[Code of Federal Regulations]
[Title 26, Volume 3]
[Revised as of April 1, 2002]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.171-4]

[Page 172]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
COMPUTATION OF TAXABLE INCOME (Continued)--Table of Contents
 
Sec. 1.171-4  Election to amortize bond premium on taxable bonds.

    (a) Time and manner of making the election--(1) In general. A holder 
makes the election to amortize bond premium by offsetting interest 
income with bond premium in the holder's timely filed federal income tax 
return for the first taxable year to which the holder desires the 
election to apply. The holder should attach to the return a statement 
that the holder is making the election under this section.
    (2) Coordination with OID election. If a holder makes an election 
under Sec. 1.1272-3 for a bond with bond premium, the holder is deemed 
to have made the election under this section.
    (b) Scope of election. The election under this section applies to 
all taxable bonds held during or after the taxable year for which the 
election is made.
    (c) Election to amortize made in a subsequent taxable year--(1) In 
general. If a holder elects to amortize bond premium and holds a taxable 
bond acquired before the taxable year for which the election is made, 
the holder may not amortize amounts that would have been amortized in 
prior taxable years had an election been in effect for those prior 
years.
    (2) Example. The following example illustrates the rule of this 
paragraph (c):

    Example. (i) Facts. On May 1, 1999, C purchases for $130,000 a 
taxable bond maturing on May 1, 2006, with a stated principal amount of 
$100,000, payable at maturity. The bond provides for unconditional 
payments of interest of $15,000, payable on May 1 of each year. C uses 
the cash receipts and disbursements method of accounting and the 
calendar year as its taxable year. C has not previously elected to 
amortize bond premium, but does so for 2002.
    (ii) Amount to amortize. C's basis for determining loss on the sale 
or exchange of the bond is $130,000. Thus, under Sec. 1.171-1, the 
amount of bond premium is $30,000. Under Sec. 1.171-2, if a bond premium 
election were in effect for the prior taxable years, C would have 
amortized $3,257.44 of bond premium on May 1, 2000, and $3,551.68 of 
bond premium on May 1, 2001, based on annual accrual periods ending on 
May 1. Thus, for 2002 and future years to which the election applies, C 
may amortize only $23,190.88 ($30,000-$3,257.44-$3,551.68).

    (d) Revocation of election. The election under this section may not 
be revoked unless approved by the Commissioner. Because a revocation of 
the election is a change in accounting method, a taxpayer must follow 
the rules under Sec. 1.446-1(e)(3)(i) to request the Commissioner's 
consent to revoke the election. A revocation of the election applies to 
all taxable bonds held during or after the taxable year for which the 
revocation is effective. The holder may not amortize any remaining bond 
premium on bonds held at the beginning of the taxable year for which the 
revocation is effective. Therefore, no adjustment under section 481 is 
allowed upon the revocation of the election because no items of income 
or deduction are omitted or duplicated.

[T.D. 8746, 62 FR 68182, Dec. 31, 1997]