§ 1274. Determination of issue price in the case of certain debt instruments issued for property

Legislative history

Reconstructed from this section’s Code source credit and amendment notes, resolved against the local Statutes at Large. Editorial notes are evidence, not the law that made the change.

1. 1984

   Tax Reform Act of 1984

   Pub. L. 98–369 div. A title I § 41(a) · 98 Stat. 494

   Enacted · 26 U.S.C. § 1274

   Added Pub. L. 98–369, div. A, title I, § 41(a), July 18, 1984, 98 Stat. 538

   Source evidence

   Code source credit
   Added Pub. L. 98–369, div. A, title I, § 41(a), July 18, 1984, 98 Stat. 538

   Enacted provision · exact public law section
   (a) General Rule.— Subchapter P of chapter 1 (relating to special rules for capital gains and losses) is amended by adding at the end thereof the following new part: “PART V— SPECIAL RULES FOR BONDS AND OTHER DEBT INSTRUMENTS “Subpart A. Original issue discount. “Subpart B. Market discount. “Subpart C. Discount on short-term obligations. “Subpart D. Miscellaneous provisions. “Subpart A— Original Issue Discount “Sec. 1271. Treatment of amounts received on retirement or sale or ex-change of debt instruments. “Sec. 1272. Current inclusion in income of original issue discount. “Sec. 1273. Determination of amount of original issue discount. “Sec. 1274. Determination of issue price in the case of certain debt instruments issued for property. “Sec. 1275. Other definitions and special rules. “SEC. 1271. TREATMENT OF AMOUNTS RECEIVED ON RETIREMENT OR SALE OR EXCHANGE OF DEBT INSTRUMENTS. “(a) General Rule.— For purposes of this title— “(1) Retirement.— Amounts received by the holder on retirement of any debt instrument shall be considered as amounts received in exchange therefor. “(2) Ordinary income on sale or exchange where intention to call before maturity.— “(A) In general.— If at the time of original issue there was an intention to call a debt instrument before maturity, any gain realized on the sale or exchange thereof which does not exceed an amount equal to— “(i) the original issue discount, reduced by “(ii) the portion of original issue discount previously includible in the gross income of any holder (without Post, p. 533. regard to subsection (a)(6) or (b)(4) of section 1272 (or the corresponding provisions of prior law)), shall be treated as ordinary income. “(B) Exceptions.— This paragraph (and paragraph (2) of subsection (c)) shall not apply to— “(i) any tax-exempt obligation, or “(ii) any holder who has purchased the debt instrument at a premium. “(3) Certain short-term government obligations.— “(A) In general.— On the sale or exchange of any shortterm Government obligation, any gain realized which does not exceed an amount equal to the ratable share of the acquisition discount shall be treated as ordinary income. “(B) Short-term government obligation.— For purposes of this paragraph, the term ‘short-term Government obligation’ means any obligation of the United States or any of its possessions, or of a State or any political subdivision thereof, or of the District of Columbia which is— “(i) issued on a discount basis, and “(ii) payable without interest at a fixed maturity date not more than 1 year from the date of issue. Such term does not include any tax-exempt obligation. “(C) Acquisition discount.— For purposes of this paragraph, the term ‘acquisition discount’ means the excess of the stated redemption price at maturity over the taxpayer’s basis for the obligation. “(D) Ratable share.— For purposes of this paragraph, the ratable share of the acquisition discount is an amount which bears the same ratio to such discount as— “(i) the number of days which the taxpayer held the obligation, bears to “(ii) the number of days after the date the taxpayer acquired the obligation and up to (and including) the date of its maturity. “(b) Exceptions.— This section shall not apply to— “(1) Natural persons.— Any obligation issued by a natural person. “(2) Obligations issued before july 2, 1982, by certain issuers.— Any obligation issued before July 2, 1982, by an issuer which— “(A) is not a corporation, and “(B) is not a government or political subdivision thereof. “(c) Transition Rules.— “(1) Special rule for certain obligations issued before January 1, 1955.— Paragraph (1) of subsection (a) shall apply to a debt instrument issued before January 1, 1955, only if such instrument was issued with interest coupons or in registered form, or was in such form on March 1, 1954. “(2) Special rule for certain obligations with respect to which original issue discount not currently includible.— “(A) In general.— On the sale or exchange of debt instruments issued by a government or political subdivision thereof after December 31, 1954, and before July 2, 1982, or by a corporation after December 31, 1954, and on or before May 27, 1969, any gain realized which does not exceed— “(i) an amount equal to the original issue discount, or “(ii) if at the time of original issue there was no intention to call the debt instrument before maturity, an amount which bears the same ratio to the original issue discount as the number of complete months that the debt instrument was held by the taxpayer bears to the number of complete months from the date of original issue to the date of maturity, shall be considered as ordinary income. “(B) Subsection (a) (2) (a) not to apply.— Subsection (a)(2)(A) shall not apply to any debt instrument referred to in subparagraph (A) of this paragraph. “(C) Cross reference.— “For current inclusion of original issue discount, see section 1272. “(d) Double Inclusion in Income Not Required— This section and sections 1272 and 1286 shall not require the inclusion of any Post, p. 551. amount previously includible in gross income. “SEC. 1272. CURRENT INCLUSION IN INCOME OF ORIGINAL ISSUE DISCOUNT. “(a) Original Issue Discount on Debt Instruments Issued After July 1, 1982, Included in Income on Basis of Constant Interest Rate.— “(1) General rule.— For purposes of this title, there shall be included in the gross income of the holder of any debt instru-ment having original issue discount issued after July 1, 1982, an amount equal to the sum of the daily portions of the original issue discount for each day during the taxable year on which such holder held such debt instrument. “(2) Exceptions.— Paragraph (1) shall not apply to— “(A) Tax-exempt obligations.— Any tax-exempt obligation. “(B) United states savings bonds.— Any United States savings bond. “(C) Short-term obligations.— Any debt instrument which has a fixed maturity date not more than 1 year from the date of issue. “(D) Obligations issued by natural persons before march 2, 1984.— Any obligation issued by a natural person before March 2, 1984. “(E) Loans between natural persons.— “(i) In general.— Any loan made by a natural person to another natural person if— “(I) such loan is not made in the course of a trade or business of the lender, and “(II) the amount of such loan (when increased by the outstanding amount of prior loans by such natural person to such other natural person) does not exceed $10,000. “(ii) Clause (i) not to apply where tax avoidance a principal purpose.— Clause (i) shall not apply if the loan has as 1 of its principal purposes the avoidance of any Federal tax. “(iii) Treatment of husband and wife.— For purposes of this subparagraph, a husband and wife shall be treated as 1 person. The preceding sentence shall not apply where the spouses lived apart at all times during the taxable year in which the loan is made. “(3) Determination of daily portions.— For purposes of paragraph (1), the daily portion of the original issue discount on any debt instrument shall be determined by allocating to each day in any accrual period its ratable portion of the increase during such accrual period in the adjusted issue price of the debt instrument. For purposes of the preceding sentence, the increase in the adjusted issue price for any accrual period shall be an amount equal to the excess (if any) of— “(A) the product of— “(i) the adjusted issue price of the debt instrument at the beginning of such accrual period, and “(ii) the yield to maturity (determined on the basis of compounding at the close of each accrual period and properly adjusted for the length of the accrual period), over “(B) the sum of the amounts payable as interest on such debt instrument during such accrual period. “(4) Adjusted issue price.— For purposes of this subsection, the adjusted issue price of any debt instrument at the beginning of any accrual period is the sum of— “(A) the issue price of such debt instrument, plus “(B) the adjustments under this subsection to such issue price for all periods before the first day of such accrual period. “(5) Accrual period.— Except as otherwise provided in regulations prescribed by the Secretary, the term ‘accrual period’ means a 6-month period (or shorter period from the date of original issue of the debt instrument) which ends on a day in the calendar year corresponding to the maturity date of the debt instrument or the date 6 months before such maturity date. “(6) Reduction where subsequent holder pays acquisition premium.— “(A) Reduction.— For purposes of this subsection, in the case of any purchase after its original issue of a debt instrument to which this subsection applies, the daily portion for any day shall be reduced by an amount equal to the amount which would be the daily portion for such day (without regard to this paragraph) multiplied by the fraction determined under subparagraph (B). “(B) Determination of fraction.— For purposes of subparagraph (A), the fraction determined under this subparagraph is a fraction— “(i) the numerator of which is the excess (if any) of— “(I) the cost of such debt instrument incurred by the purchaser, over “(II) the issue price of such debt instrument, increased by the portion of original issue discount previously includible in the gross income of any holder (computed without regard to this paragraph), and “(ii) the denominator of which is the sum of the daily portions for such debt instrument for all days after the date of such purchase and ending on the stated maturity date (computed without regard to this paragraph). “(b) Ratable Inclusion Retained for Corporate Debt Instruments Issued Before July 2, 1982.— “(1) General rule.— There shall be included in the gross income of the holder of any debt instrument issued by a corporation after May 27, 1969, and before July 2, 1982— “(A) the ratable monthly portion of original issue discount, multiplied by “(B) the number of complete months (plus any fractional part of a month determined under paragraph (3)) such holder held such debt instrument during the taxable year. “(2) Determination of ratable monthly portion.— Except as provided in paragraph (4), the ratable monthly portion of original issue discount shall equal— “(A) the original issue discount, divided by “(B) the number of complete months from the date of original issue to the stated maturity date of the debt instrument. “(3) Month defined.— For purposes of this subsection— “(A) Complete month.— A complete month commences with the date of original issue and the corresponding day of each succeeding calendar month (or the last day of a calendar month in which there is no corresponding day). “(B) Transfers during month.— In any case where a debt instrument is acquired on any day other than a day determined under subparagraph (A), the ratable monthly portion of original issue discount for the complete month (or partial month) in which such acquisition occurs shall be allocated between the transferor and the transferee in accordance with the number of days in such complete (or partial) month each held the debt instrument. “(4) Reduction where subsequent holder pays acquisition premium.— “(A) Reduction.— For purposes of this subsection, the ratable monthly portion of original issue discount shall not include its share of the acquisition premium. “(B) Share of acquisition premium.— For purposes of subparagraph (A), any month’s share of the acquisition premium is an amount (determined at the time of the purchase) equal to— “(i) the excess of— “(I) the cost of such debt instrument incurred by the holder, over “(II) the issue price of such debt instrument, increased by the portion of original issue discount previously includible in the gross income of any holder (computed without regard to this paragraph), “(ii) divided by the number of complete months (plus any fractional part of a month) from the date of such purchase to the stated maturity date of such debt instrument. “(c) Exceptions.— This section shall not apply to any holder— “(1) who has purchased the debt instrument at a premium, or “(2) which is a life insurance company to which section 811(b) applies. “(d) Definition and Special Rule.— “(1) Purchase defined.— For purposes of this section, the term ‘purchase’ means— “(A) any acquisition of a debt instrument, where “(B) the basis of the debt instrument is not determined in whole or in part by reference to the adjusted basis of such debt instrument in the hands of the person from whom acquired. “(2) Basis adjustment.— The basis of any debt instrument in the hands of the holder thereof shall be increased by the amount included in his gross income pursuant to this section. “SEC. 1273. DETERMINATION OF AMOUNT OF ORIGINAL ISSUE DISCOUNT. “(a) General Rule.— For purposes of this subpart— “(1) In general.— The term ‘original issue discount’ means the excess (if any) of— “(A) the stated redemption price at maturity, over “(B) the issue price. “(2) Stated redemption price at maturity.— The term ‘stated redemption price at maturity’ means the amount fixed by the last modification of the purchase agreement and includes interest and other amounts payable at that time (other than any interest based on a fixed rate, and payable unconditionally at fixed periodic intervals of 1 year or less during the entire term of the debt instrument). “(3) ¼ of 1 percent de minimis rule.— If the original issue discount determined under paragraph (1) is less than— “(A) ¼ of 1 percent of the stated redemption price at maturity, multiplied by “(B) the number of complete years to maturity, then the original issue discount shall be treated as zero. “(b) Issue Price.— For purposes of this subpart— “(1) Publicly offered debt instruments not issued for property.— In the case of any issue of debt instruments— “(A) publicly offered, and “(B) not issued for property, the issue price is the initial offering price to the public (E)(cluding bond houses and brokers) at which price a substantial amount of such debt instruments was sold. “(2) Other debt instruments not issued for property.— In the case of any issue of debt instruments not issued for property and not publicly offered, the issue price of each such instrument is the price paid by the first buyer of such debt instrument. “(3) Debt instruments issued for property where there is public trading.— In the case of a debt instrument which is issued for property and which— “(A) is part of an issue a portion of which is traded on an established securities market, or “(B) is issued for stock or securities which are traded on an established securities market, the issue price of such debt instrument shall be the fair market value of such property. “(4) Other cases.— Except in any case— “(A) to which paragraph (1), (2), or (3) of this subsection applies, or “(B) to which section 1274 applies, Post. p. 538. the issue price of a debt instrument which is issued for property shall be the stated redemption price at maturity. “(5) Property.— In applying this subsection, the term ‘property’ includes services and the right to use property, but such term does not include money. “(c) Special Rules for Applying Subsection (b).— For purposes of subsection (b)— “(1) Initial offering price; price paid by the first buyer.— The terms ‘initial offering price’ and ‘price paid by the first buyer’ include the aggregate payments made by the purchaser under the purchase agreement, including modifications thereof. “(2) Treatment of investment units.— In the case of any debt instrument and an option, security, or other property issued together as an investment unit— “(A) the issue price for such unit shall be determined in accordance with the rules of this subsection and subsection (b) as if it were a debt instrument, “(B) the issue price determined for such unit shall be allocated to each element of such unit on the basis of the relationship of the fair market value of such element to the fair market value of all elements in such unit, and “(C) the issue price of any debt instrument included in such unit shall be the portion of the issue price of the unit allocated to the debt instrument under subparagraph (B). “SEC. 1274. DETERMINATION OF ISSUE PRICE IN THE CASE OF CERTAIN DEBT INSTRUMENTS ISSUED FOR PROPERTY. “(a) In General.— In the case of any debt instrument to which this section applies, for purposes of this subpart, the issue price shall be— “(1) where there is adequate stated interest, the stated principal amount, or “(2) in any other case, the imputed principal amount. “(b) Imputed principal amount.— For purposes of this section— “(1) In general.— Except as provided in paragraph (3), the imputed principal amount of any debt instrument shall be equal to the sum of the present values of all payments due under such debt instrument. “(2) Determination of present value.— For purposes of paragraph (1), the present value of a payment shall be determined in the manner provided by regulations prescribed by the Secretary— “(A) as of the date of the sale or exchange, and “(B) by using a discount rate equal to 120 percent of the applicable Federal rate, compounded semiannually. “(3) Fair market value rule in potentially abusive situations.— “(A) In general.— In the case of any potentially abusive situation, the imputed principal amount of any debt instrument received in exchange for property shall be the fair market value of such property adjusted to take into account other consideration involved in the transaction. “(B) Potentially abusive situation defined.— For purposes of subparagraph (A), the term ‘potentially abusive situation’ means— “(i) a tax shelter (as defined in section 6661(b)(2)(C)(ii)), and “(ii) any other situation which, by reason of— “(I) recent sales transactions, “(II) nonrecourse financing, “(III) financing with a term in excess of the economic life of the property, or “(IV) other circumstances, is of a type which the Secretary specifies by regulations as having potential for tax avoidance. “(c) Debt Instruments To Which Section Applies.— “(1) In general.— Except as otherwise provided in this subsection, this section shall apply to any debt instrument given in consideration for the sale or exchange of property if— “(A) the stated redemption price at maturity for such debt instrument exceeds— “(i) where there is adequate stated interest, the stated principal amount, or “(ii) m any other case, the testing amount, and “(B) some or all of the payments due under such debt instrument are due more than 6 months after the date of such sale or exchange. “(2) Adequate stated interest.— For purposes of this section, there is adequate stated interest with respect to any debt instrument if the stated principal amount for such debt instrument is less than or equal to the testing amount. “(3) Testing amount.— For purposes of this section, the term ‘testing amount’ means, with respect to any debt instrument, the imputed principal amount of such debt instrument which would be determined under subsection (b) (including paragraph (3) thereofi if a discount rate equal to 110 percent of the applicable Federal rate were used. “(4) Exceptions.— This section shall not apply to— “(A) Sales for less than $1,000,000 of farms by individuals or small businesses.— “(i) In general.— Any debt instrument arising from the sale or exchange of a farm (within the meaning of section 6420(c)(2))— “(I) by an individual, estate, or testamentary trust, “(II) by a corporation which as of the date of the sale or exchange is a small business corporation (as defined in section 1244(c)(3)), or “(III) by a partnership which as of the date of the sale or exchange meets requirements similar to those of section 1244(c)(3). “(ii) $1,000,000 limitation.— Clause (i) shall apply only if it can be determined at the time of the sale or exchange that the sales price cannot exceed $1,000,000. For purposes of the preceding sentence, all sales and exchanges which are part of the same transaction (or a series of related transactions) shall be treated as 1 sale or exchange. “(B) Sales of principal residences.— Any debt instrument arising from the sale or exchange by an individual of his principal residence (within the meaning of section 1034). “(C) Sales involving total payments of $250,000 or less.— “(i) In general.— Any debt instrument arising from the sale or exchange of property if the sum of the following amounts does not exceed $250,000: “(I) the aggregate amount of the payments due under such debt instrument and all other debt instruments received as consideration for the sale or exchange, and “(II) the aggregate amount of any other consideration to be received for the sale or exchange. “(ii) Consideration other than debt instrument taken into account at fair market value.— For purposes of clause (i), any consideration (other than a debt instrument) shall be taken into account at its fair market value. “(iii) Aggregation of transactions.— For purposes of this subparagraph, all sales and exchanges which are part of the same transaction (or a series of related transactions) shall be treated as 1 sale or exchange. “(D) Debt instruments which are publicly traded or issued for publicly traded property.— Any debt instrument to which section 1273(b)(3) applies. Ante, p. 536. “(E) Certain sales of patents.— In the case of any transfer described in section 1235(a) (relating to sale or exchange of patents), any amount contingent on the productivity, use, or disposition of the property transferred. “(F) Sales or exchanges to which section 483(e) applies.— Any debt instrument to the extent section 483(e) (relating to certain land transfers between related persons) applies to such instrument. “(d) Determination of Applicable Federal Rate.— For purposes of this section— “(1) Applicable federal rate.— “(A) In general.— “In the case of a debt instrument with a term of: The applicable Federal rate is:  Not over 3 years The Federal short-term rate.   Over 3 years but not over 9 years. The Federal mid-term rate.   Over 9 years The Federal long-term rate.  “(B) Determination of rates.— Within 15 days after the close of— “(i) the 6-month period ending on September 30 of any calendar year, or “(ii) the 6-month period ending on March 31 of any calendar year, the Secretary shall determine the Federal short-term rate, mid-term rate, and long-term rate for such 6-month period. “(C) Effective date of determination.— Any Federal rate determined under subparagraph (A) shall— “(i) apply during the 6-month period beginning on January 1 of the succeeding calendar year in the case of a determination made under subparagraph (B)(i), and “(ii) apply during the 6-month period beginning on July 1 of the calendar year in the case of a determination made under subparagraph (B)(ii). “(D) Federal rate for any 6-month period.— For purposes of this paragraph— “(i) Federal short-term rate.— The Federal shortterm rate for any 6-month period shall be the rate determined by the Secretary based on the average market yield (during such 6-month period) on outstanding marketable obligations of the United States with remaining periods to maturity of 3 years or less. “(ii) Federal mid-term and long-term rates.— The Federal mid-term rate and long-term rate shall be determined in accordance with the principles of clause (i). “(2) Rate applicable to any sale or exchange.— In the case of any sale or exchange, the determination of the applicable Federal rate shall be made as of the first day on which there is a binding contract in writing for the sale or exchange. “(3) Term of debt instrument.— In determining the term of a debt instrument for purposes of this subsection, under regulations prescribed by the Secretary, there shall be taken into account options to renew or extend. “SEC. 1275. OTHER DEFINITIONS AND SPECIAL RULES. “(a) Definitions.— For purposes of this subpart— “(1) Debt instrument.— “(A) In general.— Except as provided in subparagraph (B), the term ‘debt instrument’ means a bond, debenture, note, or certificate or other evidence of indebtedness. “(B) Exception for certain annuity contracts.— The term ‘debt instrument’ shall not include any annuity contract to which section 72 applies and which— “(i) depends (in whole or in substantial part) on the life expectancy of 1 or more individuals, or “(ii) is issued by an insurance company subject to tax under subchapter L— “(I) in a transaction in which there is no consideration other than cash or another annuity contract meeting the requirements of this clause, “(II) pursuant to the exercise of an election under an insurance contract by a beneficiary thereof on the death of the insured party under such contract, or “(III) in a transaction involving a qualified pension or employee benefit plan. “(2) Issue date.— “(A) Publicly offered debt instruments.— In the case of any debt instrument which is publicly offered, the term ‘date of original issue’ means the date on which the issue was first issued to the public. “(B) Issues not publicly offered and not issued for property.— In the case of any debt instrument to which section 1273(b)(2) applies, the term ‘date of Original issue’ Ante, p. 536. means the date on which the debt instrument was sold by the issuer. “(C) Other debt instruments.— In the case of any debt instrument not described in subparagraph (A) or (B), the term ‘date of original issue’ means the date on which the debt instrument was issued in a sale or exchange. “(3) Tax-exempt obligation.— The term ‘tax-exempt obligation’ means any obligation if— “(A) the interest on such obligation is not includible in gross income under section 103, or “(B) the interest on such obligation is exempt from tax (without regard to the identity of the holder) under any other provision of law. “(4) Special rule for determination of issue price in case of exchange of debt instruments in reorganizations.— “(A) In general.— If— “(i) any debt instrument is issued pursuant to a plan of reorganization (within the meaning of section 368(a)(1)) for another debt instrument (hereinafter in this paragraph referred to as the ‘old debt instrument’), and “(ii) the amount which (but for this paragraph) would be the issue price of the debt instrument so issued is less than the adjusted issue price of the old debt instrument, then the issue price of the debt instrument so issued shall be treated as equal to the adjusted issue price of the old debt instrument. “(B) Definitions.— For purposes of this paragraph— “(i) Debt instrument.— The term ‘debt instrument’ includes an investment unit. “(ii) Adjusted issue price.— “(I) In general.— The adjusted issue price of the old debt instrument is its issue price, increased by the portion of any original issue discount previously includible in the gross income of any holder (without regard to subsection (a)(6) or (b)(4) of Ante, p. 533. section 1272 (or the corresponding provisions of prior law)). “(II) Special rule for applying section 163(e).— For purposes of section 163(e), the adjusted issue price of the old debt instrument is its issue price, increased by any original issue discount previously allowed as a deduction. “(b) Treatment of Borrower in the Case of Certain Loans for Personal Use.— “(1) Sections 1274 and 483 not to apply.— In the case of the obligor under any debt instrument given in consideration for Ante, p. 538. Post, p. 553. the sale or exchange of property, sections 1274 and 483 shall not apply if such property is personal use property. “(2) Original issue discount deducted on cash basis in certain cases.— In the case of any debt instrument, if— “(A) such instrument— “(i) is incurred in connection with the acquisition or carrying of personal use property, and “(ii) has original issue discount (determined after the application of paragraph (1)), and “(B) the obligor under such instrument uses the cash receipts and disbursements method of accounting, Post, pp. 556,654. notwithstanding section 163(e), the original issue discount on such instrument shall be deductible only when paid. “(3) Personal use property.— For purposes of this subsection, the term ‘personal use property’ means any property substantially all of the use of which by the taxpayer is not in connection with a trade or business of the taxpayer or an activity described in section 212. The determination of whether property is described in the preceding sentence shall be made as of the time of issuance of the debt instrument. “(c) Information Requirements.— “(1) Information required to be set forth on instrument.— “(A) In general.— In the case of any debt instrument having original issue discount, the Secretary may by regulations require that— “(i) the amount of the original issue discount, and “(ii) the issue date, be set forth on such instrument. “(B) Special rule for instruments not publicly offered.— In the case of any issue of debt instruments not publicly offered, the regulations prescribed under subparagraph (A) shall not require the information to be set forth on the debt instrument before any disposition of such instrument by the first buyer. “(2) Information required to be submitted to secretary.— In the case of any issue of publicly offered debt instruments having original issue discount, the issuer shall (at such time and in such manner as the Secretary shall by regulation prescribe) furnish the Secretary the following information: “(A) The amount of the original issue discount. “(B) The issue date. “(C) Such other information with respect to the issue as the Secretary may by regulations require. For purposes of the preceding sentence, any person who makes a public offering of stripped bonds (or stripped coupons) shall be treated as the issuer of a publicly offered debt instrument having original issue discount. “(3) Exceptions.— This subsection shall not apply to any obligation referred to in section 1272(a)(2) (relating to exceptions Ante, p. 533. from current inclusion of original issue discount). “(4) Cross reference.— “For civil penalty for failure to meet requirements of this subsection, see section 6706. Post, p. 555. “(d) Regulation Authority.— The Secretary may prescribe regulations providing that where, by reason of varying rates of interest, put or call options, indefinite maturities, contingent payments, assumptions of debt instruments, or other circumstances, the tax treatment under this subpart (or section 163(e)) does not carry out Post, pp. 556, 654. the purposes of this subpart (or section 163(e)), such treatment shall be modified to the extent appropriate to carry out the purposes of this subpart (or section 163(e)). “Subpart B— Market Discount on Bonds “Sec. 1276. Disposition gain representing accrued market discount treated as ordinary income. “Sec. 1277. Deferral of interest deduction allocable to accrued market dis-count. “Sec. 1278. Definitions and special rules. “SEC. 1276. DISPOSITION GAIN REPRESENTING ACCRUED MARKET DIS-COUNT TREATED AS ORDINARY INCOME. “(a) Ordinary Income.— “(1) In general.— Except as otherwise provided in this section, gain on the disposition of any market discount bond shall be treated as ordinary income to the extent it does not exceed the accrued market discount on such bond. Such gain shall be recognized notwithstanding any other provision of this subtitle. “(2) Dispositions other than sales, etc.— For purposes of paragraph (1), a person disposing of any market discount bond m any transaction other than a sale, exchange, or involuntary conversion shall be treated as realizing an amount equal to the fair market value of the bond. “(3) Gain treated as interest for certain purposes.— Except for purposes of sections 871(a), 881, 1441, 1442, and 6049 (and such other provisions as may be specified in regulations), any amount treated as ordinary income under paragraph (1) shall be treated as interest for purposes of this title. “(b) Accrued Market Discount.— For purposes of this section— “(1) Ratable accrual.— Except as otherwise provided in this subsection or subsection (c), the accrued market discount on any bond shall be an amount which bears the same ratio to the market discount on such bond as— “(A) the number of days which the taxpayer held the bond, bears to “(B) the number of days after the date the taxpayer acquired the bond and up to (and including) the date of its maturity. “(2) Election of accrual on basis of constant interest rate (in lieu of ratable accrual).— “(A) In general.— At the election of the taxpayer with respect to any bond, the accrued market discount on such bond shall be the aggregate amount which would have been includible in the gross income of the taxpayer under section Ante, p. 533. 1272(a) (determined without regard to paragraph (2) thereof) with respect to such bond for all periods during which the bond was held by the taxpayer if such bond had been— “(i) originally issued on the date on which such bond was acquired by the taxpayer, “(ii) for an issue price equal to the basis of the taxpayer in such bond immediately after its acquisition. “(B) Coordination where bond has original issue discount.— In the case of any bond having original issue discount, for purposes of applying subparagraph (A)— “(i) the stated redemption price at maturity of such bond shall be treated as equal to its revised issue price, and “(ii) the determination of the portion of the original issue discount which would have been includible in the gross income of the taxpayer under section 1272(a) shall be made under regulations prescribed by the Secretary. “(C) Election irrevocable.— An election under subparagraph (A), once made with respect to any bond, shall be irrevocable. “(c) Treatment of Nonrecognition Transactions.— Under regulations prescribed by the Secretary— “(1) Transferred basis property.— If a market discount bond is transferred in a nonrecognition transaction and such bond is transferred basis property in the hands of the transferee, for purposes of determining the amount of the accrued market discount with respect to the transferee— “(A) the transferee shall be treated as having acquired the bond on the date on which it was acquired by the transferor for an amount equal to the basis of the transferor, and “(B) proper adjustments shall be made for gain recognized by the transferor on such transfer (and for any original issue discount or market discount included in the gross income of the transferor). “(2) Exchanged basis property.— If any market discount bond is disposed of by the taxpayer in a nonrecognition transaction and paragraph (1) does not apply to such transaction, any accrued market discount determined with respect to the property disposed of to the extent not theretofore treated as ordinary income under subsection (a)— “(A) shall be treated as accrued market discount with respect to the exchanged basis property received by the taxpayer in such transaction if such property is a market discount bond, and “(B) shall be treated as ordinary income on the disposition of the exchanged basis property received by the tax-payer in such exchange if such property is not a market discount bond. “(3) Paragraph (i) to apply to certain distributions by corporations or partnerships.— For purposes of paragraph (1), if the basis of any market discount bond in the hands of a transferee is determined under section 334(c), 732(a), or 732(b), such property shall be treated as transferred basis property in the hands of such transferee. “(d) Special Rules.— Under regulations prescribed by the Secretary— “(1) rules similar to the rules of subsection (b) of section 1245 shall apply for purposes of this section; except that— “(A) paragraph (1) of such subsection shall not apply, and “(B) an exchange qualifying under section 354(al, 355(a), or 356(a) (determined without regard to subsection (a) of this section) shall be treated as an exchange described in paragraph (3) of such subsection, and “(2) appropriate adjustments shall be made to the basis of any property to reflect gain recognized under subsection (a). “(e) Section Not To Apply to Market Discount Bonds Issued on or Before Date of Enactment of Section.— This section shall not apply to any market discount bond issued on or before the date of the enactment of this section. “SEC. 1277. DEFERRAL OF INTEREST DEDUCTION ALLOCABLE TO ACCRUED MARKET DISCOUNT. “(a) General Rule.— Except as otherwise provided in this section, the net direct interest expense with respect to any market discount bond shall be allowed as a deduction for the taxable year only to the extent that such expense exceeds the portion of the market discount allocable to the days during the taxable year on which such bond was held by the taxpayer (as determined under the rules of section 1276(b)). Ante, p. 543. “(b) Disallowed Deduction Allowed for Later Years.— “(1) Election to take into account in later year where net interest income from bond.— “(A) In general.— If— “(i) there is net interest income for any taxable year with respect to any market discount bond, and “(ii) the taxpayer makes an election under this subparagraph with respect to such bond, any disallowed interest expense with respect to such bond shall be treated as interest paid or accrued by the taxpayer during such taxable year to the extent such disallowed interest expense does not exceed the net interest income with respect to such bond. “(B) Determination of disallowed interest expense.— For purposes of subparagraph (A), the amount of the disallowed interest expense— “(i) shall be determined as of the close of the preceding taxable year, and “(ii) shall not include any amount previously taken into account under subparagraph (A). “(C) Net interest income.— For purposes of this paragaph, the term ‘net interest income’ means the excess of the amount determined under paragraph (2) of subsection (c) over the amount determined under paragraph (1) of subsection (c). “(2) Remainder of disallowed interest expense allowed for year of disposition.— “(A) In general.— Except as otherwise provided in this paragraph, the amount of the disallowed interest expense with respect to any market discount bond shall be treated as interest paid or accrued by the taxpayer in the taxable year in which such bond is disposed of. “(B) Nonrecognition transactions.— If any market discount bond is disposed of in a nonrecognition transaction— “(i) the disallowed interest expense with respect to such bond shall be treated as interest paid or accrued in the year of disposition only to the extent of the amount of gain recognized on such disposition, and “(ii) the disallowed interest expense with respect to such property (to the extent not so treated) shall be treated as disallowed interest expense— “(I) in the case of a transaction described in section 1276(c)(1), of the transferee with respect to the transferred basis property, or “(II) in the case of a transaction described in section 1276(c)(2), with respect to the exchanged basis property. “(C) Disallowed interest expense reduced for amounts previously taken into account under paragraph 1.— For purposes of this paragraph, the amount of the disallowed interest expense shall not include any amount previously taken into account under paragraph (1). “(3) Disallowed interest expense.— For purposes of this subsection, the term ‘disallowed interest expense’ means the aggregate amount disallowed under subsection (a) with respect to the market discount bond. “(c) Net Direct Interest Expense.— For purposes of this section, the term ‘net direct interest expense’ means, with respect to any market discount bond, the excess (if any) of— “(1) the amount of interest paid or accrued during the taxable year on indebtedness which is incurred or continued to purchase or carry such bond, over “(2) the aggregate amount of interest (including original issue discount) includible in gross income for the taxable year with respect to such bond. In the case of any financial institution to which section 585 or 593 applies, the determination of whether interest is described in paragraph (1) shall be made under principles similar to the principles of section 291(e)(1)(B)(ii). Under rules similar to the rules of section Post, p. 574. 265(5), short sale expenses shall be treated as interest for purposes of determining net direct interest expense. “(d) Special Rule for Gain Recognized on Disposition of Market Discount Bonds Issued on or Before Date of Enactment of Section.— In the case of a market discount bond issued on or before the date of the enactment of this section, any gain recognized by the taxpayer on any disposition of such bond shall be treated as ordinary income to the extent the amount of such gain does not exceed the amount allowable with respect to such bond under subsection (b)(2) for the taxable year in which such bond is disposed of. “SEC. 1278. DEFINITIONS AND SPECIAL RULES. “(a) In General.— For purposes of this part— “(1) Market discount bond.— “(A) In general.— Except as provided in subparagraph (B), the term ‘market discount bond’ means any bond having market discount. “(B) Exceptions.— The term ‘market discount bond’ shall not include— “(i) Short-term obligations.— Any obligation with a fixed maturity date not exceeding 1 year from the date of issue. “(ii) Tax-exempt obligations.— Any tax-exempt obligation (as defined in section 1275(a)(3)). Ante, p. 540. “(iii) United states savings bonds.— Any United States savings bond. “(iv) Installment obligations.— Any installment obligation to which section 453B applies. “(2) Market discount.— “(A) In general.— The term ‘market discount’ means the excess (if any) of— “(i) the stated redemption price of the bond at maturity, over “(ii) the basis of such bond immediately after its acquisition by the taxpayer. “(B) Coordination where bond has original issue dis-count.— In the case of any bond having original issue discount, for purposes of subparagraph (A), the stated redemption price of such bond at maturity shall be treated as equal to its revised issue price. “(C) De minimis rule.— If the market discount is less than *4 of 1 percent of the stated redemption price of the bond at maturity multiplied by the number of complete years to maturity (after the taxpayer acquired the bond), then the market discount shall be considered to be zero. “(3) Bond.— The term ‘bond’ means any bond, debenture, note, certificate, or other evidence of indebtedness. “(4) Revised issue price.— The term ‘revised issue price’ means of the sum of— “(A) the issue price of the bond, and “(B) the aggregate amount of the original issue discount includible in the gross income of all holders for periods before the acquisition of the bond by the taxpayer (determined without regard to section 1272 (a)(6) or (b)(4)). Ante, p. 533. “(5) Original issue discount, etc.— The terms ‘original issue discount′, ‘stated redemption price at maturity’, and ‘issue price’ have the respective meanings given such terms by subpart A of this part. “(b) Election To Include Market Discount Currently.— “(1) In general.— If the taxpayer makes an election under this subsection— “(A) sections 1276 and 1277 shall not apply, and Ante, pp. 543, 545. “(B) market discount on any market discount bond shall be included in the gross income of the taxpayer for the taxable years to which it is attributable (as determined Ante, p. 543. under the rules of subsection (b) of section 1276). Except for purposes of sections 871(a), 881, 1441, 1442, and 6049 (and such other provisions as may be specified in regulations), any amount included in gross income under subparagraph (B) shall be treated as interest for purposes of this title. “(2) Scope of election.— An election under this subsection shall apply to all market discount bonds acquired by the taxpayer on or after the 1st day of the 1st taxable year to which such election applies. “(3) Period to which election applies.— An election under this subsection shall apply to the taxable year for which it is made and for all subsequent taxable years, unless the taxpayer secures the consent of the Secretary to the revocation of such election. “(c) Regulations.— The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this subpart. “Subpart C— Discount on Short-Term Obligations “Sec. 1281. Current inclusion in income of discount on certain short-term obligations. “Sec. 1282. Deferral of interest deduction allocable to accrued discount. “Sec. 1283. Definitions and special rules. “SEC. 1281. CURRENT INCLUSION IN INCOME OF DISCOUNT ON CERTAIN SHORT-TERM OBLIGATIONS. “(a) In General.— In the case of any short-term obligation to which this section applies, for purposes of this title, there shall be included in the gross income of the holder an amount equal to the sum of the daily portions of the acquisition discount for each day during the taxable year on which such holder held such obligation. “(b) Short-Term Obligations to Which Section Applies.— “(1) In general.— This section shall apply to any short-term obligation which— “(A) is held by a taxpayer using an accrual method of accounting, “(B) is held primarily for sale to customers in the ordinary course of the taxpayer’s trade or business, “(C) is held by a bank (as defined in section 581), “(D) is held by a regulated investment company or a common trust fund, or “(E) is identified by the taxpayer under section 1256(e)(2) as being part of a hedging transaction. “(2) Treatment of obligations held by pass-thru entities.— “(A) In general.— This section shall apply also to— “(i) any short-term obligation which is held by a passthru entity which is formed or availed of for purposes of avoiding the provisions of this section, and “(ii) any short-term obligation which is acquired by a pass-thru entity (not described in clause (i)) during the required accrual period. “(B) Required accrual period.— For purposes of subparagraph (A), the term ‘required accrual period’ means the period— “(i) which begins with the first taxable year for which the ownership test of subparagraph (C) is met with respect to the pass-thru entity (or a predecessor), and “(ii) which ends with the first taxable year after the taxable year referred to in clause (i) for which the ownership test of subparagraph (C) is not met and with respect to which the Secretary consents to the termination of the required accrual period. “(C) Ownership test.— The ownership test of this subparagraph is met for any taxable year if, on at least 90 days during the taxable year, 20 percent or more of the value of the interests in the pass-thru entity are held by persons described in paragraph (1) or by other pass-thru entities to which subparagraph (A) applies. “(D) Pass-thru entity.— The term ‘pass-thru entity’ means any partnership, S corporation, trust, or other passthru entity. “(c) Cross Reference.— “For special rules limiting the application of this section to original issue discount in the case of nongovernmental obligations, see section 1283(c). “SEC. 1282. DEFERRAL OF INTEREST DEDUCTION ALLOCABLE TO ACCRUED DISCOUNT. “(a) General Rule.— Except as otherwise provided in this section, the net direct interest expense with respect to any short-term obligation shall be allowed as a deduction for the taxable year only to the extent that such expense exceeds the sum of the daily portions of the acquisition discount for each day during the taxable year on which the taxpayer held such obligation. “(b) Section Not To Apply to Obligations to Which Section 1281 Applies.— “(1) In general.— This section shall not apply to any short-term Ante, p. 548. obligation to which section 1281 applies. “(2) Election to have section 1281 apply to all obligations.— “(A) In general.— A taxpayer may make an election under this paragraph to have section 1281 apply to all short-term obligations acquired by the taxpayer on or after the 1st day of the 1st taxable year to which such election applies. “(B) Period to which election applies— An election under this paragraph shall apply to the taxable year for which it is made and for all subsequent taxable years, unless the taxpayer secures the consent of the Secretary to the revocation of such election. “(c) Certain Rules Made Applicable — Rules similar to the rules of subsections (b) and (c) of section 1277 shall apply for purposes of Ante, p. 545. this section. “(d) Cross Reference.— “For special rules limiting the application of this section to original issue discount in the case of nongovernmental obligations, see section 1283(c). “SEC. 1283. DEFINITIONS AND SPECIAL RULES. “(a) Definitions.— For purposes of this subpart— “(1) Short-term obligation.— “(A) In general.— Except as provided in subparagraph (B), the term ‘short-term obligation’ means any bond, debenture, note, certificate, or other evidence of indebtedness which has a fixed maturity date not more than 1 year from the date of issue. “(B) Exceptions for tax-exempt obligations— The term ‘short-term obligation’ shall not include any tax-exempt Ante, p. 540. obligation (as defined in section 1275(a)(3)). “(2) Acquisition discount.— The term ‘acquisition discount’ means the excess of— “(A) the stated redemption price at maturity (as defined Ante, p. 536. in section 1273), over “(B) the taxpayer’s basis for the obligation. “(b) Daily Portion.— For purposes of this subpart— “(1) Ratable accrual.— Except as otherwise provided in this subsection, the daily portion of the acquisition discount is an amount equal to— “(A) the amount of such discount, divided by “(B) the number of days after the day on which the taxpayer acquired the obligation and up to (and including) the day of its maturity. “(2) Election of accrual on basis of constant interest rate (in lieu of ratable accrual).— “(A) In general.— At the election of the taxpayer with respect to any obligation, the daily portion of the acquisition discount for any day is the portion of the acquisition discount accruing on such day determined (under regulations prescribed by the Secretary) on the basis of— “(i) the taxpayer’s yield to maturity based on the taxpayer’s cost of acquiring the obligation, and “(ii) compounding daily. “(B) Election irrevocable.— An election under subparagraph (A), once made with respect to any obligation, shall be irrevocable. “(c) Special Rules for Nongovernmental Obligations.— “(1) In general.— In the case of any short-term obligation which is not a short-term Government obligation (as defined in Ante, p. 532. section 1271(a)(3)(B))— “(A) sections 1281 and 1282 shall be applied by taking into account original issue discount in lieu of acquisition discount, and “(B) appropriate adjustments shall be made in the application of subsection (b) of this section. “(2) Election to have paragraph (i) not apply.— “(A) In general.— A taxpayer may make an election under this paragraph to have paragraph (1) not apply to all obligations acquired by the taxpayer on or after the first day of the first taxable year to which such election applies. “(B) Period to which election applies.— An election under this paragraph shall apply to the taxable year for which it is made and for all subsequent taxable years, unless the taxpayer secures the consent of the Secretary to the revocation of such election. “(d) Other Special Rules.— “(1) Basis adjustments.— The basis of any short-term obligation in the hands of the holder thereof shall be increased by the amount included in his gross income pursuant to section 1281. “(2) Double inclusion in income not required.— Section 1281 shall not require the inclusion of any amount previously Ante, p. 548. includible in gross income. “(3) Coordination with other provisions.— Section 454(b) and section 1271(a)(3) shall not apply to any short-term obligation Ante, p. 532. to which section 1281 applies. “Subpart D— Miscellaneous Provisions “Sec. 1286. Tax treatment of stripped bonds. “Sec. 1287. Denial of capital gain treatment for gains on certain obligations not in registered form. “Sec. 1288. Treatment of original issue discount on tax-exempt obligations. “SEC. 1286. TAX TREATMENT OF STRIPPED BONDS. “(a) Inclusion in Income as if Bond and Coupons Were Original Issue Discount Bonds.— If any person purchases after July 1, 1982, a stripped bond or a stripped coupon, then such bond or coupon while held by such purchaser (or by any other person whose basis is determined by reference to the basis in the hands of such purchaser) shall be treated for purposes of this part as a bond originally issued on the purchase date and having an original issue discount equal to the excess (if any) of— “(1) the stated redemption price at maturity (or, in the case of coupon, the amount payable on the due date of such coupon), over “(2) such bond’s or coupon’s ratable share of the purchase price. For purposes of paragraph (2), ratable shares shall be determined on the basis of their respective fair market values on the date of purchase. “(b) Tax Treatment of Person Stripping Bond.— For purposes of this subtitle, if any person strips 1 or more coupons from a bond and after July 1, 1982, disposes of the bond or such coupon— “(1) such person shall include in gross income an amount equal to the interest accrued on such bond while held by such person and before the time that such coupon or bond was disposed of (to the extent such interest has not theretofore been included in such person’s gross income), “(2) the basis of the bond and coupons shall be increased by the amount of the accrued interest described in paragraph (1), “(3) the basis of the bond and coupons immediately before the disposition (as adjusted pursuant to paragraph (2)) shall be allocated among the items retained by such person and the items disposed of by such person on the basis of their respective fair market values, and “(4) for purposes of subsection (a), such person shall be treated as having purchased on the date of such disposition each such item which he retains for an amount equal to the basis allocated to such item under paragraph (3). A rule similar to the rule of paragraph (4) shall apply in the case of any person whose basis in any bond or coupon is determined by reference to the basis of the person described in the preceding sentence. “(c) Retention of Existing Law for Stripped Bonds Purchased Before July 2, 1982.— If a bond issued at any time with interest coupons— “(1) is purchased after August 16, 1954, and before January 1, 1958, and the purchaser does not receive all the coupons which first become payable more than 12 months after the date of the purchase, or “(2) is purchased after December 31, 1957, and before July 2, 1982, and the purchaser does not receive all the coupons which first become payable after the date of the purchase, then the gain on the sale or other disposition of such bond by such purchaser (or by a person whose basis is determined by reference to the basis in the hands of such purchaser) shall be considered as ordinary income to the extent that the fair market value (determined as of the time of the purchase) of the bond with coupons attached exceeds the purchase price. If this subsection and section Ante, p. 532. 1271(a)(2)(A) apply with respect to gain realized on the sale or exchange of any evidence of indebtedness, then section 1271(a)(2)(A) shall apply with respect to that part of the gain to which this subsection does not apply. “(d) Special Rules for Tax-Exempt Obligations.— In the case of Ante, p. 540. any tax-exempt obligation (as defined in section 1275(a)(3))— “(1) subsections (a) and (b)(1) shall not apply, “(2) the rules of subsection (b)(4) shall apply for purposes of subsection (c), and “(3) subsection (c) shall be applied without regard to the requirement that the bond be purchased before July 2, 1982. “(e) Definitions and Special Rules.— For purposes of this section— “(1) Bond.— The term ‘bond’ means a bond, debenture, note, or certificate or other evidence of indebtedness. “(2) Stripped bond.— The term ‘stripped bond’ means a bond issued at any time with interest coupons where there is a separation in ownership between the bond and any coupon which has not yet become payable. “(3) Stripped coupon.— The term ‘stripped coupon’ means any coupon relating to a stripped bond. “(4) Stated redemption price at maturity.— The term ‘stated redemption price at maturity’ has the meaning given Ante, p. 536. such term by section 1273(a)(2). “(5) Coupon.— The term ‘coupon’ includes any right to receive interest on a bond (whether or not evidenced by a coupon). This paragraph shall apply for purposes of subsection (c) only in the case of purchases after July 1, 1982. “(6) Purchase.— The term ‘purchase’ has the meaning given Ante, p. 533. such term by section 1272(d)(1). “(f) Regulation Authority.— The Secretary may prescribe regulations providing that where, by reason of varying rates of interest, put or call options, or other circumstances, the tax treatment under this section does not accurately reflect the income of the holder of a stripped coupon or stripped bond, or of the person disposing of such bond or coupon, as the case may be, for any period, such treatment shall be modified to require that the proper amount of income be included for such period. “SEC. 1287. DENIAL OF CAPITAL GAIN TREATMENT FOR GAINS ON CERTAIN OBLIGATIONS NOT IN REGISTERED FORM. “(a) In General.— If any registration-required obligation is not in registered form, any gain on the sale or other disposition of such obligation shall be treated as ordinary income (unless the issuance of such obligation was subject to tax under section 4701). “(b) Definitions.— For purposes of subsection (a)— “(1) Registration-required obligation.— The term ‘registration-required obligation’ has the meaning given to such term by section 163(f)(2) except that clause (iv) of subparagraph (A), and subparagraph (B), of such section shall not apply. “(2) Registered form.— The term ‘registered form’ has the same meaning as when used in section 163(1). “SEC. 1288. TREATMENT OF ORIGINAL ISSUE DISCOUNT ON TAX-EXEMPT OBLIGATIONS. “(a) General Rule.— Original issue discount on any tax-exempt obligation shall be treated as accruing— “(1) for purposes of section 163, in the manner provided by section 1272(a) (determined without regard to paragraph (6) Ante, p. 533. thereof), and “(2) for purposes of determining the adjusted basis of the holder, in the manner provided by section 1272(a) (determined with regard to paragraph (6) thereof). “(b) Definitions and Special Rules.— For purposes of this section— “(1) Original issue discount.— The term ‘original issue dis-count’ has the meaning given to such term by section 1273(a) Ante, p. 536. Infra. Ante, p. 538. without regard to paragraph (3) thereof. In applying section 483 or 1274, under regulations prescribed by the Secretary, appropriate adjustments shall be made to the applicable Federal rate to take into account the tax exemption for interest on the obligation. “(2) Tax-exempt obligation.— The term ‘tax-exempt obligation’ has the meaning given to such term by section 1275(a)(3). Ante, p. 540. “(3) Short-term obligations.— In applying this section to obligations with maturity of 1 year or less, rules similar to the rules of section 1283(b) shall apply.” Ante, p. 549.

2. 1985

   Pub. L. 99–121 § 101(a)(1)(A) · 99 Stat. 505

   Struck · 26 U.S.C. § 1274(b)(2)(B)

   Pub. L. 99–121, § 101(a)(1)(A), struck out “120 percent of” after “rate equal to”

   Source evidence

   Code amendment note
   Subsec. (b)(2)(B). Pub. L. 99–121, § 101(a)(1)(A), struck out “120 percent of” after “rate equal to”.

   Enacted provision · exact public law section
   (A) Subparagraph (B) of section 1274(b)(2) of the Internal Revenue Code of 1954 (defining imputed principal amount) is amended by striking out “120 percent of”.

3. 1985

   Pub. L. 99–121 § 101(a)(1)(B) · 99 Stat. 505

   1. Amended · 26 U.S.C. § 1274(c)(1)(A)(ii)

      Pub. L. 99–121, § 101(a)(1)(B), amended cl. (ii) generally

   2. Substituted · 26 U.S.C. § 1274(c)(1)(A)(ii)

      Pub. L. 99–121, § 101(a)(1)(B), substituting “the imputed principal amount of such debt instrument determined under subsection (b)” for “the testing amount”

   Source evidence

   Code amendment note
   Subsec. (c)(1)(A)(ii). Pub. L. 99–121, § 101(a)(1)(B), amended cl. (ii) generally, substituting “the imputed principal amount of such debt instrument determined under subsection (b)” for “the testing amount”.

   Enacted provision · exact public law section
   (B) Clause (ii) of section 1274(c)(1)(A) of such Code is amended to read as follows: “(ii) in any other case, the imputed principal amount of such debt instrument determined under subsection (b), and”.

4. 1985

   Pub. L. 99–121 § 101(a)(1)(C) · 99 Stat. 505

   Substituted · 26 U.S.C. § 1274(c)(2)

   Pub. L. 99–121, § 101(a)(1)(C), substituted “the imputed principal amount of such debt instrument determined under subsection (b)” for “the testing amount”

   Source evidence

   Code amendment note
   Subsec. (c)(2). Pub. L. 99–121, § 101(a)(1)(C), substituted “the imputed principal amount of such debt instrument determined under subsection (b)” for “the testing amount”.

   Enacted provision · exact public law section
   (C) Paragraph (2) of section 1274(c) of such Code is amended by striking out “the testing amount” and inserting in lieu thereof “the imputed principal amount of such debt instrument determined under subsection (b)”.

5. 1985

   Pub. L. 99–121 § 101(a)(1)(D) · 99 Stat. 505

   Redesignated · 26 U.S.C. § 1274(c)(3)

   Pub. L. 99–121, § 101(a)(1)(D), redesignated par. (4) as (3). Former par. (3), defining “testing amount”, was struck out

   Source evidence

   Code amendment note
   Subsec. (c)(3). Pub. L. 99–121, § 101(a)(1)(D), redesignated par. (4) as (3). Former par. (3), defining “testing amount”, was struck out.

   Enacted provision · exact public law section
   (D) Subsection (c) of section 1274 of such Code is amended by striking out paragraph (3) and by redesignating paragraph (4) as paragraph (3).

6. 1985

   Pub. L. 99–121 § 102(b) · 99 Stat. 505

   Redesignated · 26 U.S.C. § 1274(c)(4)

   Pub. L. 99–121, § 102(b), added par. (4). Former par. (4) redesignated (3)

   Source evidence

   Code amendment note
   Subsec. (c)(4). Pub. L. 99–121, § 102(b), added par. (4). Former par. (4) redesignated (3).

   Enacted provision · exact public law section
   (b) Exception for Assumptions.— Subsection (c) of section 1274 of such Code is amended by adding at the end thereof the following new paragraph: “(4) Exception for assumptions.— If any person— “(A) in connection with the sale or exchange of property, assumes any debt instrument, or “(B) acquires any property subject to any debt instrument, 98 Stat. 553. 26 USC 483. in determining whether this section or section 483 applies to such debt instrument, such assumption (or such acquisition) shall not be taken into account unless the terms and conditions of such debt instrument are modified (or the nature of the transaction is changed) in connection with the assumption (or acquisition).”

7. 1985

   Pub. L. 99–121 § 101(b)(1) · 99 Stat. 505

   Substituted · 26 U.S.C. § 1274(d)(1)(B)(D)

   Pub. L. 99–121, § 101(b)(1), amended subpars. (B) to (D) generally, in subpar. (B) substituting provisions setting a monthly schedule for the determination of Federal rates for provisions which had formerly set a semi-annual schedule for the determination of such rates, in subpar. (C) substituting provisions setting a monthly schedule for the determination of Federal short-term, mid-term, and long-term rates based on the average market yield during any 1-month period ending in the month in which the determination is made for former provisions which had directed that the Federal rate determined under subpar. (A) apply during the appropriate 6-month period, and in subpar. (D) substituting provisions allowing a lower rate in certain cases for provisions relating to the setting of the Federal rate for any 6-month period

   Source evidence

   Code amendment note
   Subsec. (d)(1)(B) to (D). Pub. L. 99–121, § 101(b)(1), amended subpars. (B) to (D) generally, in subpar. (B) substituting provisions setting a monthly schedule for the determination of Federal rates for provisions which had formerly set a semi-annual schedule for the determination of such rates, in subpar. (C) substituting provisions setting a monthly schedule for the determination of Federal short-term, mid-term, and long-term rates based on the average market yield during any 1-month period ending in the month in which the determination is made for former provisions which had directed that the Federal rate determined under subpar. (A) apply during the appropriate 6-month period, and in subpar. (D) substituting provisions allowing a lower rate in certain cases for provisions relating to the setting of the Federal rate for any 6-month period.

   Enacted provision · exact public law section
   (1) In general.— Paragraph (1) of section 1274(d) of such Code 98 Stat. 538. 26 USC 1274. (defining applicable Federal rate) is amended by striking out subparagraphs (B), (C), and (D) and inserting in lieu thereof the following: “(B) Determination of rates.— During each calendar month, the Secretary shall determine the Federal short-term rate, mid-term rate, and long-term rate which shall apply during the following calendar month. “(C) Federal rate for any calendar month.— For purposes of this paragraph— “(i) Federal short-term rate.— The Federal short-term rate shall be the rate determined by the Secretary based on the average market yield (during any 1-month period selected by the Secretary and ending in the calendar month in which the determination is made) on outstanding marketable obligations of the United States with remaining periods to maturity of 3 years or less. “(ii) Federal mid-term and long-term rates.— The Federal mid-term and long-term rate shall be determined in accordance with the principles of clause (i). “(D) Lower rate permitted in certain cases.— The Secretary may by regulations permit a rate to be used with respect to any debt instrument which is lower than the applicable Federal rate if the taxpayer establishes to the satisfaction of the Secretary that such lower rate is based on the same principles as the applicable Federal rate and is appropriate for the term of such instrument.”

8. 1985

   Pub. L. 99–121 § 101(b)(2) · 99 Stat. 505

   Amended · 26 U.S.C. § 1274(d)(2)

   Pub. L. 99–121, § 101(b)(2), amended par. (2) generally. Prior to amendment, par. (2) read as follows: “In the case of any sale or exchange, the determination of the applicable Federal rate shall be made as of the first day on which there is a binding contract in writing for the sale or exchange.”

   Source evidence

   Code amendment note
   Subsec. (d)(2). Pub. L. 99–121, § 101(b)(2), amended par. (2) generally. Prior to amendment, par. (2) read as follows: “In the case of any sale or exchange, the determination of the applicable Federal rate shall be made as of the first day on which there is a binding contract in writing for the sale or exchange.”

   Enacted provision · exact public law section
   (2) Rate applicable to any sale or exchange.— Paragraph (2) of section 1274(d) of such Code (relating to rate applicable to any sale or exchange) is amended to read as follows: “(2) Lowest 3-month rate applicable to any sale or exchange.— “(A) In general.— In the case of any sale or exchange, the applicable Federal rate shall be the lowest 3-month rate. “(B) Lowest 3-month rate.— For purposes of subparagraph (A), the term ‘lowest 3-month rate’ means the lowest of the applicable Federal rates in effect for any month in the 3-calendar-month period ending with the 1st calendar month in which there is a binding contract in writing for such sale or exchange.”

9. 1985

   Pub. L. 99–121 § 101(c) · 99 Stat. 505

   Added · 26 U.S.C. § 1274(e)

   Pub. L. 99–121, § 101(c), added subsec. (e)

   Source evidence

   Code amendment note
   Subsec. (e). Pub. L. 99–121, § 101(c), added subsec. (e).

   Enacted provision · exact public law section
   (c) Rate Increased to 110 Percent in Case of Sale-Leaseback.— 98 Stat. 538. 26 USC 1274. Section 1274 of such Code (relating to determination of issue price in the case of certain debt instruments issued for property) is amended by adding at the end thereof the following new subsection: “(e) 110 Percent Rate Where Sale-Leaseback Involved.— “(1) In general.— In the case of any debt instrument to which this subsection applies, the discount rate used under subsection 98 Stat. 553. 26 USC 483. (b)(2)(B) or section 483(b) shall be 110 percent of the applicable Federal rate, compounded semiannually. “(2) Lower discount rates shall not apply.— Section 1274A shall not apply to any debt instrument to which this subsection applies. “(3) Debt instruments to which this subsection applies.— This subsection shall apply to any debt instrument given in consideration for the sale or exchange of any property if, pursuant to a plan, the transferor or any related person leases a portion of such property after such sale or exchange.”

10. 1986

    Tax Reform Act of 1986

    Pub. L. 99–514 title XVIII § 1803(a)(14)(A) · 100 Stat. 2085

    Redesignated · 26 U.S.C. § 1274(c)(3)(A)

    Pub. L. 99–514 substituted “for $1,000,000 or less” for “for less than $1,000,000” in heading of subsec. (c)(4)(A) as so designated prior to its redesignation as subsec. (c)(3)(A) by Pub. L. 99–121, § 101(a)(1)(D), see 1985 Amendment note below

    Source evidence

    Code amendment note
    Subsec. (c)(3)(A). Pub. L. 99–514 substituted “for $1,000,000 or less” for “for less than $1,000,000” in heading of subsec. (c)(4)(A) as so designated prior to its redesignation as subsec. (c)(3)(A) by Pub. L. 99–121, § 101(a)(1)(D), see 1985 Amendment note below.

    Enacted provision · exact public law section
    (A) Subparagraph (A) of section 1274(c)(4) is amended by striking out “for less than 51,000,000” in the subparagraph heading and inserting in lieu thereof “for 51,000,000 or less”.

11. 1989

    Improved Penalty Administration and Compliance Tax Act

    Pub. L. 101–239 title VII § 7721(c)(11) · 103 Stat. 2106

    Substituted · 26 U.S.C. § 1274(b)(3)(B)(i)

    Pub. L. 101–239 substituted “section 6662(d)(2)(C)(ii)” for “section 6661(b)(2)(C)(ii)”

    Source evidence

    Code amendment note
    Subsec. (b)(3)(B)(i). Pub. L. 101–239 substituted “section 6662(d)(2)(C)(ii)” for “section 6661(b)(2)(C)(ii)”.

    Enacted provision · exact public law section
    (11) Clause (i) of section 1274(b)(3)(B) is amended by striking “section 6661(b)(2)(C)(ii)” and inserting “section 6662(d)(2)(C)(ii)”.

12. 1996

    Small Business Job Protection Act of 1996

    Pub. L. 104–188 title I § 1704(t)(78) · 110 Stat. 1755

    Substituted · 26 U.S.C. § 1274(b)(3)(B)(i)

    Pub. L. 104–188 substituted “section 6662(d)(2)(C)(iii)” for “section 6662(d)(2)(C)(ii)”

    Source evidence

    Code amendment note
    Subsec. (b)(3)(B)(i). Pub. L. 104–188 substituted “section 6662(d)(2)(C)(iii)” for “section 6662(d)(2)(C)(ii)”.

    Enacted provision · exact public law section
    (78) Sections 461(i)(3)(C) and 1274(b)(3)(B)(i) are each amended by striking “section 6662(d)(2)(C)(ii)” and inserting “section 6662(d)(2)(C)(iii)”.

13. 1997

    Pub. L. 105–34 title III § 312(d)(1) · 111 Stat. 788

    Substituted · 26 U.S.C. § 1274(c)(3)(B)

    Pub. L. 105–34 substituted “section 121” for “section 1034”

    Source evidence

    Code amendment note
    Subsec. (c)(3)(B). Pub. L. 105–34 substituted “section 121” for “section 1034”.

    Enacted provision · exact public law section
    (1) The following provisions of the Internal Revenue Code of 1986 are each amended by striking “section 1034” and inserting “section 121”: sections 25(e)(7), 56(e)(1)(A), 56(e)(3)(B)(i), 143(i)(1)(C)(i)(I), 163(h)(4)(A)(i)(I), 280A(d)(4)(A), 464(f)(3)(B)(i), 1033(h)(4), 1274(c)(3)(B), 6334(a)(13), and 7872(f)(11)(A).

    Effective date note
    Amendment by Pub. L. 105–34 applicable to sales and exchanges after May 6, 1997, with certain exceptions, see section 312(d) of Pub. L. 105–34, set out as a note under section 121 of this title.

14. 2018

    Energy and Water Development and Related Agencies Appropriations Act, 2018

    Pub. L. 115–141 div. U title IV § 401(a)(179) · 132 Stat. 348

    Substituted · 26 U.S.C. § 1274(b)(3)(B)(i)

    Pub. L. 115–141 substituted “section 6662(d)(2)(C)(ii)” for “section 6662(d)(2)(C)(iii)”

    Source evidence

    Code amendment note
    Subsec. (b)(3)(B)(i). Pub. L. 115–141 substituted “section 6662(d)(2)(C)(ii)” for “section 6662(d)(2)(C)(iii)”.

    Enacted provision · exact public law section
    Sec. 401. The Nuclear Regulatory Commission shall comply with the July 5, 2011, version of Chapter VI of its Internal Commission Procedures when responding to Congressional requests for information.

15 of 15 references resolved to an enrolled provision