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Bond Premium Carryforward

In TD. 9653, the IRS issued final regs on the tax treatment of bond premium carryforwards in the final accrual period. The final regs adopt ,without substantiative change, the proposed regs [Reg. 140437-12, January 2013] and withdrew the temporary reg-T.D. 9609.

The temporary reg was issued to answer a holder’s question concerning the treatment of a taxable zero-coupon debt instrument, including a Treasury bill, acquired at a premium but having a negative yield. Under prior regs, a holder who elected to amortize the bond premium, would have a capital loss if the security was retired or sold.

The IRS said this situation arose as a result of market conditions and was not contemplated when the prior regs were issued in 1997. The new regs deal with this issue by adding a specific rule providing that an electing holder can take an ordinary loss, rather than a capital loss, for all or part of the premium under Sec. 171(A) when the investment is sold, retired, or otherwise disposed of.

The regs apply to bonds acquired on or after January 4, 2013 (the effective date of the temporary regs) but taxpayers may apply the regs to bonds acquired before that date.

[as reported by The Journal of , March 2013]

In accordance with Circular 230 Disclosure

Dr. Goedde is a former college professor who taught income tax, auditing, personal finance, and financial accounting and has 25 years of experience preparing income tax returns and consulting. He published many accounting and tax articles in professional journals. He is presently retired and does tax return preparation and consulting. He also writes articles on various aspects of taxation. During tax season he works as a volunteer income tax return preparer for seniors and low income persons in the IRS’s VITA program.

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