Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 60-17

1960-1 C.B. 124

Sec. 171

Sec. 1016

IRS Headnote

Where a tax-exempt callable bond, purchased at a premium, is not called on the first call date provided for in the bond, that portion of the premium paid on the purchase of the bond, not properly amortizable over the first call period, must be further amortized down to the next lower call price, and the basis of the bond adjusted accordingly. This process must be repeated whenever a call date to which the bond premium has been amortized goes by without the actual calling of the bond. In the event that there is no next lower call price provided for in the bond, the remainder of the total bond premium must be amortized down to the price payable at maturity and the basis of the bond reduced accordingly.

Full Text

Rev. Rul. 60-17

Advice has been requested whether the premium paid on the purchase of a tax-exempt callable bond, not properly amortizable over the first possible call period, should be  further amortized over the remaining call periods provided for in the bond.

Where a taxpayer purchases a tax-exempt bond at a premium, he is required under the terms of sections 171 and 1016(a)(5) of the Internal Revenue Code of 1954, or sections 113(b)(1)(H) and 125 of the Internal Revenue Code of 1939, to reduce his basis for the bond by amortizing the bond premium down to the amount payable at maturity, or to the amount payable at the earliest call date, if an ascertainable call date is provided for in the bond.

It is the position of the Internal Revenue Service that, in the case of a tax-exempt callable bond, any bond premium must be amortized to the earliest call date and the basis of the bond reduced accordingly. In such cases, where the earliest call date has gone by and the tax-exempt bond has not actually been called, the remainder of the bond premium which has not yet been amortized must be further amortized down to the next lower call price prior to maturity and the basis of the tax-exempt bond must be reduced accordingly. If the date of this next lower call price goes by and the tax-exempt bond is again not called, the bond must be further amortized down to the next lower call price provided for in the bond and the basis of the bond must be reduced accordingly. This process is to be repeated whenever a call date to which the bond has been amortized goes by without an actual calling of the bond. In the event that there is no next lower call price provided for in the tax-exempt bond, the remainder of the total bond premium must be amortized down to the price payable at maturity and the basis of the bond must be reduced accordingly. The rule stated above may be illustrated by the following example:

On October 1, 1945, a taxpayer purchased for $105.50 a fully tax-exempt, par value $100.000, municipal bond subject to the following terms and conditions:

                                        Callable on any interest

Call prices:                                  date between:

First call _____________ $105.00     Jan. 1, 1946 and Dec. 31, 1947

Second call ____________  104.00     Jan. 1, 1948 and Dec. 31, 1949

Third call _____________  103.00     Jan. 1, 1950 and Dec. 31, 1955

REDEEMABLE AT PAR. $100.00, JANUARY 1, 1956.

As stated in the House and Senate Committee Reports with reference to section 125 of the 1939 Code, which are equally applicable, insofar as here pertinent, to section 171 of the 1954 Code, `Bond premium, in the case of any bond subject to this section, is the total premium thereon; that is, the excess of the basis of the bond for determining loss over the amount payable at maturity.' See H.R. Report No. 2333, 77th Cong., C.B. 1942-2, 372, at 432, and Senate Report No. 1631, 77th Cong., C.B. 1942-2, 504, at 574.

Since the amortization of bond premium is mandatory with respect to tax-exempt bonds, it is clear that the entire bond premium of $5.50 in the above example is subject to amortization. Assuming that the bond is not actually called on any of the call dates, the bond premium should be amortized as follows: Fifty cents of the total bond premium should be amortized down to the first call date of January 1, 1946. An additional one dollar should be amortized down to the second call date of January 1, 1948, and again one dollar down to the third call date of January 1, 1950. After the third call date has gone by, the balance of the bond premium, viz., three dollars should be amortized down to the maturity date of January 1, 1956. The taxpayer's basis for the bond must, of course, be reduced accordingly.

If, in the above example, the taxpayer held the bond until January 1, 1955, and then sold it, his basis for for the bond at the time of sale would be $100.50, computed in accordance with the formula set forth above. Taxpayer's gain or loss on the sale of the tax-exempt bond must be computed on the basis of the bond as adjusted for amortization of the bond premium.