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IRS will allow lenders to defer sec. 461(g)(2) points as OID.

Reversing a long-standing position, the IRS's reproposed original issue discount (OID) regulations will allow for the deferral of points paid in cash, including points deductible by a borrower under Sec. 461(g)(2). Under the new rules all payments from a borrower to a lender (other than payments for services, such as loan processing fees or commitment fees) will reduce the loan's issue price. Since the issue price will be less than the stated redemption price, the loan will have OID. If de minimis, the OID will be recognized under a loan liquidation approach; otherwise the OID will be recognized under the general OID rules using an effective yield method.

Therefore, lenders will now be permitted to recognize home mortgage points over the term of the mortgage, and the position in Bell Federal Savings & Loan Ass'n, TC Memo 1991-368, will no longer be applied. Many lenders are currently reporting prepaid home mortgage points at the time of closing in accordance with the IRS's long-standing position on prepaid income as expressed in Bell Federal and the Service's 1986 OID regulations). The rights of taxpayers currently under examination or in appeals and who have a pending issue with respect to the deferral of points income are uncertain.

Relying on the existing proposed OID regulations, the IRS began granting accounting method changes in 1991 to defer points that exceeded the de minimis threshold and were not deductible currently by the borrower. The Service has informally indicated that it will consent to accounting method changes under the new OID regulations, since taxpayers may rely on the position in the newly proposed regulations when filing tax returns (even though the regulations are proposed to be effective for loans entered into on or after 60 days after the regulations are issued in final form). The IRS also indicated that it may issue an automatic accounting method change procedure in the near future to permit such changes and avoid having to process innumerable accounting method change applications.

Because a change in the treatment of such points is considered a change in accounting method, lenders should consider filing a Form 3115, Application for Change in Accounting Method, with the IRS National Office. The earliest year in which calendar-year taxpayers may request a change in method of accounting under Rev. Proc. 92-20 is 1993, since the Form 3115 would not be due until June 30, 1993.

Although it is not totally clear, the Service should classify these changes as a change from a Category A method, and thus permit a one-year pickup of the entire negative Sec. 481(a) adjustment. Remember, however, that the IRS treated prior change requests relying on the then proposed OID regulations as a Category B change.
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Title Annotation:original issue discount
Author:Schmidt, Henry W., Jr.
Publication:The Tax Adviser
Date:Jun 1, 1993
Words:452
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