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Heads Up on Merrill Lynch 1099

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    Heads Up on Merrill Lynch 1099

    ML is reporting total tax exempt interest to IRS. When you look at the details, the interest total for each bond is reduced by the ABP. So if you have interest from various states you need to add back the ABP to each bond to get the correct tax exempt interest to report. My guess is this issue may come up with other brokerages.

    #2
    ABP? What does that stand for?

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      #3
      Not for sure - but I think it is the "Amortized Bond Premium"

      Sandy

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        #4
        I've had that issue before which has caused problems. If you do not report the entire amount of tax-exempt interest, the client will get a notice from their home state. I've had to cite Reg 1.171-2(c) Example 4(iv) when responding to a notice from the home state. To avoid a notice going forward, I've decided to addback the entire interest and then take the ABP as a subtraction. That way the amounts will agree with the 1099s and the correct net amount is reported.

        Example 4. Tax-exempt obligation --

        (i) Facts. On January 15, 1999, C purchases for $120,000 a tax-exempt obligation maturing on January 15, 2006, with a stated principal amount of $100,000, payable at maturity. The obligation provides for unconditional payments of interest of $9,000, payable on January 15 of each year. C uses the cash receipts and disbursements method of accounting, and C decides to use annual accrual periods ending on January 15 of each year.

        (ii) Amount of bond premium. The interest payments on the obligation are qualified stated interest. Therefore, the sum of all amounts payable on the obligation (other than the interest payments) is $100,000. Under Section 1.171-1, the amount of bond premium is $20,000 ($120,000--$100,000).

        (iii) Bond premium allocable to the first accrual period. Based on the remaining payment schedule of the obligation and C's basis in the obligation, C's yield is 5.48 percent, compounded annually. The bond premium allocable to the accrual period ending on January 15, 2000, is the excess of the qualified stated interest allocable to the period ($9,000) over the product of the adjusted acquisition price at the beginning of the period ($120,000) and C's yield (5.48 percent, compounded annually). Therefore, the bond premium allocable to the accrual period is $2,420.55 ($9,000 - $6,579.45).

        (iv) Premium used to offset interest. Although C receives an interest payment of $9,000 on January 15, 2000, C only receives tax-exempt interest income of $6,579.45, the qualified stated interest allocable to the period ($9,000) offset with bond premium allocable to the period ($2,420.55). Under Section 1.1016-5(b), C's basis in the obligation is reduced by $2,420.55 on January 15, 2000.

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