SECTION 2. BACKGROUND

.01 A debt instrument (loan) is issued with original issue discount (OID) if the loan’s issue price is less than its stated redemption price at maturity. See § 1273(a)(1) of the Internal Revenue Code. In some cases, although a loan is issued with OID, the amount of OID is treated as zero. See § 1273(a)(3) and § 1.1273–1(d) (concerning de minimis OID).

.02 Points treated as paid when a loan is originated generally reduce the issue price of the loan. See § 1.1273–2(g) (concerning the effect of certain cash payments on the issue price of a loan). Thus, all points charged on a loan create or increase OID on the loan. As used in this revenue procedure, the term “points” refers only to amounts charged for the use or forbearance of money.

.03 Section 1.1272–3 allows a holder of a debt instrument to elect to use a constant yield method to account for all interest that accrues on the instrument. For purposes of this election, interest includes stated interest, acquisition discount, OID, de minimis OID, market discount, de minimis market discount, and unstated interest, as adjusted by any amortizable bond premium or acquisition premium. A holder may make the election only for a debt instrument acquired on or after April 4, 1994. Section 1.1272–3(d) provides rules for the time and manner of making the election under § 1.1272–3.

.04 Section 6001 and the regulations thereunder require taxpayers to keep per

manent books of account or records to establish the amount of gross income for a taxable year.