O Corporation on January 1, 1956, for a consideration of $100,000, issued 20- year bonds with a $100,000 face value, to- gether with options to purchase stock of O Corporation, which could be exercised at any time up to 5 years from the date of issue. The issue price of the bonds as determined under the rules of allocation set forth in sub- division (ii)(a) of § 1.1232–3(b)(2) is $98,000. O Corporation, upon the exercise of the options prior to Dec. 24, 1968, had deducted from in- come their fair market value at the time of exercise, which is assumed for purposes of this example to have been $3,000. Even though the bonds are considered to have been issued at a discount under paragraph (a)(1) of this section, O Corporation would have no deduction over the remaining life of the bonds, inasmuch as O Corporation, in computing the amount of such deduction, is required under paragraph (a)(2)(iii) of this section to reduce the amount which would otherwise be treated as bond discount, $2,000 ($100,000–$98,000), by the amount deducted from income upon the exercise of the op- tions, in this case, $3,000.
O Corporation. The Corporation will pay the representative for any inventory and products the actual cost of the inventory, including the actual cost of assembly for any product packaged for retail sale.
