From: ask@cbnews.cb.att.com (Arthur S. Kamlet)
Subject: Re: Original Issue Discount
Organization: AT&T Bell Laboratories,  Columbus, Ohio
Distribution: usa
Date: Sat, 26 Dec 1992 22:12:51 GMT

In article <1992Dec21.200959.883@mobil.com> etpeters@dal.mobil.com (E. T. Peterson(Eric)) writes:
>I need some advice from you tax/investment gurus out there.

Well, I'm certainly neither, but I'll add  my 2c anyway.

>I have some "Bank Atlantic Financial Corporation Subordinated Debentures".
>They are supposed to pay approximately 10% per year until they mature in
>the year 2011.  They have stopped paying the interest on them.  Instead, I

This sounds as if they have defaulted on the bonds?  Is that right?
I am surprised they would issue you a 1099-OID if they were supposed
to pay interest but then defaulted.   Some debentures are OID for
an initial period of time and then become interest paying after
that initial period.  Those would issue 1099OIDs for the initial
period only.

I thought OID meant they were supposed to pay no (or far below
market) interest during the period they issue you 1099OIDs.

>get a form 1099-OID (Original Interest Discount) which forces me to pay
>tax on the interest that they should be paying me, but aren't!  Such a deal!

I'm confused too.   I thought they issue you a 1099OID during the
period they are not supposed to be paying you!   If they are not
paying you because they have defaulted, then the bonds should be in
default and they should not be issuing an OID.

I suggest asking them exactly what's going on.

>I have two choices:
>1) I can get rid of them now for $5. (They are supposedly $3300 in principal).

What did you pay for them?  If they carry a face amount of $3300 and
are worth a total of $5, then they surely have defaulted!  And no
one seems to think they will be worth much either.

Actually at those prices, they seem like something to add to an IRA
account.  Since the acreted interest in an IRA is not taxable, it
doesn't matter if they go on reporting 1099OID amounts because you
pay no tax on those amounts in an IRA.   But if they recover, you
would have a whopping big gain!  If they go belly up you are out $5.
No big deal.


>2) I can hold them until 2011, paying taxes on all the phantom income, and
>then have a capital loss write-off when they mature and the company defaults
>on them.


Seems like a bad deal.  You are out the tax on the money all these
years.  I wouldn't hold unless you truly had confidence they will
recover and make up their payments and capital.  Even so, I'd buy
for a tax defered account only.


>I am trying to analyse choice #2, but I have the following questions.
>
>a) In 2011, will I be able to write off the principal and all interest as
>a capital loss? (Yes, I know there is a $3000 limit on losses. Assume I strike
>it rich that year and have plenty of gains to offset!)


Assuming the 1099OID is done correctly, your cost basis for these
thingies is increased by each acreted interest amount reported on
1099OID.   So after all those years your total cost basis is your
cost plus the sum of all the intervening OIDs.

The sales price is whatever you get for it.  The capital gain/loss
is the difference between sales price and cost basis.

The interest you never got doesn't figure in anywhere.  Not even as
a bad debt.

>b) Does the writeoff in 2011 include compunded interest or simple interest?
>$3300 compounded at 10% gives a $20182 writeoff.  Simple interest gives $9570.

Interest doesn't figure in at all.  You use just addition and
subtraction, no multiplication or division :^)

>or is it compounded (rises every year).
>
>d) If I sell now, do I get a capital loss of $3300-$5= $3295?


You get a loss of your cost basis (what you paid plus all acreted
interest you reported on your tax return) less your net sales price.

If you paid $3300, my sympathies.  But I just sold my IBM so I have
little sympathy to go around :^(

If you think your tax bracket is going to rise a lot in the next
year or two you might consider waiting to sell until then, so the
loss gets you more tax dollars.
-- 
Art Kamlet  a_s_kamlet@att.com  AT&T Bell Laboratories, Columbus
Newsgroups: misc.taxes