1 Unless otherwise indicated, all section references are

to the Internal Revenue Code in effect for the taxable year in

issue. All Rule references are to the Tax Court Rules of

Practice and Procedure.

T.C. Memo. 1997-249

UNITED STATES TAX COURT

THOMAS J. GAFFNEY AND ANNE F. GAFFNEY, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 13092-96. Filed June 3, 1997.

Thomas J. and Anne F. Gaffney, pro se.

Gary W. Bornholdt, for respondent. 

MEMORANDUM OPINION

DINAN, Special Trial Judge: This case was assigned

pursuant to the provisions of section 7443A(b)(3) and Rules 180,

181, and 182.1
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2 In their petition to the Court, petitioners failed to

address respondent's determination that they received and failed

to report dividend income in the amount of $16. We deem

petitioners to have conceded this issue. Rule 34(b)(4). 

Respondent's adjustment to petitioners' miscellaneous itemized

deductions is computational and will be resolved by the Court's

holding on the issue in this case.

Respondent determined a deficiency in petitioners' Federal

income tax for 1993 in the amount of $4,242.

After a concession by petitioners,2 the issue remaining for

decision is whether petitioners must include in gross income

original issue discount that accrued during 1993.

This case was submitted fully stipulated under Rule 122. 

The stipulations of fact and attached exhibits are incorporated

herein by this reference. Petitioners resided in West Islip, New

York, on the date the petition was filed in this case.

Petitioners maintained a brokerage account with Bear,

Stearns Securities Corp. (Bear, Stearns) during 1993. Their

brokerage account holdings included original issue discount debt

instruments and stripped bonds. The record does not reveal the

issuance date of the debt instruments or the stripped bonds, or

the date on which they were acquired by petitioners.

Bear, Stearns issued a consolidated Form 1099-INT-DIV-MISCOID-1099B (Form 1099) that reported $14,847.50 of original issue

discount that had accrued on petitioners' holdings in 1993. 

Petitioners failed to report the accrued original issue discount

on their 1993 joint Federal income tax return. Respondent issued
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3 The difference between the original issue discount

amount reported on the Form 1099 and the amount determined in the

statutory notice of deficiency is due to rounding.

a statutory notice of deficiency that increased petitioners' 1993

interest income by $14,845 to reflect the unreported original

issue discount.3

Respondent's determinations in the statutory notice of

deficiency are presumed to be correct, and petitioners bear the

burden of proving otherwise. Rule 142(a); Welch v. Helvering,

290 U.S. 111, 115 (1933).

Section 61(a) includes in gross income all income from

whatever source derived. The amount of any item of gross income

shall be included in the gross income for the taxable year in

which it is received by the taxpayer under the taxpayer's method

of accounting. Sec. 451(a). Petitioners use the cash receipts

and disbursements method to compute their income. See sec.

446(c)(1). Generally, under the cash receipts and disbursements

method, all items which constitute gross income, whether in the

form of cash, property, or services, are to be included for the

taxable year in which actually or constructively received. Sec.

1.446-1(c)(1)(i), Income Tax Regs. However, special rules exist

under sections 1271 through 1275 for the ratable inclusion of

original issue discount in respect of certain corporate

obligations. Sec. 1.451-1(d), Income Tax Regs.
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4 The requirement that debt instrument holders include

original issue discount in income ratably over the life of the

instrument was first enacted by the Tax Reform Act of 1969, Pub.

L. 91-172, sec. 413, 83 Stat. 487, 609, as former section

1232(a)(3). This requirement was carried forward as former

section 1232A(a)(1) by the Tax Equity and Fiscal Responsibility

Act of 1982, Pub. L. 97-248, sec. 231, 96 Stat. 324, 496. The

language of section 1272(a)(1), enacted by the Deficit Reduction

Act of 1984, Pub. L. 98-369, sec. 41, 98 Stat. 494, 531, is

substantively identical to former section 1232A(a)(1).

Section 1272(a)(1) requires the holder of any debt

instrument having original issue discount issued after July 1,

1982, to include in gross income an amount equal to the sum of

the daily portions of the original issue discount for each day

during the taxable year on which the holder held such debt

instrument.4 Original issue discount is defined as the excess,

if any, of the stated redemption price at maturity over the issue

price. Sec. 1273(a). Furthermore, section 1286(a) provides

for a stripped bond to be treated as a bond originally issued on

the purchase date and having an original issue discount equal to

the excess of the stated redemption price at maturity over such

bond's ratable share of the purchase price.

Petitioners argue that because they use the cash receipts

and disbursements method of accounting they should not be

required to include the disputed amount of original issue

discount in their gross income until they actually receive the

original issue discount. We disagree with petitioners. Section

1272(a)(1) clearly requires the holder of a debt instrument

issued at a discount to include in gross income for the taxable
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year the amount of the accrued discount allocable to the portion

of the taxable year in which he or she held such debt instrument. 

See Security Bank Minn. v. Commissioner, 994 F.2d 432, 436 (8th

Cir. 1993), affg. 98 T.C. 33 (1992). The rationale for inclusion

is that "Earned original issue discount serves the same function

as stated interest * * * it is simply 'compensation for the use

or forbearance of money.'" United States v. Midland-Ross Corp.,

381 U.S. 54, 57 (1965) (quoting Deputy v. du Pont, 308 U.S. 488,

498 (1940).

We find that petitioners have failed to prove that sections

1271 through 1275 do not apply to their debt instruments having

original issue discount, or that the amount of accrued original

issue discount reported on the Form 1099 is erroneous. After

considering petitioners' other arguments and finding them to be

without merit, we hold that petitioners must include in gross

income their original issue discount that accrued during 1993. 

Respondent's determination is sustained.

To reflect the foregoing,

Decision will be entered

for respondent.