Question: Regarding the tax deferral of reinvested utility stock dividends: For federal income tax purposes how do you report (1) the discount on reinvested dividends offered by many utilities; (2) any discount on optional cash purchases; and (3) that part of reinvested dividends that are a tax-free return of capital?

Answer: When a company offers a discount on the price of shares bought under a normal dividend reinvestment plan, you must report as dividend income the fair market value (on the dividend payment date) of the number of shares credited to your account rather than the cash amount of the dividend.

But if you are reinvesting utility stock dividends that you plan to exclude from income under the 1981 tax law, the discount has no real significance.

In the first place, you are not reporting the dividends as income; and second, when you sell the accumulated dividend shares you use a zero-cost base against which to figure capital gain (assuming you owned the shares at least a year).

So you simply ignore the discount, except for one consideration: You must use the full market value of the reinvested shares to meet the $750/$1,500 annual ceiling on the amount of dividends on which tax may be deferred.

There is no change in the way you handle a discount on the purchase of additional shares for cash. Most companies with dividend reinvestment plans permit a shareholder to buy shares for his account without brokerage fees, but only a few offer a discount on those supplemental purchases.

In that case, there is no change from past procedures for handling such a discount. That is, you must report as income the difference between the price you pay for the stock and the fair market value on the dividend payment date (or on the date the stock is credited to your account, if different from the dividend date).

I don't have an answer to the third part of your question because the IRS is still considering the problem and hasn't reached a decision yet.

Q: I read with interest your column on zero-coupon municipal bonds, and your suggestion to residents of states other than Virginia to check with their brokers for issues in their own home states. (The column specifically mentioned Virginia Housing Authority bonds, exempt from both federal and Virginia income tax.) Your readers may be interested to know that in addition to bonds of their home states, bonds issued by Puerto Rico and the various U.S. possessions are exempt from all state and local tax as well as federal.

A: Somewhere in the back of my mind that little item must have been kicking around because it popped up immediately when I read your letter. But it didn't surface when I was writing the orginal Aug. 23 column.

There is no blanket federal law on the books that says all these bonds are exempt from state and local tax. The original legislation that established the Commonwealth of Puerto Rico and the framework for each of the possessions included a provision to that effect.

But there are modifications. For example, there is an amendment to the Virgin Islands law that says class VI bonds guaranteed by the federal government do not qualify for state tax exemption.

Your home state's tax office should be able to tell you their position. And the prospectus or descriptive literature for any specific bond issue should carry a legal opinion as to taxability.

Residents of the District of Columbia should know that all municipal bonds, regardless of the state of issue, are exempt from D.C. tax.