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year the amount of the accrued discount allocable to the portion
of the taxable year in which he or she held such debt instrument.
See Security Bank Minn. v. Commissioner, 994 F.2d 432, 436 (8th
Cir. 1993), affg. 98 T.C. 33 (1992). The rationale for inclusion
is that "Earned original issue discount serves the same function
as stated interest * * * it is simply 'compensation for the use
or forbearance of money.'" United States v. Midland-Ross Corp.,
381 U.S. 54, 57 (1965) (quoting Deputy v. du Pont, 308 U.S. 488,
498 (1940).
We find that petitioners have failed to prove that sections
1271 through 1275 do not apply to their debt instruments having
original issue discount, or that the amount of accrued original
issue discount reported on the Form 1099 is erroneous. After
considering petitioners' other arguments and finding them to be
without merit, we hold that petitioners must include in gross
income their original issue discount that accrued during 1993.
Respondent's determination is sustained.
To reflect the foregoing,
Decision will be entered
for respondent.
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Last modified: May 25, 2011