generally the appropriate Form W-8 or an acceptable substitute) that the payee is a foreign person. A U.S. resident is not a foreign person. For proof of the payee's foreign status, you can rely on the appropriate Form W-8 or on documentary evidence for payments made outside the United States to an offshore account or, in case of broker proceeds, a sale effected outside the United States. Receipt of the appropriate Form W-8 does not relieve you from information reporting and backup withholding if you actually know the payee is a U.S. person.

For information about the 30% withholding tax that may apply to payments of U.S.-source OID or interest to foreign persons, see Publication 515.

Foreign-source amount. Backup withholding and information reporting are not required for payments of foreign-source OID and interest made outside the United States. However, if the payments are made inside the United States, the requirements for backup withholding and information reporting will apply unless the payee has given you the appropriate Form W-8 or acceptable substitute as proof that the payee is a foreign person.

More information. See sections 1.6049-5 of the regulations for more information about backup withholding and information reporting on foreign-source amounts or payments to foreign persons.

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