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tures. The amount to be withheld is limited to the

payments of U.S.-source OID, interest, or pro-

principal purpose of the loan is to avoid

cash paid.

any federal tax.

ceeds from a sale or redemption of an OID

instrument if the payee has given you proof

Registered long-term obligations with

See chapter 1 of Publication 550 for informa-

(generally the appropriate Form W – 8 or an ac-

cash payments. If a registered long-term obli-

tion about the rules for these and other types of

ceptable substitute) that the payee is a foreign

gation has cash payments before maturity,

discounted instruments, such as short-term and

person. A U.S. resident is not a foreign person.

backup withholding applies when a cash pay-

market discount obligations. Publication 550

For proof of the payee’s foreign status, you can

ment is made. The amount subject to backup

also discusses rules for holders of REMIC inter-

rely on the appropriate Form W – 8 or on docu-

withholding is the total of the qualified stated

ests and CDOs.

mentary evidence for payments made outside

interest (defined earlier under Definitions) and

the United States to an offshore account or, in

OID includible in the owner’s gross income for

De minimis rule. You can treat OID as zero if

case of broker proceeds, a sale effected outside

the calendar year when the payment is made. If

the total OID on a debt instrument is less than

the United States. Receipt of the appropriate

more than one cash payment is made during the

one-fourth of 1% (.0025) of the stated redemp-

Form W – 8 does not relieve you from informa-

year, the OID subject to withholding for the year

tion price at maturity multiplied by the number of

tion reporting and backup withholding if you ac-

must be allocated among the expected cash

full years from the date of original issue to matur-

tually know the payee is a U.S. person.

payments in the ratio that each bears to the total

ity. Long-term instruments with de minimis OID

For information about the 30% withholding

of the expected cash payments. For any pay-

are not listed in this publication.

tax that may apply to payments of U.S.-source

ment, the required withholding is limited to the

OID or interest to foreign persons, see Publica-

cash paid.

Example 2. You bought at issuance a

tion 515.

10-year bond with a stated redemption price at

Payee not the original owner. If the payee

maturity of $1,000, issued at $980 with OID of

Foreign-source amount. Backup withhold-

is not the original owner of the obligation, the

$20. One-fourth of 1% of $1,000 (the stated

ing and information reporting are not required for

OID subject to backup withholding is the OID

redemption price) times 10 (the number of full

payments of foreign-source OID and interest

includible in the gross income of all owners dur-

years from the date of original issue to maturity)

made outside the United States. However, if the

ing the calendar year (without regard to any

equals $25. Under the de minimis rule, you can

amount paid by the new owner at the time of

payments are made inside the United States,

treat the OID as zero because the $20 discount

the requirements for backup withholding and

transfer). The amount subject to backup with-

is less than $25.

holding at maturity of a listed obligation must be

information reporting will apply unless the payee

determined using the issue price shown in Sec-

has given you the appropriate Form W – 8 or

Example 3. Assume the same facts as Ex-

tion I.

acceptable substitute as proof that the payee is

ample 2, except the bond was issued at $950.

a foreign person.

Bearer long-term obligations with cash

You must report part of the $50 OID each year

payments. If a bearer long-term obligation

More information. See section 1.6049 – 5

because it is more than $25.

has cash payments before maturity, backup

of the regulations for more information about

Choice to report all interest as OID. Gener-

withholding applies when the cash payments

backup withholding and information reporting on

ally, you can choose to treat all interest on a debt

are made. For payments before maturity, the

foreign-source amounts or payments to foreign

amount subject to withholding is the qualified

instrument acquired after April 3, 1994, as OID

persons.

and include it in gross income by using the

stated interest (defined earlier under Definitions)

includible in the owner’s gross income for the

constant yield method. See Figuring OID using

the constant yield method under Debt Instru-

calendar year. For a payment at maturity, the

Information for

amount subject to withholding is only the total of

ments Issued After 1984, later, for more infor-

mation.

any qualified stated interest paid at maturity and

Owners of OID

the OID includible in the owner’s gross income

For this choice, interest includes stated inter-

est, acquisition discount, OID, de minimis OID,

for the calendar year when the obligation ma-

Debt Instruments

tures. The required withholding at maturity is

market discount, de minimis market discount,

and unstated interest, as adjusted by any amor-

limited to the cash paid.

tizable bond premium or acquisition premium.

This section is for persons who prepare their

Sales and redemptions. If you report the

See section 1.1272 – 3 of the regulations for

own tax returns. It discusses the income tax

gross proceeds from a sale, exchange, or re-

more information.

rules for figuring and reporting OID on long-term

demption of a debt instrument on Form 1099 – B

debt instruments. It also includes a similar dis-

Purchase after date of original issue. A debt

for 2002, you may be required to withhold 30%

cussion for stripped bonds and coupons, such

instrument you purchased after the date of origi-

of the amount reported. Backup withholding ap-

as zero coupon instruments available through

nal issue may have premium, acquisition pre-

plies in the following situations.

the Department of the Treasury’s STRIPS pro-

mium, or market discount. If so, the OID

•

gram and government-sponsored enterprises

The payee does not give you a TIN.

reported to you on Form 1099 – OID may have to

such as the Resolution Funding Corporation.

•

be adjusted. For more information, see Showing

The IRS notifies you that the payee gave

However, the information provided does not

an OID adjustment under How To Report OID,

an incorrect TIN.

cover every situation. More information can be

later.

•

found in the regulations under sections 1271

For debt instruments held in an account

Adjustment for premium. If your debt in-

opened after 1983, the payee does not

through 1275 of the Internal Revenue Code.

strument (other than a contingent payment debt

certify, under penalties of perjury, that the

instrument or an inflation-indexed debt instru-

TIN given is correct.

Reporting OID. Generally, you report OID as

ment) has premium, do not report any OID as

it accrues each year, whether or not you receive

ordinary income. Your adjustment is the total

any payments from the bond issuer.

Payments outside the United States to U.S.

OID shown on your Form 1099 – OID.

person. The requirements for backup with-

Exceptions. The rules for reporting OID on

Adjustment for acquisition premium. If

holding and information reporting apply to pay-

long-term instruments do not apply to the follow-

your debt instrument has acquisition premium,

ments of OID and interest made outside the

ing debt instruments.

reduce the OID you report. Your adjustment is

United States to a U.S. person, a controlled

•

U.S. savings bonds.

the difference between the OID shown on your

foreign corporation, or a foreign person at least

•

Form 1099 – OID and the reduced OID amount

50% of whose income for the preceding 3-year

Tax-exempt obligations. (However, see

figured using the rules explained later under

period is effectively connected with the conduct

Tax-Exempt Bonds and Coupons, later.)

Figuring OID on Long-Term Debt Instruments.

of a U.S. trade or business.

•

Obligations issued by individuals before

Adjustment for market discount. If your

March 2, 1984.

Payments to foreign person. The following

debt instrument has market discount that you

discussions explain the rules for backup with-

•

Loans of $10,000 or less between individ-

choose to include in income currently, increase

holding and information reporting on payments

uals who are not in the business of lending

the OID you report. Your adjustment is the ac-

to foreign persons.

money. (The dollar limit includes outstand-

crued market discount for the year.

ing prior loans by the lender to the bor-

U.S.-source amount. Backup withholding

See Market Discount Bonds in chapter 1 of

and information reporting are not required for

rower.) This exception does not apply if a

Publication 550 for information on how to figure

Page 5

Publication 1212 - List Of Original Issue Discount Instruments - Department Of Treasury - 2002 Page 5

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