California Code of Regulations › Title 18 - Public Revenues › Division 3 - Franchise Tax Board › Chapter 3.5 - Bank and Corporation Tax › Subchapter 7 - Net Income › Article 1 - Deductions › Section 24360-24363(b) - Determination of Bond Premium

Current through Register 2024 Notice Reg. No. 28, July 12, 2024
(1) In general.
(A) Except as otherwise provided in this
					 regulation, bond premium on any bond to which Section
					 24360 applies is the excess of the
					 amount of the basis (for determining loss on sale or exchange under Section
					 24911) of the bond over the amount
					 payable at maturity or, in the case of a callable bond, the earlier call date.
					 For determination of applicable call date, see subsection (2) of this
					 regulation.
(B)
(i) The amortizable bond premium on a wholly
					 taxable bond described in 24362(a) shall be computed by reference to the amount
					 payable on maturity or on an earlier call date. For purposes of this
					 subparagraph, the date of acquisition of a bond shall be the date such bond was
					 ordered under a firm commitment to buy and not the date the bond was delivered
					 to the taxpayer.
(ii) The
					 application of the provisions of subparagraph (i) of this paragraph may be
					 illustrated by the following example:
EXAMPLE (1).
Assume that the taxpayer acquired at the date of issue,
						January 1, 1956, a $100 wholly taxable bond for $112, callable at any time
						thereafter upon 30 days' notice. The premium of $12 attributable to such bond
						may be amortized only with reference to the maturity date of the bond.
						Similarly, assume that in 1957 the taxpayer acquired a $100, 20-year bond,
						issued on January 1, 1954, for $115. The bond was callable 2 years after the
						date of issuance or, if not then called, 10 years after the date of issuance.
						The premium of $15 attributable to such bond may be amortized in accordance
						with the method of amortization authorized by subsection
						24360-24363(b)(6).
(iii) In the case of a wholly taxable bond
					 described in Section
					 24361(b), which
					 has a call date not more than three years after the date of such issue, the
					 amount of bond premium attributable to the income year in which the bond is
					 called shall include an amount equal to the excess of the amount of the
					 adjusted basis (for determining loss on sale or exchange) of such bond as of
					 the beginning of the income year over the amount received on redemption of the
					 bond or (if greater than the amount received on redemption) the amount payable
					 on maturity. For determining whether an earlier call date is a date more than
					 three years after the date of original issue, consideration will be given to
					 the terms under which a bond is issued. For adjustments proper to reflect
					 unamortized bond premium for the period before the date as of which Section
					 24360 becomes applicable to the
					 bond in the hands of the taxpayer, see paragraph (D) of this subsection. For
					 example, if a wholly taxable bond, issued on January 1, 1954, and acquired by
					 the taxpayer on January 1, 1955, at a price of $109, matures in 10 years from
					 the date of issue (9 years from the date of acquisition) but is callable at
					 $105 on 30 days' notice, Section
					 24361(a)(2)
					 requires that the bond be amortized to maturity, that is, at the rate of $1 per
					 year. If the bond is called on December 31, 1956, for $105, then $3, the excess
					 of the adjusted basis of $108 ($109 less $1 deducted in 1955) over the amount
					 received on redemption, $105, may be deducted for the year
					 1956.
(C) Whether the
					 purchase and immediate transfer of callable bonds occurs in such a manner as to
					 make the entire transaction not bona fide, and hence the deductions for
					 amortization for bond premium not allowable, will depend on all the facts and
					 circumstances.
(D) If the date as
					 of which the basis of the bond was established precedes the first income year
					 with respect to which Section
					 24360 applies to the bond, proper
					 adjustments shall be made to reflect unamortized bond premium on such bond for
					 the period including the holding period before the date as of which Section
					 24360 first becomes applicable to
					 the bond in the hands of the taxpayer. Such adjustment is required whether an
					 election was made under Section
					 24121(o) of the
					 Bank and Corporation Tax Law of 1954 or under Section
					 24360 and applies to all bonds to
					 which Section
					 24360 is applicable.
(E) The rule relating to adjustments set
					 forth in paragraph (D) of this subsection may be illustrated by the following
					 examples:
EXAMPLE (1).
On January 1, 1956, T Corporation, which makes its tax
						returns on the calendar year basis, owns a fully taxable $100 bond, maturing on
						January 1, 1966. T purchased this bond on January 1, 1946, for $120. T elects
						to have Section
						24360 apply to such bond for 1957
						and subsequent income years. In determining the amount of bond premium to be
						amortized over the remaining 9 years of the life of the bond, T is required but
						solely for such purpose, to treat the bond as if it had amortized the bond
						premium thereon during the prior 11 year, and to make the proper adjustments in
						the original bond premium. Accordingly, T would treat $11 as having been
						amortized during the first 11 years and would be required to amortize the
						remaining $9 over the following 9 years. When the bond is redeemed on January
						1, 1966, for $100, only the $9 attributable to the last 9 years will actually
						have been amortized, and the basis of the bond will have been reduced only by
						that amount. The $11 attributable to the first 11 years will have been treated
						as an adjustment to the original bond premium but will not have been amortized
						nor will the basis of the bond have been reduced by that amount. Consequently,
						T will have a capital loss in the year of redemption on account of the $11
						attributable to the period January 1, 1946, to January 1, 1957.
EXAMPLE (2).
Y Corporation makes its income tax returns on the
						calendar year basis, owns a fully tax-exempt $100 bond maturing on January 1,
						1962. It purchased this bond on January 1, 1942, for $120. On December 31,
						1955, Y sells the bond for $108 and realizes a gain of $1, computed as
						follows:
(i)
Total bond premium
								($120-$100)........................................................................................................................................................................................................................................
..........................$20
(ii)
Amount of bond premium amortizable if
								held to maturity (total bond premiums minus unamortized bond premium
								attributable to 1942 (a year to which Section
								24121(o) of the
								Bank and Corporation Tax Law of 1954 was not applicable),
								$20-$1).................................................................................................................................................................................................................................................................................................
..........................19
(iii)
Amount of bond premium amortized from
								January 1, 1943, through December 31, 1955 ($1 for each such
								year)................................................................................................................
..........................13
(iv)
Adjusted basis of bond at close of
								1954
								($120--$13).................................................................................................................................................................................................................................................................................................
..........................107
(v)
Gains
								($108--$107).................................................................................................................................................................................................................................................................................................
..........................1
(F) Amortizable bond premium on any bond to
					 which Section
					 24360 applies is that part of the
					 bond premium on the bond which is attributable to the income
					 year.