Guide to Original Issue Discount (OID) Instruments

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Guide to Original Issue Discount (OID) Instruments Powered By Docstoc
					               Publication 1212
               (Rev. December 2011)                 Contents
Department     Cat. No. 61273T
                                                    Photographs of Missing Children . . . . .                              1
of the                                              Introduction . . . . . . . . . . . . . . . . . . . . .                 1


               Guide to
Treasury
                                                    Definitions . . . . . . . . . . . . . . . . . . . . . .                2
Internal
Revenue                                             Debt Instruments on the OID List . . . . . .                           3

               Original
Service
                                                    Debt Instruments Not on the OID
                                                       List . . . . . . . . . . . . . . . . . . . . . . . .                3


               Issue                                Information for Brokers and Other
                                                        Middlemen . . . . . . . . . . . . . .
                                                        Short-Term Obligations
                                                                                                   .....                   3



               Discount (OID)                               Redeemed at Maturity . . . .
                                                        Long-Term Debt Instruments . .
                                                                                                   .
                                                                                                   .
                                                                                                       .
                                                                                                       .
                                                                                                           .
                                                                                                           .
                                                                                                               .
                                                                                                               .
                                                                                                                   .
                                                                                                                   .   .
                                                                                                                           3
                                                                                                                           4
                                                                                                                           4

               Instruments
                                                        Certificates of Deposit . . . . . . .      .   .   .   .   .   .
                                                        Bearer Bonds and Coupons . . .             .   .   .   .   .   .   4
                                                        Backup Withholding . . . . . . . .         .   .   .   .   .   .   4
                                                    Information for Owners of OID
                                                        Debt Instruments . . . . . . . . . .           .... 5
                                                        Form 1099-OID . . . . . . . . . . . .          .....6
                                                        How To Report OID . . . . . . . . .            .....6
                                                        Figuring OID on Long-Term Debt
                                                            Instruments . . . . . . . . . . . .        ....                7
                                                        Figuring OID on Stripped Bonds
                                                            and Coupons . . . . . . . . . . .          . . . . 11
                                                    How To Get Tax Help . . . . . . . . . . . . . . 13
                                                    Index . . . . . . . . . . . . . . . . . . . . . . . . . . 16




                                                    Photographs of
                                                    Missing Children
                                                    The Internal Revenue Service is a proud partner
                                                    with the National Center for Missing and Ex-
                                                    ploited Children. Photographs of missing chil-
                                                    dren selected by the Center may appear in this
                                                    publication on pages that would otherwise be
                                                    blank. You can help bring these children home
                                                    by looking at the photographs and calling
                                                    1-800-THE-LOST (1-800-843-5678) if you rec-
                                                    ognize a child.




                                                    Introduction
                                                    This publication has two purposes. Its primary
                                                    purpose is to help brokers and other middlemen
                                                    identify publicly offered original issue discount
                                                    (OID) debt instruments they may hold as nomi-
                                                    nees for the true owners, so they can file Forms
                                                    1099-OID or Forms 1099-INT as required. The
                                                    other purpose of the publication is to help own-
                                                    ers of publicly offered OID debt instruments de-
                                                    termine how much OID to report on their income
                                                    tax returns.
                                                        The list of publicly offered OID debt instru-
                                                    ments (OID list) is on the IRS website. The
                                                    original issue discount tables, Sections I-A
                                                    through III-G, are only available on the IRS web-
                  Get forms and other information   site at http://www.irs.gov/formspubs/article/
                  faster and easier by:             0,,id=213465,00.html. The tables are posted to
                                                    the website in late November or early December
                                                    of each year. The information on these lists
                  Internet IRS.gov                  come from the issuers of the debt instruments
                                                    and from financial publications and is updated

Dec 09, 2011
annually. (However, see Debt Instruments Not         address below and receive a response within 10         the debt instrument was purchased at a pre-
on the OID List, later.)                             days after your request is received.                   mium. See Premium, later.
    Brokers and other middlemen can rely on
                                                         Internal Revenue Service                           Adjusted issue price. The adjusted issue
this list to determine, for information reporting
                                                         1201 N. Mitsubishi Motorway                        price of a debt instrument at the beginning of an
purposes, whether a debt instrument was issued
                                                         Bloomington, IL 61705-6613                         accrual period is used to figure the OID allocable
at a discount and the OID to be reported on
information returns. However, because the in-                                                               to that period. In general, the adjusted issue
formation in the list has generally not been veri-     Tax questions. If you have a tax question,           price at the beginning of the debt instrument’s
fied by the IRS as correct, the following tax        check the information available on IRS.gov or          first accrual period is its issue price. The ad-
matters are subject to change upon examination       call 1-800-829-1040. We cannot answer tax              justed issue price at the beginning of any subse-
by the IRS.                                          questions sent to either of the above addresses.       quent accrual period is the sum of the issue
                                                                                                            price and all the OID includible in income before
  • The OID reported by owners of a debt                                                                    that accrual period minus any payment previ-
    instrument on their income tax returns.          Useful Items
                                                     You may want to see:                                   ously made on the debt instrument, other than a
  • The issuer’s classification of an instrument                                                            payment of qualified stated interest.
    as debt for federal income tax purposes.           Publication                                          Debt instrument. The term “debt instrument”
                                                       t 515     Withholding of Tax on Nonresident          means any instrument or contractual arrange-
Instructions for issuers of OID debt instru-                     Aliens and Foreign Entities                ment that constitutes indebtedness under gen-
ments. In general, issuers of publicly offered                                                              eral principles of federal income tax law
OID debt instruments must, within 30 days after        t 550     Investment Income and Expenses
                                                                                                            (including, for example, a bond, debenture,
the issue date, report information about the in-       t 938     Real Estate Mortgage Investment            note, certificate, or other evidence of indebted-
struments to the IRS on Form 8281, Information                   Conduits (REMICs) Reporting                ness). It generally does not include an annuity
Return for Publicly Offered Original Issue Dis-                  Information (And Other                     contract.
count Instruments. See the form instructions for                 Collateralized Debt Obligations
more information.                                                (CDOs)).                                   Issue price. For debt instruments listed in
                                                                                                            Section I-A and Section I-B, the issue price gen-
         Issuers should report errors in and                                                                erally is the initial offering price to the public
         omissions from the list in writing at the     Form (and Instructions)
                                                                                                            (excluding bond houses and brokers) at which a
         following address:                            t 1096 Annual Summary and Transmittal of             substantial amount of these instruments was
                                                              U.S. Information Returns                      sold.
     IRS OID Publication Project
     SE:W:CAR:MP:T                                     t 1099-B Proceeds From Broker and
                                                                                                            Market discount. Market discount arises
     1111 Constitution Ave. NW, IR-6526                       Barter Exchange Transactions
                                                                                                            when a debt instrument purchased in the secon-
     Washington, D.C. 20224                            t 1099-INT Interest Income                           dary market has decreased in value since its
REMIC and CDO information reporting re-                                                                     issue date, generally because of an increase in
                                                       t 1099-OID Original Issue Discount
quirements. Brokers and other middlemen                                                                     interest rates. An OID debt instrument has mar-
must follow special information reporting re-          t Schedule B (Form 1040) Interest and                ket discount if your adjusted basis in the debt
quirements for real estate mortgage investment                Ordinary Dividends                            instrument immediately after you acquired it
conduits (REMIC) regular, and collateralized                                                                (usually its purchase price) was less than the
                                                       t Schedule D (Form 1040) Capital Gains
debt obligations (CDO) interests. The rules are                                                             debt instrument’s issue price plus the total OID
                                                              and Losses
explained in Publication 938, Real Estate Mort-                                                             that accrued before you acquired it. The market
gage Investment Conduits (REMICs) Reporting             t W-8 Instructions for the Requester of             discount is the difference between the issue
Information (And Other Collateralized Debt Obli-                 Forms W-8BEN, W-8ECI, W-8EXP,              price plus accrued OID and your adjusted basis.
gations (CDOs)).                                                 and W-8IMY
    Holders of interests in REMICs and CDOs              See How To Get Tax Help near the end of            Premium. A debt instrument is purchased at a
should see chapter 1 of Publication 550 for infor-   the text for information about getting publica-        premium if its adjusted basis immediately after
mation on REMICs and CDOs.                           tions and forms.                                       purchase is greater than the total of all amounts
                                                                                                            payable on the debt instrument after the
Comments and suggestions. We welcome                                                                        purchase date, other than qualified stated inter-
your comments about this publication and your                                                               est. The premium is the excess of the adjusted
suggestions for future editions.
   You can write to us at the following address:
                                                     Definitions                                            basis over the payable amounts. See Publica-
                                                                                                            tion 550 for information on the tax treatment of
                                                     The following terms are used throughout this           bond premium.
    IRS Tax Forms and Publications
    SE:W:CAR:MP:T:B                                  publication. “Original issue discount” is defined      Qualified stated interest. In general, quali-
    1111 Constitution Ave. NW, IR-6526               first. The other terms are listed alphabetically.      fied stated interest is stated interest that is un-
    Washington, D.C. 20224                                                                                  conditionally payable in cash or property (other
                                                     Original issue discount (OID). OID is a form
                                                     of interest. It is the excess of a debt instrument’s   than debt instruments of the issuer) at least
    We respond to many letters by telephone.         stated redemption price at maturity over its issue     annually over the term of the debt instrument at
Therefore, it would be helpful if you would in-      price (acquisition price for a stripped bond or        a single fixed rate.
clude your daytime phone number, including the       coupon). Zero coupon bonds and debt instru-
area code, in your correspondence.                                                                          Stated redemption price at maturity. A debt
                                                     ments that pay no stated interest until maturity
    You can email us at taxforms@irs.gov.                                                                   instrument’s stated redemption price at maturity
                                                     are examples of debt instruments that have OID.
Please put “Publications Comment” on the sub-                                                               is the sum of all amounts (principal and interest)
ject line. You can also send us comments from        Accrual period. An accrual period is an inter-         payable on the debt instrument other than quali-
www.irs.gov/formspubs/, select “Comment on           val of time used to measure OID. The length of         fied stated interest.
Tax Forms and Publications” under “Information       an accrual period can be 6 months, a year, or
                                                     some other period, depending on when the debt          Yield to maturity (YTM). In general, the YTM
about.”
                                                     instrument was issued.                                 is the discount rate that, when used in figuring
    Although we cannot respond individually to
                                                                                                            the present value of all principal and interest
each comment received, we do appreciate your
                                                     Acquisition premium. Acquisition premium is            payments, produces an amount equal to the
feedback and will consider your comments as
                                                     the excess of a debt instrument’s adjusted basis       issue price of the debt instrument. The YTM is
we revise our tax products.
                                                     immediately after purchase, including purchase         generally shown on the face of the debt instru-
  Ordering forms and publications. Visit             at original issue, over the debt instrument’s ad-      ment or in the literature you receive from your
www.irs.gov/formspubs/ to download forms and         justed issue price at that time. A debt instrument     broker. If you do not have this information, con-
publications, call 1-800-829-3676, or write to the   does not have acquisition premium, however, if         sult your broker, tax advisor, or the issuer.

Page 2                                                                                                                Publication 1212 (December 2011)
                                                      the Resolution Funding Corporation. This sec-             • Commercial paper and banker’s accept-
Debt Instruments                                      tion also includes debt instruments backed by
                                                      U.S. Treasury securities that represent owner-
                                                                                                                     ances issued at a discount.
                                                                                                                • Obligations issued at a discount by individ-
on the OID List                                       ship interests in those securities.
                                                          The obligations listed in Section II are ar-
                                                                                                                     uals.

The OID list on the IRS website can be used by        ranged by maturity date. The amounts listed are           • Foreign obligations not traded in the
brokers and other middlemen to prepare infor-         the total OID for a calendar year per $1,000 of                United States and obligations not issued in
mation returns.                                       redemption price.                                              the United States.

         If you own a listed debt instrument, you     Section III. This section contains short-term
  !      generally should not rely on the infor-
         mation in the OID list to determine (or
                                                      discount obligations.

                                                                                                              Information for
 CAUTION

compare) the OID to be reported on your tax             • Section III-A: Short-Term U.S. Treasury
return. The OID amounts listed are figured with-          Bills.
out reference to the price or date at which you         • Section III-B: Student Loan Marketing As-           Brokers and
acquired the debt instrument. For information
about determining the OID to be reported on
                                                          sociation.
                                                                                                              Other Middlemen
your tax return, see the instructions for figuring      • Section III-C: Federal Home Loan Banks.
                                                                                                              The following discussions contain specific in-
OID under Information for Owners of OID Debt            • Section III-D: Federal National Mortgage            structions for brokers and middlemen who hold
Instruments, later.                                       Association.
                                                                                                              or redeem a debt instrument for the owner.
    The following discussions explain what infor-
                                                        • Section III-E: Federal Farm Credit Bank.                 In general, you must file a Form 1099 for the
mation is contained in each section of the list.
                                                        • Section III-F: Federal Home Loan Mort-              debt instrument if the interest or OID to be in-
Section I. This section contains publicly of-             gage Corporation.                                   cluded in the owner’s income for a calendar year
fered, long-term debt instruments.                                                                            totals $10 or more. You also must file a Form
                                                        • Section III-G: Federal Agricultural Mort-           1099 if you were required to deduct and withhold
  • Section I-A: Corporate Debt Instruments               gage Corporation.                                   tax, even if the interest or OID is less than $10.
      Issued Before 1985.                                                                                     See Backup Withholding, later.
  • Section I-B: Corporate Debt Instruments                    Information that supplements Section                If you must file a Form 1099, furnish a copy
      Issued After 1984.                                       III-A is available on the Internet at http:/   to the owner of the debt instrument by January
                                                               /www.treasurydirect.gov/tdhome.htm.            31 in the year it is due. File all your Forms 1099
  • Section I-C: Inflation-Indexed Debt Instru-                                                               with the IRS, accompanied by Form 1096, by
      ments.                                              The short-term obligations listed in this sec-      February 28 in the year it is due (March 31 if you
                                                      tion are arranged by maturity date. For each            file electronically).
   For each publicly offered debt instrument in       obligation, the list contains the CUSIP number,
Section I, the list contains the following informa-   maturity date, issue date, issue price (expressed       Electronic payee statements. You can issue
tion.                                                 as a percent of principal), and discount to be          Form 1099-OID electronically with the consent
                                                      reported as interest for a calendar year per
  • The name of the issuer.                           $1,000 of redemption price. Brokers and other
                                                                                                              of the recipient.
  • The Committee on Uniform Security Iden-           middlemen should rely on the issue price infor-         More information. For more information, in-
      tification Procedures (CUSIP) number.           mation in Section III only if they are unable to        cluding penalties for failure to file (or furnish)
                                                      determine the price actually paid by the owner.
  • The issue date.                                                                                           required information returns or statements, see
                                                                                                              the General Instructions for Certain Information
  • The maturity date.                                                                                        Returns (Forms 1098, 1099, 3921, 3922, 5498,
  • The issue price expressed as a percent of                                                                 and W-2G) for the appropriate calendar year.
      principal or of stated redemption price at      Debt Instruments
      maturity.
                                                      Not on the OID List                                     Short-Term Obligations
  • The annual stated or coupon interest rate.                                                                Redeemed at Maturity
      (This rate is shown as 0.00 if no annual        The list of debt instruments discussed earlier
      interest payments are provided.)                does not contain the following items.                   If you redeem a short-term discount obligation
                                                                                                              for the owner at maturity, you must report the
  • The yield to maturity will be added to Sec-         • U.S. savings bonds.                                 discount as interest on Form 1099-INT.
      tion I-B for bonds issued after December                                                                    To figure the discount, use the purchase
      31, 2006.
                                                        • Certificates of deposit and other
                                                          face-amount certificates issued at a dis-           price shown on the owner’s copy of the
  • The total OID accrued up to January 1 of a            count, including syndicated certificates of         purchase confirmation receipt or similar record,
      calendar year. (This information is not             deposit.                                            or the price shown in your transaction records.
      available for every instrument.)                                                                                   If you sell the obligation for the owner
                                                        • Obligations issued by tax-exempt organi-
  • For long-term debt instruments issued af-             zations.                                               !       before maturity, you must file Form
                                                                                                                         1099-B to reflect the gross proceeds to
      ter July 1, 1982, the daily OID for the ac-                                                              CAUTION

      crual periods falling in a calendar year and
                                                        • OID debt instruments that matured or                the seller. Do not report the accrued discount to
                                                          were entirely called by the issuer before           the date of sale on either Form 1099-INT or
      a subsequent year.
                                                          the tables were posted on the IRS web-              Form 1099-OID.
  • The total OID per $1,000 of principal or              site.
                                                                                                                  If the owner’s purchase price cannot be de-
      maturity value for a calendar year and a
                                                        • Mortgage-backed securities and mortgage             termined, figure the discount as if the owner had
      subsequent year.
                                                          participation certificates.                         purchased the obligation at its original issue
                                                                                                              price. A special rule is used to determine the
Section II. This section contains stripped cou-
                                                        • Long-term OID debt instruments issued               original issue price for information reporting on
                                                          before May 28, 1969.
pons and principal components of U.S. Treasury                                                                U.S. Treasury bills (T-bills) listed in Section III-A.
and Government-Sponsored Enterprise debt in-            • Short-term obligations, other than the obli-        Under this rule, you treat as the original issue
struments. These stripped components are                  gations listed in Section III.                      price of the T-bill the noncompetitive (weighted
available through the Department of the Trea-                                                                 average of accepted auction bids) discount price
sury’s Separate Trading of Registered Interest
                                                        • Debt instruments issued at a discount by            for the longest-maturity T-bill maturing on the
                                                          states or their political subdivisions.
and Principal of Securities (STRIPS) program                                                                  same date as the T-bill being redeemed. This
and government-sponsored enterprises such as            • REMIC regular interests and CDOs.                   noncompetitive discount price is the issue price

Publication 1212 (December 2011)                                                                                                                           Page 3
(expressed as a percent of principal) shown in         Figuring OID. You can determine the OID on              • You hold the bond as a nominee for the
Section III-A.                                         a long-term debt instrument by using either of             true owner.
    A similar rule is used to figure the discount on   the following.
                                                                                                               • The payee is a foreign person. See Pay-
short-term discount obligations issued by the            • Section I of the OID list.                             ments to foreign person under Backup
organizations listed in Section III-B through Sec-                                                                Withholding, later.
tion III-G.                                              • The income tax regulations.
                                                                                                             Because you cannot assume the presenter of
   Example 1. There are 13-week and                       Using Section I. If the owner held the debt        the coupon also owns the bond, you should not
26-week T-bills maturing on the same date as           instrument for the entire calendar year, report       report OID on the bond on Form 1099-OID. The
the T-bill being redeemed. The price actually          the OID shown in Section I for the calendar year.     coupon may have been “stripped” (separated)
paid by the owner cannot be established by             Because OID is listed for each $1,000 of stated       from the bond and separately purchased.
owner or middleman records. You treat as the           redemption price at maturity, you must adjust
                                                                                                               However, if a long-term bearer bond on the
issue price of the T-bill the noncompetitive dis-      the listed amount to reflect the debt instrument’s
                                                                                                             OID list is presented to you for redemption upon
                                                       actual stated redemption price at maturity. For
count price (expressed as a percent of principal)                                                            call or maturity, you should prepare a Form
                                                       example, if the debt instrument’s stated redemp-
shown in Section III-A for a 26-week bill matur-                                                             1099-OID showing the OID for that calendar
                                                       tion price at maturity is $500, report one-half the
ing on the same date as the T-bill redeemed.                                                                 year, as well as any coupon interest payments
                                                       listed OID.
The interest you report on Form 1099-INT is the                                                              collected at the time of redemption.
                                                            If the owner held the debt instrument for less
OID (per $1,000 of principal) shown in Section
                                                       than the entire calendar year, figure the OID to
III-A for that obligation.
                                                       report as follows.                                    Backup Withholding
Long-Term                                               1. Look up the daily OID for the first accrual       If you report OID on Form 1099-OID or interest
                                                                                                             on Form 1099-INT for a calendar year, you may
Debt Instruments                                           period in the calendar year during which
                                                                                                             be required to apply backup withholding to the
                                                           the owner held the debt instrument.
If you hold a long-term OID debt instrument as a                                                             reportable payment at a rate of 28%. The
                                                        2. Multiply the daily OID by the number of           backup withholding is deducted at the time a
nominee for the true owner, you generally must             days the owner held the debt instrument
file Form 1099-OID. For this purpose, you can                                                                cash payment is made. See Pub. 1281, Backup
                                                           during that accrual period.                       Withholding for Missing and Incorrect Name/
rely on Section I of the OID list to determine the
                                                        3. Repeat steps (1) and (2) for any remaining        TIN(s), for more information.
following information.
                                                           accrual periods for the year during which             Backup withholding generally applies in the
  • Whether a debt instrument has OID.                     the owner held the debt instrument.               following situations.
  • The OID to be reported on the Form                  4. Add the results in steps (2) and (3) to de-        1. The payee does not give you a taxpayer
     1099-OID.                                             termine the owner’s OID per $1,000 of                 identification number (TIN).
In general, you must report OID on publicly of-            stated redemption price at maturity.
                                                                                                              2. The IRS notifies you that the payee gave
fered, long-term debt instruments listed in Sec-        5. If necessary, adjust the OID in (4) to reflect        an incorrect TIN.
tion I. You also can report OID on other                   the debt instrument’s stated redemption
long-term debt instruments.                                                                                   3. The IRS notifies you that the payee is sub-
                                                           price at maturity.
                                                                                                                 ject to backup withholding due to payee
Form 1099-OID. On Form 1099-OID for a cal-             Report the result on Form 1099-OID in box 1.              underreporting.
endar year show the following information.                Using the income tax regulations. Instead           4. For debt instruments acquired after 1983:
  • Box 1. The OID for the actual dates the            of using Section I to figure OID, you can use the
                                                       regulations under sections 1272 through 1275 of           a. The payee does not certify, under pen-
     owner held the debt instruments during a
                                                       the Internal Revenue Code. For example, under                alties of perjury, that he or she is not
     calendar year. To determine this amount,
                                                       the regulations, you can use monthly accrual                 subject to backup withholding under (3),
     see Figuring OID, next.
                                                       periods in figuring OID for a debt instrument                or
  • Box 2. The qualified stated interest paid or       issued after April 3, 1994, that provides for             b. The payee does not certify, under pen-
     credited during the calendar year. Interest       monthly payments. (If you use Section I-B, the               alties of perjury, that the TIN given is
     reported here is not reported on Form             OID is figured using 6-month accrual periods.)               correct.
     1099-INT. The qualified stated interest on            For a general explanation of the rules for
     Treasury inflation-protected securities may       figuring OID under the regulations, see Figuring          However, for short-term discount obligations
     be reported on Form 1099-INT in box 3             OID on Long-Term Debt Instruments under In-           (other than government obligations), bearer
     instead.                                          formation for Owners of OID Debt Instruments,         bonds and coupons, and U.S. savings bonds,
  • Box 3. Any interest or principal forfeited         later.                                                backup withholding applies only if the payee
     because of an early withdrawal that the                                                                 does not give you a TIN or gives you an obvi-
     owner can deduct from gross income. Do            Certificates of Deposit                               ously incorrect number for a TIN.
     not reduce the amounts in boxes 1 and 2
     by the forfeiture.                                If you hold a bank certificate of deposit (CD) as a   Short-term obligations. Backup withholding
                                                       nominee, you must determine whether the CD            applies to OID on a short-term obligation only
  • Box 4. Any backup withholding for this             has OID and any OID includible in the income of       when the OID is paid at maturity. However,
     debt instrument.                                  the owner. You must file an information return        backup withholding applies to any interest pay-
  • Box 5. The CUSIP number, if any. If there          showing the reportable interest and OID, if any,      able before maturity when the interest is paid or
     is no CUSIP number, give a description of         on the CD. These rules apply whether or not you       credited.
     the debt instrument, including the abbrevi-       sold the CD to the owner. Report OID on a CD in           If the owner of a short-term obligation at
     ation for the stock exchange, the abbrevia-       the same way as OID on other debt instruments.        maturity is not the original owner and can estab-
     tion used by the stock exchange for the           See Short-Term Obligations Redeemed at Ma-            lish the purchase price of the obligation, the
                                                       turity and Long-Term Debt Instruments, earlier.       amount subject to backup withholding must be
     issuer, the coupon rate, and the year of
     maturity (for example, NYSE XYZ 12.50                                                                   determined by treating the purchase price as the
     2006). If the issuer of the debt instrument       Bearer Bonds and Coupons                              issue price. However, you can choose to disre-
                                                                                                             gard that price if it would require significant man-
     is other than the payer, show the name of
                                                       If a coupon from a bearer bond is presented to        ual intervention in the computer or
     the issuer in this box.
                                                       you for collection before the bond matures, you       recordkeeping system used for the obligation. If
  • Box 6. The OID on a U.S. Treasury obliga-          generally must report the interest on Form            the purchase price of a listed obligation is not
     tion for the part of the year the owner held      1099-INT. However, do not report the interest if      established or is disregarded, you must use the
     the debt instrument.                              either of the following apply.                        issue price shown in Section III.

Page 4                                                                                                                 Publication 1212 (December 2011)
Long-term obligations. If no cash payments            period is effectively connected with the conduct       • U.S. savings bonds.
are made on a long-term obligation before ma-         of a U.S. trade or business.
                                                                                                             • Tax-exempt obligations. (However, see
turity, backup withholding applies only at matur-
                                                      Payments to foreign person. The following                 Tax-Exempt Bonds and Coupons, later.)
ity. The amount subject to backup withholding is
the OID includible in the owner’s gross income        discussions explain the rules for backup with-         • Obligations issued by individuals before
for the calendar year when the obligation ma-         holding and information reporting on payments             March 2, 1984.
tures. The amount to be withheld is limited to the    to foreign persons.
                                                                                                             • Loans of $10,000 or less between individ-
cash paid.                                               U.S.-source amount. Backup withholding                 uals who are not in the business of lending
   Registered long-term obligations with              and information reporting are not required for            money. (The dollar limit includes outstand-
cash payments. If a registered long-term obli-        payments of U.S.-source OID, interest, or pro-            ing prior loans by the lender to the bor-
gation has cash payments before maturity,             ceeds from a sale or redemption of an OID                 rower.) This exception does not apply if a
backup withholding applies when a cash pay-           instrument if the payee has given you proof               principal purpose of the loan is to avoid
ment is made. The amount subject to backup            (generally the appropriate Form W-8 or an ac-             any federal tax.
withholding is the total of the qualified stated      ceptable substitute) that the payee is a foreign
interest (defined earlier under Definitions) and      person. A U.S. resident is not a foreign person.        See chapter 1 of Publication 550 for informa-
OID includible in the owner’s gross income for        For proof of the payee’s foreign status, you can     tion about the rules for these and other types of
the calendar year when the payment is made. If        rely on the appropriate Form W-8 or on docu-         discounted debt instruments, such as short-term
more than one cash payment is made during the         mentary evidence for payments made outside           and market discount obligations. Publication
year, the OID subject to withholding for the year     the United States to an offshore account or, in      550 also discusses rules for holders of REMIC
must be allocated among the expected cash             case of broker proceeds, a sale effected outside     interests and CDOs.
payments in the ratio that each bears to the total    the United States. Receipt of the appropriate
                                                      Form W-8 does not relieve you from information       De minimis rule. You can treat OID as zero if
of the expected cash payments. For any pay-
                                                      reporting and backup withholding if you actually     the total OID on a debt instrument is less than
ment, the required withholding is limited to the
                                                      know the payee is a U.S. person.                     one-fourth of 1% (.0025) of the stated redemp-
cash paid.
                                                          For information about the 28% withholding        tion price at maturity multiplied by the number of
   Payee not the original owner. If the payee         tax that may apply to payments of U.S.-source        full years from the date of original issue to matur-
is not the original owner of the obligation, the      OID or interest to foreign persons, see Publica-     ity. Debt instruments with de minimis OID are
OID subject to backup withholding is the OID          tion 515.                                            not listed in this publication. There are special
includible in the gross income of all owners dur-                                                          rules to determine the de minimis amount in the
ing the calendar year (without regard to any             Foreign-source amount. Backup withhold-           case of debt instruments that provide for more
amount paid by the new owner at the time of           ing and information reporting are not required for   than one payment of principal. Also, the de
transfer). The amount subject to backup with-         payments of foreign-source OID and interest          minimis rules generally do not apply to
holding at maturity of a listed obligation must be    made outside the United States. However, if the      tax-exempt obligations.
determined using the issue price shown in Sec-        payments are made inside the United States,
tion I.                                               the requirements for backup withholding and             Example 2. You bought at issuance a
                                                      information reporting will apply unless the payee    10-year debt instrument with a stated redemp-
   Bearer long-term obligations with cash             has given you the appropriate Form W-8 or            tion price at maturity of $1,000, issued at $980
payments. If a bearer long-term obligation            acceptable substitute as proof that the payee is     with OID of $20. One-fourth of 1% of $1,000 (the
has cash payments before maturity, backup             a foreign person.                                    stated redemption price) times 10 (the number
withholding applies when the cash payments                                                                 of full years from the date of original issue to
are made. For payments before maturity, the             More information. For more information
                                                      about backup withholding and information re-         maturity) equals $25. Under the de minimis rule,
amount subject to withholding is the qualified                                                             you can treat the OID as zero because the $20
stated interest (defined earlier under Definitions)   porting on foreign-source amounts or payments
                                                      to foreign persons, see Regulations section          discount is less than $25.
includible in the owner’s gross income for the
calendar year. For a payment at maturity, the         1.6049-5.
                                                                                                             Example 3. Assume the same facts as Ex-
amount subject to withholding is only the total of                                                         ample 2, except the debt instrument was issued
any qualified stated interest paid at maturity and                                                         at $950. You must report part of the $50 OID
the OID includible in the owner’s gross income                                                             each year because it is more than $25.
for the calendar year when the obligation ma-         Information for
tures. The required withholding at maturity is                                                             Choice to report all interest as OID. Gener-
limited to the cash paid.                             Owners of OID                                        ally, you can choose to treat all interest on a debt
                                                                                                           instrument acquired after April 3, 1994, as OID
Sales and redemptions. If you report the              Debt Instruments                                     and include it in gross income by using the
gross proceeds from a sale, exchange, or re-                                                               constant yield method. See Constant yield
demption of a debt instrument on Form 1099-B          This section is for persons who prepare their        method under Debt Instruments Issued After
for a calendar year, you may be required to           own tax returns. It discusses the income tax         1984, later, for more information.
withhold 28% of the amount reported. Backup           rules for figuring and reporting OID on long-term        For this choice, interest includes stated inter-
withholding applies in the following situations.      debt instruments. It also includes a similar dis-    est, acquisition discount, OID, de minimis OID,
                                                      cussion for stripped bonds and coupons, such         market discount, de minimis market discount,
  • The payee does not give you a TIN.                as zero coupon bonds available through the           and unstated interest, as adjusted by any amor-
  • The IRS notifies you that the payee gave          Department of the Treasury’s STRIPS program          tizable bond premium or acquisition premium.
    an incorrect TIN.                                 and government-sponsored enterprises such as         For more information, see Regulations section
                                                      the Resolution Funding Corporation. However,         1.1272-3.
  • For debt instruments held in an account           the information provided does not cover every
    opened after 1983, the payee does not             situation. More information can be found in the      Purchase after date of original issue. A debt
    certify, under penalties of perjury, that the     regulations under sections 1271 through 1275 of      instrument you purchased after the date of origi-
    TIN given is correct.                             the Internal Revenue Code.                           nal issue may have premium, acquisition pre-
                                                                                                           mium, or market discount. If so, the OID
Payments outside the United States to U.S.            Including OID in income. Generally, you in-          reported to you on Form 1099-OID may have to
                                                      clude OID in income as it accrues each year,         be adjusted. For more information, see Showing
person. The requirements for backup with-
                                                      whether or not you receive any payments from         an OID adjustment under How To Report OID,
holding and information reporting apply to pay-
                                                      the debt instrument issuer.                          later. The following rules generally do not apply
ments of OID and interest made outside the
                                                                                                           to contingent payment debt instruments.
United States to a U.S. person, a controlled            Exceptions. The rules for including OID in
foreign corporation, or a foreign person at least     income as it accrues generally do not apply to          Adjustment for premium. If your debt in-
50% of whose income for the preceding 3-year          the following debt instruments.                      strument (other than an inflation-indexed debt

Publication 1212 (December 2011)                                                                                                                       Page 5
instrument) has premium, do not report any OID        Form 1099-OID                                        your spouse. See the Form 1099 instructions for
as ordinary income. Your adjustment is the total                                                           more information.
OID shown on your Form 1099-OID.                      The issuer of the debt instrument (or your bro-          When preparing your tax return, follow the
                                                      ker, if you purchased or held the debt instrument    instructions under Showing an OID adjustment
   Adjustment for acquisition premium. If
                                                      through a broker) should give you a copy of          in the next discussion.
your debt instrument has acquisition premium,
                                                      Form 1099-OID or a similar statement if the
reduce the OID you report. Your adjustment is
                                                      accrued OID for the calendar year is $10 or
the difference between the OID shown on your
                                                      more and the term of the debt instrument is more
                                                                                                           How To Report OID
Form 1099-OID and the reduced OID amount
                                                      than 1 year. Form 1099-OID shows all OID in-         Generally, you report your taxable interest and
figured using the rules explained later under
                                                      come in box 1 except OID on a U.S. Treasury          OID income on the interest line of Form 1040EZ,
Figuring OID on Long-Term Debt Instruments.           obligation, which is shown in box 6. It also         Form 1040A, or Form 1040.
   Adjustment for market discount. If your            shows, in box 2, any qualified stated interest you
debt instrument has market discount that you          must include in income. (However, any qualified
                                                                                                           Form 1040 or Form 1040A required. You
choose to include in income currently, increase       stated interest on Treasury inflation-protected
                                                                                                           must use Form 1040 or Form 1040A (you cannot
the OID you report. Your adjustment is the ac-        securities can be reported on Form 1099-INT in
                                                                                                           use Form 1040EZ) under either of the following
crued market discount for the year.                   box 3.) A copy of Form 1099-OID will be sent to
                                                                                                           conditions.
    See Market Discount Bonds in chapter 1 of         the IRS. Do not attach your copy to your tax
Publication 550 for information on how to figure      return. Keep it for your records.                      • You received a Form 1099-OID as a nomi-
accrued market discount and include it in your                                                                 nee for the actual owner.
                                                               If you are required to file a tax return
income currently and for other information about
market discount bonds. If you choose to use the
                                                        !
                                                       CAUTION
                                                               and you receive Form 1099-OID show-
                                                               ing taxable amounts, you must report
                                                                                                             • Your total interest and OID income for the
                                                                                                               year was more than $1,500.
constant yield method to figure accrued market        these amounts on your return. A 20% accu-
discount, also see Figuring OID on Long-Term          racy-related penalty may be charged for un-
                                                                                                           Form 1040 required. You must use Form
Debt Instruments, later. The constant yield           derpayment of tax due to either negligence or
                                                                                                           1040 (you cannot use Form 1040A or Form
method of figuring accrued OID, explained in          disregard of rules and regulations or substantial
                                                      understatement of tax.                               1040EZ) if you are reporting more or less OID
those discussions under Constant yield method,
is also used to figure accrued market discount.                                                            than the amount shown on Form 1099-OID,
                                                      Form 1099-OID not received. If you held an           other than because you are a nominee. For
    For more information concerning premium or        OID debt instrument for a calendar year but did
                                                                                                           example, if you paid a premium or an acquisition
market discount on an inflation-indexed debt          not receive a Form 1099-OID, refer to the later
                                                                                                           premium when you purchased the debt instru-
instrument, see Regulations section 1.1275-7.         discussions under Figuring OID on Long-Term
                                                                                                           ment, you must use Form 1040 because you will
                                                      Debt Instruments for information on the OID you
                                                                                                           report less OID than shown on Form 1099-OID.
Sale, exchange, or redemption. Generally,             must report.
                                                                                                           Also, you must use Form 1040 if you were
you treat your gain or loss from the sale, ex-
                                                      Refiguring OID. You must refigure the OID            charged an early withdrawal penalty.
change, or redemption of a discounted debt in-
strument as a capital gain or loss if you held the    shown on Form 1099-OID, in box 1 or box 6, to
                                                      determine the proper amount to include in in-        Where to report. List each payer’s name (if a
debt instrument as a capital asset. If you sold the
                                                      come if one of the following applies.                brokerage firm gave you a Form 1099, list the
debt instrument through a broker, you should
                                                                                                           brokerage firm as the payer) and the amount
receive Form 1099-B or an equivalent statement          • You bought the debt instrument at a pre-         received from each payer on Form 1040A,
from the broker. Use the Form 1099-B or other               mium or at an acquisition premium.             Schedule 1, line 1, or Form 1040, Schedule B,
statement and your brokerage statements to
complete Schedule D (Form 1040).                        • The debt instrument is a stripped bond or        line 1. Include all OID and periodic interest
                                                            coupon (including zero coupon bonds            shown on any Form 1099-OID, boxes 1, 2, and
    Your gain or loss is the difference between
                                                            backed by U.S. Treasury securities).           6, you received for the tax year. Also include any
the amount you realized on the sale, exchange,
                                                                                                           other OID and interest income for which you did
or redemption and your basis in the debt instru-        • The debt instrument is a contingent pay-         not receive a Form 1099.
ment. Your basis, generally, is your cost in-               ment or inflation-indexed debt instrument.
creased by the OID you have included in income
                                                      See the discussions under Figuring OID on            Showing an OID adjustment. If you use
each year you held it. In general, to determine       Long-Term Debt Instruments or Figuring OID on        Form 1040 to report more or less OID than
your gain or loss on a tax-exempt bond, figure        Stripped Bonds and Coupons, later, for the spe-      shown on Form 1099-OID, list the full OID on
your basis in the bond by adding to your cost the     cific computations.                                  Schedule B, Part I, line 1, and follow the instruc-
OID you would have included in income if the
bond had been taxable.                                                                                     tions under 1 or 2, next.
                                                      Refiguring interest. If you disposed of a debt
    See chapter 4 of Publication 550 for more                                                                  If you use Form 1040A to report the OID
                                                      instrument or acquired it from another holder
information about the tax treatment of the sale or                                                         shown on a Form 1099-OID you received as a
                                                      between interest dates, see the discussion
redemption of discounted debt instruments.                                                                 nominee for the actual owner, list the full OID on
                                                      under Bonds Sold Between Interest Dates in
                                                                                                           Schedule 1, Part I, line 1 and follow the instruc-
                                                      chapter 1 of Publication 550 for information
   Example 4. Larry, a calendar year taxpayer,        about refiguring the interest shown on Form          tions under 1.
bought a corporate debt instrument at original        1099-OID in box 2.                                    1. If the OID, as adjusted, is less than the
issue for $86,235.17 on November 1 of Year 1.
                                                                                                               amount shown on Form 1099-OID, show
The 15-year debt instrument matures on Octo-          Nominee. If you are the holder of an OID debt            the adjustment as follows.
ber 31 of Year 16 at a stated redemption price of     instrument and you receive a Form 1099-OID
$100,000. The debt instrument provides for            that shows your taxpayer identification number           a. Under your last entry on line 1, subtotal
semiannual payments of interest at 10%. As-           and includes amounts belonging to another per-              all interest and OID income listed on
sume the debt instrument is a capital asset in        son, you are considered a “nominee.” You must               line 1.
Larry’s hands. The debt instrument has                file another Form 1099-OID for each actual
$13,764.83 of OID ($100,000 stated redemption         owner, showing the OID for the owner. Show the           b. Below the subtotal, write “Nominee Dis-
price at maturity minus $86,235.17 issue price).      owner of the debt instrument as the “recipient”             tribution” or “OID Adjustment” and show
                                                      and you as the “payer.”                                     the OID you are not required to report.
    Larry sold the debt instrument for $90,000 on
November 1 of Year 4. Including the OID he will          Complete Form 1099-OID and Form 1096                  c. Subtract that OID from the subtotal and
report for the period he held the debt instrument     and file the forms with the Internal Revenue                enter the result on line 2.
in Year 4, Larry has included $1,214.48 of OID in     Service Center for your area. You must also give
income and has increased his basis by that            a copy of the Form 1099-OID to the actual             2. If the OID, as adjusted, is more than the
amount to $87,449.65. Larry has realized a gain       owner. However, you are not required to file a           amount shown on Form 1099-OID, show
of $2,550.35. All of Larry’s gain is capital gain.    nominee return to show amounts belonging to              the adjustment as follows.

Page 6                                                                                                               Publication 1212 (December 2011)
    a. Under your last entry on line 1, subtotal      Corporate Debt Instruments                             Transfers during the month. If you buy or
       all interest and OID income listed on          Issued After May 27, 1969,                             sell a debt instrument on any day other than the
       line 1.                                        and Before July 2, 1982                                same day of the month as the date of original
                                                                                                             issue, the ratable monthly portion of OID for the
    b. Below the subtotal, write “OID Adjust-         If you hold these debt instruments as capital          month of sale is divided between the seller and
       ment” and show the additional OID.             assets, you must include part of the OID in            the buyer according to the number of days each
    c. Add that OID to the subtotal and enter         income each year you own the debt instruments.         held the debt instrument. Your holding period for
       the result on line 2.                          For information about showing the correct OID          this purpose begins the day you acquire the debt
                                                      on your tax return, see the discussion under           instrument and ends the day before you dispose
                                                      How To Report OID, earlier. Your basis in the          of it.
Figuring OID on                                       debt instrument is increased by the OID you
                                                      include in income.
Long-Term Debt Instruments                                                                                   Debt Instruments Issued After
                                                      Form 1099-OID. You should receive a Form               July 1, 1982, and Before 1985
How you figure the OID on a long-term debt
                                                      1099-OID showing OID for the part of the year
instrument depends on the date it was issued. It
                                                      you held the debt instrument. However, if you          If you hold these debt instruments as capital
also may depend on the type of the debt instru-
                                                      paid an acquisition premium, you may need to           assets, you must include part of the OID in
ment. There are different rules for each of the
                                                      refigure the OID to report on your tax return. See     income each year you own the debt instruments
following debt instruments.
                                                      Reduction for acquisition premium, later.              and increase your basis by the amount included.
 1. Corporate debt instruments issued after                                                                  For information about showing the correct OID
                                                      Form 1099-OID not received.                            on your tax return, see How To Report OID,
    1954 and before May 28, 1969, and gov-
    ernment debt instruments issued after                        If you held an OID debt instrument in a     earlier.
    1954 and before July 2, 1982.                                calendar year but did not receive a         Form 1099-OID. You should receive a Form
                                                                 Form 1099-OID, refer to Section I-A at      1099-OID showing OID for the part of the year
 2. Corporate debt instruments issued after
                                                      http://www.irs.gov/formspubs/article/                  you held the debt instrument. However, if you
    May 27, 1969, and before July 2, 1982.
                                                      0,,id=213465,00.html.                                  paid an acquisition premium, you may need to
 3. Debt instruments issued after July 1, 1982,             The OID listed is for each $1,000 of redemp-     refigure the OID to report on your tax return. See
    and before 1985.                                  tion price. You must adjust the listed amount if       Constant yield method and the discussions on
 4. Debt instruments issued after 1984 (other         your debt instrument has a different principal         acquisition premium that follow, later.
    than debt instruments described in (5) and        amount. For example, if you have a debt instru-
                                                      ment with a $500 principal amount, use one-half        Form 1099-OID not received.
    (6)).
                                                      the listed amount to figure your OID.                            If you held an OID debt instrument in a
 5. Contingent payment debt instruments is-                If you held the debt instrument the entire                  calendar year but did not receive a
    sued after August 12, 1996.                       year, use the OID shown in Section I-A for a                     Form 1099-OID, refer to Section I-A at
 6. Inflation-indexed debt instruments (includ-       calendar year. (If your debt instrument is not         http://www.irs.gov/formspubs/article/
    ing Treasury inflation-protected securities)      listed in Section I-A, consult the issuer for infor-   0,,id=213465,00.html.
    issued after January 5, 1997.                     mation about the issue price and the OID that               The OID listed is for each $1,000 of redemp-
                                                      accrued for that year.) If you did not hold the        tion price. You must adjust the listed amount if
Zero coupon bonds. The rules for figuring             debt instrument the entire year, figure your OID       your debt instrument has a different principal
OID on zero coupon bonds backed by U.S.               using the following method.                            amount. For example, if you have a debt instru-
Treasury securities are discussed under Figur-                                                               ment with a $500 principal amount, use one-half
                                                       1. Divide the OID shown by 12.
ing OID on Stripped Bonds and Coupons, later.                                                                the listed amount to figure your OID.
                                                       2. Multiply the result in (1) by the number of            If you held the debt instrument the entire
                                                          complete and partial months (for example,          year, use the OID shown in Section I-A. (If your
Corporate Debt Instruments                                61/2 months) you held the debt instrument          instrument is not listed in Section I-A, consult the
Issued After 1954 and                                     during a calendar year. This is the OID to         issuer for information about the issue price, the
Before May 28, 1969,                                      include in income unless you paid an ac-           yield to maturity, and the OID that accrued for
and Government Debt Instruments                           quisition premium. The reduction for acqui-        that year.) If you did not hold the debt instrument
Issued After 1954 and                                     sition premium is discussed next.                  the entire year, figure your OID using either of
Before July 2, 1982                                                                                          the following methods.
                                                      Reduction for acquisition premium. If you                Method 1.
If you hold these debt instruments as capital         bought the debt instrument at an acquisition
assets, you include OID in income only in the         premium, figure the OID to include in income as         1. Divide the total OID for a calendar year by
year the debt instrument is sold, exchanged, or       follows.                                                   365 (366 for leap years).
redeemed, and only if you have a gain. The OID,
which is taxed as ordinary income, generally           1. Divide the total OID on the debt instrument         2. Multiply the result in (1) by the number of
equals the following amount.                              by the number of complete months, and                  days you held the debt instrument during
                                                          any part of a month, from the date of origi-           that particular year.
   number of full months                                  nal issue to the maturity date. This is the
   you held the debt
                                                          monthly OID.                                       This computation is an approximation and may
   instrument                    X   original issue
   number of full months             discount          2. Subtract from your cost the issue price and        result in a slightly higher OID than Method 2.
   from date of original issue                            the accumulated OID from the date of is-
   to date of maturity
                                                                                                               Method 2.
                                                          sue to the date of purchase. (If the result is
   The balance of the gain is capital gain. If            zero or less, stop here. You did not pay an         1. Look up the daily OID for the first accrual
there is a loss on the sale of the debt instrument,       acquisition premium.)                                  period you held the debt instrument during
the entire loss is a capital loss and no OID is                                                                  a calendar year. (See Accrual period under
                                                       3. Divide the amount figured in (2) by the
reported.                                                                                                        Constant yield method, next.)
                                                          number of complete months, and any part
                                                          of a month, from the date of your purchase          2. Multiply the daily OID by the number of
                                                          to the maturity date.                                  days you held the debt instrument during
                                                                                                                 that accrual period.
                                                       4. Subtract the amount figured in (3) from the
                                                          amount figured in (1). This is the OID to           3. If you held the debt instrument for part of
                                                          include in income for each month you hold              both accrual periods, repeat (1) and (2) for
                                                          the debt instrument during the year.                   the second accrual period.

Publication 1212 (December 2011)                                                                                                                         Page 7
 4. Add the results of (2) and (3). This is the       is different from the method described in the       Form 1099-OID not received.
    OID to include in income, unless you paid         preceding discussion. To figure the daily acqui-              If you held an OID debt instrument in a
    an acquisition premium. (The reduction for        sition premium under this method, multiply the                calendar year but did not receive a
    acquisition premium is discussed later.)          daily OID by the following fraction.                          Form 1099-OID, refer to Section I-B at
                                                        • The numerator is the acquisition premium.       http://www.irs.gov/formspubs/article/
Constant yield method. This discussion                                                                    0,,id=213465,00.html.
shows how to figure OID on debt instruments             • The denominator is the total OID remain-            The OID listed is for each $1,000 of redemp-
issued after July 1, 1982, and before 1985, using         ing for the debt instrument after your
                                                                                                          tion price. You must adjust the listed amount if
a constant yield method. OID is allocated over            purchase date.                                  your debt instrument has a different principal
the life of the debt instrument through adjust-                                                           amount. For example, if you have a debt instru-
ments to the issue price for each accrual period.       Using Section I-A to figure accumulated
                                                                                                          ment with a $500 principal amount, use one-half
    Figure the OID allocable to any accrual pe-       OID.
                                                                                                          the listed amount to figure your OID.
riod as follows.                                                                                              Use the OID shown in Section I-B for a calen-
                                                               Section I-A is found at: http://www.irs.
 1. Multiply the adjusted issue price at the be-               gov/formspubs/article/                     dar year if you held the debt instrument the
    ginning of the accrual period by the debt                  0,,id=213465,00.html.                      entire year. (If your debt instrument is not listed
    instrument’s yield to maturity.                                                                       in Section I-B, consult the issuer for information
                                                          If you bought your corporate debt instrument
                                                                                                          about the issue price, the yield to maturity, and
 2. Subtract from the result in (1) any qualified     in a calendar year or the subsequent year, you      the OID that accrued for that year.) If you did not
    stated interest allocable to the accrual pe-      can figure the accumulated OID to the date of       hold the debt instrument the entire year, figure
    riod.                                             purchase by adding the following amounts.           your OID as follows.

   Accrual period. An accrual period for any           1. The amount from the “Total OID to Janu-          1. Look up the daily OID for the first accrual
OID debt instrument issued after July 1, 1982,            ary 1, YYYY” column for your debt instru-           period in which you held the debt instru-
and before 1985 is each 1-year period beginning           ment.                                               ment during a calendar year. (See Accrual
on the date of the issue of the obligation and         2. The OID from January 1 of a calendar year           period under Constant yield method, later.)
each anniversary thereafter, or the shorter pe-           to the date of purchase, figured as follows.     2. Multiply the daily OID by the number of
riod to maturity for the last accrual period. Your
                                                                                                              days you held the debt instrument during
tax year will usually include parts of two accrual        a. Multiply the daily OID for the first ac-         that accrual period.
periods.                                                     crual period in the calendar year by the
                                                             number of days from January 1 to the          3. Repeat (1) and (2) for any remaining ac-
   Daily OID. The OID for any accrual period is
                                                             date of purchase, or the end of the ac-          crual periods in which you held the debt
allocated equally to each day in the accrual
                                                             crual period if the debt instrument was          instrument.
period. You must include in income the sum of
the OID amounts for each day you hold the debt               purchased in the second or third ac-          4. Add the results of (2) and (3). This is the
instrument during the year. If your tax year in-             crual period.                                    OID to include in income for that year, un-
cludes parts of two or more accrual periods, you                                                              less you paid an acquisition premium. (The
                                                          b. Multiply the daily OID for each subse-
must include the proper daily OID amounts for                                                                 reduction for acquisition premium is dis-
                                                             quent accrual period by the number of            cussed later.)
each accrual period.
                                                             days in the period to the date of
   Figuring daily OID. The daily OID for the                 purchase or the end of the accrual pe-
initial accrual period is figured using the follow-                                                       Tax-exempt bond. If you own a tax-exempt
                                                             riod, whichever applies.                     bond, figure your basis in the bond by adding to
ing formula.
                                                          c. Add the amounts figured in (2a) and          your cost the OID you would have included in
                 (ip × ytm) − qsi                            (2b).                                        income if the bond had been taxable. You need
                         p                                                                                to make this adjustment to determine if you have
                                                                                                          a gain or loss on a later disposition of the bond.
    ip = issue price                                                                                      In general, use the rules that follow to determine
                                                      Debt Instruments                                    your OID.
  ytm = yield to maturity                             Issued After 1984                                   Constant yield method. This discussion
   qsi = qualified stated interest
                                                      If you hold debt instruments issued after 1984,     shows how to figure OID on debt instruments
     p = number of days in accrual period             you must report part of the OID in gross income     issued after 1984 using a constant yield method.
                                                      each year that you own the debt instruments.        (The special rules that apply to contingent pay-
                                                                                                          ment debt instruments and inflation-indexed
                                                      You must include the OID in gross income
    The daily OID for subsequent accrual peri-                                                            debt instruments are explained later.) OID is
ods is figured the same way except the adjusted       whether or not you hold the debt instrument as a
                                                                                                          allocated over the life of the debt instrument
issue price at the beginning of each period is        capital asset. Your basis in the debt instrument
                                                                                                          through adjustments to the issue price for each
used in the formula instead of the issue price.       is increased by the OID you include in income.      accrual period.
                                                      For information about showing the correct OID           Figure the OID allocable to any accrual pe-
Reduction for acquisition premium on debt             on your tax return, see How To Report OID,          riod as follows.
instruments purchased before July 19, 1984.           earlier.
If you bought the debt instrument at an acquisi-                                                           1. Multiply the adjusted issue price at the be-
tion premium before July 19, 1984, figure the                                                                 ginning of the accrual period by a fraction.
OID includible in income by reducing the daily        Form 1099-OID. You should receive a Form
                                                                                                              The numerator of the fraction is the debt
OID by the daily acquisition premium. Figure the      1099-OID showing OID for the part of a calendar         instrument’s yield to maturity and the de-
daily acquisition premium by dividing the total       year you held the debt instrument. However, if          nominator is the number of accrual periods
acquisition premium by the number of days in          you paid an acquisition premium, you may need           per year. The yield must be stated appro-
the period beginning on your purchase date and        to refigure the OID to report on your tax return.       priately taking into account the length of
ending on the day before the date of maturity.        See Constant yield method and Reduction for             the particular accrual period.
                                                      acquisition premium, later.
Reduction for acquisition premium on debt                                                                  2. Subtract from the result in (1) any qualified
instruments purchased after July 18, 1984.                You may also need to refigure the OID for a         stated interest allocable to the accrual pe-
If you bought the debt instrument at an acquisi-      contingent payment or inflation-indexed debt in-        riod.
tion premium after July 18, 1984, figure the OID      strument on which the amount reported on Form
includible in income by reducing the daily OID by     1099-OID is inaccurate. See Contingent Pay-           Accrual period. For debt instruments is-
the daily acquisition premium. However, the           ment Debt Instruments or Inflation-Indexed Debt     sued after 1984 and before April 4, 1994, an
method of figuring the daily acquisition premium      Instruments, later.                                 accrual period is each 6-month period that ends

Page 8                                                                                                              Publication 1212 (December 2011)
on the day that corresponds to the stated matur-      ($86,235.17 + $174.11), or $86,409.28. The             within a month). Consult your tax advisor for
ity date of the debt instrument or the date 6         number of days for the second accrual period           more information about making this computa-
months before that date. For example, a debt          (July 1 through December 31) is 184 days. The          tion.
instrument maturing on March 31 has accrual           daily OID for the second accrual period is figured         The OID for the final accrual period is the
periods that end on September 30 and March 31         as follows.                                            difference between the amount payable at ma-
of each calendar year. Any short period is in-                                                               turity (other than a payment of qualified stated
cluded as the first accrual period.                         ($86,409.28 x .12/2) – $5,000
                                                                                                             interest) and the adjusted issue price at the
    For debt instruments issued after April 3,                        184 days
                                                                                                             beginning of the final accrual period.
1994, accrual periods may be of any length and
                                                                 $184.55681
may vary in length over the term of the debt                 =              = $1.00303
                                                                    184                                      Reduction for acquisition premium. If you
instrument, as long as each accrual period is no                                                             bought the debt instrument at an acquisition
longer than 1 year and all payments are made               Since the first and second accrual periods
                                                                                                             premium, figure the OID includible in income by
on the first or last day of an accrual period.        coincide exactly with your tax year, you include
                                                                                                             reducing the daily OID by the daily acquisition
However, the OID listed for these debt instru-        in income for Year 1 the OID allocable to the first
                                                                                                             premium. To figure the daily acquisition pre-
ments in Section I-B has been figured using           two accrual periods, $174.11 ($.95665 × 182
                                                      days) plus $184.56 ($1.00303 × 184 days), or           mium, multiply the daily OID by the following
6-month accrual periods.                                                                                     fraction.
                                                      $358.67. Add the OID to the $10,000 interest
   Daily OID. The OID for any accrual period is       you report on your income tax return for Year 1.         • The numerator is the acquisition premium.
allocated equally to each day in the accrual
period. Figure the amount to include in income           Example 6. Assume the same facts as in                • The denominator is the total OID remain-
by adding the OID for each day you hold the           Example 5, except that you bought the debt                   ing for the debt instrument after your
debt instrument during the year. Since your tax       instrument at original issue on May 1 of Year 1,             purchase date.
year will usually include parts of two or more        with a maturity date of April 30, Year 16. Also,
accrual periods, you must include the proper          the interest payment dates are October 31 and             Example 7. Assume the same facts as in
daily OID for each accrual period. If your debt       April 30 of each calendar year. The accrual            Example 6, except that you bought the debt
instrument has 6-month accrual periods, your          periods are the 6-month periods ending on each         instrument on November 1 of Year 1 for
tax year will usually include one full 6-month        of these dates.                                        $87,000, after its original issue on May 1 of Year
accrual period and parts of two other 6-month             The number of days for the first accrual pe-       1. The adjusted issue price on November 1 of
periods.                                              riod (May 1 through October 31) is 184 days.           Year 1 is $86,409.28 ($86,235.17 + $174.11). In
   Figuring daily OID. The daily OID for the          The daily OID for the first accrual period is fig-     this case, you paid an acquisition premium of
initial accrual period is figured using the follow-   ured as follows.                                       $590.72 ($87,000 − $86,409.28). The daily OID
ing formula.                                                                                                 for the accrual period November 1 through April
                                                             ($86,235.17 x .12/2) – $5,000
                                                                       184 days                              30, reduced for the acquisition premium, is fig-
                (ip × ytm/n) − qsi                                                                           ured as follows.
                         p
                                                                 $174.11020
                                                             =              = $.94625                        1) Daily OID on date of purchase
                                                                    184
    ip = issue price                                                                                            (2nd accrual period) . . . . . . . . .         $1.01965*

  ytm = yield to maturity                                The number of days for the second accrual           2) Acquisition premium               $590.72
                                                      period (November 1 through April 30) is 181
     n = number of accrual periods in 1 year                                                                 3) Total OID remaining
                                                      days (182 for leap years). The daily OID for the
   qsi = qualified stated interest                    second accrual period is figured as follows.              after purchase date
                                                                                                                ($13,764.83 −
     p = number of days in accrual period                                                                       $174.11) . . . . . . . . . 13,590.72
                                                             ($86,409.28 x .12/2) – $5,000
                                                                       181 days                              4) Line 2 ÷ line 3 . . . . . . . . . . . . .        .04346

    The daily OID for subsequent accrual peri-                   $184.55681                                  5) Line 1 × line 4 . . . . . . . . . . . . .        .04432
                                                             =              = $1.01965
ods is figured the same way except the adjusted                     181
issue price at the beginning of each period is                                                               6) Daily OID reduced for the
                                                          If you hold the debt instrument through the           acquisition premium. Line 1 −
used in the formula instead of the issue price.                                                                 line 5 . . . . . . . . . . . . . . . . . . .   $0.97533
                                                      end of Year 1, you must include $236.31 of OID
                                                      in income. This is $174.11 ($.94625 × 184 days)
   Example 5. On January 1 of Year 1, you                                                                    * As shown in Example 6.
                                                      for the period May 1 through October 31 plus
bought a 15-year, 10% debt instrument of A
                                                      $62.20 ($1.01965 × 61 days) for the period No-             The total OID to include in income for Year 1
Corporation at original issue for $86,235.17. Ac-
                                                      vember 1 through December 31. The OID is               is $59.50 ($.97533 × 61 days).
cording to the prospectus, the debt instrument
                                                      added to the $5,000 interest income paid on
matures on December 31 of Year 15 at a stated
                                                      October 31 of Year 1. Your basis in the debt
redemption price of $100,000. The yield to ma-
                                                      instrument is increased by the OID you include         Contingent Payment
turity is 12%, compounded semiannually. The
                                                      in income. On January 1 of Year 2, your basis in       Debt Instruments
debt instrument provides for qualified stated in-
                                                      the A Corporation debt instrument is $86,471.48
terest payments of $5,000 on June 30 and De-
                                                      ($86,235.17 + $236.31).                                This discussion shows how to figure OID on a
cember 31 of each calendar year. The accrual
periods are the 6-month periods ending on each           Short first accrual period. You may have            contingent payment debt instrument issued after
of these dates. The number of days for the first      to make adjustments if a debt instrument has a         August 12, 1996, that was issued for cash or
accrual period (January 1 through June 30) is         short first accrual period. For example, a debt        publicly traded property. In general, a contingent
181 days (182 for leap years). The daily OID for      instrument with 6-month accrual periods that is        payment debt instrument provides for one or
the first accrual period is figured as follows.       issued on February 15 and matures on October           more payments that are contingent as to timing
                                                      31 has a short first accrual period that ends April    or amount. If you hold a contingent payment
      ($86,235.17 x .12/2) – $5,000                   30. (The remaining accrual periods begin on            bond, you must report OID as it accrues each
                181 days                              May 1 and November 1.) For this short period,          year.
                                                      figure the daily OID as described earlier, but             Because the actual payments on a contin-
           $174.11020                                                                                        gent payment debt instrument cannot be known
       =              = $.96193                       adjust the yield for the length of the short accrual
              181
                                                      period. You may use any reasonable com-                in advance, issuers and holders cannot use the
                                                      pounding method in determining OID for a short         constant yield method (discussed earlier under
   The adjusted issue price at the beginning of       period. Examples of reasonable compounding             Debt Instruments Issued After 1984) without
the second accrual period is the issue price plus     methods include continuous compounding and             making certain assumptions about the pay-
the OID previously includible in income               monthly compounding (that is, simple interest          ments on the debt instrument. To figure OID

Publication 1212 (December 2011)                                                                                                                                 Page 9
accruals on contingent payment debt instru-              amount, you have a positive adjustment. If         capital asset. Your basis in the debt instrument
ments, holders and issuers must use the non-             the contingent payment is less than the            is increased by the OID you include in income.
contingent bond method.                                  projected fixed amount, you have a nega-
                                                         tive adjustment.                                   Inflation-adjusted principal amount. For
Noncontingent bond method.            Under this                                                            any date, the inflation-adjusted principal amount
method, the issuer must compute a comparable           Net positive adjustment. A net positive ad-          of an inflation-indexed debt instrument is the
yield for the debt instrument and, based on this     justment exists for a tax year when the total of       debt instrument’s outstanding principal amount
yield, construct a projected payment schedule        any positive adjustments described in (2) above        multiplied by the index ratio for that date. (For
for the instrument, which includes a projected       for the tax year is more than the total of any         TIPS, multiply the par value by the index ratio for
fixed amount for each contingent payment. In         negative adjustments for the tax year. Treat a         that date.) For this purpose, determine the out-
general, holders and issuers accrue OID on this      net positive adjustment as additional OID for the      standing principal amount as if there were no
projected payment schedule using the constant        tax year.                                              inflation or deflation over the term of the debt
yield method that applies to fixed payment debt                                                             instrument.
instruments. When a contingent payment differs          Net negative adjustment. A net negative
from the projected fixed amount, the holders and     adjustment exists for a tax year when the total of        Index ratio. This is a fraction, the numerator
issuers make adjustments to their OID accruals.      any negative adjustments described in (2)              of which is the value of the reference index for
If the actual contingent payment is larger than      above for the tax year is more than the total of       the date and the denominator of which is the
expected, both the issuer and the holder in-         any positive adjustments for the tax year. Use a       value of the reference index for the debt instru-
crease their OID accruals. If the actual contin-     net negative adjustment to offset OID on the           ment’s issue date.
gent payment is smaller than expected, holders       debt instrument for the tax year. If the net nega-         A qualified reference index measures infla-
and issuers generally decrease their OID accru-      tive adjustment is more than the OID on the debt       tion and deflation over the term of a debt instru-
als.                                                 instrument for the tax year, you can claim the         ment. Its value is reset each month to a current
                                                     difference as an ordinary loss. However, the           value of a single qualified inflation index (for
Form 1099-OID. The amount shown on Form              amount you can claim as an ordinary loss is            example, the nonseasonally adjusted U.S. City
1099-OID in box 1 you receive for a contingent       limited to the OID on the debt instrument you          Average All Items Consumer Price Index for All
payment debt instrument may not be the correct       included in income in prior tax years. You must        Urban Consumers (CPI-U), published by the
amount to include in income. For example, the        carry forward any net negative adjustment that         Department of Labor). The value of the index for
amount may not be correct if the contingent          is more than the total OID for the tax year and        any date between reset dates is determined
payment was different from the projected             prior tax years and treat it as a negative adjust-     through straight-line interpolation.
amount. If the amount in box 1 is not correct, you   ment in the next tax year.
must figure the OID to report on your return                                                                           The daily index ratios for Treasury in-
under the following rules. For information on        Basis adjustments. In general, increase your                      flation-protected securities are avail-
showing an OID adjustment on your tax return,        basis in a contingent payment debt instrument                     able on the Internet at http://www.
see How To Report OID, earlier.                      by the OID included in income. Your basis, how-        treasurydirect.gov/instit/annceresult/tipscpi/
                                                     ever, is not affected by any negative or positive      tipscpi.htm.
Figuring OID. To figure OID on a contingent          adjustments. Decrease your basis by any non-           Form 1099-OID. The amount shown in box 6
payment debt instrument, you need to know the        contingent payment received and the projected          of the Form 1099-OID you receive for an infla-
“comparable yield” and “projected payment            contingent payment scheduled to be received.           tion-indexed debt instrument may not be the
schedule” of the debt instrument. The issuer         Treatment of gain or loss on sale or ex-               correct amount to include in income. For exam-
must make these available to you.                    change. If you sell a contingent payment debt          ple, the amount may not be correct if you bought
   Comparable yield. The comparable yield            instrument at a gain, your gain is ordinary in-        the debt instrument other than at original issue
generally is the yield at which the issuer would     come (interest income), even if you hold the debt      or sold it during the year. If the amount shown in
issue a fixed rate debt instrument with terms and    instrument as a capital asset. If you sell a contin-   box 6 is not correct, you must figure the OID to
conditions similar to those of the contingent pay-   gent payment debt instrument at a loss, your           report on your return under the following rules.
ment debt instrument. The comparable yield is        loss is an ordinary loss to the extent of your prior   For information about showing an OID adjust-
determined as of the debt instrument’s issue         OID accruals on the debt instrument. If the debt       ment on your tax return, see How To Report
date.                                                instrument is a capital asset, treat any loss that     OID, earlier.
                                                     is more than your prior OID accruals as a capital
   Projected payment schedule. The pro-              loss.                                                  Figuring OID. Figure the OID on an infla-
jected payment schedule for a contingent pay-            See Regulations section 1.1275-4 for excep-        tion-indexed debt instrument using one of the
ment debt instrument includes all fixed              tions to these rules.                                  following methods.
payments due under the instrument and a pro-
jected fixed amount for each contingent pay-         Premium, acquisition premium, and market                 • The coupon bond method, described in
ment. The projected payment schedule is              discount. The rules for accruing premium, ac-              the following discussion, applies if the debt
created by the issuer as of the debt instrument’s    quisition premium, and market discount do not              instrument is issued at par (as determined
issue date. It is used to determine the issuer’s     apply to a contingent payment debt instrument.             under Regulations section
and holder’s interest accruals and adjustments.      See Regulations section 1.1275-4 to determine              1.1275-7(d)(2)(i)), all stated interest pay-
                                                     how to account for these items.                            able on the debt instrument is qualified
  Steps for figuring OID. Figure the OID on a                                                                   stated interest, and the coupons have not
contingent payment debt instrument in two                                                                       been stripped from the debt instrument.
steps.
                                                     Inflation-Indexed Debt Instruments                         This method applies to TIPS, including
                                                                                                                TIPS issued with more than a de minimis
 1. Figure the OID using the constant yield
                                                     This discussion shows how you figure OID on                amount of premium (see Regulations sec-
    method (discussed earlier under Debt In-
                                                     certain inflation-indexed debt instruments is-             tion 1.1275-7T).
    struments Issued After 1984 ) that applies
                                                     sued after January 5, 1997. An inflation-indexed
    to fixed payment debt instruments. Use the
                                                     debt instrument is generally a debt instrument
                                                                                                              • The discount bond method applies to
    comparable yield as the yield to maturity.                                                                  any inflation-indexed debt instrument that
                                                     on which the payments are adjusted for inflation
    In general, use the projected payment                                                                       does not qualify for the coupon bond
                                                     and deflation (such as Treasury infla-
    schedule to determine the instrument’s ad-                                                                  method, such as a stripped debt instru-
                                                     tion-protected securities (TIPS)).
    justed issue price at the beginning of each                                                                 ment. This method is described in Regula-
                                                         In general, if you hold an inflation-indexed
    accrual period (other than the initial pe-                                                                  tions section 1.1275-7(e).
                                                     debt instrument, you must report as OID any
    riod). Do not treat any amount payable as
                                                     increase in the inflation-adjusted principal
    qualified stated interest.                                                                                Under the coupon bond method, figure the
                                                     amount of the debt instrument that occurs while
                                                                                                            OID you must report for the tax year as follows.
 2. Adjust the OID in (1) to account for actual      you held the debt instrument during the tax year.
    contingent payments. If the contingent           You must include the OID in gross income                 Debt instrument held at the end of the tax
    payment is greater than the projected fixed      whether or not you hold the debt instrument as a       year. If you held the debt instrument at the end

Page 10                                                                                                               Publication 1212 (December 2011)
of the tax year, figure your OID for the year using   in the same way you would show an OID adjust-             bonds that are offered primarily by broker-
the following steps.                                  ment. See How To Report OID, earlier.                     age firms (variously called CATS, TIGRs,
                                                          You decrease your basis in the debt instru-           etc.).
 1. Add the inflation-adjusted principal amount       ment by the deflation adjustment used to offset
    for the day after the last day of the tax year    interest income.
    and any principal payments you received                                                                 Seller of stripped bonds or coupons. If you
    during the year. (For TIPS, multiply the par                                                            strip coupons from a bond and sell the bond or
                                                         Example 9. Assume the same facts as in             coupons, include in income the interest that ac-
    value by the index ratio for the day after        Example 8, except that you bought the debt
    the last day of the tax year, and add any                                                               crued while you held the bond before the date of
                                                      instrument for $9,831 on January 6 of Year 9,         sale to the extent the interest was not previously
    principal payments received.)                     when the inflation-adjusted principal amount          included in your income. For an obligation ac-
 2. Subtract from (1) above the infla-                was $12,050.10, and sold the debt instrument          quired after October 22, 1986, you must also
    tion-adjusted principal amount for the first      on March 1 of Year 9, when the infla-                 include the market discount that accrued before
    day on which you held the debt instrument         tion-adjusted principal amount was $12,011.20.        the date of sale of the stripped bond (or coupon)
    during the tax year. (For TIPS, subtract          Because the OID calculation for Year 9                to the extent the discount was not previously
    from (1) above the product of the par value       ($12,011.20 − $12,050.10) produces a negative         included in your income.
    times the index ratio for the first day held      number (negative $38.90), you have a deflation            Add the interest and market discount you
    during the tax year.)                             adjustment. You use this deflation adjustment to      include in income to the basis of the bond and
                                                      offset the stated interest reported to you on the     coupons. This adjusted basis is then allocated
    Interest is reported separately, as discussed
                                                      debt instrument.                                      between the items you keep and the items you
later under Stated interest.
                                                          Your basis in the debt instrument on March 1      sell, based on the fair market value of the items.
  Debt instrument sold or retired during the          of Year 9 is $9,792.10 ($9,831 cost − $38.90          The difference between the sale price of the
tax year. If you sold the debt instrument during      deflation adjustment) for Year 9.                     bond (or coupon) and the allocated basis of the
the tax year, or if it was retired, figure your OID                                                         bond (or coupon) is the gain or loss from the
for the year using the following steps.               Premium on inflation-indexed debt instru-             sale.
                                                      ments. In general, any premium on an infla-               Treat any item you keep as an OID bond
 1. Add the inflation-adjusted principal amount       tion-indexed debt instrument is determined as of      originally issued and purchased by you on the
    for the last day on which you held the debt       the date you acquire the debt instrument by           sale date of the other items. If you keep the
    instrument during the tax year and any            assuming there will be no further inflation or        bond, treat the excess of the redemption price of
    principal payments you received during the        deflation over the remaining term of the debt         the bond over the basis of the bond as OID. If
    year. (For TIPS, multiply the par value by        instrument. You allocate any premium over the         you keep the coupons, treat the excess of the
    the index ratio for the sale or retirement        remaining term of the debt instrument by making       amount payable on the coupons over the basis
    date, and add any principal payments re-          the same assumption. In general, the premium          of the coupons as OID.
    ceived.)                                          allocable to a tax year offsets the interest other-
 2. Subtract from (1) above the infla-                wise includible in income for the year. If the        Purchaser of stripped bonds or coupons. If
    tion-adjusted principal amount for the first      premium allocable to the year is more than that       you purchase a stripped bond or coupon, treat it
    day on which you held the debt instrument         interest, the difference generally offsets the OID    as if it were originally issued on the date of
    during the tax year. (For TIPS, subtract          on the debt instrument for the year. See Regula-      purchase. If you purchase the stripped bond,
    from (1) above the product of the par value       tions section 1.1275-7T for an example applying       treat as OID any excess of the stated redemp-
    times the index ratio for the first day held      the coupon bond method to a TIPS issued with          tion price at maturity over your purchase price. If
    during the tax year.)                             more than a de minimis amount of premium.             you purchase the stripped coupon, treat as OID
                                                                                                            any excess of the amount payable on the due
    Interest is reported separately, as discussed                                                           date of the coupon over your purchase price.
later under Stated interest.                          Figuring OID on Stripped
                                                      Bonds and Coupons
   Example 8. On February 6 of Year 9, you                                                                  Form 1099-OID
bought an old 10-year, 3.375% inflation-indexed       If you strip one or more coupons from a bond
debt instrument (maturing January 15 of Year          and then sell or otherwise dispose of the bond or     The amount shown in box 6 of the Form
11) for $9,831. The stated principal (par value)      the stripped coupons, they are treated as sepa-       1099-OID you receive for a stripped bond or
amount is $10,000 and the inflation-adjusted          rate debt instruments issued with OID. The            coupon may not be the proper amount to include
principal amount for February 6 of Year 9 is          holder of a stripped bond has the right to receive    in income. If not, you must figure the OID to
$12,047.50 ($10,000 par value times 1.20475           the principal (redemption price) payment. The         report on your return under the rules that follow.
index ratio). You held the debt instrument until      holder of a stripped coupon has the right to          For information about showing an OID adjust-
August 29 of Year 9 when the inflation-adjusted       receive an interest payment on the bond. The          ment on your tax return, see How To Report
principal amount was $12,275.70 ($10,000 par          rule requiring the holder of a debt instrument        OID, earlier.
value times 1.22757 index ratio). Your OID for        issued with OID to include the OID in gross
Year 9 is $228.20 ($12,275.70 − $12,047.50).          income as it accrues applies to stripped bonds
Your basis in the debt instrument on August 29        and coupons acquired after July 1, 1982. See          Tax-Exempt Bonds and Coupons
of Year 9 was $10,059.20 ($9,831 cost +               Debt Instruments and Coupons Purchased After
$228.20 OID) for Year 9.                              July 1, 1982, and Before 1985 or Debt Instru-         The OID on a stripped tax-exempt bond, or on a
                                                      ments and Coupons Purchased After 1984,               stripped coupon from such a bond, is generally
  Stated interest. Under the coupon bond                                                                    not taxable. However, if you acquired the
                                                      later, for information about figuring the OID to
method, you report any stated interest on the                                                               stripped bond or coupon after October 22, 1986,
                                                      report.
debt instrument under your regular method of                                                                you must accrue OID on it to determine its basis
accounting. For example, if you use the cash              Stripped bonds and coupons include the fol-
                                                                                                            when you dispose of it. How you figure accrued
method, you generally include in income for the       lowing instruments.
                                                                                                            OID and whether any OID is taxable depend on
tax year any interest payments received on the          • Zero coupon bonds available through the           the date you bought (or are treated as having
debt instrument during the year.                          Department of the Treasury’s STRIPS pro-          bought) the stripped bond or coupon.
                                                          gram and government-sponsored enter-
Deflation adjustments. If your calculation to                                                               Acquired before June 11, 1987. None of the
                                                          prises such as the Resolution Funding
figure OID on an inflation-indexed debt instru-                                                             OID on bonds or coupons acquired before this
                                                          Corporation and the Financing Corpora-
ment produces a negative number, you do not                                                                 date is taxable. The accrued OID is added to the
                                                          tion.
have any OID. Instead, you have a deflation                                                                 basis of the bond or coupon. The accrued OID is
adjustment. A deflation adjustment generally is         • Debt instruments backed by U.S. Treasury          the amount that produces a yield to maturity
used to offset interest income from the debt              securities that represent ownership inter-        (YTM), based on your purchase date and
instrument for the tax year. Show this offset as          ests in those securities. Examples include        purchase price, equal to the lower of the follow-
an adjustment on your Form 1040, Schedule B,              obligations backed by U.S. Treasury               ing rates.

Publication 1212 (December 2011)                                                                                                                     Page 11
 1. The coupon rate on the bond before the             difference between the redemption price ($100)           srp = stated redemption price at maturity
    separation of coupons. (However, if you            and the issue price that would produce a YTM of           ap = acquisition price
    can establish the YTM of the bond (with all        10% ($82.27). This part of the OID is treated as
    coupons attached) at the time of its original      OID on a tax-exempt obligation.                           m = number of full accrual periods from
    issue, you can use that YTM instead.)                                                                            purchase to maturity
                                                           The OID on the stripped bond that is more
 2. The YTM of the stripped bond or coupon.            than the tax-exempt part is $3.06. This is the            If the debt instrument is a stripped coupon,
                                                       excess of the total OID ($20.79) over the             the stated redemption price is the amount pay-
    Increase your basis in the stripped                tax-exempt part ($17.73). This part of the OID        able on the due date of the coupon.
tax-exempt bond or coupon by the interest that         ($3.06) is treated as OID on an obligation that is        If the period between your purchase date
accrued but was neither paid nor previously re-        not tax exempt.                                       and the maturity date (or due date) of the debt
flected in your basis before the date you sold the                                                           instrument does not divide into an exact number
bond or coupon.                                            The total OID allocable to the accrual period
                                                       ending June 30 of Year 2 is $4.75 (6% ×               of full 1-year periods, so that a period shorter
                                                       $79.21). Of this, $4.11 (5% × $82.27) is treated      than 1 year must be included, consult your bro-
Acquired after June 10, 1987. Part of the OID                                                                ker or your tax advisor for information about
on bonds or coupons acquired after this date           as OID on a tax-exempt obligation and $0.64
                                                       ($4.75 − $4.11) is treated as OID on an obliga-       figuring the YTM.
may be taxable. Figure the taxable part in three
steps.                                                 tion that is not tax exempt. Your basis in the debt   Daily OID. The OID for any accrual period is
                                                       instrument as of June 30 of Year 2 is increased       allocated equally to each day in the accrual
   Step 1. Figure OID as if all taxable. First         to $83.96 ($79.21 issue price + accrued OID of
figure the OID following the rules in this section                                                           period. You figure the amount to include in in-
                                                       $4.75).                                               come by adding the daily OID amounts for each
as if all the OID were taxable. (See Debt Instru-
ments and Coupons Purchased After 1984,                                                                      day you hold the debt instrument during the
later.) Use the yield to maturity (YTM) based on                                                             year. If your tax year includes parts of more than
                                                       Debt Instruments and Coupons                          one accrual period (which will be the case un-
the date you obtained the stripped bond or cou-        Purchased After July 1, 1982, and
pon.                                                                                                         less the accrual period coincides with your tax
                                                       Before 1985                                           year), you must include the proper daily OID
   Step 2. Determine nontaxable part. Find                                                                   amounts for each of the two accrual periods.
the issue price that would produce a YTM as of         If you purchased a stripped bond or coupon after
                                                                                                                 The daily OID for the initial accrual period is
the purchase date equal to the lower of the            July 1, 1982, and before 1985, and you held that
                                                                                                             figured by applying the following formula.
following rates.                                       debt instrument as a capital asset during any
                                                       part of a calendar year, you must figure the OID                         (ap × ytm)
 1. The coupon rate on the bond from which             to be included in income using a constant yield                              p
    the coupons were separated. (However,              method. Under this method, OID is allocated
    you can use the original YTM instead.)             over the time you hold the debt instrument by             ap = acquisition price
 2. The YTM based on the purchase price of             adjusting the acquisition price for each accrual
                                                       period. The OID for the accrual period is figured       ytm = yield to maturity
    the stripped coupon or bond.
                                                       by multiplying the adjusted acquisition price at           p = number of days in accrual period
    Subtract this issue price from the stated re-      the beginning of the period by the yield to matur-
demption price of the bond at maturity (or, in the     ity.                                                      The daily OID for subsequent accrual peri-
case of a coupon, the amount payable on the                                                                  ods is figured in the same way except the ad-
due date of the coupon). The result is the part of                                                           justed acquisition price at the beginning of each
                                                       Adjusted acquisition price. The adjusted ac-
the OID treated as OID on a stripped tax-exempt                                                              period is used in the formula instead of the
                                                       quisition price of a stripped bond or coupon at
bond or coupon.                                                                                              acquisition price.
                                                       the beginning of the first accrual period is its
                                                                                                                 The rules for figuring OID on these debt
  Step 3. Determine taxable part. The tax-             purchase (or acquisition) price. The adjusted
                                                                                                             instruments are similar to those in Debt Instru-
able part of OID is the OID determined in Step 1       acquisition price at the beginning of any subse-
                                                                                                             ments Issued After July 1, 1982, and Before
minus the nontaxable part determined in Step 2.        quent accrual period is the sum of the acquisi-
                                                                                                             1985, earlier.
                                                       tion price and all of the OID includible in income
   Exception. None of the OID on your
                                                       before that accrual period.
stripped tax-exempt bond or coupon is taxable if
you bought it from a person who held it for sale          Accrual period. An accrual period for any          Debt Instruments and Coupons
on June 10, 1987, in the ordinary course of that       stripped bond or coupon acquired before 1985 is       Purchased After 1984
person’s trade or business.                            each 1-year period beginning on the date of the
                                                       purchase of the obligation and each anniversary       If you purchased a stripped bond or coupon
   Basis adjustment. Increase the basis of                                                                   (other than a stripped inflation-indexed debt in-
                                                       thereafter, or the shorter period to maturity for
your stripped tax-exempt bond or coupon by the                                                               strument) after 1984, and you held that debt
taxable and nontaxable accrued OID. If you own         the last accrual period.
                                                                                                             instrument during any part of a calendar year,
a tax-exempt bond from which one or more                                                                     you must figure the OID to be included in income
coupons have been stripped, increase your ba-          Yield to maturity (YTM). In general, the YTM
                                                                                                             using a constant yield method. Under this
sis in it by the sum of the interest accrued but not   of a stripped bond or coupon is the discount rate
                                                                                                             method, OID is allocated over the time you hold
paid before you dispose of it (and not previously      that, when used in figuring the present value of      the debt instrument by adjusting the acquisition
reflected in basis) and any accrued market dis-        all principal and interest payments, produces an      price for each accrual period. The OID for the
count to the extent not previously included in         amount equal to the acquisition price of the debt     accrual period is figured by multiplying the ad-
your income.                                           instrument or coupon.                                 justed acquisition price at the beginning of the
                                                          Figuring YTM. If you purchased a stripped          period by a fraction. The numerator of the frac-
   Example 10. Assume that a tax-exempt                bond or coupon after July 1, 1982, but before         tion is the debt instrument’s yield to maturity and
bond with a face amount of $100 due January 1          1985, and the period from your purchase date to       the denominator is the number of accrual peri-
of Year 4 and a coupon rate of 10% (com-               the day the debt instrument matures can be            ods per year.
pounded semiannually) was issued for $100 on           divided exactly into full 1-year periods without          If the stripped bond or coupon is an infla-
January 1 of Year 1. On January 1 of Year 2 the                                                              tion-indexed instrument, you must figure the
                                                       including a shorter period, then the YTM can be
bond was stripped and you bought the right to                                                                OID to be included in income using the discount
                                                       figured by applying the following formula.
receive the principal amount for $79.21. The                                                                 bond method described in Regulations section
stripped bond is treated as if it was originally                                 1
                                                                                                             1.1275-7(e).
issued on January 1 of Year 2 with OID of                                        m
$20.79 ($100.00 − $79.21). This reflects a YTM                             srp                               Adjusted acquisition price. The adjusted ac-
at the time of the strip of 12% (compounded
semiannually). The tax-exempt part of OID on
                                                                        ( )ap        – 1                     quisition price of a stripped bond or coupon at
                                                                                                             the beginning of the first accrual period is its
the stripped bond is limited to $17.73. This is the                                                          purchase (or acquisition) price. The adjusted

Page 12                                                                                                                Publication 1212 (December 2011)
acquisition price at the beginning of any subse-        Use 7.892% YTM to figure the OID for each                 Formula 2.
quent accrual period is the sum of the acquisi-      accrual period or partial accrual period for which
tion price and all of the OID includible in income   you must report OID.                                                                            r
                                                                                                                                                     s
before that accrual period.
                                                        2. Short initial accrual period. If the period
                                                     from the date you purchased a stripped bond or                              ap x (1 + ytm /n)       − ap
Accrual period. For a stripped bond or cou-                                                                                                  r
pon acquired after 1984 and before April 4,          coupon to the date of its maturity cannot be
1994, an accrual period is each 6-month period       divided evenly into full accrual periods, so that a
that ends on the day that corresponds to the         shorter period must be included, you can figure                ap = acquisition price
stated maturity date of the stripped bond (or        the YTM by using the following formula (the
                                                     exact method).                                               ytm = yield to maturity
payment date of a stripped coupon) or the date 6
months before that date. For example, a                                            1                                   n = number of accrual periods in 1 year
stripped bond that has a maturity date (or a                                   ( r + m
                                                                                 s         )                           p = number of days in accrual period
stripped coupon that has a payment date) of
March 31 has accrual periods that end on Sep-
tember 30 and March 31 of each calendar year.
                                                              n ×  (( )  srp
                                                                         ap
                                                                                          – 1    )                     r = number of days from purchase to
                                                                                                                           end of short accrual period
Any short period is included as the first accrual                                                                      s = number of days in accrual period
period.                                                   n = number of accrual periods in 1 year                          ending on last day of short accrual
    For a stripped bond or coupon acquired after                                                                           period
                                                        srp = stated redemption price at maturity
April 3, 1994, accrual periods may be of any
length and may vary in length over the term of           ap = acquisition price                                     The rules for figuring OID on these debt
the debt instrument, as long as each accrual               r = number of days from purchase to                  instruments are similar to those illustrated in
period is no longer than 1 year and all payments               end of short accrual period                      Example 5 and Example 6, earlier, under Debt
are made on the first or last day of an accrual                                                                 Instruments Issued After 1984.
                                                          s = number of days in accrual period
period.
                                                              ending on last day of short accrual                 Example 13. Assume the same facts as in
                                                              period
Yield to maturity (YTM). In general, the YTM                                                                    Example 12, and that you held the coupon for
of a stripped bond or coupon is the discount rate        m = number of full accrual periods from                the rest of Year 1.
that, when used in figuring the present value of             purchase to maturity
                                                                                                                   For the short initial accrual period from May
all principal and interest payments, produces an                                                                30 through August 11, the daily OID is figured
amount equal to the acquisition price.                  Example 12. On May 30 of Year 1, you                    using Formula 2, as follows.
   Figuring YTM. How you figure the YTM for          bought a coupon stripped from a U.S. Treasury
a stripped debt instrument or coupon purchased       bond through the Department of the Treasury’s
after 1984 depends on whether you have equal         STRIPS program for $60,000. $100,000 is pay-                                             74
accrual periods or a short initial accrual period.   able on the coupon’s due date, August 11 of                                              181
                                                     Year 7. You decide to figure OID using 6-month
   1. Equal accrual periods. If the period from      accrual periods. There are 12 full 6-month ac-                $60,000 × (1 + .08406/2)          − $60,000
the date you purchased a stripped bond or cou-       crual periods and a 74-day short initial accrual                              74
pon to the maturity date can be divided evenly       period from the purchase date to the coupon’s
into full accrual periods without including a        due date. The YTM on this stripped coupon is                      $1,018.48
shorter period, you can figure the YTM by using                                                                    =                 = $13.76327
                                                     figured as follows.                                                   74
the following formula.
                                     1
                                                                                                                   The OID for this period is $1,018.48
                                                                                                                ($13.76327 × 74 days).
            n ×
                  ((      srp
                          ap    )
                                     m
                                           – 1   )                                 (         1
                                                                                       (74/181) + 12   )            For the second accrual period from August
                                                            (
                                                        2 × ($100,000 / $60,000)                            )
                                                                                                           -1   12 of Year 1 through February 11 of Year 2, the
                                                        = 2 × (1.04203 -1) = .08406 = 8.406%                    adjusted acquisition price is $61,018.48. This is
                                                        Use 8.406% YTM to figure the OID for each               the original $60,000 acquisition price plus
     n = number of accrual periods in 1 year                                                                    $1,018.48 OID for the short initial accrual period.
                                                     accrual period or partial accrual period for which
   srp = stated redemption price at maturity         you must report OID.                                       The daily OID is figured using Formula 1, as
                                                                                                                follows.
    ap = acquisition price
                                                     Daily OID. The OID for any accrual period is
    m = number of full accrual periods from          allocated equally to each day in the accrual                         $61,018.48 × (.08406/2)
        purchase to maturity                         period. You must include in income the sum of                                184
                                                     the daily OID amounts for each day you hold the
   If the debt instrument is a stripped coupon,      debt instrument during the year. Since your tax                          $2,564.60671
the stated redemption price is the amount pay-                                                                            =                = $13.93808
                                                     year will usually include parts of two or more                                184
able on the due date of the coupon.                  accrual periods, you must include the proper
                                                     daily OID amounts for each accrual period.                    The OID for the part of this period included in
   Example 11. On May 15 of Year 1, you                                                                         Year 1 (August 12 – December 31) is $1,979.21
bought a coupon stripped from a U.S. Treasury           Figuring daily OID. For the initial accrual             ($13.93808 × 142 days).
bond through the Department of the Treasury’s        period of a stripped bond or coupon acquired
STRIPS program for $38,000. An amount of             after 1984, figure the daily OID using Formula 1,              The OID to be reported on your income tax
$100,000 is payable on the coupon’s due date,        next, if there are equal accrual periods. Use              return for Year 1 is $2,997.69 ($1,018.48 +
November 14 of Year 13. There are exactly 25         Formula 2 if there is a short initial accrual period.      $1,979.21).
6-month periods between the purchase date,               For subsequent accrual periods, figure the               Final accrual period. The OID for the final
May 15 of Year 1, and the coupon’s due date,         daily OID using Formula 1 (whether or not there            accrual period for a stripped bond or coupon is
November 14 of Year 13. The YTM on this              was a short initial accrual period), but use the           the amount payable at maturity of the stripped
stripped coupon is figured as follows.               adjusted acquisition price in the formula instead          bond (or interest payable on the stripped cou-
                                1                    of the acquisition price.                                  pon) minus the adjusted acquisition price at the
     2 ×
           ((   $100,000
                $38,000    )    25
                                     – 1    )          Formula 1.

                                                                         ap × ytm / n
                                                                                                                beginning of the final accrual period. The daily
                                                                                                                OID for the final accrual period is figured by
                                                                                                                dividing the OID for the period by the number of
     = 2 × (1.03946 -1) = 0.07892 = 7.892%                                    p                                 days in the period.

Publication 1212 (December 2011)                                                                                                                                Page 13
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Page 14                                                                                                               Publication 1212 (December 2011)
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Publication 1212 (December 2011)                                                                                                                      Page 15
                                      To help us develop a more useful index, please let us know if you have ideas for index entries.
Index                                 See “Comments and Suggestions” in the “Introduction” for the ways you can reach us.


A                                                        Debt instruments issued after                                  I                                                              P
Accrual period . . . . . . . . . . . . . . . 2             July 1, 1982 . . . . . . . . . . . . . . . .             7   Inflation-indexed debt                                         Premium . . . . . . . . . . . . . . . . . . . . . 2
Acquisition premium . . . . . . . . . 2                  Debt instruments issued after                                    instruments . . . . . . . . . . . . . . . 10                 Publications (See Tax help)
Adjusted issue price . . . . . . . . . 2                   May 27, 1969, corporate . . . .                          7   Information for brokers and
Assistance (See Tax help)                                Debt instruments not on the                                      other middlemen . . . . . . . . . . . 3
                                                           OID list . . . . . . . . . . . . . . . . . . . . .       3
                                                                                                                                                                                       Q
                                                                                                                        Information for owners of OID
                                                                                                                                                                                       Qualified stated interest . . . . . . 2
                                                         Debt Instruments on the OID                                      debt instruments . . . . . . . . . . . 5
B                                                          list . . . . . . . . . . . . . . . . . . . . . . . . .   3   Issue price . . . . . . . . . . . . . . . . . . . 2
Backup withholding . . . . . . . . . . 4                 Definitions . . . . . . . . . . . . . . . . . . .          2                                                                  R
                                                                                                                        Issuers of OID debt
Bearer bonds and                                           Accrual period . . . . . . . . . . . . . .               2                                                                  REMIC and CDO information
                                                                                                                          instruments, Instructions
  coupons . . . . . . . . . . . . . . . . . . . 4          Acquisition premium . . . . . . . . .                    2                                                                   reporting requirements . . . . . 2
                                                                                                                          for . . . . . . . . . . . . . . . . . . . . . . . . . 2
Brokers (See Information for                               Adjusted issue price . . . . . . . . .                   2
  brokers and other middlemen)                             Debt instrument . . . . . . . . . . . . .                2
                                                                                                                        L                                                              S
                                                           Issue price . . . . . . . . . . . . . . . . . .          2
                                                                                                                        Long-term debt                                                 Section I . . . . . . . . . . . . . . . . . . . . . 3
C                                                          Market discount . . . . . . . . . . . . .                2
                                                           Original issue discount                                        instruments . . . . . . . . . . . . . . . . 4                Section II . . . . . . . . . . . . . . . . . . . . . 3
Certificates of deposit . . . . . . . . 4                                                                                                                                              Section III . . . . . . . . . . . . . . . . . . . . 3
                                                              (OID) . . . . . . . . . . . . . . . . . . . . .       2
Comments and                                                                                                                                                                           Short-term obligations
  suggestions . . . . . . . . . . . . . . . . 2
                                                           Premium . . . . . . . . . . . . . . . . . . . .          2   M
                                                           Qualified stated interest . . . . . .                    2                                                                    redeemed at maturity . . . . . . 3
Contingent payment debt                                                                                                 Market discount . . . . . . . . . . . . . . 2
                                                           Stated redemption price at                                                                                                  Stated redemption price at
  instruments . . . . . . . . . . . . . . . . 9                                                                         More information (See Tax help)
                                                              maturity . . . . . . . . . . . . . . . . . .          2                                                                    maturity . . . . . . . . . . . . . . . . . . . . 2
                                                           Yield to maturity . . . . . . . . . . . . .              2                                                                  Stripped bonds and coupons,
D                                                                                                                       O                                                                figuring OID . . . . . . . . . . . . . . . 11
Debt instrument . . . . . . . . . . . . . . 2                                                                           OID list, Debt Instruments                                     Suggestions, Comments
                                                         E                                                                on . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Debt instruments:                                        Electronic payee                                                                                                                and . . . . . . . . . . . . . . . . . . . . . . . . 2
  Long-term . . . . . . . . . . . . . . . . . . 4                                                                       OID on long-term debt
                                                           statements . . . . . . . . . . . . . . . . . 3
  Short-term . . . . . . . . . . . . . . . . . . 3                                                                        instruments, figuring . . . . . . . 7
                                                                                                                                                                                       T
Debt instruments and coupons                                                                                            OID on stripped bonds and
                                                         F                                                                                                                             Tax help . . . . . . . . . . . . . . . . . . . . . 14
  purchased after 1984 . . . . . . 12                                                                                     coupons, figuring . . . . . . . . . 11
                                                         Form 1099-OID . . . . . . . . . . . . . . . 4                                                                                 Taxpayer Advocate . . . . . . . . . . 14
Debt instruments and coupons                                                                                            OID, figuring . . . . . . . . . . . . . . . . . 4
                                                         Free tax services . . . . . . . . . . . . 14                     Using section I . . . . . . . . . . . . . . 4                TTY/TDD information . . . . . . . . 14
  purchased after July 1, 1982,
  and before 1985 . . . . . . . . . . . 12                                                                                Using the income tax
Debt instruments issued after                            H                                                                  regulations . . . . . . . . . . . . . . . . 4              Y
  1954, corporate . . . . . . . . . . . . 7              Help (See Tax help)                                            Original issue discount                                        Yield to maturity . . . . . . . . . . . 2, 13
Debt instruments issued after                                                                                             (OID) . . . . . . . . . . . . . . . . . . . . . . . 2
                                                                                                                        Owners of OID debt                                                                                                s
  1984 . . . . . . . . . . . . . . . . . . . . . . . 8
                                                                                                                          instruments, information
                                                                                                                          for . . . . . . . . . . . . . . . . . . . . . . . . . 5




Page 16                                                                                                                                                                              Publication 1212 (December 2011)

				
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