Rev. & Tax. Code, § 24361

(a) For purposes of subsection (b), the amount of bond premium, in the case of the holder of any bond, shall be determined—

(1) With reference to the amount of the basis (for determining loss on sale or exchange) of such bond;

(2) With reference to the amount payable on maturity or on earlier call date; and

(3) With adjustments proper to reflect unamortized bond premium, with respect to the bond, for the period before the date as of which Section 24360 becomes applicable with respect to the taxpayer with respect to such bond.

In no case shall the amount of bond premium on a convertible bond include any amount attributable to the conversion features of the bond.

(b) The amortizable bond premium of the taxable year shall be the amount of the bond premium attributable to such year. In the case of a bond described in Section 24362(a) issued after January 22, 1951, and acquired after January 22, 1954, which has a call date not more than three years after the date of such issue, the amount of bond premium attributable to the taxable year in which the bond is called shall include an amount equal to the excess of the amount of the adjusted basis (for determining loss on sale or exchange) of such bond as of the beginning of the taxable year over the amount received on redemption of the bond or (if greater) the amount payable on maturity.

(c) (1) Except as provided in regulations, the determinations required under subdivisions (a) and (b) shall be made on the basis of the taxpayer’s yield to maturity determined by—

(A) Using the taxpayer’s basis for purposes of determining loss on sale or exchange of the obligation, and

(B) Compounding at the close of each accrual period (as defined in Section 1272(a)(5) of the Internal Revenue Code).

(2) For purposes of paragraph (1), if the amount payable on an earlier call date is used under subparagraph (B) of paragraph (1) in determining the amortizable bond premium attributable to the period before the earlier call date, that bond shall be treated as maturing on that date for the amount so payable and then reissued on that date for the amount so payable.