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Part VI: Bonds.

7747. Is premium paid for a tax-exempt bond deductible? Must basis in a tax-exempt bond be reduced by bond premium?

An individual who owns any fully tax-exempt interest bearing bond (or debenture, note, certificate or other evidence of indebtedness) must amortize any premium he paid for the bond, but the part of the premium allocable to the year is not deductible. (2ak) (The premium paid, in effect, reduces the annual interest; therefore, because the tax-free interest received each year represents in part a tax-free return of premium, premium is not deductible.) Regulations in effect for bonds acquired before March 2, 1998 (or held before a taxable year containing March 2, 1998) provided substantially similar rules. See Q 7748 for an explanation of the effective date for final regulations under IRC Section 171. The individual must reduce his basis each year by the amount of premium allocable to the year. (3ak)

For an explanation of how the annual amount of amortization is calculated, see Q 7748.

7748. How is premium on tax-exempt bonds amortized?

Bond premium that must be amortized is the amount by which an individual's tax basis for determining loss (adjusted for prior years' amortization) exceeds the face amount of the bond at maturity (or earlier call date in the case of a callable bond). (4ak) (A taxpayer's basis for determining loss can be lower than his basis for determining gain, as in the case of a gift. See Q 7519.)

Under final regulations generally effective for bonds acquired on or after March 2, 1998 (see Q 7741), a holder amortizes bond premium by offsetting qualified stated interest allocable to an accrual period with the bond premium allocable to the accrual period. (5ak) Bond premium is allocable to an accrual period based on a constant yield that is used to conform the treatment of bond premium to the treatment of original issue discount (see Q 7737). (6ak)

For the purpose of determining the amount amortizable, if the bond is acquired in an exchange for other property and the bond's basis is determined (in whole or in part) by the basis of the property, the basis of the bond is not more than its fair market value immediately after the exchange. (1al) This rule applies to exchanges occurring after May 6, 1986.

Calculation of Amount Amortized

Bonds Issued After September 27, 1985

Except as provided in regulations (see below), the determination of the annual amortizable amount is computed on the basis of the taxpayer's yield to maturity by using the taxpayer's basis in the bond (for purposes of determining loss) and by compounding at the close of each accrual period. (The accrual period is determined as discussed in Q 7737.) If the amount payable on a call date that is earlier than maturity is used for purposes of determining the yield to maturity, the bond is treated as maturing on the call date and then as reissued on that call date for the amount payable on the call date. (2al)

Under regulations generally in effect for bonds acquired on or after March 2, 1998, a holder amortizes bond premium under the same rules that apply to taxable bonds (see Q 7742); however, in the case of tax-exempt bonds, bond premium in excess of qualified stated interest is treated under a separate rule. If the bond premium allocable to an accrual period exceeds the qualified stated interest allocable to the accrual period, the excess is a nondeductible loss. (3al)

See Q 7741 for an explanation of the effective date of final regulations under IRC Section 171.

Bonds Issued on or Before September 27, 1985

The amount of the premium allocable to each year may be determined under any reasonable method of amortization, but once an individual has used a method, he must consistently use the same method. (The Service has approved use of the "yield" method of amortizing bond premium. (4al)) Instead of any other method, a taxpayer may use the straight line method set forth in the regulations. Under that method, the amount of premium that is allocable to each year is an amount that bears the same ratio to the bond premium as the number of months in the tax year the bond was held by the individual bears to the number of months from the beginning of the tax year (or, if the bond was acquired in the tax year, from the date of acquisition) to the date of maturity or to an earlier call date if appropriate. A fractional part of a month is counted only if it is more than one-half of a month and then it is counted as a month. (5al) The regulations, as amended December 30, 1997, do not include the above rules.

If the premium is solely a result of capitalized expenses (such as buying commissions), an individual using the straight line method provided in the regulations may amortize the capital expenses; if such expenses are a part of a larger premium, he must treat them as part of the premium, if he uses the straight line method. (6al) The regulations, as amended December 30, 1997, do not include the above rules.

Where there is more than one call date, the premium paid for a tax-exempt bond must be amortized to the earliest call date. (1am) If the bond is not called at that date, the premium is then amortized down to the next lower call price, and so on to maturity. (2am) The Service apparently reasons that because amortization is mandatory in the case of tax-exempt bonds, the entire premium must be subject to amortization.
   Example: A $100 bond is acquired at the time of issue for $125.The
   bond is callable in five years at $115 and in 10 years at $110. The
   individual may amortize $10 of the premium during the first five
   years and, if the bond is not then called, an additional $5 of
   premium during the next five years. If the bond is not called at
   the end of 10 years, the remaining $10 of premium must be amortized
   to maturity.


7749. Is premium paid on call of a tax-exempt bond before maturity tax-exempt interest?

No, it is a capital payment taxable as capital gain. (3am) See Q 7746, if the bond was originally issued at a discount. For the treatment of capital gains and losses, see Q 7524.

7750. Is interest on a tax-exempt municipal bond paid by a private insurer because of default by the state or political subdivision tax-exempt?

Yes, interest that would have been tax-exempt if paid by the issuer will be tax-exempt if paid by a private insurer on the issuer's default. (4am) It makes no difference whether the issuer or the underwriter pays the premium on insurance obtained by the issuer covering payment of the principal and interest or whether the individual investors obtain their own insurance. (5am)

A bondholder, however, may not exclude from gross income interest paid or accrued under an agreement for defaulted interest if the agreement is not incidental to the bonds or is in substance a separate debt instrument or similar investment when purchased. If, at the time the contract is purchased, the premium is reasonable, customary, and consistent with the reasonable expectation that the issuer of the bonds, rather than the insurer will pay debt service on the bonds, then the agreement will be considered both incidental to the bonds and not a separate debt instrument or similar investment. Under these circumstances, a bondholder may exclude interest paid or accrued under an agreement for defaulted interest. (6am)

If the interest or principal is guaranteed by the federal government, see Q 7751.

7751. Is interest on municipal bonds tax-exempt if payment is guaranteed by the United States or corporations established under federal law?

Interest on bonds issued by states, territories and possessions or their political subdivisions, which would otherwise be exempt from federal income tax, may not be exempt if payment of interest or principal is federally guaranteed. (7am)

Generally, an obligation issued after 1983 is federally guaranteed if payment of principal or interest (in whole or in part, directly or indirectly) is guaranteed by: (1) the United States; (2) any U.S. agency; (3) under regulations to be prescribed; any entity with authority to borrow from the United States (the District of Columbia and U.S. possessions are usually excepted); or (4) if proceeds of the issue are to be used in making loans so guaranteed. (1an)

Exceptions to this rule include certain bonds guaranteed by the Federal Housing Administration, the Veterans' Administration, the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, the Government National Mortgage Association, and the Student Loan Marketing Association. Some housing program obligations and qualified mortgage bonds and veterans' mortgage bonds are also excepted, provided proceeds are not invested in federally insured deposits or accounts. Bonds issued or guaranteed by Connie Lee Insurance Company are not considered "federally guaranteed." (2an)

Some state and local obligations are secured by certificates of deposit federally insured by the Savings Association Insurance Fund (SAIF-formerly the Federal Savings and Loan Insurance Corporation (FSLIC)) or the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per bondholder. Bonds issued after April 14, 1983, other than any obligations issued pursuant to a binding contract in effect on March 4, 1983, are denied tax-exempt status if 5% or more of the proceeds of the issue are to be invested in federally insured deposits or accounts. (3an)

The IRS ruled that interest on refunding bonds that were issued in an advance refunding of previously issued private activity bonds would be excludable from gross income under IRC Section 103(a). (4an)

7752. Are interest and expense deductions limited because of ownership of municipal bonds?

If interest is paid on loans by an individual who owns tax-exempt municipal bonds, deduction of the interest may be partly or entirely denied (see Q 7927). In addition, some expense deductions may be denied to individuals holding obligations the interest on which is tax-exempt (see Q 7932).

7753. If the interest on an obligation issued by a state or local government is not tax-exempt, how is it taxed?

Short-term obligations issued on a discount basis and payable without interest at a fixed maturity date of one year or less are treated like U.S. Treasury bills (see Q 7713 to Q 7715). (5an) Other bonds are treated like U.S. Treasury notes and bonds (see Q 7719 to Q 7722). (6an)

Other Issues Affecting Bonds

7754. How are buyer and seller taxed on a bond bought or sold "flat"?

Bonds on which interest or principal payments are in default may be quoted "flat," that is, without any allocation in the quoted price between accrued but unpaid interest and principal.

The purchaser of a bond quoted flat treats any payment he receives attributable to interest that accrued before he purchased the bond as a return of capital that reduces his basis. Amounts received in excess of his tax basis in the bond are capital gain. (1ao) They are not treated as interest. (2ao) Thus, if the bond is a tax-exempt municipal bond, return of interest accrued prior to acquisition reduces the owner's basis and any excess is taxable as capital gain; it is not tax-free interest. (3ao)

The owner of a bond, whether or not purchased flat, treats any payment of interest attributable to defaulted interest that accrued after he purchased the bond as interest when it is received. It does not make any difference whether the amounts are received from the obligor or from a purchaser, or whether or not the obligation is held to maturity. (4ao)

Thus, where the face amount and all interest accrued before and after purchase is paid in full on redemption of the bonds by the obligor, the amount of interest accrued after purchase is interest and the balance of the proceeds is return of capital, which is tax free to the extent of the purchaser's basis, and capital gain to the extent it exceeds basis. (5ao) See Q 7524 for the treatment of capital gains and losses.

But where the amount received on a flat sale or on redemption is less than the entire amount due (principal and interest), the amount recovered is allocated between principal and interest accruing while the seller held the bond under this formula: (6ao)
purchase price allocable        face amount of interest
to interest accrued while       accrued while Seller
Seller owned bond               owned bond
                            =
amount received on sale         face amount of principal
                                and interest due at sale


However, the appeals court in Jaglom suggested (but did not decide because the question was not appealed) that where sale occurred in anticipation of imminent payment by the debtor, fair market value of principal and interest would be more appropriate in the formula than face value.

If a bond was held as part of a tax straddle, the additional rules and qualifications explained in Q 7698 to Q 7705 apply. If a bond was held as part of a conversion transaction, the rules as explained in Q 7706 and Q 7707 will apply.

7755. What is a zero coupon bond? How is the owner taxed?

Zero coupon bonds are obligations payable without interest at a fixed maturity date and issued at a deep discount. Maturities can range from short-term to long-term. For tax purposes, they are considered original issue discount bonds, and the original issue discount is included in ordinary income depending on when issued, as explained in Q 7724 and Q 7737 to Q 7740. (1ap) In the case of a tax-exempt zero-coupon bond, the original issue discount is apportioned among holders as explained in Q 7738, but not included in income. (2ap)

7756. What is a stripped bond?

It is a bond issued with interest coupons where the ownership of any unmatured coupon is separated from the ownership of the rest of the bond. (3ap) It may be a Treasury, corporate or municipal obligation. With respect to purchases after July 1, 1982, a coupon includes any right to interest. (4ap)

In 2002, the Service released guidance on the application of the coupon stripping rules to certain fees payable out of mortgage payments received by mortgage pool trusts. (5ap)

In 2008, the Treasury Department lowered the minimum and multiple amounts of Treasury marketable notes, bonds, and Treasury inflation-protected securities (TIPS) that may be stripped from $1,000 to $100. The change applies to all Treasury marketable securities eligible for stripping (notes, bonds, plus TIPS issued after January 15, 1985) outstanding on and after April 7, 2008. (6ap)

7757. How is an individual taxed who sells separately the corpus or coupons of a taxable bond he originally acquired as a unit?

After July 1, 1982

If an individual strips one or more unmatured coupons (or rights to interest) from a taxable bond and, after July 1, 1982, disposes of the bonds or the coupon(s), the tax treatment is as follows:

(1) he must include in his income (a) any interest accrued but not yet due on the bond at the time of sale (and not already included in income), and (b) with respect to obligations acquired after October 22, 1986, any accrued market discount on the bond (not already included in income);

(2) he must then increase his tax basis in the bond and coupon(s) by the amount of accrued interest and market discount included in income ((1) above);

(3) he must allocate the tax basis immediately before disposition (as increased in (2) above) among the items retained and those disposed of in proportion to their respective fair market values;

(4) the individual is then treated as if he purchased on the date of disposition any part he retains for an amount equal to the basis allocated to the item. He is taxed on the part retained as if it were an original issue discount obligation issued on the date of purchase. The amount of OID is the excess of the amount payable at maturity of the bond or the due date of the coupon, whichever is applicable, over the purchase price. Under regulations effective after August 7, 1991, the discount is disregarded if it is less than 1/4 of 1% (.0025) of the amount so payable multiplied by the full number of years from the date the stripped bond or coupon was purchased to final maturity. (1aq) A person who strips a taxable bond or coupon must include in income original issue discount on the part retained as it accrues without regard to whether it is considered a short-term or long-term obligation; and

(5) he recognizes gain or loss on the part he sells to the extent the amount realized exceeds or is less than the basis allocated to the part sold; the part he sells is treated by the buyer as an original issue discount bond issued on the date of purchase, as discussed in Q 7758. (2aq)

Transfers between spouses, or between former spouses if incident to divorce, are discussed in Q 7555. (3aq)

Before July 2, 1982

A taxpayer who stripped bonds and then sold the bonds and retained the detached coupon properly allocated his entire basis to the stripped bonds and was not required, for purposes of determining loss, to allocate basis between the coupons he detached and retained and the stripped bonds he sold (as is required for transactions occurring after July 1, 1982). (4aq) However, he must treat the coupon as a right to interest, so that on sale or redemption of the coupons, the entire proceeds are interest. (5aq)

7758. How is an individual taxed if he buys a stripped taxable bond corpus or coupons?

After July 1, 1982

A stripped taxable bond or coupon is considered, for tax purposes, as an original issue discount bond issued at the time of purchase. The discount is the amount by which the stated redemption price at maturity of the bond, or the amount payable on the due date of the coupon, exceeds its ratable share of the purchase price. (6aq) Under regulations effective after August 7, 1991, the discount is disregarded if it is less than 1/4 of 1% (.0025) of the amount so payable multiplied by the full number of years from the date the stripped bond or coupon was purchased to final maturity. (7aq)

The owner must include in income each year a portion of the discount and increase his tax basis each year by the amount included (see Q 7737). (Ratable shares of the purchase price are determined on the basis of respective fair market values on the date of purchase.) The amount of discount that accrues each day is determined the same way as the amount of original issue discount on an OID bond that has not been stripped, using the acquisition price instead of issue price in the formula and increasing the acquisition price each accrual period by the amount accrued in the previous period. A stripped coupon has no stated interest for purposes of the formula (see Q 7737). On sale or redemption, any gain or loss is generally capital gain or loss. Where leveraging is used to purchase or carry stripped coupons or bonds (acquired after July 18, 1984) that are payable not more than one year from the date of purchase, it is possible, but not at all clear, that the rules deferring the deductibility of interest expense on short-term obligations may apply (see Q 7928). (1ar)

On or Before July 1, 1982

On sale of a bond that was bought without all unmatured coupons before July 2, 1982 and after December 31, 1957 (or purchased on or before December 31, 1957 but after August 16, 1954 without all coupons maturing more than 12 months after the date of purchase), any gain recognized must be treated as ordinary income up to the amount by which the fair market value the obligation would have had at the time of purchase with the coupons was greater than the actual price the individual paid for the bond without the coupons. (2ar) Gain in excess of that amount may generally be treated as capital gain; (3ar) however, the bond, if originally issued at a discount, may also be subject to the rules discussed in Q 7739.

On sale of coupons bought separately from the bond corpus, any interest accrued but not due at the time an individual purchased a detached coupon and that he paid the seller is recovered tax free. Any additional gain on sale of coupons bought separately prior to maturity is capital gain, but the same gain on redemption at maturity is ordinary income. (4ar) Where a series of coupons is purchased in a block, the cost is allocated among the individual coupons by taking their maturity dates into account. (5ar)

7759. If tax-exempt bonds are stripped, how are the purchaser and seller of the stripped bond or coupons taxed?

If an individual strips one or more unmatured coupons from a tax-exempt bond and, after July 1, 1982, disposes of the bond or the coupon(s), he must increase the tax basis of the bond by any interest accrued but not paid up to the time of disposition and allocate this tax basis between the items disposed of and the items retained, in proportion to their respective fair market values. (He does not include the interest in income.) If he strips coupons after October 22, 1986, he must also increase his basis by accrued original issue discount prior to allocation of basis among the items retained and the items disposed of. The calculation of this original issue discount is explained below. If an individual strips coupons after June 10, 1987, he must also calculate the amount of original issue discount that is allocable to the "tax-exempt portion" of the stripped bond or coupon. Any excess over this amount will be treated as original issue discount attributable to a taxable obligation. (1as)

After June 10, 1987

In the case of a tax-exempt bond stripped after June 10, 1987, a portion of the original issue discount may be treated as if it comes from a taxable obligation. The "tax-exempt portion" of the original issue discount is the excess of the obligation's stated redemption price at maturity (or the amount payable on a coupon's due date) over an issue price that would produce a yield to maturity as of the purchase date of the stripped bond or coupon equal to the lower of (1) the coupon rate of interest on the obligation from which the coupons were stripped, or (2) the yield to maturity (on the basis of the purchase price) of the stripped coupon or bond. Alternatively, the purchaser may use the original yield to maturity in (1), above, rather than the coupon rate of interest. (2as)

Any original issue discount in excess of the "tax-exempt portion" will be treated as discount on an obligation that is not tax-exempt. (3as) The person who strips the bond increases his basis by any interest and market discount accrued on the bond but not yet paid before the disposition, to the extent that such amounts have not previously been reflected in his basis. (4as)

October 23, 1986 through June 10, 1987

In the case of a tax-exempt bond stripped after October 22, 1986 and before June 11, 1987, the amount of original issue discount that is added to the basis of the person who strips the bond is the amount that produces a yield to maturity (as of the purchase date) equal to the lower of (1) the coupon rate before the separation or (2) the yield to maturity (on the basis of purchase price) of the stripped obligation or coupon. The holder increases his basis by this amount (prior to allocating his basis between the parts retained and disposed of) and is then treated as having purchased on the date of disposition any part he retains for an amount equal to the tax basis allocated to the retained item. (5as)

An individual who purchased a stripped tax-exempt bond or coupon after October 22, 1986 but before June 11, 1987 (except as provided below) is treated as if he bought a tax-exempt obligation issued on the purchase date having an original issue discount equal to an amount that produces a yield to maturity of the lower of: (a) the coupon rate of interest before separation, or (b) the yield to maturity, on the basis of purchase price, of the obligation or coupon. (6as) The holder's basis is adjusted to reflect the discount so determined as it accrues at a constant interest rate, but the accruing discount is not included in income. (7as) This rule also applies to obligations purchased after June 10, 1987 if such bond or coupon was held in stripped form by the dealer on June 10, 1987.

Before October 23, 1986

An individual who purchased after December 31, 1957 and before October 23, 1986, a stripped tax-exempt bond without all unmatured coupons (or after August 16, 1954 but before January 1, 1958 without all coupons maturing more than 12 months after purchase) treats, on his subsequent disposition of the bond, any gain as ordinary income to the extent the fair market value with coupons attached exceeds the actual purchase price. (1at) The IRC does not clarify, for purposes of these pre-October 23, 1986 purchases, whether "ordinary income" is to be treated as tax-exempt interest.

7760. When is the interest on United States Savings Bonds Series E or EE taxed?

United States savings bonds (Series E before 1980 and Series EE after), including Patriot Bonds (see below) are issued on a noninterest bearing discount basis. Interest accrues at stated intervals and becomes part of the redemption value paid when the bond is cashed or finally matures. The difference between the price paid and the larger redemption value is interest. Savings bonds continue to accrue interest after the stated maturity until the Treasury announces discontinuance of payments, generally after 30 years. For the new method of calculating interest, see "fixed interest rates," below. This interest is subject to all federal taxes (unless it qualifies for the exclusion described in Q 7762), and the bonds are subject to federal and state estate, inheritance, gift or other excise taxes, but not state or local taxes on principal or interest. (2at) Bonds held less than five years from issue date are subject to a 3-month interest penalty.

Minimum holding period. In 2003, the Treasury Department extended the minimum holding period applicable to United States savings bonds from 6 to 12 months, effective with issues dated on and after February 1, 2003. The minimum holding period is the length of time from issue date that a bond must be held before it is eligible for redemption. Both Series EE and Series I savings bonds are affected. Series EE and Series I savings bonds bearing issue dates prior to February 1, 2003 retain the 6-month holding period in effect when they were issued. (3at)

Fixed interest rates. The Treasury Department has announced that Series EE savings bonds issued on and after May 1, 2005, will earn fixed, instead of variable, rates of interest. (4at) Previously, a new variable rate was announced each May 1 and November 1, and applied to bonds during the first semiannual rate period beginning on or after the effective date of the rate. Consequently, a Series EE bond purchased prior to May 1, 2005, earned a new rate of interest every six months. However, a Series EE bond purchased on or after May 1, 2005, will have one rate of interest that will continue for the life of the bond (although a different rate or method of determining the rate may be used for any extended maturity period).

The interest rate for a Series EE bond issued on or after May 1, 2005, will be a fixed rate of interest as determined by the Secretary of the Treasury and announced each May 1 and November 1. The most recently announced fixed rate will apply to Series EE bonds purchased during the six months following the announcement (or for any other period of time announced by the Secretary). The fixed rate will be established for the life of the bond, including the extended maturity period, unless the Secretary announces a different fixed rate or amends the terms and conditions prior to the beginning of the extended maturity period. All other Series EE terms and conditions remain unchanged. These changes do not affect bonds that were purchased before May 1, 2005. (1au)

Deferred reporting of interest. An owner of E, EE or Series I savings bonds (see Q 7765) who reports on a cash basis may treat the increase in redemption value, for federal income tax purposes, either of two ways:

(1) he may defer reporting the increase to the year of maturity, redemption, or other disposition, whichever is earlier; or

(2) he may elect to treat the increase as income each year as it accrues. (2au)

Ordinarily, an election made by the owner of an E, EE or I bond to report interest annually applies to all E, EE and I bonds he then owns or subsequently acquires. (3au) However, a taxpayer who reports interest annually may elect to change to deferred reporting with automatic consent of the IRS, provided certain requirements are met. To obtain automatic consent for the taxable year for which the change is requested, the taxpayer may file a statement in lieu of Form 3115. (4au) The statement must be identified at the top as follows: "CHANGE IN METHOD OF ACCOUNTING UNDER SECTION 6.01 OF THE APPENDIX OF REV PROC. 2002-9." The statement must set forth:

(i) the Series E, EE, or I savings bonds for which the change in accounting method is requested;

(ii) an agreement to report all interest on any bonds acquired during or after the year of change when the interest is realized upon disposition, redemption, or final maturity, whichever is earliest; and

(iii) an agreement to report all interest on the bonds acquired before the year of change when the interest is realized upon disposition, redemption, or final maturity, whichever is earliest, with the exception of any interest income previously reported in prior taxable years.

The statement must include the name and Social Security number of the taxpayer underneath the heading. (5au) The change is effective for any increase in redemption price occurring after the beginning of the year of change for all Series E, EE, and I savings bonds held by the taxpayer on or after the beginning of the year of change. (6au) The taxpayer must attach the signed statement to his tax return for the year of the change, which must be filed by the due date (including extensions). (7au) (Alternatively, instead of filing the statement, the taxpayer can request permission to change from deferred reporting to annual reporting by filing Form 3115 and following the form instructions for an automatic change.) If the taxpayer is precluded from using the automatic consent procedure under Rev. Proc. 2002-9, above, the taxpayer must file Form 3115 in accordance with the regulations. (8au)

Taxpayers may switch from deferred reporting to annual reporting in any year without permission; however, an election under Revenue Procedure 2002-9 may not be made more than once in any 5-year period. (1av) The year of change is included within the 5-year prohibition regarding prior changes. (2av)

The election to treat accruing interest as income annually is made by including the interest in gross income on the owner's tax return for the year he makes the election. (3av) It may not be made by amended return. (4av) He must include (in the year he elects to report interest annually) the increase in the redemption price of all his E, EE, and I bonds that has occurred since the date of acquisition. If he owns any bond (such as H or HH) that retains interest deferred on an E or EE bond, that interest must also be reported. (5av) After making the election, he must include the actual increase in redemption value that occurs on the stated intervals in each year. (This is not necessarily the amount that would accrue ratably.) (6av)

A bond owner whose income is not sufficient to require filing a return is not deemed to have automatically elected to treat accruing interest as income; however, the election may be made by filing a return reporting the interest, even though no return is otherwise required. (7av)

A previous election to report annual increases in redemption value does not bind anyone to whom the bond is transferred. (8av) For example, an executor who elects to include deferred interest in an estate's income is not bound by the election to report annually when the bond is transferred to him in his capacity as trustee of a trust created under a will. (9av)

To the extent the increase in redemption value (interest) has not been includable in gross income previously by the taxpayer or any other taxpayer, it is included by a cash basis taxpayer for the tax year in which the obligation is redeemed or disposed of. (10av) (For an explanation of the exclusion for interest on certain Series EE and Series I bonds used for educational expenses, see Q 7762.) If the obligation is partially redeemed or partially disposed of by being partially reissued to another person, the increase is included in income by the taxpayer in proportion to the total denominations redeemed or disposed of. (11av)

Similarly, where Series E and EE bonds were transferred incident to a divorce, the transferor was required to include unrecognized interest as income in the year of transfer. The transferee's basis in such bonds was adjusted by adding the amount of interest includable by the transferor. (12av)

Previously, an individual could, at maturity or before, exchange a Series E or EE bond for a Series HH bond (or Series H bond before 1980-but see Editor's Note, Q 7764) without recognizing the unreported interest, except that he must report the interest to the extent he receives cash in the exchange. (1aw)

Transfer of an E/EE bond to a revocable personal trust does not require inclusion of unreported interest in income because the grantor continues to be considered the owner of the bonds. (2aw) Reissuance of a Series H bond (received in exchange of a Series E bond on which reporting of interest has been deferred) to a trustee of a trust where the trust corpus will revert to the grantor and any previously unreported interest is allocable to corpus, will not result in inclusion of the previously unreported interest in the grantor's income. He will include the interest in his gross income in the year the bond is redeemed, disposed of, or reaches final maturity. (3aw)

Surrender of an E bond, bought entirely with his own funds, by one co-owner for reissue in the sole name of the other co-owner causes recognition of unreported appreciation to the date of reissue in the purchasing co-owner's name (see also Q 7607 regarding the gift). (4aw) However, if the bond is reissued in the sole name of the co-owner who originally purchased the bond with his own funds there is no taxable transaction. (5aw)

Patriot Bonds. Patriot Bonds are regular Series EE Savings Bonds specially inscribed with the legend "Patriot Bond." As with regular Series EE Savings Bonds, Patriot Bonds are sold at one-half of face value ($50, $75, $100, $200, $500, $1,000, $5,000, and $10,000). Patriot Bonds earn 90% of 5-year Treasury security yields. Patriot Bonds increase in value monthly, but interest is compounded semiannually. Interest on Patriot Bonds is exempt from state and local income taxes; federal tax can be deferred until the bond is redeemed or it stops earning interest (in 30 years). Patriot bonds can be redeemed anytime after six months for issue dates of January 2003 and earlier; bonds with issue dates on or after February 1, 2003 can be cashed anytime after 12 months. Depending on interest rates, bonds may actually reach face value anywhere between 12 and 17 years. However, a 3-month interest penalty is applied to bonds redeemed before five years. Patriot Bonds can be purchased in person at banks or credit unions, or on the Internet at: http:www.savingsbonds.gov. (6aw)

7761. Can a child owning Series E or EE bonds elect to include interest?

According to IRS Publication 550, if a child is the owner of an E, EE, or I bond, the election to report interest annually may be made by the child or by the parent. The choice is made by filing a return showing all the interest earned through the year and stating that the child is electing to report interest each year. The child then does not have to file another return until he or she has enough gross income during a year to require filing.

A child could elect to change from annual to deferred reporting under Revenue Procedure 89-46.This provision is not included in the current revenue procedure governing such elections. (7aw) However, Publication 550 states that neither the parent nor the child can change the way that interest is reported unless permission from the IRS is requested (in accordance with the procedures outlined in Q 7760).Thus, it appears that a child may make such election. If the election is available, the parent of a child making such an election may sign Form 3115 on behalf of the child. See Q 7515 for an explanation of the taxation and filing requirements of children under age 14.

7762. May the interest on Series EE or Series I bonds used to meet education expenses be excluded from income?

Subject to certain limitations and phaseout rules, interest on qualified United States savings bonds may be excluded from gross income to the extent that the proceeds are used to pay qualified higher education expenses during the taxable year in which the redemption occurs. The exclusion is available only to taxpayers whose modified adjusted gross income falls within certain ranges. (1ax)

The special tax benefits available for education savings with Series EE bonds also apply to Series I (inflation-indexed) savings bonds, provided the requirements set forth below are satisfied. (2ax) For the treatment of inflation-indexed savings bonds, see Q 7765.

Definitions

Qualified United States savings bonds are any United States savings bonds issued (i) after 1989, (ii) to an individual who has attained age 24 before the date of issuance. (3ax) The "date of issuance" is the first day of the month the bonds are purchased; therefore, a purchaser who has just reached the age of 24 and wishes to take advantage of the exclusion should purchase the bonds in the month following his birthday. (4ax)

Qualified higher education expenses are tuition and fees required for enrollment or attendance at an eligible educational institution or certain vocational education schools. Qualified higher education expenses do not include amounts by which educational fees are reduced by items such as scholarships, grants, employer provided educational assistance, or other amounts that reduce tuition. The term also does not include expenses with respect to any course or other education involving sports, games, or hobbies other than as part of a degree program. The IRC specifies "tuition and fees required for enrollment or attendance ... at an eligible educational institution"; the term does not include expenses incurred for room and board or travel expenses to and from college. (5ax)

Qualified higher education expenses include any contribution to a qualified tuition program (formerly known as a qualified state tuition program-see Q 7517) on behalf of a designated beneficiary or to a Coverdell Education Savings Account (formerly known as an Education Individual Retirement Account--see Q 7516) on behalf of an account beneficiary, who is the taxpayer, the taxpayer's spouse, or any dependent with respect to whom the taxpayer is allowed a dependency exemption (see Q 7530). (6ax) For purposes of applying the rules applicable to qualified tuition programs under IRC Section 529, the investment in the contract is not increased because of any portion of the contribution to the program that is not includable in gross income as a qualified higher education expense. (7ax)

The rules allowing the exclusion of interest on qualified United States savings bonds are coordinated with the Hope and Lifetime Learning Credits (see Q 7546). Generally, the amount of the qualified higher education expenses otherwise taken into account under IRC Section 135(a) with respect to the education of an individual is reduced by the amount of the qualified higher education expenses taken into account in determining the credit allowable to the taxpayer or any other person under the rules for the Hope and Lifetime Learning credits with respect to qualified higher education expenses. Likewise, the rules allowing the exclusion of interest on qualified United States savings bonds are also coordinated with the amounts taken into account in determining the exclusions for qualified tuition programs (see Q 7517) and Coverdell Education Savings Account distributions (see Q 7516). (1ay) The above amounts are reduced before the application of the interest limitation and phaseout rules (see below).

Modified adjusted gross income refers to adjusted gross income (AGI) determined without regard to this exclusion and without regard to IRC Sections 137 (exclusions for qualified adoption expenses), 221 (deduction for student loan interest), 222 (deduction for higher education expenses, which expires 12-31-2009), 911, 931, and 933 (the last three sections providing exclusions of foreign earned income or income earned in certain possessions of the United States), but determined after application of IRC Sections 86 (partial inclusion of Social Security and railroad retirement benefits), 469 (adjustments with respect to limitations of passive activity losses and credits), and 219 (adjustments for contributions to IRAs and SEPs). (2ay)

Limitations and Phaseout

If the aggregate proceeds of the bond exceed the amount of expenses paid, the amount of the exclusion is limited to an "applicable fraction" of the interest otherwise excludable. Essentially, this calculation simply reduces the amount of excludable interest pro rata, based on the proportion of educational expenses to redemption amounts. The numerator of the "applicable fraction" is the amount of expenses paid; the denominator is the aggregate proceeds redeemed. For example, a taxpayer whose Series EE bonds have reached maturity may exclude the amount of redemption, up to the amount of fees paid; generally, half of any excess bond proceeds will be treated as taxable interest and the other half as a return of principal. If the qualified education expenses equal or exceed the proceeds of the redemption, this limitation does not apply. (3ay)

An additional limitation is imposed by means of a phase-out rule, designed to confine the tax benefit to lower and middle income taxpayers. The exclusion is phased out beginning at the following levels of modified adjusted gross income in the 2010 tax year; single or head of household--$70,100; married filing jointly--$105,100. The range over which the phaseout occurs is $15,000 (single) or $30,000 (joint return); thus the exclusion is fully phased out at $85,100 for single filers, or $135,100 for married individuals filing jointly. (4ay) (The exclusion is not available to married taxpayers filing separately.) The income levels at which the phase-out begins are indexed for inflation and rounded to the nearest $50. (5ay)

The phaseout amount for tax years beginning in 2010 is calculated as follows:

1. A fraction is determined as follows: (a) the numerator is the excess of the taxpayer's modified adjusted gross income for 2010 over $70,100 (single or head of household) or $105,100 (married filing jointly; (b) the denominator is $15,000 (single or head of household), or $30,000 (joint return). For example, for a single or head of household taxpayer with modified adjusted gross income of $75,100 the ratio would be $5,000 to $15,000, or one-third.

2. The amount otherwise excludable is reduced by that proportion. In the example above, an otherwise permitted exclusion of $12,000 would be reduced by one-third, to $8,000.

The operation of both limitations may be seen in the following example:
   Example: Mr. and Mrs. Mabry pay $18,000 in tuition expenses and
   redeem savings bonds of $20,000 in 2010. They file jointly and
   their modified adjusted gross income is $115,100.

   Exclusion limitation: Of the $20,000 redemption amount, assume that
   $10,000 is return of principal and $10,000 is interest. Since less
   than $20,000 was spent on tuition, the exclusion is limited to the
   amount that represents the proportion of tuition payments to
   redemption proceeds. The applicable fraction is $18,000/$20,000.
   Thus, $9,000 of the $10,000 interest is potentially excludable and
   $1,000 would be taxed as ordinary income.

   Phaseout amount: The threshold amount in 2010 for the phase-out of
   the exclusion is $105,100 (joint return), and their $115,100
   modified adjusted gross income is $10,000 over that amount. The
   ratio of $10,000 to $30,000 is one-third, therefore their otherwise
   excludable interest ($9,000) is reduced by one-third, leaving
   $6,000 that may be excluded from income.


There are several additional rules governing the savings bond exclusion and limiting the potential for abuse of it. The taxpayer must be the original and sole owner of the bond (or own it jointly with his spouse); (1az) a bond purchased from another individual will not qualify for the exclusion. The taxpayer purchasing the bond must have attained the age of 24 by the date of issuance. (This rule prevents savings bonds that are purchased in a child's name to avoid the "kiddie tax" from obtaining preferred treatment when redeemed.) The tuition expenses must be for the taxpayer, the taxpayer's spouse, or a dependent of the taxpayer (with respect to whom he can claim a dependency exemption). The exclusion is not available for bonds obtained as part of a tax-free rollover of Series E savings bonds into Series EE bonds. (2az)

7763. How is interest on a Series E or EE bond taxed after the death of the owner?

An executor or administrator may make an election on behalf of a decedent (who has not previously elected) to include all interest in the decedent's final income tax return. (3az) If the decedent or his representative had not elected to include interest in the decedent's gross income annually, all interest earned before and after death is income to the estate or other beneficiary receiving the bond, either on his election to include interest annually or on redemption, final maturity, or disposal of the bond. Either may defer reporting or elect to report just as any owner (see Q 7760).

Unreported interest earned on E and EE bonds up to the date of death and unreported interest that was part of the consideration for H and HH bonds held at death are income in respect of a decedent. (1ba) The person who eventually includes the deferred interest in income may take a deduction in the year he reports the interest for any estate tax attributable to the income in respect of a decedent (see Q 7536). (2ba) The Service has ruled that in determining the fair market value of Series E savings bonds for estate tax purposes, the estate should not calculate a discount for lack of marketability for the income taxes due on the interest that accrued on the bonds from the date of purchase to the date of maturity. (3ba)

Like the owner of any other E or EE bond, the owner of E and EE bonds acquired from a decedent could exchange them for Series HH bonds (or H bonds before 1980--but see Editor's Note, below) without recognition of unreported interest. (4ba) However, the interest must be included in income on disposal, redemption or final maturity of the H or HH bonds received in the exchange, or on the election of the owner to report annually interest on E and EE bonds. (Editor's Note: The Bureau of the Public Debt stopped offering Series HH Savings Bonds to the public after August 31, 2004. HH bonds issued through August 2004 will continue to earn interest until they reach final maturity 20 years after issue. HH bonds, issued since 1980, are available in exchange for Series E or EE bonds. (5ba))

The Service privately ruled that: (1) the distribution of Series E and Series HH savings bonds from a decedent's estate to several tax-exempt organizations did not result in the recognition of income by the estate; (2) the accrued interest attributable to the bonds would be includable in the gross income of the exempt organizations in the year in which the bonds were disposed of, redeemed, or reached maturity; and (3) assuming that the organizations continued their exempt status, the accrued interest would be exempt when recognized by the organizations. (6ba)

7764. How is the owner of Series H or HH bonds taxed?

Editor's Note: The Bureau of the Public Debt stopped offering Series HH Savings Bonds to the public after August 31, 2004. HH bonds issued through August 2004 will continue to earn interest until they reach final maturity 20 years after issue. HH bonds, issued since 1980, are available in exchange for Series E or EE bonds. (7ba)

Series H and HH bonds are interest-paying United States savings bonds. Interest is paid by check semiannually, and the amounts paid in a year are included in gross income. (8ba) The bonds are nontransferable. Interest received on H/HH bonds is subject to all federal taxes, and the bonds are subject to federal and state estate, gift, inheritance, or other excise taxes but not to state or local taxes on principal or interest. (9ba)

If H or HH bonds were received in exchange for E or EE bonds on which reporting of interest was deferred, the owner may continue to defer reporting the interest accrued on the E or EE bonds exchanged until the year in which the H or HH bonds received in the exchange reach final maturity, are redeemed, or are otherwise disposed of. At that time, the amount of unreported interest on the E or EE bonds that was not recognized at the time of the exchange must be reported as interest. (1bb) HH bonds bear a legend showing how much of the issue price represents interest on the securities exchanged. The owner of Series H or HH bonds received in exchange for E or EE bonds on which reporting was deferred may elect to report the past increases in redemption value of the E or EE bonds. The election would also apply to any other E or EE bonds or H or HH bonds he owns or thereafter acquires in any subsequent years, unless the Service permits him to change his method of reporting. (2bb)

The Service privately ruled that: (1) the distribution of Series E and Series HH savings bonds from a decedent's estate to several tax-exempt organizations did not result in the recognition of income by the estate; (2) the accrued interest attributable to the bonds would be includable in the gross income of the exempt organizations in the year in which the bonds were disposed of, redeemed, or reached maturity; and (3) assuming that the organizations continued their exempt status, the accrued interest would be exempt when recognized by the organizations. (3bb)

7765. How is the owner of Series I bonds taxed?

In 1998, the Treasury Department began offering a type of savings bonds whose rates are adjusted for inflation. Series I (inflation-indexed) savings bonds are sold at par value (face amount) in denominations ranging from $50 to $5,000. (4bb) An individual can purchase no more than $5,000 in Series I bonds during any calendar year. (5bb) The difference between the purchase price and the redemption value is taxable interest, which is payable when the bond is redeemed or finally matures. (6bb) Series I savings bonds mature in 30 years. (7bb)

Series I savings bonds accrue earnings based on both a fixed rate of return and the semiannual inflation rate. (8bb) A single rate is constructed to reflect the combined effects of the two rates. (9bb) The following example demonstrates how the composite earnings rate is determined:
   Example: The 3.36% composite earnings rate for Series I savings
   bonds bought from November 2009 through April 2010 applies for the
   first six months after their issue. The earnings rate combines the
   .30% fixed rate with the 1.53% semiannual inflation rate (as
   measured by the Consumer Price Index for all Urban Consumers
   (CPI-CU)). (10bb)


The formula for computing the composite rate is:

Composite rate = [Fixed rate + (2 x semiannual inflation rate) + (fixed rate x semiannual inflation rate)]

For 2010, the composite rate is calculated as follows:

Composite rate = [0.0030 + (2 x 0.0153) + (0.0030 x 0.0153)]

Composite rate = [0.0030 + 0.0306 + 0.0000459]

Composite rate = [0.0336459]

Composite rate = 0.0336

Composite rate = 3.36%

The fixed rate of return, applicable at the time a Series I savings bond is issued, will apply to the bond throughout its 30-year life. (1bc) The semiannual inflation rate, announced each May and November, will be reflected in a Series I savings bond's value beginning on that bond's next semiannual interest period following the announcement. (2bc) In general, a bond's composite rate will be higher than its fixed rate if the semiannual inflation rate reflects any inflation. In other words, inflation will cause a bond to earn additional interest. Likewise, a bond's composite rate will be lower than its fixed rate if the semiannual inflation rate reflects any deflation. Deflation will cause a bond to increase in value slowly, or not increase in value at all. However, even if deflation becomes so great that it would reduce the composite rate to below zero, the Treasury will not allow the value of a bond to decrease from its most recent redemption value. (3bc)

A Series I savings bond may be redeemed anytime after six months for issue dates of January 2003 and earlier. Bonds with issue dates on or after February 1, 2003 can be cashed anytime after 12 months. A bond redeemed less than five years from the date of issue will be subject to a 3-month interest penalty. (4bc) Tables of redemption values are made available in various formats and media, including the Internet (www.savingsbonds.govj. (5bc) The bonds have an interest paying life of 30 years after the date of issue, and cease to increase in value as of that date. (6bc)

Interest earned on Series I savings bonds is subject to all federal taxes (unless it qualifies for the exclusion described in Q 7762), and the bonds are subject to federal and state estate, inheritance, gift or other excise taxes, but not state or local taxes on principal or interest. (7bc)

Interest earned on Series I savings bonds is includable on federal income tax returns in the same way as Series EE bonds (see Q 7760). (8bc) In general, owners may defer reporting the increment for federal income tax purposes until: (i) they redeem the bonds, (ii) the bonds cease earning interest after 30 years, or (iii) the bonds are otherwise disposed of, whichever is earlier. (9bc) However, an owner may elect to accrue the increment each year it is earned. (10bc) If an investor takes no action, the gain is deferred until the first of the three events described above occurs. (11bc) The increase in value will be includable in income annually only if an investor affirmatively acts by making such an election. (12bc)

The special tax benefits available for education savings with Series EE bonds also apply to Series I savings bonds. (1bd) (See Q 7762.) Essentially, a taxpayer who otherwise satisfies the requirements set forth in IRC Section 135 (see Q 7762) may be able to exclude all or part of the interest earned on Series I savings bonds from income for that tax year. (2bd)

Series I savings bonds are nontransferable. (3bd) Although these bonds can be exchanged for Series EE savings bond, they can no longer be exchanged for Series HH savings bonds because the Bureau of Public Debt stopped offering Series HH bonds to the public effective August 31, 2004.

7766. What is a "Ginnie Mae" mortgage backed pass-through certificate?

A Ginnie Mae pass-through certificate represents ownership of a proportionate interest in a fixed pool of mortgages insured or guaranteed by the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), the Department of Agriculture's Rural Housing Service (RHS), and the Department of Housing and Urban Development's Office of Public and Indian Housing (PIH). The mortgages in the pool have the same interest rate, term to maturity, and type of dwelling. The certificates are generally issued by a mortgage banker or savings and loan association and are secured by the pool of mortgages that have been placed by the issuer with a bank custodian. They call for payment by the issuer of specified monthly installments based on the amortization schedules of the mortgages in the pool. In addition, the certificates provide for payment of a proportionate share of prepayments or other early recoveries of principal. An amount is withheld each month by the issuer to discharge the certificate holder's obligation to pay servicing, custodian and guarantee fees. Pass-through certificates may be either "fully modified" or "straight."

Timely payment of the principal and interest, whether or not collected, is guaranteed to the fully modified pass-through certificate holder by the Government National Mortgage Association (GNMA, or "Ginnie Mae"). Straight pass-through certificates provide for the payment by the issuer of a proportionate share of proceeds, as collected, on the pool of mortgages, less servicing fees and other costs. Straight pass-through certificates are guaranteed by GNMA only as to proper servicing of the mortgages by the issuer (i.e., payment of interest and principal actually collected or collectible through due diligence).

The full faith and credit of the United States is pledged to the payment of all amounts guaranteed by GNMA. (4bd) Certificates are issued in registered form and are fully transferable and assignable. They are marketable in the secondary market. They are available in minimum denominations of $25,000 ($1 thereafter) and may be available for less in the secondary market. The maximum maturity is 30 years; however, experience has shown that the average life is shorter. If all certificate holders and the issuer agree, the pool arrangement may be terminated at any time prior to the final maturity date.

Similar mortgage backed pass-through certificates are issued and guaranteed by "Fannie Mae" (Federal National Mortgage Association or FNMA), but are not backed by the full faith and credit of the United States.

7767. How is the monthly payment on Ginnie Mae mortgage backed pass-through certificates taxed?

Payments on pass-through certificates to certificate holders are made monthly. Each payment represents part interest and part principal (i.e., payments on the underlying portfolio of mortgages passed through to certificate holders). The issuer provides each certificate holder with a monthly statement indicating which part of the distribution represents scheduled principal amortization, which part is interest, and which part represents unscheduled collection of principal. Interest and other items of income, including prepayment penalties, assumption fees, and late payment charges, must be included in gross income in the year received. Principal payments are tax free to the extent they represent recovery of capital. (1be) To the extent they represent discount on purchase of the mortgages, they must be included as ordinary income; as owners of undivided interests in the entire pool, pass-through certificate owners must include as ordinary income their ratable shares of any discount income realized on purchase of each of the mortgages in the pool. Discount on mortgages that are taxable obligations of corporations or governments or their political subdivisions, is included in income as original issue discount under the rules discussed in Q 7737 to Q 7740. (2be)

Income from Ginnie Mae certificates is not exempt from state taxation despite the pledging of the full faith and credit of the United States on all amounts guaranteed by the GNMA because the government is a guarantor, not an obligor, of the instruments. (3be)

Amounts withheld by the issuer of the certificate to pay servicing, custodian and guarantee fees are expenses incurred for the production of income. (See Q 7931 for an explanation of the rules governing deduction of such expenses by pass-through entities.) Certificate holders may amortize their proportionate share of any premium paid to acquire mortgages under rules applicable to corporate interest-bearing bonds-see Q 7741. (4be)

7768. What is a "REMIC?"

A REMIC is a "real estate mortgage investment conduit." In general, a REMIC is a fixed pool of real estate mortgages that issues multiple classes of securities backed by the mortgages and that has elected to be taxed as a REMIC. It can issue several different classes of "regular interests" and must issue one (and only one) class of "residual interests." (5be) A regular interest is a debt obligation (or is treated as one) and a "residual interest" participates in the income or loss of the REMIC. (6be) A REMIC is not treated as a separate taxable entity (unless it engages in certain prohibited transactions); instead, the income is taxable to the interest holders as explained in Q 7769. (7be)

Generally, entities that do not qualify as REMICs, but that issue multiple maturity debt obligations, the payments on which are related to payments on the mortgages and other obligations held by the entity, are classified as Taxable Mortgage Pools (TMPs). (1bf) (Domestic building and loan associations are not considered TMPs.) TMPs are taxed as corporations. (2bf)

7769. How is the owner of a REMIC interest taxed?

As a general rule, REMICs issue several classes of "regular" interests and a single class of "residual interests." Interests are subject to federal income tax under the following rules.

Regular Interests

An interest in a REMIC is a regular interest if it (1) was issued as a designated regular interest on the "startup day" selected by the REMIC, (2) unconditionally entitles the holder to a specified principal amount, and (3) provides for interest payments (if any) that (a) are based on a fixed rate, or, to the extent provided in regulations, at a variable rate, or (b) consist of a specified, unvarying portion of the interest payments on qualified mortgages. (3bf) See Notice 93-11 (4bf) for the Service's acceptance of a floating rate as a variable rate. (5bf)

Under regulations effective for most obligations issued on or after April 4, 1994, a variable rate includes a qualified floating rate as defined in Treas. Reg. [section]1.1275-5(b)(1). (6bf) In addition, a rate equal to the highest, lowest, or average of two or more qualified floating rates is a variable rate for purposes of IRC Section 860G.

A REMIC may issue a regular interest that bears interest that can be expressed as a percentage of the interest payable on a specified portion of a regular interest acquired from another REMIC (sometimes called a specified portion regular interest or an "Interest Only" interest or "IO"). (7bf) The Treasury Department and the Service are considering whether to issue regulations with respect to the tax treatment of REMIC IOs for issuers and initial- and secondary-market purchasers. An advance notice of proposed rulemaking was released in 2004 regarding the proper timing of income or deduction attributable to an "interest only" regular interest in a REMIC. The advance notice provided additional background information and set forth summary descriptions of possible approaches to the pertinent issues. (8bf) Nothing has yet come of this project, however.

The timing (but not the amount) of the principal payment may be contingent on the extent of prepayment on mortgages and the amount of income from permitted investments. (9bf) No minimum specified principal amount is required; it may be zero. (10bf)

Similar requirements apply if the interest is in the form of stock, a partnership interest, interest in a trust, or other form permitted under state law. If an interest is not in the form of debt, it must entitle the holder to a specified amount (even if it is zero) that would, if it were issued in debt form, be identified as the principal amount of the debt. (1bg)

A REMIC may issue regular interests that are subordinated to other classes of regular interests, which bear all or a disproportionate share of losses or expenses from cash flow shortfalls such as, for example, losses from defaults or delinquencies on mortgages or other permitted investments. (2bg)

The Service has ruled that in the event that payments received from certain pre-existing interests were insufficient to distribute interest at the applicable stated rate on interests in a newly formed REMIC, a "funds-available" cap would not prevent the new interests from qualifying as regular interests under IRC Section 860G. (3bg)

Generally, holders of regular interests are taxed as if the interest were a debt instrument, except that holders must account for income from the interest on the accrual basis method (regardless of the accounting method otherwise used by the holder). IRC Sec. 860B. Periodic payments of interest (or similar amounts) are treated as accruing pro rata between interest payment dates. Original issue discount on regular interests is includable as it accrues. Special rules apply to the determination of original issue discount on regular interests. (4bg) For proposed regulations issued in 2004 addressing the special rule for accruing original issue discount on certain REMIC regular interests, which provide for delayed payment periods of fewer than 32 days, see Prop. Treas. Reg. [section]1.1275-2(m); REG-108637-03. (5bg)

The IRC prohibits (with some exceptions) the indirect deduction through pass-through entities of amounts that would not be allowable as a deduction if paid or incurred directly by an individual. (6bg) Under some circumstances (e.g., if the REMIC is substantially similar to an investment trust) holders of regular interests may be required under IRC Section 67(c) and regulations thereunder to include in income as interest an allocable share of certain investment expenses of the REMIC. The amount may be deducted as a miscellaneous itemized deduction if the holder itemizes deductions; however, aggregate miscellaneous deductions are subject to a 2% floor. (7bg) No increase in basis is allowed for the amount passed through as miscellaneous expense even though it is included in income. (8bg) See Q 7532 regarding the treatment of miscellaneous itemized deductions.

The REMIC is required to report to regular interest holders' amounts includable as interest and original discount and the allocable share of expenses. (9bg) However, under regulations effective June 16, 2000, the requirement that REMIC issuers set forth certain "legending" information on the face of certificates when issued (i.e., the total amount of original issue discount on the instruments, the issue date, the rate at which interest is payable as of the issue date, and the yield to maturity) has been eliminated. (10bg)

On disposition, gain is ordinary income to the extent that it does not exceed the excess (if any) of (1) the interest the holder would have included in gross income if the yield on the regular interest were calculated at a rate of 110% of the applicable federal rate as of the beginning of the taxpayer's holding period, over (2) the amount of interest actually includable in gross income by the taxpayer prior to disposition. (1bh)

Regular interests may be treated as market discount bonds (see Q 7730) if the revised issue price (within the meaning of IRC Section 1278) exceeds the holder's basis in the interest. Market premium on a regular interest can be amortized currently (see Q 7741).

FASIT transfers to REMICS. The FASIT rules have been repealed. (2bh) (See Q 7770.) The amendments are generally effective on January 1, 2005. (3bh) The definitions of REMIC regular interests, qualified mortgages, and permitted investments have been modified so that certain types of real estate loans and loan pools can be transferred to, or purchased by, a REMIC. According to the Conference Committee Report, modifications to the present-law REMIC rules are intended to permit the use of REMICS by taxpayers that have relied on FASITs to securitize certain obligations secured by interests in real property. (4bh)

Residual Interests

In general, a residual interest is any interest in the REMIC, other than a regular interest, that is issued on the startup day and is designated as a residual interest. (5bh) However, there may be only one class of such interests and any distributions with respect to such interests must be pro rata. (6bh)

The holder of a residual interest takes into account his daily portion of the taxable income or net loss of the REMIC for each day that he held the interest during his taxable year. (7bh) Any reasonable convention may be used to determine the holder's daily portion of income or loss. (8bh) This amount is treated as ordinary income or loss. IRC Sec. 860C(e). Such income in excess of daily accruals of income on the issue price at 120% of the long term federal rate is called "excess inclusions," and a holder of a residual interest can in no event have a taxable income of less than his excess inclusions. In other words, they cannot be offset by any deductions. (9bh)

In addition, a REMIC must allocate to certain residual interest holders each calendar quarter a proportionate share of investment expenses paid or accrued for the quarter for which a deduction is allowed under IRC Section 212 to the REMIC: these holders are individuals, any other persons (such as a trust or estate) that compute taxable income in the same manner as an individual, and certain pass-through entities (such as partnerships, S corporations and grantor trusts) having as a partner, shareholder, beneficiary, participant or interest holder an individual, a person who computes taxable income in the same manner as an individual, or a pass-through entity. Such a residual interest holder must include in income his allocable share of these expenses and may deduct them as miscellaneous itemized expenses subject to the 2% floor. (1bi)

Distributions from a REMIC are not included in gross income by the holder unless they exceed his adjusted basis in the interest. To the extent distributions exceed his basis, the excess is treated as gain from sale of the residual interest. (2bi) The amount of net loss that may be taken into account by the holder with respect to any calendar quarter is limited to the adjusted basis of his interest as of the close of the quarter; disallowed loss may be carried over indefinitely in succeeding quarters. (3bi)

The adjusted basis of a residual interest is increased by the amount of taxable income of the REMIC taken into account by the holder; it is decreased (not below zero) by the amount of distributions and by any net loss taken into account. (4bi) However, no increase in the holder's basis is allowed for the amount of miscellaneous expenses allocated to him and included in his income. (5bi)

With certain exceptions, a REMIC's taxable income, for purposes of determining the amount includable by holders of residual interests, is determined in the same manner as for individuals, using a calendar year and using the accrual method of accounting. (6bi)

The Service privately ruled that whether a holder is liable for taxes associated with a noneconomic REMIC residual interest depends on the facts and circumstances associated with the transfer of the interest. (7bi)

The REMIC is required to provide information quarterly (on Schedule Q) to holders of residual interests regarding their share of income or loss, the amount of excess inclusion, and allocable investment expenses. (8bi)

For purposes of the wash sale rule (see Q 7651), a residual interest in a REMIC is treated as a security and, except as provided in regulations, such a residual interest and an interest in a "taxable mortgage pool" are treated as substantially identical stock or securities. Furthermore, the 30-day period in the wash sale rule is enlarged to six months in applying it to such interests. (For this purpose, the definition of a taxable mortgage pool is treated as if in effect in tax years beginning after 1986.) (9bi)

The Service released regulations in 2002 relating to safe harbor transfers of noneconomic REMIC residual interests in REMICs. The regulations provide additional limitations on the circumstances under which transferors may claim safe harbor treatment. (10bi)

The Service also issued regulations in 2008 relating to income associated with a residual interest in a REMIC and that is allocated through certain entities to foreign persons who have invested in those entities. (11bi)

If a charitable remainder trust (CRT-see Q 7949, Q 7951, and Q 7952) is a partner in a partnership or a shareholder in a real estate investment trust (REIT-see Q 7903), and if the partnership or the REIT has excess inclusion income from holding a residual interest in a REMIC, the Service has ruled that: (1) the excess inclusion income allocated to a CRT is not UBTI to the CRT and, thus, does not affect the CRT's tax exemption for the taxable year; (2) a CRT is a disqualified organization for purposes of IRC Section 860E; and (3) a pass-through entity that has excess inclusion income allocable to a CRT is subject to the pass-through entity tax under IRC Section 860E(e)(6)(A). (1bj) In a legal memorandum, the Service concluded that, in general, a holder of a residual interest in a REMIC may not offset excess inclusion income by an otherwise allowable charitable contribution deduction. (2bj)

In 2006 the Service provided interim guidance relating to excess inclusion income of pass-through entities, particularly real estate investment trusts (see Q 7903). The interim guidance applies to excess inclusion income from REMIC residual interests (and REIT taxable mortgage pools), whether received directly or allocated from another pass-through entity. (3bj)

Rules for coordinating excess inclusions with net operating losses: Any "excess inclusion" (see above) for any taxable year is not to be taken into account in determining the amount of any net operating loss (NOL) for the taxable year (i.e., in determining the loss for a "loss year"). (4bj) Any excess inclusion for a taxable year is not to be taken into account in determining taxable income for the taxable year for purposes of the second sentence of IRC Section 172(b)(2). (5bj) The Service has ruled that in computing an NOL for the taxable year, no excess inclusion is taken into account. If, during the same taxable year, a taxpayer both recognizes an excess inclusion and incurs an NOL, the excess inclusion may not be offset by the NOL and is not taken into account in determining the amount of the NOL that may be carried to another taxable year. The Service has further ruled that if an NOL is carried back or carried over to a taxable year in which an excess inclusion is recognized, the excess inclusion cannot be offset by the NOL carryback or carryover, and is not included in the calculation of taxable income for NOL absorption purposes. (6bj)

REMIC Inducement Fees. In 2004, the IRS released regulations relating to the proper timing and source of income from fees received to induce the acquisition of noneconomic residual interests in REMICS. The regulations provide that an inducement fee must be included in income over a period reasonably related to the period during which the applicable REMIC is expected to generate taxable income (or net loss) allocable to the holder of the noneconomic residual interest. Under a special rule applicable upon disposition of a residual interest, if any portion of an inducement fee received with respect to becoming the holder of a noneconomic residual interest has not been recognized in full by the holder as of the time the holder transfers (or otherwise ceases to be the holder for federal income tax purposes) of that residual interest in the applicable REMIC, the holder must include the unrecognized portion of the inducement fee in income at that time. The regulations set forth two safe harbor methods of accounting for inducement fees, and also contain a rule that an inducement fee is income from sources within the United States. (1bk) The Service also released the procedures by which taxpayers can obtain automatic consent to change from any method of accounting for inducement fees to one of the two safe harbor methods. (2bk) The Service reached a settlement with two entities that purportedly brokered noneconomic residual interests in a manner based on what the IRS perceived to be an overly aggressive interpretation of the tax laws. (3bk)

7770. What is a "FASIT"?

Editor's Note: The FASIT rules have been repealed. (4bk) (For the underlying reasons triggering the repeal, see H.R. Conf. Rep. No. 108-755 (AJCA 2004).) The amendments are generally effective on January 1, 2005. (5bk) However, the repeal provision also provides a transition period for existing FASITS, under which the repeal of the FASIT rules generally does not apply to any FASIT in existence on the date of the enactment to the extent that regular interests issued by the FASIT prior to such date continue to remain outstanding in accordance with their original terms of issuance. (6bk) See Q 7769 for modifications to the present-law REMIC rules that permit the use of REMICs by taxpayers that have relied upon FASITs to securitize certain obligations secured by interests in real property.

A financial asset securitization investment trust (FASIT) is any entity (1) for which an election to be treated as a FASIT applies for the taxable year, (2) all of the interests in which are regular interests or the ownership interest (as defined in Q 7771), (3) that has only one ownership interest and such ownership interest is held directly by an eligible corporation, (4) "substantially all" (see "substantiality test" below) of the assets of which consist of permitted assets as of the close of the third month beginning after the day of its formation and at all times thereafter (except during liquidation), and (5) is not a regulated investment company (see Q 7885). (7bk) Transition rules apply to securitization trusts in existence before September 1, 1997 that elected FASIT treatment. (8bk)

FASITs are a type of investment instrument that are designed to facilitate the securitization of debt obligations such as credit card receivables, home equity loans, and automobile loans. (9bk) A regular interest in a FASIT may be held by any person; however, if the interest constitutes a high-yield interest, it may be held only by another FASIT or an eligible corporation. (10bk) An ownership interest may be held only by an eligible corporation. (11v) An eligible corporation is any non-exempt domestic C corporation other than a RIC, REIT, REMIC, or subchapter T cooperative. (12bk) See Q 7771 for the definitions of regular interest, high-yield interest, and ownership interest.

For purposes of IRC Section 860L(a)(1)(D), a FASIT meets the "substantiality test" if the aggregate adjusted basis of its assets other than permitted assets is less than 1% of the aggregate adjusted basis of all its assets. (1bl) Permitted assets that may be held by a FASIT are: (1) cash or cash equivalents; (2bl) (2) any debt instrument (as defined in IRC Section 1275(a)(1)) under which interest payments (or other similar amounts), if any, at or before maturity meet certain requirements applicable to regular interests in a REMIC (see Q 7769); (3) foreclosure property (as defined in IRC Section 860L(c)(3) (3bl)); (4) any asset (i) that is an interest rate or foreign currency notional principal contract, letter of credit, insurance, guarantee against payment defaults, or other similar instrument permitted by the Secretary, and (ii) that is reasonably required to guarantee or hedge against the FASIT's risks associated with being the obligor on interests issued by the FASIT (4bl)); (5) contract rights to acquire debt instruments described under (2) above, or assets described under (4) above (5bl)); (6) any regular interest in another FASIT; and (7) any regular interest in a REMIC. (6bl) Special rules apply for contracts or agreements in the nature of a line of credit. (7bl) Permitted assets do not include any debt instrument issued by the holder of the ownership interest or a related person other than a cash equivalent, or any direct or indirect interest in such a debt instrument. (8bl)

A permitted debt instrument is: (1) a fixed rate debt instrument, including a debt instrument having more than one payment schedule for which a single yield can be determined under Treas. Regs. [section][section]1.1272-1(c) or 1.1272 1(d); (2) a variable rate debt instrument within the meaning of Treas. Reg. [section]1.1272-5 if the debt instrument provides for interest at a qualified floating rate within the meaning of Treas. Reg. [section]1.1275-5(b); (3) a REMIC regular interest; (4) a FASIT regular interest (including a FASIT regular interest issued by another FASIT in which the owner (or a related person) holds an ownership interest); (5) an inflation-indexed debt instrument as defined in Treas. Reg. [section]1.1275-7; (6) any receivable generated through an extension of credit under a revolving credit agreement (such as a credit card account; (7) a stripped bond or stripped coupon (as defined in IRC Sections 1286(e)(2) and 1286(e)(3)), if the debt instrument from which the stripped bond or stripped coupon is created is described in (1)--(6), above; and (8) a certificate of trust representing a beneficial ownership interest in a debt instrument described in items (1)-(7), above. (9bl) Special rules apply to short-term instruments issued by the owner or a related person. (10bl) Debt instruments that are not permitted assets include: (1) an equity-linked debt instrument (e.g., a debt instrument convertible into stock); (2) a defaulted debt instrument; (3) owner debt; (4) certain owner-guaranteed debt; (5) a debt instrument linked to the owner's credit; (6) partial interests in non-permitted debt instruments; and (7) certain foreign debt subject to withholding tax. (11bl)

Once an entity elects to be treated as a FASIT, the election applies for all subsequent taxable years unless revoked with the consent of the Service. In the event the entity ceases to be a FASIT, it will not be treated as a FASIT after the date of cessation unless the termination is inadvertent and adjustments are made to restore the entity to FASIT status. (12bl)

Under proposed regulations issued in 2000, unlikely with the repeal of the FASIT rules ever to be finalized, in the event of cessation, the FASIT owner is treated as disposing of the FASIT's assets for their fair market value in a prohibited transaction. Gain on this deemed distribution is subject to the prohibited transactions tax. Any loss is disallowed. (1bm) The owner must recognize cancellation of indebtedness income in an amount equal to the adjusted issue price of the regular interests outstanding immediately before the cessation over the fair market value of those interests immediately before the cessation. (2bm) Holders of the regular interests are treated as exchanging their FASIT regular interests for interests in the underlying arrangement. Gain must be recognized if a regular interest is exchanged either for an interest not classified as debt or for an interest classified as debt that differs materially either in kind or extent. No loss may be recognized on the exchange. (3bm) The underlying arrangement is no longer treated as a FASIT and generally is prohibited from being the subject of a new FASIT election. In addition, the underlying arrangement is treated as holding the assets of the terminated FASIT and is classified under general tax principles (e.g., as a corporation or partnership). (4bm)

A FASIT is not treated as a taxable entity (however, a penalty is imposed on the holder of the ownership interest if the FASIT engages in certain prohibited transactions); instead, the income is taxable to the interest holders as explained in Q 7771. (5bm)

7771. How is the holder of a FASIT interest taxed?

Editor's Note: The FASIT rules have been repealed. (6bm) The amendments are generally effective on January 1, 2005. (7bm) However, the provision provides a transition period for existing FASITS under which the repeal of the FASIT rules generally does not apply to any FASIT in existence on the date of the enactment to the extent that regular interests issued by the FASIT prior to such date continue to remain outstanding in accordance with their original terms of issuance. (8bm) See Q 7769 for modifications to the present-law REMIC rules that permit the use of REMICs by taxpayers that have relied upon FASITs to securitize certain obligations secured by interests in real property.

A financial asset securitization investment trust (FASIT--see Q 7770) may issue one or more classes of "regular interests" and a single "ownership" interest. (9bm) Transition rules apply to securitization trusts in existence before September 1, 1997, that elected FASIT treatment. (10bm)

Regular Interests

A regular interest is any interest that is issued by a FASIT on or after the startup day with fixed terms and that is designated as a regular interest if it (1) unconditionally entitles the holder to receive a specified principal amount (or other similar amounts) as described below, (2) provides that interest payments, if any, are based on a fixed rate or, to the extent provided in regulations, at a variable rate, (3) does not have a stated maturity (including options to renew) greater than 30 years, although a longer period may by permitted by regulations, (4) has an issue price that does not exceed 125% of its stated principal amount, and (5) has a yield to maturity less than the sum of the applicable federal rate for the calendar month in which the obligation is issued plus five percentage points. (1bn)

A regular interest will not fail to meet the first requirement merely because the timing (but not the amount) of the principal payments (or similar amounts) may be contingent on (a) the extent to which payments on debt instruments held by a FASIT are made in advance of anticipated payments and on (b) the amount of income from permitted assets. (2bn) The term startup day means the date designated in the FASIT election as the startup day of the FASIT. (3bn) The issue price of a FASIT regular interest not issued for property is determined under IRC Section 1273(b). (4bn) Notwithstanding IRC Sections 1273 and 1274, the issue price of a FASIT regular interest issued for property is the fair market value of the regular interest determined as of the issue date. (5bn)

Generally, a holder of a regular interest is taxed as if the regular interest were a debt instrument, except that a holder must account for income from the interest on an accrual basis (regardless of the accounting method otherwise used by the holder). (6bn) The holder of a regular interest will not be subject to special rules under IRC Section 163(e)(5) for original issue discount on certain high-yield obligations. (7bn)

High-Yield Interests

The term regular interest may also include any high-yield interest. A high-yield interest is one that would meet the definition of a regular interest except that it does not meet one or more of the clauses of requirements (1), (4), or (5) in the definition of regular interests above. Furthermore, an interest that fails to meet requirement (2), above, may constitute a high-yield interest if interest payments (or similar amounts), if any, consist of a specified portion of the interest payments on permitted assets (see Q 7770 for a definition of permitted assets) and such portion does not vary during the period such interest is outstanding. A high-yield interest can be held only by another FASIT or an eligible corporation (defined in Q 7770). (8bn)

The taxable income of a holder of a high-yield interest may not be less than the sum of (1) the holder's taxable income determined solely with respect to such interests and (2) any excess inclusion (if any) imposed on the holder of a residual interest of a REMIC. (9bn) Any increase in taxable income for any taxable year that results from the application of the above rule is disregarded in determining the amount of any net operating loss for the taxable year and determining taxable income for purposes of carrybacks and carryforwards of a net operating loss. (10bn) Similar rules apply to the holders of high-yield interests subject to the alternative minimum tax. (11bn)

Special rules apply to high-yield interests that are held by disqualified holders. (1bo) A disqualified holder is any holder other than a FASIT or an eligible corporation (as defined in Q 7770). (2bo)

Ownership Interest

An ownership interest is defined as any interest issued by the FASIT after the startup day (defined above) that is designated as an ownership interest and is not a regular interest. (3bo) A FASIT may have only one ownership interest, which must be directly held by an eligible corporation (see Q 7770). (4bo)

The following rules are applied in determining the taxable income of the holder of an ownership interest in a FASIT: (1) all assets, liabilities, and items of income, gain, deduction, loss, and credit of a FASIT are treated as those of the ownership interest holder; (2) a constant yield method (including the special rules under IRC Section 1272(a)(6) for accelerated payments) under the accrual method of accounting must be used to determine all interest, acquisition discount, original issue discount, market discount, and premium deductions or adjustments with respect to each debt instrument of the FASIT; (3) no items of income, gain, or deduction allocable to a prohibited transaction are taken into account, and (4) any tax-exempt interest accrued by the FASIT is treated as ordinary income of the holder. (5bo)

For the owner's annual reporting requirements, including the manner in which the items of income, gain, loss, deduction, and credit from permitted transactions and prohibited transactions are to be taken into account separately, see Prop. Treas. Reg. [section]1.860H-6(e).The method of accounting for permitted hedges, and the character of such hedges, are set forth in Prop. Treas. Reg. [section]1.860H-6(c). Rules coordinating the FASIT owner rules with the mark to market provisions are stated in Prop. Treas. Reg. [section]1.860H-6(d). For the rule governing the transfer of an ownership interest, see Prop. Treas. Reg. [section]1.860H-6(g). In early 2001, the Service announced an alternative safe harbor under which the transfer of a FASIT ownership interest is presumed to be accomplished without an intention to impede the assessment or collection of tax. (6bo)

A prohibited transaction means (1) the receipt of any income derived from any asset that is not a permitted asset (as defined in Q 7770) (with certain exceptions), (2) the disposition of any permitted asset other than foreclosure property (with certain exceptions), (3) the receipt of any income derived from any loan originated by the FASIT, (7bo) and (4) the receipt of any income representing a fee or other compensation for services (other than any fee received as compensation for a waiver, amendment, or consent under permitted assets not acquired through foreclosure). (8bo) The receipt of any income derived from any asset that is not a permitted asset will not constitute a prohibited transaction where income is derived from the disposition of certain former hedge assets or contracts to acquire such assets. (9bo) Additionally, dispositions of permitted assets that will not constitute a prohibited transaction include certain substitutions of debt instruments to reduce over-collateralization, certain transactions that are excepted from the prohibited transactions penalty under the REMIC rules (see Q 7769), and the complete liquidation of any class of regular interests. (1bp)

Whether an activity will or will not be presumed to be loan origination is determined under Proposed Treasury Regulation Sections 860L-1(a)(2) and 1.860L-1(a)(3). The proposed regulations provide five safe harbors to limit the scope of the prohibited transaction rules as they relate to loan origination. (2bp) The distribution to the owner of a debt instrument contributed by the owner, and the transfer to the owner of one debt instrument in exchange for another, are prohibited transactions if within 180 days of receiving the debt instrument the owner realizes a gain on the disposition of the instrument to any person regardless of whether the realized gain is recognized. (3bp) To clarify the application of the distribution rule, the proposed regulations deem a distribution of a debt instrument to be carried out principally to recognize gain if the owner (or a related person) sells the substituted or distributed debt instrument at a gain within 180 days of the substitution or distribution. (4bp)

The taxable income of a holder of an ownership interest may not be less than the sum of (1) the holder's taxable income determined solely with respect to such interests and (2) any excess inclusion (if any) of a holder of a residual interest of a REMIC. (5bp) Any increase in taxable income for any taxable year that results from the application of the above rule is disregarded in determining the amount of any net operating loss for the taxable year and determining taxable income for purposes of carrybacks and carryforwards of a net operating loss. (6bp) Similar rules apply to the holders of an ownership interest subject to the alternative minimum tax. (7bp)

Gain recognition on property transferred to FASIT. If property is sold or contributed to a FASIT by the holder of the ownership interest (or a related person), gain (but not loss) is recognized by the holder (or related person) in an amount equal to the excess (if any) of the property's value (determined under IRC Section 860I(d)) on the date of sale or contribution over its adjusted basis on such date. (8bp) If the FASIT acquires property other than from a holder of an ownership interest or related person, the property is treated as having been acquired by the holder of the ownership interest for an amount equal to the FASIT's cost of acquiring such property, and then as having been sold to the FASIT at the value determined under IRC Section 860I(d). (9bp) An owner (or a related person) does not have to recognize gain under IRC Section 860I on a transfer or pledge of property to a regular interest holder if the owner (or related person) makes the transfer or pledge in a capacity other than as owner (or related person) and the regular interest holder receives the transfer or pledge in a capacity other than regular interest holder. (10bp)

Determination of value for gain recognition purposes. The value of property, for purposes of the FASIT provisions, is determined under special rules set forth in IRC Section 860I(d). In the case of a nonpublicly traded debt instrument, the value is equal to the sum of the present values of the reasonably expected payments under such instrument determined (in the manner provided by regulations prescribed by the Secretary) (1) as of the date of the event resulting in the gain recognition under IRC Section 860I and (2) by using a discount equal to 120% of the applicable federal rate (see Q 7513), or such other discount rate specified in the regulations, compounded semiannually. (1bq) Reasonably expected payments on an instrument must be determined in a commercially reasonable manner and may take into account reasonable assumptions concerning early repayments, late payments, non-payments, and loan servicing costs. No other assumptions may be considered. (2bq) Any assumption used in determining the reasonably expected payments on an instrument must satisfy the consistency test. (3bq) In addition to the consistency test, the proposed regulations place a ceiling on projected loan servicing costs. (4bq)

The proposed regulations provide exceptions from the special valuation rules (discussed above) for certain beneficial and stripped interests. (5bq) The proposed regulations also provide an exception for certain debt instruments that are contemporaneously purchased and transferred to the FASIT (i.e., the spot purchase rule). Under this provision, the value of a debt instrument is its cost to the owner if four conditions are met. (6bq) The special valuation rule for guarantees is set forth in Prop. Treas. Reg. [section]1.860I-2(d)(4).

In the case of any other property (i.e., debt traded on an established securities market), the value is its fair market value. (7bq) A debt instrument is traded on an established securities market if it is traded on a market described in Treasury Regulation Sections 1.1273-2(f)(2), 1.1273-2(f)(3), or 1.1273-2(f)(4). (8bq) In the case of revolving loan accounts, each extension of credit (other than the accrual of interest) will be treated as a separate debt instrument, and payments on such extensions of credit having substantially the same terms will be applied to such extensions beginning with the earliest extension. (9bq)

Gain is determined and recognized immediately before the property is transferred to the FASIT or becomes support property, or in the case of foreclosure property, on the day immediately following the termination of the grace period allowed for foreclosure property. (10bq)

If property held by the holder of the ownership interest in a FASIT (or by a person related to such holder) supports any regular interest in the FASIT, gain is recognized to the holder or related person in the same manner as if the holder had sold the property (at the value determined under IRC Section 860I(d)) on the earliest date that the property supports such an interest. In addition, the property is treated as held by the FASIT. (11bq) Support property is defined in Prop. Treas. Reg. [section]1.860I-1(b).

Future regulations were authorized that would have provided for the deferral of gain that would otherwise have been recognized under IRC Section 860I(a) or IRC Section 860I(b) above (but see Editor's Note, above). (12bq)

The basis of any property on which gain is recognized under the FASIT rules is increased by the amount of such gain. (1br) Furthermore, the rules governing recognition of gain by FASITs supersede any other nonrecognition provisions (e.g. like-kind exchanges) that might otherwise apply. (2br)

For purposes of the FASIT rules, persons are related if they meet the definition with respect to individuals described in IRC Section 267(b) or controlled partnerships under IRC Section 707(b), except that in applying IRC Sections 267(b) or 707(b)(1), "20 percent" will be substituted for "50 percent" where applicable (see Q 7523). (3br) A related person also includes certain persons engaged in trades or businesses under common control. (4br)

For purposes of the wash sale rule (see Q 7651), an ownership interest is subject to rules similar to those applicable to REMICS (see Q 7769). Under those rules, an ownership interest is treated as a security, and an ownership interest and any interest in a taxable mortgage pool comparable to a residual interest in an ownership interest are treated as substantially identical stock or securities. Furthermore, the 30-day period in the wash sale rule is enlarged to six months in applying it to such interests. (5br)

The FASIT anti-abuse rule evaluates transactions against the underlying purpose of the FASIT provisions, which is to promote the spreading of credit risk on debt instruments by facilitating the securitization of debt instruments. If a FASIT is formed or used to achieve a tax result inconsistent with this purpose, the Commissioner may take remedial action including disregarding the FASIT election, reallocating items of income, deductions and credits, recharacterizing regular interests, and redesignating the holder of the ownership interest. (6br)

7772. Must bonds be in registered form? What are "registration required" bonds?

Any obligation of a type offered to the public that has a maturity of more than one year must be in registered form (a "registration required" bond). This includes obligations of federal, state, and local governments as well as corporations and partnerships. An exception is made for certain obligations reasonably designed to be sold only outside the United States to non-United States persons and payable outside the United States and its possessions. However, if they are in bearer form, these obligations must carry a statement that any United States person holding the obligation will be subject to tax limitations. (7br) A "United States person" is a United States citizen or resident, a domestic partnership or corporation, or an estate or certain trusts (other than a foreign estate or trust). (8br)

Bonds that are "not of a type offered to the public" do not have to meet the registration requirement. (9br) Temporary regulations state that a bond is "of a type offered to the public" if similar obligations are publicly offered or traded. (1bs) Even if a bond is not publicly traded, it may be considered "of a type offered to the public" if: (a) the bond would be treated as readily tradable in an established securities market under the installment sales rules; (2) the bond is comparable to a bond described in (1); or (3) similar obligations are publicly offered or traded. (2bs)

The Treasury also has authority to require registration of other obligations if they are used frequently for tax avoidance. (3bs)

A book entry obligation is considered registered if the right to principal of, and stated interest on, the obligation may be transferred only through a book entry system that identifies the owner of an interest in the obligation. Regulations may permit book entries in the case of a nominee or a chain of nominees. (4bs)

Registration is required for some U.S. Treasury issues after September 3, 1982 and other Treasury issues and issues of U.S. agencies and instrumentalities issued after 1982. (5bs) Obligations issued by other than the United States and its agencies and instrumentalities must be in registered form in order for the issuer (or holder, in some cases) to qualify for certain tax benefits (see Q 7773). This requirement generally applies to municipal bonds issued after June 30, 1983 (although some previously had to be in registered form in order to qualify for tax-exemption). Other bonds must be in registered form after 1982.

The constitutionality of the registration requirement was unsuccessfully challenged in South Carolina v. Baker, (6bs) in which the Supreme Court upheld the constitutionality of both the registration requirement and the tax consequences imposed on most unregistered bonds.

Issuers of registration required obligations not in registered form are denied a deduction for interest paid or accrued on the obligation, and their earnings and profits may not be decreased by such nondeductible interest (except for certain foreign issuers). (7bs) In addition, they are subject to an excise tax of 1% of the principal times the number of years to maturity, except in the case of obligations that would be tax-exempt if issued in registered form. (8bs)

Generally, then, the tax limitations apply to the issuer rather than the holder. However, in the case of obligations the issuance of which would not be subject to the 1% excise tax, and obligations that would be tax-exempt if issued in registered form, limitations are imposed directly on the holder (see Q 7773).

An obligation, the terms of which are fixed and for which full consideration is received before December 31, 1982, is not required to be registered even if smaller denomination certificates in that obligation are not distributed to ultimate investors until after that date, according to the General Explanation of the Tax Equity and Fiscal Responsibility Act of 1982 by the Joint Committee on Taxation.

The Service has provided clarification on whether bonds held through certain book-entry systems are treated as registered or in bearer form under Treasury Regulation Section 5f.103-1(c) and Section 1.871-14. (1bt)

7773. What tax limitations apply to the holder of registration required bonds that are not in registered form?

Income from otherwise tax-exempt bonds that do not meet the registration requirement (see Q 7772) is not exempt from federal income tax in the hands of a U.S. person. However, this limitation does not apply to interest exempt from tax by the United States under a treaty. (2bt)

Loss on the sale, exchange, theft, loss, etc., of a registration required obligation that would be tax-exempt if registered is not deductible if not in registered form. (3bt) Gain on sale or exchange of a registration required bond that would otherwise be tax-exempt but that is not registered must be treated as ordinary income. It is denied capital gain treatment. (4bt) These sanctions also apply to U.S. persons holding unregistered bonds that are not required to be registered because they were designed for distribution outside the United States. (5bt)

Regulations allow the loss deduction and capital gains treatment by a holder who, within 30 days of the date when the seller or other transferor is reasonably able to make the bearer obligation available to the holder, surrenders the obligation to a transfer agent or to the issuer for conversion into registered form. (6bt)

7774. What is a structured product? How are structured products taxed?

"Structured products are not specifically defined in the securities laws. They have been described as securities that may be derived from or based on a particular security or commodity, a basket of securities, an index, a debt issuance, or a foreign currency. Many involve innovative financing techniques creating customized financing and investment products to suit specific financial needs of customers. They may involve complex "tranched" (i.e., segmented) liabilities and transfers through special purpose vehicles. "Such transactions may be structured for any number of reasons--for example, for principal protection, tax minimization, accounting cosmetics, monetization, or other specific purposes." (7bt) Some of the more popular types of structured products sold to retail investors include principal-protected notes, equity-linked notes, and indexed-linked notes.

The taxation of a structured product will depend on the tax treatment of its individual components. See Q 7638--stock; Q 7663 through Q 7692--options; Q 7723 through Q 7727--corporate bonds; Q 7730 through Q 7736--market discount; and Q 7737 through Q 7741--original issue discount.

(1.) IRC Secs. 454(b), 1272(a)(2).

(2.) IRC Sec. 1282(b)(2).

(3.) IRC Sec. 1283(a).

(4.) IRC Sec. 1283(c).

(5.) IRC Sec. 1281(a)(2).

(6.) IRC Sec. 1283(b)(1).

(7.) IRC Sec. 1281(a).

(1a.) IRC Sec. 1283(b)(2).

(2a.) Under IRC Sec. 1256(e).

(3a.) IRC Sec. 1281(b).

(4a.) IRC Sec. 1283(b)(2).

(5a.) IRC Sec. 1283(d).

(6a.) IRC Sec. 1221.

(7a.) IRC Sec. 1271(a)(3).

(8a.) IRC Sec. 1222.

(9a.) IRC Sec. 1271(a)(3).

(1b.) IRC Sec. 1271(a)(3)(E); Treas. Reg. [section]1.1271-1(b)(2).

(2b.) IRC Sec. 1283(d).

(3b.) IRC Sec. 453(k). See Rev. Rul. 93-84, 1993-2 CB 225.

(4b.) 31 USC 3124.

(5b.) IRC Sec. 1041.

(6b.) IRC Sec. 1272(a)(2).

(7b.) IRC Secs. 1282(b), 1283(c).

(8b.) IRC Sec. 1281(a)(2).

(1c.) IRC Sec. 1271(a)(4); Treas. Reg. [section]1.1271-1(b)(2).

(2c.) IRC Sec. 1283(c)(2).

(3c.) IRC Sec. 1281(a).

(4c.) Under IRC Sec. 1256(e).

(5c.) IRC Sec. 1281(b).

(6c.) IRC Sec. 1281(b)(1)(F).

(7c.) IRC Sec. 1283(d).

(8c.) IRC Sec. 1271(a)(4).

(9c.) IRC Sec. 1273(a).

(1d.) IRC Sec. 1271(a)(4); Treas. Reg. [section]1.1271-1(b)(2).

(2d.) IRC Sec. 1278(a)(1)(B)(i).

(3d.) IRC Sec. 1271(a)(3)(A).

(4d.) IRC Sec. 267(a).

(5d.) IRC Sec. 1091.

(6d.) IRC Sec. 453(k). See Rev. Rul. 93-84, 1993-2 CB 225.

(7d.) IRC Sec. 1041.

(8d.) IRC Sec. 1282(c).

(9d.) IRC Sec. 1282(a).

(10d.) IRC Sec. 1282(c).

(1e.) Treas. Regs. [section][section]1.61-7, 1.451-2(b); Lavery v. Comm., 158 F.2d 859 (7th Cir. 1946); Obland v. U.S., 67-2 USTC H9751 (E.D. Mo. 1967).

(2e.) L.A. Thompson Scenic Ry. Co. v. Comm., 9 BTA 1203 (1928); Rev. Rul. 69-263, 1969-1 CB 197.

(3e.) IRC Sec. 1273(a).

(4e.) IRC Sec. 1272(d).

(5e.) IRC Sec. 1271(b); Treas. Reg. [section]1.67-7(c).

(1f.) Treas. Reg. [section]1.61-7(d).

(2f.) IRC Sec. 1001(a).

(3f.) IRC Secs. 1272(d), 1276(d)(2), 1278(b)(4); General Explanation-TRA '84, p. 99.

(4f.) IRC Sec. 1016(a)(5).

(5f.) IRC Sec. 1276.

(6f.) IRC Sec. 1271(c)(2).

(1g.) IRC Sec. 1271(a)(2)(B).

(2g.) Treas. Reg. [section]1.1232-3(d)(2).

(3g.) U.S. v. Midland-Ross Corp, 381 U.S. 54 (1965).

(4g.) IRC Sec. 1271(c).

(5g.) 2001-9 CB 742.

(6g.) Rev. Rul. 78-5, 1978-1 CB 263.

(7g.) IRC Sec. 1223(2).

(1h.) Treas. Reg. [section]1.61-7.

(2h.) Treas. Reg. [section]1.451-2(b); Lavery v. Comm., 158 F.2d 859 (7th Cir. 1946); Obland v. U.S., 67-2 USTC H9751 (E.D. Mo. 1967).

(3h.) L.A. Thompson Scenic Ry. Co. v. Comm., 9 BTA 1203 (1928); Rev. Rul. 69-263, 1969-1 CB 197.

(4h.) IRC Secs. 1272(a), 1272(b), 1273(a)(3); see Treas. Reg. [section]1.1232-3.

(5h.) See IRC Sec. 1278(b).

(6h.) IRC Sec. 1276(a)(3).

(7h.) IRC Sec. 1276(b)(3).

(1i.) Treas. Reg. [section]1.61-7(d).

(2i.) IRC Sec. 1001(a).

(3i.) IRC Sec. 1272(d)(2).

(4i.) IRC Sec. 1271(a)(2).

(1j.) See Treas. Reg. [section]1.1232-3(c).

(2j.) IRC Sec. 1271(c).

(3j.) U.S. v. Midland-Ross Corp.,381 U.S. 54 (1965).

(4j.) IRC Secs. 1271(a), 1271(c).

(5j.) IRC Sec. 453(k). See Rev. Rul. 93-84, 1993-2 CB 225.

(6j.) IRC Sec. 1041.

(1k.) Rev. Rul. 72-312, 1972-1 CB 22.

(2k.) Rev. Rul. 72-265, 1972-2 CB 222.

(3k.) Rev. Rul. 69-135, 1969-1 CB 198.

(4k.) See Treas. Regs. [section][section]1.1232-3(b)(2)(i); 1.1273-2(j).

(5k.) Treas. Reg. [section]1.1273-2(j).

(1l.) Treas. Reg. [section]1.1275-4(b)(1).

(2l.) Treas. Reg. [section]1.1275-4(b)(2).

(3l.) Treas. Reg. [section]1.1275-4(b).

(4l.) See Rev. Rul. 2002-42, 2002-2 CB 76.

(5l.) Notice 96-51, 1996-2 CB 216.

(6l.) Notice 96-51, 1996-2 CB 216.

(1m.) Notice 96-51, above.

(2m.) See 31 U.S.C. [section]3103(a).

(3m.) Treas. Reg. [section]1.1275-7(c); see Notice 96-51, 1996-2 CB 216.

(4m.) Treas. Reg. [section]1.1275-7(c)(5).

(5m.) Treas. Reg. [section]1.1275-7(d)(2).

(6m.) Treas. Reg. [section]1.1275-7(d)(2)(i).

(7m.) Treas. Reg. [section]1.1273-1(d).

(8m.) Treas. Reg. [section]1.1275-7(d)(2)(ii).

(1n.) Treas. Reg. [section]1.1275-7(d)(3).

(2n.) Treas. Reg. [section]1.1275-7(d)(2).

(3n.) Treas. Reg. [section]1.1275-7(d)(4).

(4n.) See Treas. Reg. [section]1.1272-1(b)(1).

(5n.) See Treas. Reg. [section]1.1275-7(e)(3)(iii).

(6n.) Treas. Regs. [section][section]1.1275-7(e)(3)(iv) and 1.1275-7(e)(3)(v).

(7n.) Treas. Reg. [section]1.1286-2.

(8n.) Treas. Reg. [section]1.1275-7(f)(1).

(1o.) Treas. Reg. [section]1.1275-7(f)(1)(i).

(2o.) Treas. Reg. [section]1.1275-7(f)(4).

(3o.) Treas. Reg. [section]1.1275-7(f)(3).

(4o.) See Treas. Reg. [section]1.1272-1(g).

(5o.) Treas. Reg. [section]1.1275-7(f)(2).

(6o.) See Treas. Reg. [section]1.1275-7(f)(5).

(7o.) See Treas. Reg. [section]1.171-3(b).

(8o.) IRC Sec. 1278(a)(1).

(1p.) IRC Sec. 1278(a)(1)(D).

(2p.) IRC Sec. 1278(a)(2).

(3p.) IRC Sec. 1278(a)(2)(B).

(4p.) IRC Sec. 1278(a)(2)(C).

(5p.) IRC Sec. 1278(b).

(6p.) IRC Sec. 1278(b)(3).

(7p.) IRC Sec. 1276(a)(3).

(8p.) IRC Sec. 1276(b)(3).

(1q.) IRC Sec. 1276(b)(2).

(2q.) Rev. Proc. 92-67, 1992-2 CB 429; as modified by Rev. Proc. 99-49, 1999-2 CB 725; modified, amplified, and superseded by Rev. Proc. 2002-9, 2002-1 CB 327.

(3q.) IRC Sec. 1278(b)(4).

(4q.) IRC Secs. 1276, 1278.

(5q.) IRC Sec. 1278(b).

(6q.) IRC Sec. 1276(b)(2).

(1r.) General Explanation-TRA '84, p. 94.

(2r.) IRC Sec. 1277(d), prior to repeal by OBRA '93.

(3r.) Rev. Rul. 60-210, 1960-1 CB 38.

(4r.) 2001-1 CB 742.

(5r.) IRC Sec. 453(k). See Rev. Rul. 93-84, 1993-2 CB 225.

(6r.) IRC Sec. 1041.

(1s.) IRC Sec. 1276.

(2s.) General Explanation-TRA '84, p. 94.

(3s.) IRC Sec. 1278(b).

(4s.) TRA '84, Sec. 44(c)(1). See IRC Secs. 1276, 1277, and 1278.

(5s.) IRC Sec. 1276(c).

(6s.) IRC Secs. 1276(c), 1278(b).

(7s.) IRC Secs. 1277(b)(2)(B), 1278(a)(1)(C).

(8s.) IRC Sec. 1277(b)(2).

(9s.) IRC Sec. 1277(d), prior to repeal by OBRA '93.

(1t.) IRC Secs. 1276(c), 1278(b).

(2t.) IRC Secs. 1277(a), 1278(a)(1)(C).

(3t.) IRC Sec. 1282(c). See General Explanation-TRA '84, p. 98.

(4t.) IRC Sec. 1273(a).

(5t.) IRC Sec. 1273(b)(3).

(6t.) Treas. Reg. [section]1.1272-1(b)(1).

(7t.) IRC Sec. 1272(a)(1).

(1u.) Gaffney v. Comm., TC Memo 1997-249.

(2u.) Treas. Reg. [section]1.1271-1(a)(1).

(3u.) Treas. Reg. [section]1.1271-1(a)(2)(i).

(4u.) Treas. Reg. [section]1.1272-1(b)(3).

(5u.) Treas. Reg. [section]1.171-4(a)(2).

(6u.) IRC Sec. 1272(d)(2); Treas. Reg. [section]1.1272-1(g).

(7u.) Rev. Rul. 2000-12, 2000-1 CB 744.

(8u.) See IRC Sec. 1272(a)(6).

(1v.) 2001-1 CB 742.

(2v.) IRC Sec. 1272(a).

(3v.) IRC Sec. 1271(c)(2).

(4v.) IRC Sec. 1273(a)(3).

(5v.) IRC Sec. 1271(a)(2)(B). See Treas. Reg. [section]1.1232-3(d). See also Treas. Reg. [section]1.1272-2.

(6v.) IRC Sec. 1271(c).

(7v.) See Treas. Reg. [section]1.1232-3(c), Ex.(1).

(8v.) Treas. Reg. [section]1.1232-3(c).

(1w.) Treas. Reg. [section]1.1232-3A(a)(2)(i); IRC Sec. 1272(b)(2).

(2w.) IRC Sec. 1272(b)(1); Treas. Reg. [section]1.1232-3A(a)(1).

(3w.) IRC Sec. 1272(b)(4); Treas. Regs. [section][section]1.1232-3A(a)(2)(ii), 1.1232-3A(a)(3)(i).

(4w.) IRC Sec. 1272(d); Treas. Reg. [section]1.1232-3A(a)(4).

(5w.) IRC Sec. 1272(b); Treas. Reg. [section]1.1232-3A(a)(2)(ii).

(1x.) Treas. Reg. [section]1.1232-3A(a)(3).

(2x.) IRC Sec. 1272(d)(2); Treas. Reg. [section]1.1232-3A(c).

(3x.) IRC Sec. 1271(c)(2).

(4x.) IRC Sec. 1271(c).

(5x.) See Treas. Reg. [section]1.1232-3(b)(4).

(6x.) IRC Sec. 171.

(1y.) IRC Sec. 171(c)(2); Treas. Reg. [section]1.171-4.

(2y.) Treas. Reg. [section]1.171-4(d).

(3y.) IRC Sec. 171(d).

(4y.) IRC Sec. 171(e).

(5y.) TAMRA '88, Sec. 1803(a)(11)(B).

(6y.) IRC Sec. 171(e), as in effect prior to amendment by TAMRA '88, Sec. 1006(j)(1).

(7y.) IRC Sec. 171(a).

(8y.) IRC Sec. 67(b)(11); see Conf. Report 99-841, Vol. II at page 34, 1986-3 CB Vol. 4.

(9y.) TAMRA '88, Act Sec. 1006(j)(2).

(10y.) Woodward Est. v. Comm., 24 TC 883 (1955) aff'd sub. nom. Bamhill v. Comm., 241 F.2d 496 (5th Cir. 1957), acq., 1956-2 CB 4, 1956-2 CB 9.

(11y.) Treas. Reg. [section]1.171-4(a)(2).

(1z.) Treas. Reg. [section]1.171-4(c).

(2z.) IRC Sec. 1016(a)(5); Treas. Reg. [section]1.1016-5(b).

(3z.) Treas. Reg. [section]1.171-1(c)(3).

(4z.) See Treas. Reg. [section]1.171-3.

(5z.) Treas. Reg. [section]1.171-1(b)(2).

(6z.) Treas. Reg. [section]1.171-1(b)(5).

(7z.) Treas. Reg. [section]1.171-2(e).

(8z.) Treas. Reg. [section]1.171-5(a).

(1aa.) Treas. Reg. [section]1.171-5(b).

(2aa.) 2001-1 CB 742.

(3aa.) IRC Sec. 171(b).

(4aa.) Treas. Reg. [section]1.171-1(d).

(5aa.) Treas. Reg. [section]1.171-1(a).

(6aa.) Treas. Reg. [section]1.171-5(a)(2).

(7aa.) Treas. Reg. [section]1.171-1(e).

(8aa.) IRC Sec. 171(b)(4); Treas. Reg. [section]1.171-1(e)(1)(ii).

(9aa.) TRA '86, Sec. 1803(a)(12)(A).

(10aa.) IRC Sec. 171(b)(4)(B).

(1ab.) Treas. Reg. [section]1.171-(1)(e)(2).

(2ab.) IRC Sec. 7701(a)(43).

(3ab.) IRC Sec. 171(b)(3).

(4ab.) TRA '86, Sec. 1803(a)(11)(A).

(5ab.) Treas. Reg. [section]1.171-2(a)(1).

(6ab.) Treas. Reg. [section]1.171-2(a)(2).

(7ab.) Treas. Reg. [section]1.171-2(a)(3)(i).

(1ac.) Treas. Regs. [section][section]1.171-2(a)(3)(ii), 1.1272-1(b)(1)(ii).

(2ac.) Treas. Reg. [section]1.171-2(a)(3)(iii).

(3ac.) Treas. Reg. [section]1.171-2(a)(4)(i)(A).

(4ac.) Treas. Reg. [section]1.171-2(a)(4)(i)(B).

(5ac.) See Treas. Reg. [section]1.171-3.

(6ac.) Rev. Rul. 82-10, 1982-1 CB 46.

(1ad.) Treas. Reg. [section]1.171-2(f).

(2ad.) Treas. Reg. [section]1.171-2(d).

(3ad.) IRC Sec. 171(b)(2).

(4ad.) Treas. Reg. [section]1.171-2(b).

(5ad.) Treas. Reg. [section]1.171-2(f)(2)(ii).

(6ad.) Treas. Reg. [section]1.171-2(a)(4).

(1ae.) Rev. Rul. 62-127, 1962-2 CB 84.

(2ae.) Lieb v. Comm.,40 TC 161 (1963).

(3ae.) Starr v. Comm., 46 TC 450 (1966), acq. 1967-2 CB 3.

(4ae.) IRC Sec. 171(b)(1).

(5ae.) Treas. Reg. [section]1.171-1(e)(1)(iii).

(6ae.) Treas. Reg. [section]1.171-2(c)(2).

(1af.) Treas. Reg. [section]1.171-1(e)(iii)(B).

(2af.) IRC Sec. 57(a)(5).

(3af.) Department of Revenue of Kentucky et al. v. Davis et ux., 553 U.S. 328 (2008), reversing, 197 S.W.3d 557.

(1ag.) 69 Fed. Reg. 75887 (12-20-2004).

(2ag.) Rev. Rul. 87-116, 1987-2 CB 44.

(3ag.) Harbor Bancorp & Subsidiaries v. Comm., 115 F.3d 722 (9th Cir. 1997), cert. den., 522 U.S. 1108 (1998).

(4ag.) IRC Sec. 86(b)(2)(B).

(5ag.) Gooldin v. Baker, 809 F.2d 187 (2nd Cir.), cert. denied, 484 U.S. 816 (1987).

(6ag.) IRC Sec. 6012(d).

(7ag.) See IRC Sec. 6049(b).

(8ag.) See Notice 2006-93, 2006-2 CB 798..

(9ag.) Notice 2009-26, 2009-1 CB 833.

(1ah.) See IRC Sec.54AA(d), as added by ARRA 2009. Notice 2009-26, 2009-1 CB 833.

(2ah.) Notice 2009-26, 2009-16 CB 833.

(3ah.) IRC Sec. 54AA(a), as added by ARRA 2009. Notice 2009-26, 2009-1 CB 833.

(4ah.) IRC Sec. 54AA(b), as added by ARRA 2009. Notice 2009-26, 2009-1 CB 833.

(5ah.) IRC Sec. 54AA(e), as added by ARRA 2009. Notice 2009-26, 2009-1 CB 833.

(6ah.) Notice 2009-26, 2009-1 CB 833. See H.R. Conf. Rep. 111-16, 111th Cong., 1st Sess. (February 12, 2009).

(7ah.) IRC Sec. 54AA(c)(1), as added by ARRA 2009. Notice 2009-26, 2009-1 CB 833.

(8ah.) IRC Sec. 54AA(c)(2), as added by ARRA 2009. Notice 2009-26, 2009-1 CB 833.

(9ah.) See H.R. Conf. Rep. 111-16, 111th Cong., 1st Sess. (February 12, 2009). Notice 2009-26, 2009-1 CB 833.

(10ah.) Notice 2009-26, 2009-1 CB 833. See H.R. Conf. Rep. 111-16, 111th Cong., 1st Sess. (February 12, 2009), n. 146.

(11ah.) IRC Sec. 54AA(f)(1), as added by ARRA 2009.

(1ai.) IRC Sec. 57(a)(5)(A).

(2ai.) IRC Sec. 57(a)(5)(B).

(3ai.) See the Conference Report, TRA '86, page 333). IRC Sec. 57(a)(5)(C).

(4ai.) See IRC Sec. 57(a)(5)(C)(vi), as added by ARRA 2009; Sec. 1503 of ARRA 2009.

(5ai.) IRC Sec. 1288(a)(2).

(6ai.) IRC Sec. 1288(b)(1).

(7ai.) IRC Sec. 1288(b).

(8ai.) TAM 8541003.

(1aj.) Rev. Rul. 73-112, 1973-1 CB 47.

(2aj.) Rev. Rul. 80-143, 1980-1 CB 19; Rev. Rul. 72-587, 1972-2 CB 74.

(3aj.) Notice 94-84, 1994-2 CB 559.

(4aj.) See Rev. Rul. 95-70, 1995-2 CB 124.

(5aj.) See Rev. Rul. 69-263, 1969-1 CB 197.

(6aj.) Rev. Rul. 73-112, above; Rev. Rul. 60-210, 1960-1 CB 38; Rev. Rul. 57-49, 1957-1 CB 62.

(7aj.) IRC Secs. 1276(a), 1278(a)(1).

(8aj.) Rev. Rul. 60-210, above; Rev. Rul. 57-49, above.

(9aj.) Willcuts v. Bunn, 282 U.S. 216 (1931); U.S. v. Stewart, 311 U.S. 60 (1940); Rev. Rul. 81-63, 1981-1 CB 455.

(10aj.) FSA 200116012.

(1ak.) IRC Sec. 453(k). See Rev. Rul. 93-84, 1993-2 CB 225.

(2ak.) IRC Sec. 171; Treas. Reg. [section]1.171-1(c).

(3ak.) IRC Sec. 1016(a)(5).

(4ak.) IRC Sec. 171(b)(1).

(5ak.) Treas. Reg. [section]1.171-2.

(6ak.) Treas. Reg. [section] 1.171-1. See also Treas. Reg. [section]1.171-2(c), Ex. 4.

(1al.) IRC Sec. 171(b)(4).

(2al.) IRC Sec. 171(b)(3).

(3al.) Treas. Reg. [section]1.171-2(a)(4)(ii).

(4al.) Rev. Rul. 82-10, 1982-1 CB 46.

(5al.) Treas. Reg. [section]1.171-2(f).

(6al.) Treas. Reg. [section]1.171-2(d).

(1am.) Pacific Affiliate, Inc. v. Comm., 18 TC 1175 (1952), aff'i, 224 F.2d 578 (9th Cir. 1955), cert. den, 350 U.S. 967 (1956).

(2am.) Rev. Rul. 60-17, 1960-1 CB 124.

(3am.) Rev. Rul. 72-587, 1972-2 CB 74; GCM 39309 (11-28-84); see also Rev. Rul. 74-172, 1974-1 CB 178; District Bond Co. v. Comm., 1 TC 837 (1943); Bryant v. Comm., 2 TC 789 (1943), acq. 1944 CB 4.

(4am.) Rev. Rul. 72-134, 1972-1 CB 29.

(5am.) Rev. Rul. 72-575, 1972-2 CB 74; Rev. Rul. 76-78, 1976-1 CB 25.

(6am.) Rev. Rul. 94-42, 1994-2 CB 15.

(7am.) IRC Sec. 149(b)(1); Treas. Reg. [section]1.149(b)-1.

(1an.) IRC Sec. 149(b).

(2an.) Notice 88-114, 1988-2 CB 449.

(3an.) IRC Sec. 149(b)(2)(B).

(4an.) Let. Rul. 200139007.

(5an.) IRC Sec. 1271(a)(3); IRC Sec. 454(b).

(6an.) IRC Secs. 1271 and 1272.

(1ao.) Rickaby v. Comm., 27 TC 886 (1957), acq. 1960-2 CB 6; Rev. Rul. 60-284, 1960-2 CB 464.

(2ao.) First Ky. Co. v. Gray, 190 F. Supp. 824 (W.D. Ky. 1960), aff'd, 309 F.2d 845 (6th Cir. 1962).

(3ao.) R.O. Holton & Co. v. Comm., 44 BTA 202 (1941); Noll v. Comm., 43 BTA 496 (1941).

(4ao.) Fisher v. Comm., 209 F.2d 513 (6th Cir. 1954), cert. den, 374 U.S. 1014; Jaglom v. Comm., 36 TC 126 (1961), aff'd, 303 F.2d 847 (2d. Cir. 1961); Tobey v. Comm., 26 TC 610 (1956), acq. 1956-2 CB 8; Shattuck v. Comm., 25 TC 416 (1955); First Ky. Co. v. Gray, above; Rev. Rul. 60-284, above.

(5ao.) Tobey v. Comm., above.

(6ao.) Jagloom v. Coomm, above. See also First Ky. Coo. v. Gray, above, and Shattuck v. Coomm., above.

(1ap.) Rev. Rul. 75-112, 1975-1 CB 274.

(2ap.) Rev. Rul. 73-112, 1973-1 CB 47.

(3ap.) IRC Sec. 1286(e)(2).

(4ap.) IRC Sec. 1286(e)(5).

(5ap.) See Chief Counsel Notice CC-2002-016 (January 24, 2002).

(6ap.) 31 Uniform Offering Circular CFR Part 356, 73 Fed. Reg. 14937 (3-20-2008).

(1aq.) Treas. Reg. [section]1.1286-1(a).

(2aq.) IRC Sec. 1286.

(3aq.) IRC Sec. 1041.

(4aq.) TAM 8602006.

(5aq.) Rev. Rul. 58-275, 1958-1 CB 22.

(6aq.) IRC Sec. 1286(a).

(7aq.) Treas. Reg. [section]1.1286-1(a).

(1ar.) See General Explanation-TRA '84, pp. 92, 102.

(2ar.) IRC Sec. 1286(c); Treas. Reg. [section]1.1232-4.

(3ar.) Hood v. Comm., TC Memo 1961-231.

(4ar.) Rev. Rul. 58-536, 1958-2 CB 21; Rev. Rul. 54-251, 1954-2 CB 172.

(5ar.) Rev. Rul. 54-251, above.

(1as.) IRC Sec. 1286(d).

(2as.) IRC Sec. 1286(d).

(3as.) IRC Sec. 1286(d)(1)(A)(ii).

(4as.) IRC Sec. 1286(d)(1)(C).

(5as.) IRC Sec. 1286(d), prior to amendment by TAMRA '88.

(6as.) IRC Sec. 1286(d).

(7as.) IRC Sec. 1286(d)(2), prior to amendment by TAMRA '88.

(1at.) IRC Sec. 1286(d) (prior to amendment by TRA '86).

(2at.) 31 CFR [section]351.8(a).

(3at.) See News Release (1-15-2003) at: http://publicdebt.treas.gov/.

(4at.) See News Release (4-4-2005), at: http://www.publicdebt.treas.gov/com/comeefixedrate.htm.

(1au.) See Final Rule, Offering of United States Savings Bonds, Series EE, 31 CFR Part 351, 70 Fed. Reg. 17288 (4-5- 2005).

(2au.) IRC Sec. 454(a).

(3au.) See IRS Pub. 550.

(4au.) Rev. Proc. 2002-9, 2002-1 CB 327, Appendix 6.01.

(5au.) See IRS Pub. 550.

(6au.) Rev. Proc. 2002-9, above, Appendix Sec. 6.01.

(7au.) IRS Pub. 550.

(8au.) Rev. Proc. 2002-9, above, Sec. 4.03.

(1av.) See Rev. Proc. 2002-9, above, Sec. 4.02(6); IRC Sec. 454; 31 CFR [section]351.8(b).

(2av.) Rev. Proc. 2002-9, above, Sec. 4.02(6).

(3av.) IRC Sec. 454(a).

(4av.) Rev. Rul. 55-655, 1955-2 CB 253.

(5av.) IRC Sec. 454(a).

(6av.) Treas. Reg. [section]1.454-1(a)(2).

(7av.) Apkin v. Comm., 86 TC 692 (1986).

(8av.) Treas. Reg. [section]1.454-1(a).

(9av.) Rev. Rul. 58-435, 1958-2 CB 370.

(10av.) See, e.g., Landers v. Comm., TC Memo 2003.

(11av.) Treas. Reg. [section]1.454-1(c).

(12av.) Rev. Rul. 87-112, 1987-2 CB 207.

(1aw.) IRC Sec. 1037(a); TD Circular, Pub. Debt Series No. 1-80, 1980-1 CB 715; 31 CFR [section]352.7(g)(3).

(2aw.) Rev. Rul. 58-2, 1958-1 CB 236; Let. Rul. 9009053.

(3aw.) Rev. Rul. 64-302, 1964-2 CB 170.

(4aw.) Rev. Rul. 55-278, 1955-1 CB 471.

(5aw.) Rev. Rul. 68-61, 1968-1 CB 346.

(6aw.) See Treasury Press Release, Treasury Department Unveils Patriot Bond on 3-Month Anniversary oof September 11 Attacks (December 22, 2001).

(7aw.) See Rev. Proc. 2002-9, 2002-1 CB 327.

(1ax.) IRC Sec. 135.

(2ax.) See 31 CFR [section]359.66.

(3ax.) IRC Sec. 135(c)(1).

(4ax.) Notice 90-7, 1990-1 CB 304.

(5ax.) IRC Secs. 135(c), 135(d); See Instructions to Form 8815.

(6ax.) IRC Sec. 135(c)(2)(C).

(7ax.) IRC Sec. 135(c)(2)(C).

(1ay.) IRC Sec. 135(d)(2).

(2ay.) IRC Sec. 135(c)(4).

(3ay.) IRC Sec. 135(b)(1).

(4ay.) Rev. Proc. 2009-50, 2009-45 IRB 617.

(5ay.) IRC Sec. 135 (b)(2)(B).

(1az.) Conference Committee Report, TAMRA '88.

(2az.) Conference Committee Report, TAMRA '88.

(3az.) Rev. Rul. 68-145, 1968-1 CB 203; Rev. Rul. 79-409, 1979-2 CB 208.

(1ba.) See Let. Rul. 9024016.

(2ba.) See Treas. Regs. [section][section]1.691(a)-2(b) Ex. 3, 1.691(b)-1(a); Rev. Rul. 64-104, 1964-1 CB 223.

(3ba.) See TAM 200303010.

(4ba.) Rev. Rul. 64-104, above.

(5ba.) See Press Release (2-18-2004), at: www.publicdebt.treas.gov/com/comtdhhw.htm.

(6ba.) Let. Rul 9845026.

(7ba.) See Press Release (2-18-2004), at: www.publicdebt.treas.gov/com/comtdhhw.htm.

(8ba.) 31 CFR [section]352.2(e)(1)(i).

(9ba.) 31 CFR [section]352.10.

(1bb.) 31 CFR [section]352.7(g).

(2bb.) Rev. Rul. 64-89, 1964-1 (part 1) CB 172.

(3bb.) Let. Rul 9845026.

(4bb.) 31 CFR [section]359.25.

(5bb.) 31 CFR [section]359.29.

(6bb.) 31 CFR [section][section]359.17, 359.39.

(7bb.) 31 CFR [section]359.5.

(8bb.) 31 CFR [section][section]359.8, 359.10, 359.11.

(9bb.) 31 CFR [section][section]359.8, 359.13.

(10bb.) See 31 CFR [section]359.14. See also "I Savings Bonds Rates & Terms" at: http://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ ibonds_iratesandterms.htm.

(1bc.) 31 CFR [section]359.10.

(2bc.) 31 CFR [section][section]359.11, 359.15.

(3bc.) 31 CFR [section]359.12; see also U.S. Treasury Department, Series I Bonds: Information Statement, p. 6.

(4bc.) 31 CFR [section][section]359.6, 359.7.

(5bc.) 31 CFR [section]359.40

(6bc.) See "I Savings Bonds Rates & Terms" at: http://www.treasurydirect.gov.

(7bc.) Appendix D to Part 359.

(8bc.) See Appendix D to Part 359.

(9bc.) Appendix D to Part 359.

(10bc.) Appendix D to Part 359.

(11bc.) Appendix D to Part 359.

(12bc.) Appendix D to Part 359.

(1bd.) 31 CFR [section]359.66.

(2bd.) 5. 31 CFR [section]359.66.

(3bd.) 31 CFR [section][section]360.15, 360.16.

(4bd.) 8 USC [section]306(g).

(1be.) Rev. Rul. 84-10, 1984-1 CB 155; Rev. Rul. 70-545, 1970-2 CB 7.

(2be.) Rev. Rul. 84-10, above; Rev. Rul. 74-169, 1974-1 CB 147; Rev. Rul. 70-544, 1970-2 CB 6.

(3be.) Rockford Life Ins. v. Illinois Dept. of Rev., 107 S.Ct. 2312 (1987).

(4be.) Rev. Rul. 84-10, above.

(5be.) IRC Sec. 860D.

(6be.) IRC Secs. 860B, 860C.

(7be.) IRC Secs. 860A, 860F(a)(1).

(1bf.) IRC Sec. 7701(i)(2); Treas. Reg. [section]301.7701(i)-1(b).

(2bf.) IRC Sec. 7701(i)(1).

(3bf.) IRC Sec. 860G(a).

(4bf.) 1993-1 CB 298.

(5bf.) Notice 87-67, 1987-2 CB 377; Notice 87-41, 1987-1 CB 500.

(6bf.) Treas. Reg. [section]1.860G-1(a)(3).

(7bf.) Treas. Reg. [section]1.860G-1(a)(2)(v) (effective for entities whose startup day is on or after November 12, 1991).

(8bf.) See REG-106679-04, 69 Fed. Reg. 52212 (8-25-2004).

(9bf.) IRC Sec. 860G(a)(1). See Treas. Reg. [section]1.860G-1(a)(5).

(10bf.) Treas. Reg. [section]1.860G-1(a)(2)(iv).

(1bg.) Treas. Reg. [section]1.860G-1(b)(4).

(2bg.) Treas. Reg. [section]1.860G-1(b)(3)(iii).

(3bg.) Let. Rul. 199920030.

(4bg.) IRC Sec. 1272(a)(6).

(5bg.) 69 Fed. Reg. 52217 (8-25-2004).

(6bg.) IRC Sec. 67(c).

(7bg.) Temp. Treas. Reg. [section]1.67-3T(b)(3).

(8bg.) Temp. Treas. Reg. [section]1.67-3T(b)(5).

(9bg.) Treas. Reg. [section]1.67-3(f); Treas. Reg. [section]1.6049-7(f).

(10bg.) TD 8888, 65 Fed. Reg. 37701 (6-16-2000); Treas. Reg. [section]1.6049-7(g), withdrawn.

(1bh.) IRC Sec. 860B(c).

(2bh.) IRC Secs. 860H, 860I, 860J, 860K, 860L, as repealed by Act. Sec. 835(a), AJCA 2004.

(3bh.) Act. Sec. 835(c)(1), AJCA 2004.

(4bh.) H.R. Conf. Rep. No. 108-755 (AJCA 2004). See IRC Secs. 860G(a)(1), 860G(a)(3), 860G(a)(7), as amended by AJCA 2004.

(5bh.) IRC Sec. 860G(a)(2).

(6bh.) IRC Sec. 860D(a).

(7bh.) IRC Sec. 860C(a).

(8bh.) Treas. Reg. [section]1.860C-1(c).

(9bh.) IRC Sec. 860E(a); Treas. Reg. [section]1.860E-1(a).

(1bi.) IRC Sec. 67(c); Temp. Treas. Reg. [section]1.67-3T(a).

(2bi.) IRC Sec. 860C(c).

(3bi.) IRC Sec. 860C(e)(2).

(4bi.) IRC Sec. 860C(d).

(5bi.) Temp. Treas. Reg. [section]1.67-3T(b)(5).

(6bi.) IRC Sec. 860C(b). See Treas. Reg. [section]1.860C-2.

(7bi.) Let. Rul. 200032001.

(8bi.) Treas. Reg. [section]1.67-3(f); Treas. Reg. [section]1.860F-4(e)(1).

(9bi.) IRC Sec. 860F(d).

(10bi.) See Treas. Regs. [section][section]1.860E-1(c)(4), 1.860E-1(c)(5) through 1.860E-1(c)(10), 67 Fed. Reg. 47451 (7- 19-2002), superseding, Rev. Proc. 200112, 2001-3 CB 335.

(11bi.) See TD 9415, 73 Fed. Reg. 40171 (7-14-2008).

(1bj.) See Rev. Rul. 2006-58, 2006-2 CB 876.

(2bj.) ILM 200850027.

(3bj.) See Notice 2006-97, 2006-2 CB 904.

(4bj.) See IRC Section 860E(a)(3)(A).

(5bj.) See Section 860E(a)(3)(B).

(6bj.) Rev. Rul. 2005-68, 2005-2 CB 853.

(1bk.) See Treas. Regs. [section][section]1.446-6, 1.860C-1(d), 1.863-1(e), 1.863-1(f), 69 Fed. Reg. 26040 (5-11-2004).

(2bk.) See Rev. Proc. 2004-30, 2004-1 CB 950.

(3bk.) See IR-2004-97 (7-26-2004).

(4bk.) IRC Secs. 860H, 860I, 860J, 860K, 860L, as repealed by AJCA 2004 Sec. 835(a).

(5bk.) AJCA 2004 Sec. 835(c)(1).

(6bk.) See AJCA 2004 Sec. 835(c)(2).

(7bk.) IRC Sec. 860L(a)(1).

(8bk.) See Prop. Treas. Reg. [section]1.860L-3; Ann. 96-121, 1996-47 IRB 12.

(9bk.) Ann. 96-121, 1996-47 IRB 12.

(10bk.) Ann. 96-121.

(11bk.) Prop. Treas. Reg. [section]1.860H-1(a)(1); Ann. 96-121, above.

(12bk.) IRC Sec. 860L(a)(2); Prop. Treas. Reg. [section]1.860H-1(a); Ann. 96-121, above.

(1bl.) See Prop. Treas. Reg. [section]1.860H-2(a).

(2bl.) See Prop. Treas. Reg. [section]1.860H-2(c).

(3bl.) See Prop. Treas. Reg. [section]1.860H-2(f).

(4bl.) See Prop. Treas. Regs. [section][section]1.860H-2(d) and 1.860H-2(e).

(5bl.) See Prop. Treas. Reg. [section]1.860H-2(h).

(6bl.) IRC Sec. 860L(c).

(7bl.) Prop. Treas. Reg. [section]1.860H-2(g).

(8bl.) IRC Sec. 860L(c).

(9bl.) Prop. Treas. Regs. [section][section]1.860H-2(b)(1)(i)-(viii).

(10bl.) See Prop. Treas. Reg. [section]1.860H-2(b)(2).

(11bl.) Prop. Treas. Regs. [section][section]1.860H-2(b)(3)(i)-(vii).

(12bl.) IRC Sec. 860L(a); Prop. Treas. Reg. [section]1.860H-3(a).

(1bm.) See Prop. Treas. Reg. [section]1.860H-3(c)(2)(i).

(2bm.) Prop. Treas. Reg. [section]1.860H-3(c)(2)(ii).

(3bm.) See Prop. Treas. Reg. [section]1.860H-3(c)(3).

(4bm.) See Prop. Treas. Reg. [section]1.860H-3(c)(1).

(5bm.) IRC Secs. 860H(a), 860L(e).

(6bm.) IRC Secs. 860H, 860I, 860J, 860K, 860L, as repealed by AJCA 2004 Sec. 835(a). (For the underlying reasons triggering the repeal, see H.R. Conf. Rep. No. 108-755 (AJCA 2004).)

(7bm.) AJCA 2004 Sec. 835(c)(1).

(8bm.) AJCA 2004 Sec. 835(c)(2).

(9bm.) IRC Sec. 860L(a)(1); see Prop. Treas. Reg. [section]1.860H-1(a).

(10bm.) See Prop. Treas. Reg. [section]1.860L-3; Ann. 96-121, 1996-47 IRB 12.

(1bn.) IRC Secs. 860L(b)(1), 163(i)(1)(B).

(2bn.) IRC Sec. 860L(b)(1).

(3bn.) IRC Sec. 860L(d).

(4bn.) Prop. Treas. Reg. [section]1.860H-4(a)(1).

(5bn.) Prop. Treas. Reg. [section]1.860H-4(a)(2).

(6bn.) IRC Sec. 860H(c).

(7bn.) IRC Secs. 860H(c)(2), 163(e)(5).

(8bn.) IRC Sec. 860L(b)(1)(B)(ii); Ann. 96-121, 1996-47 IRB 12.

(9bn.) IRC Secs. 860J(a), 860E(a)(1).

(10bn.) IRC Sec. 860J(b).

(11bn.) IRC Sec. 860J(c).

(1bo.) See IRC Sec. 860K(a); see also Prop. Treas. Reg. [section]1.860H-4(b)(1).

(2bo.) See IRC Secs. 860K(c), 860L(a)(2).

(3bo.) IRC Sec. 860L(b)(2).

(4bo.) IRC Secs. 860L(a)(C); Prop. Treas. Reg. [section]1.860H-1(a)(1).

(5bo.) IRC Sec. 860H(b); Prop. Treas. Regs. [section][section]1.860H-6(a) and 1.860H-6(b); Ann 96-121, 1996-47 IRB 12.

(6bo.) See Rev. Proc. 2001-12, 2001-1 CB 335.

(7bo.) See Prop. Treas. Reg. [section]1.860L-1(a)(1).

(8bo.) IRC Sec. 860L(e)(2).

(9bo.) IRC Sec. 860L(e)(3)(D); Prop. Treas. Reg. [section]1.860L-1(d).

(1bp.) IRC Sec. 860L(e)(3).

(2bp.) See Prop. Treas. Regs. [section][section]1.860L-1(a)(2) and 1.860L-1(a)(4).

(3bp.) Prop. Treas. Reg. [section]1.860L-1(c).

(4bp.) See Prop. Treas. Reg. [section]1.860L-1(c).

(5bp.) IRC Secs. 860J(a), 860E(a)(1).

(6bp.) IRC Sec. 860J(b).

(7bp.) IRC Sec. 860J(c).

(8bp.) IRC Sec. 860I(a)(1); Prop. Treas. Reg. [section]1.860I-1(a)(1); Ann. 96-121, 1996-47 IRB 12.

(9bp.) IRC Sec. 860I(a)(2); Prop. Treas. Reg. [section]1.860I-1(g).

(10bp.) Prop. Treas. Reg. [section]1.860I-1(a)(2).

(1bq.) IRC Sec. 860I(d)(1)(A); see Prop. Treas. Reg. [section]1.860I-2(a).

(2bq.) Prop. Treas. Reg. [section]1.860I-2(c)(1).

(3bq.) See Prop. Treas. Reg. [section]1.860I-2(c)(2).

(4bq.) See Prop. Treas. Reg. [section]1.860I-2(c)(3).

(5bq.) See Prop. Treas. Regs. [section][section]1.860I-2(d)(1) and 1.860I-2(d)(2).

(6bq.) See Prop. Treas. Reg. [section]1.860I-2(d)(3).

(7bq.) IRC Sec. 860I(d)(1)(B).

(8bq.) Prop. Treas. Reg. [section]1.860I-2(b).

(9bq.) IRC Sec. 860I(d)(2).

(10bq.) Prop. Treas. Reg. [section]1.860I-1(c).

(11bq.) IRC Sec. 860I(b).

(12bq.) IRC Sec. 860I(c). See Prop. Treas. Reg. [section]1.860I-1(d).

(1br.) IRC Sec. 860I(e).

(2br.) IRC Sec. 860I(e).

(3br.) IRC Sec. 860L(g).

(4br.) IRC Secs. 860L(g), 52(a), 52(b).

(5br.) IRC Secs. 860L(f)(1), 860F(d)(1).

(6br.) See Prop. Treas. Reg. [section]1.860L-2.

(7br.) IRC Secs. 103(b), 149, 163(f).

(8br.) IRC Sec. 7701(a)(30).

(9br.) IRC Sec. 163(f)(2)(A)(ii).

(1bs.) Temp. Treas. Reg. [section]5f.163-1(b)(2).

(2bs.) Prop. Treas. Reg. [section]5f.163-1(b)(2) (effective for bonds issued after January 21, 1993 unless substantially all of the terms of the obligation were agreed upon in writing on or before that date).

(3bs.) IRC Sec. 163(f)(2)(C).

(4bs.) IRC Secs. 149(a)(3), 163(f)(3), 4701(b), 165(j); Temp. Treas. Reg. [section]5f.103-1.

(5bs.) TEFRA Sec. 310(d).

(6bs.) 485 U.S. 505 (1988).

(7bs.) IRC Sec. 163(f); IRC Sec. 312(m).

(8bs.) IRC Sec. 4701.

(1bt.) See Notice 2006-99, 2006-2 CB 907.

(2bt.) IRC Secs. 103(b), 149; Temp. Treas. Reg. [section]5f.103-1.

(3bt.) IRC Sec. 165(j)(1).

(4bt.) IRC Sec. 1287.

(5bt.) IRC Secs. 165(j), 1287(a).

(6bt.) IRC Sec. 165(j)(3); Treas. Reg. [section]1.165-12(c)(4).

(7bt.) "Speech by SEC Staff: Structured Finance Activities: The Regulatory Viewpoint," given by Mary Ann Gadziala, Associate Director, Office of Compliance Inspections and Examinations, U.S. Securities and Exchange Commission to the International Bar Association Conference Financial Services Section, Chicago, Illinois, September 20, 2006, at: www.sec.gov/news/speech/2006/spch092006mag.htm.
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Title Annotation:TAX FACTS ON INVESTMENTS: Part 2
Publication:Tax Facts on Investments
Date:Jan 1, 2011
Words:22819
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