[Code of Federal Regulations]
[Title 31, Volume 2]
[Revised as of July 1, 2002]
From the U.S. Government Printing Office via GPO Access
[CITE: 31CFR342.6]

[Page 252-253]
 
                  TITLE 31--MONEY AND FINANCE: TREASURY
 
         CHAPTER II--FISCAL SERVICE, DEPARTMENT OF THE TREASURY
 
PART 342--OFFERING OF UNITED STATES SAVINGS NOTES--Table of Contents
 
Sec. 342.6  Taxation.

    (a) General. For the purpose of determining taxes and tax 
exemptions, the increment in value represented by the difference between 
the purchase price and the redemption value received for a savings note 
is considered interest. The interest is subject to all taxes imposed 
under the Internal Revenue Code

[[Page 253]]

of 1986, as amended. The notes are subject to estate, inheritance, gift, 
or other excise taxes, whether Federal or State, but are exempt from all 
other taxation now or hereafter imposed on the principal or interest 
thereof by any State, or any of the possessions of the United States, or 
by any local taxing authority.
    (b) Federal income tax on notes. An owner of savings notes who is a 
cash-basis taxpayer may use either of two methods for reporting the 
increase in the redemption value of the notes for Federal income tax 
purposes, as follows:
    (1) Defer reporting of the increase to the year of final maturity, 
actual redemption, or other disposition, whichever is earlier; or
    (2) Elect to report the increase for the year in which it accrues, 
in which case the election applies to all savings notes then owned and 
those subsequently acquired, as well as to any other similar obligations 
purchased on a discount basis.

If the method in paragraph (b)(1) of this section is used, the taxpayer 
may change to the method in paragraph (b)(2) of this section without 
obtaining permission from the Internal Revenue Service. However, once 
the election to use the method in paragraph (b)(2) of this section is 
made, the taxpayer may not change the method of reporting without 
permission from the Internal Revenue Service. For further information on 
Federal income taxes, the Service Center Director or District Director, 
Internal Revenue Service, of the taxpayer's district should be 
contacted.