OID - doesn't make sense to me

[LCP]

Can someone help me understand this series of events..........

Brokerage trade shows 100 corporate bonds purchased at 25 for a total of $2500 cost in 1996. The rate is 8.36%

Each year taxpayer's statement showed OID of 8.36% of the face value.

Then in 2005 the year end brokerage statement shows that the bonds were called at 25.

I thought OID resulted when bonds were issued at a price less than redemption price. This is a new client but I am looking at the buy and the sell slips. It is possible that the taxpayer could be giving me bad info on how the interest was reported each year.

[Snaggletooth]

Capital Loss

LCP, if the facts are correct as you have presented them, then there is a capital loss.

The basis would be the original purchase price plus all interest for which the taxpayer has been taxed since he purchased the bond. If he bought at $25000 and received $25000 upon redemption, then his "basis" is the $25000 plus all the cumulative OID charges.

I agree that the proceedings don't make a lot of sense in that there is no "real" amortization and no "real" discount as the events have unfolded. But rather than trying to get the issuer to clean up his mess, simply take the capital loss, as your client is entitled to it.

Sometimes if you can live with a fair conclusion wrought by information statements, it's easier than trying to deal with the purveyor of these information statements and drag the customer through the garden.

[Unregistered]

stripped bonds?

Are the bonds stripped bonds?

[LCP]

Are the bonds stripped bonds?

Not sure .... they were Consumers Power Fin 8.3615Dec31 (CUSIP 210519203 if helpful)

[Mark Goldberg]

What I just saw

I just saw a bond listed as something like Heavan City OID.
It was clearly not a zero coupon bond yielding OID. I suspect this OID in the title means something else and shuld be ignored for taxes.

[JJ EA]

Oid

What your client had was a fixed rate capital security. They are known as MIPs, QUIPs, QUIDs, TOPrSs, etc. The one your client had was a TOPrS (Trust Originated Preferred Security).
This is what I could find on these: If issued prior to 8/13/96 they almost always were issued with OID. After that date they could have been issued with OID. OID results even when they are issued at par which seems to be $25 for most of these securities. The reason they have OID is that the issuer can defer the interest payments but the owner has to include the interest in income each year whether he receives it or not that year.
I found an explanation from a broker that says they put the interest that should be paid every year on the 1099 OID, they then put the actual cash paid to the investor in the Return of Principal section of the tax info statement. So when you pay tax on the OID each year you increase basis and when the interest actually gets paid to you, your basis decreases. So the basis at the end will be $25 if all interest is eventually paid, which seems to be the case for the majority of these.
I had a client a couple of years ago that purchased these investments. The companies like to issue them because they can defer paying the interest. They are usually callable after a few years and usually get called because of the high interest they earn.

[LCP]

Thanks a ton for all the info !!