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Understanding Plain Par Investment [Internal Revenue]: Key Legal Insights
Definition & Meaning
A plain par investment refers to a type of financial obligation that meets specific criteria set by the Internal Revenue Service. It is characterized by the following:
Issued with minimal original issue discount or premium.
Sold at a price that excludes accrued interest, except for interest that accrued before issuance.
Bears interest at a fixed or variable rate, payable at least annually.
Has a redemption price that is not less than its principal amount.
Table of content
Legal Use & context
The term plain par investment is used primarily in tax law, particularly concerning the treatment of state and local bonds. Understanding this term is crucial for investors, tax professionals, and legal practitioners who deal with municipal finance. It helps determine the tax-exempt status of certain investments, which can significantly impact financial planning and investment strategies.
Key legal elements
Real-world examples
Here are a couple of examples of abatement:
Example 1: A city issues bonds to fund a new public park. These bonds are sold at their face value, with a fixed interest rate of 5% payable annually. This bond qualifies as a plain par investment.
Example 2: A state issues bonds with a variable interest rate that adjusts annually based on market conditions. If the bonds are sold without any accrued interest included in the price, they also qualify as plain par investments. (hypothetical example)
Relevant laws & statutes
The definition and criteria for plain par investments are outlined in the Internal Revenue Code, specifically under 26 CFR 1.148-1(b). This regulation provides the framework for understanding how these investments are treated for tax purposes.
Comparison with related terms
Term
Definition
Difference
Original Issue Discount
A bond issued at a price lower than its face value.
Plain par investments have minimal original issue discount.
Market Discount
The difference between the bond's face value and its market price.
Plain par investments are acquired with minimal market discount.
Common misunderstandings
What to do if this term applies to you
If you are considering investing in bonds, it's essential to understand whether they qualify as plain par investments. Review the terms of the bonds carefully, and consider consulting a tax professional for personalized advice. Additionally, users can explore US Legal Forms' templates for related legal documents to assist in managing their investments.
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