In article , snipped-for-privacy@panix.com (Seth) writes: | In article , Dan Lanciani wrote: | | >No, it was not a zero-coupon bond but its issue price was (as is often | >the case) slightly under par. | | How slightly?
Looks like it issued at around 96.4.
| IIRC, there's no OID income if it's slight enough, only | when the bond is intentionally issued with a below-par coupon and | accretion.
For taxable bonds minimal OID may (must?) be disregarded in the sense that it merely adds to the gain (reduces the loss) at redemption. This is of course good for the owner since it converts interest into capital gain taxed at a lower rate. For tax exempt bonds disregarding the OID would convert what was allegedly tax exempt interest into taxable capital gain. Last time I checked this was not required (though I'm sure the IRS wouldn't object to your paying extra taxes :). A change to that effect may well have occurred--it certainly wouldn't be out of character with the perpetual tweaks to muni accounting. (In the good old days you could recognize all the OID even if the bond was called prior to maturity. Now you have to accrue.)
This all raises the fascinating question of whether you could disregard OID on a muni that was originally tax exempt but became taxable through some violation of the rules.
| >It occurs to me that once the bond is in default it may well | >no longer satisfy the requirements of a tax-exempt instrument | | Why not? It was still issued by a municipality, right?
Sure, but isn't there a lot more to it that that? Every time I purchase a muni at issue I get a complicated prospectus with opinions as to the (non) taxability of the interest, and they always make a big deal about the importance of continues compliance with various rules. I can imagine that an entity in enough trouble that they are going to default on payment might forget to cross all the t's and dot all the i's.
Dan Lanciani ddl@danlan.*com