Tax Facts

7658 / Are there any situations in which the IRS will disallow amortization of bond premium?

The Service will disallow amortization in situations that lack economic substance.1 A deduction for amortization was disallowed where sales were not bona fide sales;2 and where an individual who put up no margin, signed no note, and intended to sell the bonds to cover his liability, was ruled not to be the owner of the bonds for purposes of deducting a part of the premium.3

Amortization of premium on tax-exempt bonds is discussed in Q 7664.

1.   Rev. Rul. 62-127, 1962-2 CB 84. With the 2010 codification of the economic substance doctrine, see IRC § 7701(o), many transactions must pass scrutiny under this doctrine to be honored.

2.   Lieb v. Comm., 40 TC 161 (1963).

3.   Starr v. Comm., 46 TC 450 (1966), acq. 1967-2 CB 3.7.

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