The IRS and Treasury Department have published final and temporary regulations that simplify accounting and provide favorable tax treatment to holders of certain debt instruments purchased at a premium. Institutions will need to adjust their systems and processes to incorporate the new guidance. What you need to do: http://gt-us.co/1nYDp2u

1. The IRS and Treasury Department have published final and temporary
regulations that simplify accounting and provide favorable tax treatment to
holders of certain debt instruments purchased at a premium. Institutions will
need to adjust their systems and processes to incorporate the new guidance.
New guidance addresses bond
premiums for TIPS and other
debt instruments
Background
Market conditions in recent years have made
bonds purchased at a premium more common.
Bond holders have had two concerns about
accounting for these instruments:
1. That the simplified accrual method (or,
coupon bond method) was not permissible for
Treasury inflation-protected securities (TIPS);
2. That any loss for the bond premium carryforward
— the bond premium that accrued but was not
deductible by the holder — existing at the time of
sale, retirement or other disposition of a taxable
debt instrument would be treated as a capital loss.
Guidance for bond premiums
1. Required use of simplified accrual method
In December 2011, the IRS issued temporary
regulations that require the use of the simplified
accrual method for TIPS with more than
de minimis premium. The final regulations
adopt these rules without substantive change.
The rules include an example that demonstrates
the coupon bond method and the bond
premium accrual method for TIPS with a
negative yield. Taxpayers may not apply the
more complex discount bond method to these
instruments. The final regulations were effective
Jan. 4, 2013, and apply to TIPS issued after
April 7, 2011.

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New guidance addresses bond premiums for TIPS and other debt instruments
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What you need to do
Institutions have two choices in how they will
produce the calculations the new guidance requires:
1. Apply these new calculations directly to their
practical business solutions, working with
an outside adviser to make certain they are
performed correctly.
2. Work with a knowledgeable third party to
program these methods into your systems,
ensuring that:
–– Input data is accurate, complete, authorized
and correct
–– Data is processed as intended in an acceptable
time period
–– Data stored is accurate and complete
–– Outputs are accurate and complete
–– A record is maintained to track the process
of data from input to storage and to the
eventual output
–– The resulting calculations adhere to the
final regulations
Contacts
Jim Marks
Director
Financial Services
Tax
T 617.973.4730
E jim.marks@us.gt.com
John M. Stomper
Partner
Audit Services
T 312.602.8080
E john.stomper@us.gt.com
2. Ordinary loss at end of final accrual period
The new guidance provides temporary regulations
on the tax treatment of a taxable debt instrument
(including TIPS or other Treasuries) with a
bond premium carryforward in the holder’s
final accrual period. Specifically, if a taxpayer
has elected to amortize the bond premium, the
regulations provide an ordinary loss (i.e., a bond
premium deduction) at the end of the holder’s
final accrual period equal to the amount of the
bond premium carryforward. This bond premium
deduction also reduces the holder’s basis in the
bond. These adjustments are taken at the time of
sale, retirement or disposition. The temporary
regulations are effective for a debt instrument
acquired on or after Jan. 4, 2013, but a taxpayer
may rely on these rules for a debt instrument
acquired before that date.