Understanding 1099-OID amount- 2011

In January 28,2011, I bought 800 shs of "Merrill Lynch Capital Trust
7% Perpetual Topper" (a trust preferred; I don't know what a "Topper"
is) for 23.965 plus commision. In my 1099 information, there is a
section for 1099 OID of $1279.45.
i received the expected 4 interest payments of $350 last year, but
they are not listed in the detail section of my 1099 . That led me to
the idea that the OID amount had noting to do with a discount from the
purchase price, but rather had something to do with the 27 days that I
actually didn't own it, and therefore was not entitled to the full
first month's interest payment UNLESS, under the covers, that was
built into the price. Some rough calculations indicate that I'm
correct. If you subtract 27 days of interest from the $1400 I
received, it comes out very close the the interest received. My only
question is why is the entire amount called OID, instead of just the
amount possibly built into the purchase price to cover the interest
for the period I didn't own it? With bonds, I have seen this broken
out as Accrued interest, and then standard interest, but this seems to
have been treated differently, lumping the full year's interest
payments into OID.
Sorry this isn't more crisply explained. Just want to know if I'm on
the right track and possibly a general idea of why it gets treated as
it has been. Thanks.
Reply to
jo
Every year I get a 1099-OID for one of my brokerage accounts. In most cases, I did not buy the bond at original issue but on the secondary market at a premium. I make OID adjustments on Schedule B based on the price I paid and IRS rules for adjusting OID. The issuer will continue to send 1099-OIDs to the current owner of record until the security is called or matures.
Reply to
Green Eggs & No Spam
In article ,
I don't understand why a bond bought at a premium, which I assume means a premium to amount payable at first call date, has OID calculations?
Reply to
Arthur Kamlet
Because the brokerage issues a 1099-OID every year for taxable interest bonds based on information reported by the issuer. I don't understand fully either, though I did read earlier this year about how to calculate the OID adjustment. I take a rather simple approach. If I did not buy the bond at discount, I did not get the OID. Therefore I adjust out all the reported OID for those bonds. Maybe that's not correct to the penny, but it has worked for years, unless IRS tells me otherwise.
Reply to
Green Eggs & No Spam
In article ,
I only had to go through this once. That was enough.
It seems that whenever the IRS gets new computation capability, someone figures out how to extract some tax money a bit faster. For this small tax, we now have to fill out an additional line on our tax form for years on end. Without computers, the amount of the tax would not be enough to cover the clerical work necessary.
In the old days, If you bought a bond at a discount, the buy price was the basis. At maturity or when you sold the bond, you took a capital gain or loss.
Reply to
Salmon Egg
In article ,
The bond ($100 face) was issued at $90. An OID schedule was calculated at issue. Due to market changes, the bond's price rose to $110. The broker is still sending statements based on the original OID schedule.
Seth
Reply to
Seth

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