§1273 Determination of Amount of Original Issue Discount

Summary

Explains how to work out the extra interest built into a bond or loan sold for less than its final payment and how to decide the issue price. Original issue discount (OID) is the amount by which the final stated payment exceeds the price at which the debt was issued. The final stated payment is the amount fixed by the last change to the purchase agreement and usually includes amounts due at maturity, but not routine fixed interest paid at intervals of one year or less. If the calculated OID is less than 1/4 of 1 percent of the final payment times the number of full years to maturity, the OID is treated as zero. Says how to pick the issue price: for public sales not paid with property, it is the initial price to the public (not dealers) where a substantial amount sold; for private sales it is the first buyer’s price; when the debt is paid with property and that property or similar items trade publicly, use the property’s fair market value. Otherwise, if none of those rules apply, use the final stated payment as the issue price. “Property” covers services and rights to use things but not money. The law also counts all payments made under the purchase deal (including changes) and says that if a debt is sold as part of an investment unit, the unit’s issue price is treated like a debt and then split among the parts based on their fair market values.