7657 / How is the amount of amortizable bond premium determined if the bond is called before maturity?
Under regulations in effect for bonds acquired before March 2, 1998 (or held before a taxable year containing March 2, 1998), the earlier call date (if it is used to determine amortizable premium) may be the earliest call date specified in the bond as a day certain, the earliest interest payment date if the bond is callable at such date, the earliest date at which the bond is callable at par, or such other call date, prior to maturity, specified in the bond as may be selected by the taxpayer.2 Where amortization is determined with respect to one of the alternative call dates, if in fact the bond is not called on that date, the premium must be amortized to a succeeding date or to maturity. The additional final regulations, amended December 30, 1997, do not include the above rules.
Basis Adjustment
Regulations in effect for bonds acquired before March 2, 1998 (or held before a taxable year containing March 2, 1998) provided that, in determining the amount of premium to be amortized each year, the basis was adjusted for amortizable premium previously deducted or offset.3 Also, an adjustment had to be made for premium not amortized in years the individual held the bond before he or she elected to amortize. However, this adjustment was made only for the purpose of determining the amortizable amount; the amount not amortized before the election did not affect basis for determining gain or loss on sale or exchange.4 If the bond was acquired by gift (or the individual’s basis is for some other reason determined by reference to the basis in the hands of another), the same adjustment must include the period the bond was held by the other person. The regulations, as amended December 30, 1997, do not include the above rules.
1. IRC § 171(b)(2).
2. Treas. Reg. § 1.171-2(b).