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

Information for Owners of OID Debt Instruments

This section is for persons who prepare their own tax returns. It discusses the income tax rules for figuring and reporting OID on long-term debt instruments. It also includes a similar discussion for stripped bonds and coupons, such as zero coupon instruments available through the Department of the Treasury's STRIPS program and government-sponsored enterprises such as the Resolution Funding Corporation. However, the information provided does not cover every situation. More information can be found in the regulations under sections 1271 through 1275 of the Internal Revenue Code.

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

Exceptions.   The rules for reporting OID on long-term instruments do not apply to the following debt instruments.

• U.S. savings bonds.
• Tax-exempt obligations. (However, see Tax-Exempt Bonds and Coupons, later.)
• Obligations issued by individuals before March 2, 1984.
• Loans of $10,000 or less between individuals who are not in the business of lending money. (The dollar limit includes outstanding prior loans by the lender to the borrower.) This exception does not apply if a principal purpose of the loan is to avoid any federal tax.

See chapter 1 of Publication 550 for information about the rules for these and other types of discounted instruments, such as short-term and market discount obligations. Publication 550 also discusses rules for holders of REMIC interests and CDOs.

De minimis rule.   You can treat OID as zero if the total OID on a debt instrument is less than one-fourth of 1% (.0025) of the stated redemption price at maturity multiplied by the number of full years from the date of original issue to maturity. Long-term instruments with de minimis OID are not listed in this publication.

Example 2.   You bought at issuance a 10-year bond with a stated redemption price at maturity of $1,000, issued at $980 with OID of $20. One-fourth of 1% of $1,000 (the stated redemption price) times 10 (the number of full years from the date of original issue to maturity) 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 as Example 2, except the bond was issued at $950. You must report part of the $50 OID each year because it is more than $25.

Choice to report all interest as OID.   Generally, you can choose to treat all interest on a debt instrument acquired after April 3, 1994, as OID and include it in gross income by using the constant yield method. See Figuring OID using the constant yield method under Debt Instruments Issued After 1984, later, for more information.

For this choice, interest includes stated interest, acquisition discount, OID, de minimis OID, market discount, de minimis market discount, and unstated interest, as adjusted by any amortizable bond premium or acquisition premium. See section 1.1272-3 of the regulations for more information.

Purchase after date of original issue.   A debt instrument you purchased after the date of original issue may have premium, acquisition premium, or market discount. If so, the OID reported to you on Form 1099-OID may have to be adjusted. For more information, see Showing an OID adjustment under How To Report OID, later.

Adjustment for premium.   If your debt instrument (other than a contingent payment debt instrument or an inflation-indexed debt instrument) has premium, do not report any OID as ordinary income. Your adjustment is the total OID shown on your Form 1099-OID.

Adjustment for acquisition premium.   If your debt instrument has acquisition premium, reduce the OID you report. Your adjustment is the difference between the OID shown on your Form 1099-OID and the reduced OID amount figured using the rules explained later under Figuring OID on Long-Term Debt Instruments.

Adjustment for market discount.   If your debt instrument has market discount that you choose to include in income currently, increase the OID you report. Your adjustment is the accrued market discount for the year.

See Market Discount Bonds in chapter 1 of Publication 550 for information on how to figure accrued market discount and include it in your income currently and for other information about market discount bonds. If you choose to use the constant yield method to figure accrued market discount, also see Figuring OID on Long-Term Debt Instruments, later. The constant yield method of figuring accrued OID, explained in those discussions under Figuring OID using the constant yield method, is also used to figure accrued market discount.

Sale, exchange, or redemption.   Generally, you treat your gain or loss from the sale, exchange, or redemption of a discounted bond or other debt instrument as a capital gain or loss if you held the bond as a capital asset. If you sold the bond through a broker, you should receive Form 1099-B or an equivalent statement from the broker. Use the Form 1099-B or other statement and your brokerage statements to complete Schedule D (Form 1040).

Your gain or loss is the difference between the amount you realized on the sale, exchange, or redemption and your basis in the debt instrument. Your basis, generally, is your cost increased by the OID you have included in income each year you held it. To determine your gain or loss on a tax-exempt bond, figure your basis in the bond by adding to your cost the OID you would have included in income if the bond had been taxable.

See chapter 4 of Publication 550 for more information about the tax treatment of the sale or redemption of discounted debt instruments.

Example 4.   On November 1, 1999, Larry, a calendar year taxpayer, bought a corporate bond at original issue for $86,235.17. The 15-year bond matures on October 31, 2014, at a stated redemption price of $100,000. The bond provides for semiannual payments of interest at 10%. Assume the bond is a capital asset in Larry's hands. The bond has $13,764.83 of OID ($100,000 stated redemption price at maturity minus $86,235.17 issue price).

On November 1, 2002, Larry sold the bond for $90,000. Including the OID he will report for the period he held the bond in 2002, Larry has included $1,214.48 of OID in income and has increased his basis by that amount to $87,449.65. Larry has realized a gain of $2,550.35. All of Larry's gain is capital gain.

Form 1099-OID

The issuer of the debt instrument (or your broker, if you purchased or held the instrument through a broker) should give you a copy of Form 1099-OID or a similar statement if the accrued OID for the calendar year is $10 or more and the term of the instrument is more than 1 year. Form 1099-OID shows all OID income in box 1 except OID on a U.S. Treasury obligation, which is shown in box 6. It also shows, in box 2, any qualified stated interest you must include in income. (However, any qualified stated interest on Treasury inflation-indexed securities that is not OID can be reported in box 3 of Form 1099-INT.) A copy of Form 1099-OID will be sent to the IRS. Do not attach your copy to your tax return. Keep it for your records.

If you are required to file a tax return and you receive Form 1099-OID showing taxable amounts, you must report these amounts on your return. A 20% accuracy-related penalty may be charged for underpayment of tax due to either of the following reasons.

• Negligence or disregard of rules and regulations.
• Substantial understatement of tax.

Form 1099-OID not received.   If you held an OID instrument for 2002 but did not receive a Form 1099-OID, refer to the later discussions under Figuring OID on Long-Term Debt Instruments for information on the OID you must report.

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

• You bought the debt instrument at a premium or at an acquisition premium.
• The debt instrument is a stripped bond or coupon (including zero coupon instruments backed by U.S. Treasury securities).
• The debt instrument is a contingent payment or inflation-indexed debt instrument.

See the discussions under Figuring OID on Long-Term Debt Instruments or Figuring OID on Stripped Bonds and Coupons, later, for the specific computations

Refiguring interest.   If you disposed of a debt instrument or acquired it from another holder between interest dates, see the discussion under Bonds Sold Between Interest Dates in chapter 1 of Publication 550 for information about refiguring the interest shown in box 2 of Form 1099-OID.

Nominee.   If you are the holder of an OID instrument and you receive a Form 1099-OID that shows your taxpayer identification number and includes amounts belonging to another person, you are considered a nominee. You must file another Form 1099-OID for each actual owner, showing the OID for the owner. Show the owner of the instrument as the recipient and you as the payer.

Complete Form 1099-OID and Form 1096 and file the forms with the Internal Revenue Service Center for your area. You must also give a copy of the Form 1099-OID to the actual owner. However, you are not required to file a nominee return to show amounts belonging to your spouse. See the Form 1099 instructions for more information.

When preparing your tax return, follow the instructions under Showing an OID adjustment in the next discussion.

How To Report OID

Generally, you report your taxable interest and OID income on line 2, Form 1040EZ; line 8a, Form 1040A; or line 8a, Form 1040.

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

• You received a Form 1099-OID as a nominee for the actual owner.
• Your total interest and OID income for the year was more than $1,500.

Form 1040 required.   You must use Form 1040 (you cannot use Form 1040A or Form 1040EZ) if you are reporting more or less OID than the amount shown on Form 1099-OID, other than because you are a nominee. For example, if you paid a premium or an acquisition premium when you purchased the debt instrument, you must use Form 1040 because you will report less OID than shown on Form 1099-OID. Also, you must use Form 1040 if you were charged an early withdrawal penalty.

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

Showing an OID adjustment.   If you use Form 1040 to report more or less OID than shown on Form 1099-OID, list the full OID on line 1, Part I of Schedule B and follow the instructions under (1) or (2), next.

If you use Form 1040A to report the OID shown on a Form 1099-OID you received as a nominee for the actual owner, list the full OID on line 1, Part I of Schedule 1 and follow the instructions under (1).

1. If the OID, as adjusted, is less than the amount shown on Form 1099-OID, show the adjustment as follows.
   1. Under your last entry on line 1, subtotal all interest and OID income listed on line 1.
   2. Below the subtotal, write Nominee Distribution or OID Adjustment and show the OID you are not required to report.
   3. Subtract that OID from the subtotal and enter the result on line 2.
2. If the OID, as adjusted, is more than the amount shown on Form 1099-OID, show the adjustment as follows.
   1. Under your last entry on line 1, subtotal all interest and OID income listed on line 1.
   2. Below the subtotal, write OID Adjustment and show the additional OID.
   3. Add that OID to the subtotal and enter the result on line 2.

Figuring OID on Long-Term Debt Instruments

How you figure the OID on a long-term debt instrument depends on the date it was issued. It also may depend on the type of the instrument. There are different rules for each of the following debt instruments.

1. Corporate debt instruments issued after 1954 and before May 28, 1969, and government instruments issued after 1954 and before July 2, 1982.
2. Corporate debt instruments issued after May 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 described in (5) and (6)).
5. Contingent payment debt instruments issued after August 12, 1996.
6. Inflation-indexed debt instruments (including Treasury inflation-indexed securities) issued after January 5, 1997.

Zero coupon instrument.   The rules for figuring OID on zero coupon instruments backed by U.S. Treasury securities are discussed under Figuring OID on Stripped Bonds and Coupons, later.

Corporate Debt Instruments Issued After 1954 and
Before May 28, 1969,
and Government Instruments
Issued After 1954 and
Before July 2, 1982

If you hold these debt instruments as capital assets, you include OID in income only in the year the instrument is sold, exchanged, or redeemed, and only if you have a gain. The OID, which is taxed as ordinary income, generally equals the following amount.

number of full months you held the instrument   number of full months from date of original issue to date of maturity

X

original issue discount

The balance of the gain is capital gain. If there is a loss on the sale of the instrument, the entire loss is a capital loss and no OID is reported.

Corporate Debt Instruments Issued After May 27, 1969,
and Before July 2, 1982

If you hold these debt instruments as capital assets, you must include part of the discount in income each year you own the instruments. For information about showing the correct OID on your tax return, see the discussion under How To Report OID, earlier. Your basis in the instrument is increased by the OID you include in income.

Form 1099-OID.   You should receive a Form 1099-OID showing OID for the part of the year you held the bond. However, if you paid an acquisition premium, you may need to refigure the OID to report on your tax return. See Reduction for acquisition premium, later.

Form 1099-OID not received.   If you held an OID instrument in 2002 but did not receive a Form 1099-OID, refer to Section I-A later in this publication. The OID listed is for each $1,000 of redemption price. You must adjust the listed amount if your debt instrument has a different principal amount. For example, if you have an instrument with a $500 principal amount, use one-half the listed amount to figure your OID.

If you held the instrument the entire year, use the OID shown in Section I-A for calendar year 2002. (If your instrument is not listed in Section I-A, consult the issuer for information about the issue price and the OID that accrued for 2002.) If you did not hold the instrument the entire year, figure your OID using the following method.

1. Divide the OID shown for 2002 by 12.
2. Multiply the result in (1) by the number of complete and partial months (for example, 6½ months) you held the debt instrument in 2002. This is the OID to include in income unless you paid an acquisition premium. The reduction for acquisition premium is discussed next.

Reduction for acquisition premium.   If you bought the debt instrument at an acquisition premium, figure the OID to include in income as follows.

1. Divide the total OID on the instrument by the number of complete months, and any part of a month, from the date of original issue to the maturity date. This is the monthly OID.
2. Subtract from your cost the issue price and the accumulated OID from the date of issue to the date of purchase. (If the result is zero or less, stop here. You did not pay an acquisition premium.)
3. Divide the amount figured in (2) by the number of complete months, and any part of a month, from the date of your purchase to the maturity date.
4. Subtract the amount figured in (3) from the amount figured in (1). This is the OID to include in income for each month you hold the instrument during the year.

Example 5.   On June 1, 1982, Acme Corporation issued 30-year bonds at 90% of the principal amount. On February 1, 2002, you bought Acme bonds with a $10,000 principal amount on the open market for $9,800. The amount you must include in income is figured as follows:

1)	Monthly OID ($1,000 total OID ÷ 360 months)		$2.78
2)	Your cost	$9,800.00
	Minus: Issue price	9,000.00
		$ 800.00
	Minus: Accumulated OID ($2.78 × 236 months)	656.08
	Acquisition premium	$ 143.92
3)	Acquisition premium divided by number of complete and partial months from date of purchase to maturity date ($143.92 ÷ 124 months)		1.16
4)	Line 1 minus line 3		$1.62

You must include $17.82 ($1.62 × 11 months) in income for 2002 because the acquisition premium reduces the ratable monthly portion of OID.

Example 6.   Assume the same facts as in Example 5, except that you bought the bonds for $9,656.08. In this case, your cost equals the original issue price plus accumulated OID. Therefore, you did not pay an acquisition premium. For 2002, include $30.58 ($2.78 × 11 months) of OID in income.

Example 7.   Assume the same facts as in Example 5, except that you bought the bonds for $9,400. In this case, you must include $30.58 of OID in your 2002 income. You did not pay an acquisition premium because you bought the bonds for less than the sum of the original issue price plus accumulated OID. The bonds have market discount, which must be reported under the rules explained in chapter 1 of Publication 550.

Transfers during the month.   If you buy or sell a debt instrument on any day other than the same day of the month as the date of original issue, the ratable monthly portion of OID for the month of sale is divided between the seller and the buyer according to the number of days each held the instrument. Your holding period for this purpose begins the day you acquire the instrument and ends the day before you dispose of it.

Example 8.   Assume the same facts as in Example 5, except that you bought the bonds on September 14, 2001, for $9,643.38 ($9,000 issue price plus $643.38 accumulated OID) and sold them on March 14, 2002. You figure the OID to include in your 2001 income as follows.

Amount for September ($2.78 × 17 days ÷ 30 days)	$ 1.58
Amount for complete months October through December ($2.78 × 3 months)	8.34
Total to include in 2001 income	$9.92

You figure the OID to include in your 2002 income as follows.

Amount for complete months January through February ($2.78 × 2 months)	$ 5.56
Amount for March ($2.78 × 13 days ÷ 31 days)	1.17
Total to include in 2002 income	$6.73

You increase your basis in the bonds by the OID you include in income. Your basis in the bonds when you sold them is $9,660.03 ($9,643.38 cost + $9.92 OID for 2001 and $6.73 OID for 2002).

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