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26 U.S.C. § 1286 — Tax treatment of stripped bonds
Federal law — U.S. Code and appendices · legal_authorities
**(a) Inclusion in income as if bond and coupons were original issue discount bonds** If any person purchases 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 disposes of the bond or such coupon—
(1) such person shall include in gross income an amount equal to the sum of—
(A) the interest accrued on such bond while held by such person and before the time such coupon or bond was disposed of (to the extent such interest has not theretofore been included in such person’s gross income), and
(B) the accrued market discount on such bond determined as of the time such coupon or bond was disposed of (to the extent such discount 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 included in gross income under 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 dispose
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Source location: Title 26, Chapter 1, § 1286; chapter-001-normal-taxes-and-surtaxes.md
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**(a) Inclusion in income as if bond and coupons were original issue discount bonds** If any person purchases 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 disposes of the bond or such coupon—
(1) such person shall include in gross income an amount equal to the sum of—
(A) the interest accrued on such bond while held by such person and before the time such coupon or bond was disposed of (to the extent such interest has not theretofore been included in such person’s gross income), and
(B) the accrued market discount on such bond determined as of the time such coupon or bond was disposed of (to the extent such discount 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 included in gross income under 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) Special rules for tax-exempt obligations**
(1) **In general** — In the case of any tax-exempt obligation (as defined in section 1275(a)(3)) from which 1 or more coupons have been stripped—
(A) the amount of the original issue discount determined under subsection (a) with respect to any stripped bond or stripped coupon—
(i) shall be treated as original issue discount on a tax-exempt obligation to the extent such discount does not exceed the tax-exempt portion of such discount, and
(ii) shall be treated as original issue discount on an obligation which is not a tax-exempt obligation to the extent such discount exceeds the tax-exempt portion of such discount,
(B) subsection (b)(1)(A) shall not apply, and
(C) subsection (b)(2) shall be applied by increasing the basis of the bond or coupon by the sum of—
(i) the interest accrued but not paid before such bond or coupon was disposed of (and not previously reflected in basis), plus
(ii) the amount included in gross income under subsection (b)(1)(B).
(2) **Tax-exempt portion** — For purposes of paragraph (1), the tax-exempt portion of the original issue discount determined under subsection (a) is the excess of—
(A) the amount referred to in subsection (a)(1), over
(B) an issue price which would produce a yield to maturity as of the purchase date equal to the lower of—
(i) the coupon rate of interest on the obligation from which the coupons were separated, or
(ii) the yield to maturity (on the basis of the purchase price) of the stripped obligation or coupon.
The purchaser of any stripped obligation or coupon may elect to apply clause (i) by substituting “original yield to maturity of” for “coupon rate of interest on”.
**(d) 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 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).
(6) **Purchase** — The term “purchase” has the meaning given such term by section 1272(d)(1).11 See References in Text note below.
**(e) Treatment of stripped interests in bond and preferred stock funds, etc.** In the case of an account or entity substantially all of the assets of which consist of bonds, preferred stock, or a combination thereof, the Secretary may by regulations provide that rules similar to the rules of this section and section 305(e), as appropriate, shall apply to interests in such account or entity to which (but for this subsection) this section or section 305(e), as the case may be, would not apply.
**(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.
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Federal law — U.S. Code and appendices · legal_authorities
**(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 regard to section 1272(a)(7) (or the corresponding provisions of prior law)),
shall be treated as ordinary income.
(B) *Exceptions* — This paragraph 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 short-term 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 has 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 t
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Federal law — U.S. Code and appendices · legal_authorities
**(a) General rule** Except as otherwise provided in this section, gross income does not include the amount of any distribution of the stock of a corporation made by such corporation to its shareholders with respect to its stock.
**(b) Exceptions** Subsection (a) shall not apply to a distribution by a corporation of its stock, and the distribution shall be treated as a distribution of property to which section 301 applies—
(1) **Distributions in lieu of money** — If the distribution is, at the election of any of the shareholders (whether exercised before or after the declaration thereof), payable either—
(A) in its stock, or
(B) in property.
(2) **Disproportionate distributions** — If the distribution (or a series of distributions of which such distribution is one) has the result of—
(A) the receipt of property by some shareholders, and
(B) an increase in the proportionate interests of other shareholders in the assets or earnings and profits of the corporation.
(3) **Distributions of common and preferred stock** — If the distribution (or a series of distributions of which such distribution is one) has the result of—
(A) the receipt of preferred stock by some common shareholders, and
(B) the receipt of common stock by other common shareholders.
(4) **Distributions on preferred stock** — If the distribution is with respect to preferred stock, other than an increase in the conversion ratio of convertible preferred stock made solely to take account of a stock dividend or stock split with respect to the stock into which such convertible stock is convertible.
(5) **Distributions of convertible preferred stock** — If the distribution is of convertible preferred stock, unless it is established to the satisfaction of the Secretary that such distribution w
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Federal law — U.S. Code and appendices · legal_authorities
**(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 in 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) **Treatment of partial principal payments**
(A) *In general* — Any partial principal payment on a market discount bond shall be included in gross income as ordinary income to the extent such payment does not exceed the accrued market discount on such bond.
(B) *Adjustment* — If subparagraph (A) applies to any partial principal payment on any market discount bond, for purposes of applying this section to any disposition of (or subsequent partial principal payment on) such bond, the amount of accrued market discount shall be reduced by the amount of such partial principal payment included in gross income under subparagraph (A).
(4) **Gain treated as interest for certain purposes** — Except for purposes of sections 103, 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) or (3) 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 whi
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Federal law — U.S. Code and appendices · legal_authorities
**(a) Requirements for qualification** A trust created or organized in the United States and forming part of a stock bonus, pension, or profit-sharing plan of an employer for the exclusive benefit of his employees or their beneficiaries shall constitute a qualified trust under this section—
(1) if contributions are made to the trust by such employer, or employees, or both, or by another employer who is entitled to deduct his contributions under section 404(a)(3)(B) (relating to deduction for contributions to profit-sharing and stock bonus plans), or by a charitable remainder trust pursuant to a qualified gratuitous transfer (as defined in section 664(g)(1)), for the purpose of distributing to such employees or their beneficiaries the corpus and income of the fund accumulated by the trust in accordance with such plan;
(2) if under the trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with respect to employees and their beneficiaries under the trust, for any part of the corpus or income to be (within the taxable year or thereafter) used for, or diverted to, purposes other than for the exclusive benefit of his employees or their beneficiaries (but this paragraph shall not be construed, in the case of a multiemployer plan, to prohibit the return of a contribution within 6 months after the plan administrator determines that the contribution was made by a mistake of fact or law (other than a mistake relating to whether the plan is described in section 401(a) or the trust which is part of such plan is exempt from taxation under section 501(a), or the return of any withdrawal liability payment determined to be an overpayment within 6 months of such determination));
(3) if the plan of which such trust is a part satisfies the requireme
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Federal law — U.S. Code and appendices · legal_authorities
### Statutory Notes
Section 1232, acts Aug. 16, 1954, ch. 736, 68A Stat. 326; Sept. 2, 1958, Pub. L. 85–866, title I, §§ 50(a), 51, 72 Stat. 1642, 1643; June 25, 1959, Pub. L. 86–69, § 3(e), 73 Stat. 140; Sept. 2, 1964, Pub. L. 88–563, § 5, 78 Stat. 845; Dec. 30, 1969, Pub. L. 91–172, title IV, § 413(a), (b), 83 Stat. 609, 611; Oct. 4, 1976, Pub. L. 94–455, title XIV, § 1402(b)(1)(S), (2), title XIX, §§ 1901(b)(3)(I), (14)(D), 1904(b)(10)(C), 90 Stat. 1732, 1793, 1796, 1817; Aug. 13, 1981, Pub. L. 97–34, title V, § 505(b), 95 Stat. 331; Sept. 3, 1982, Pub. L. 97–248, title II, §§ 231(c), 232(b), title III, § 310(b)(6), 96 Stat. 499, 501, 599; Jan. 12, 1983, Pub. L. 97–448, title III, § 306(a)(9)(B), (C)(i), (ii), 96 Stat. 2403, 2404; July 18, 1984, Pub. L. 98–369, div. A, title X, § 1001(b)(16), (d), (e), 98 Stat. 1012, related to bonds and other evidences of indebtedness. See section 1271 et seq. of this title.
Section 1232A, added Pub. L. 97–248, title II, § 231(a), Sept. 3, 1982, 96 Stat. 496; amended Pub. L. 98–369, div. A, title II, § 211(b)(17), July 18, 1984, 98 Stat. 756, related to original issue discount. See section 1271 et seq. of this title.
Section 1232B, added Pub. L. 97–248, title II, § 232(a), Sept. 3, 1982, 96 Stat. 499, related to stripped bonds. See [section 1286 of this title](https://uscode.house.gov/view.xhtml?req=granuleid:USC-prelim-title26-section1286&num=0&edition=prelim).
#### Effective Date of Repeal
Repeal applicable to taxable years ending after July 18, 1984, see section 44 of Pub. L. 98–369, set out as an Effective Date note under [section 1271 of this title](https://uscode.house.gov/view.xhtml?req=granuleid:USC-prelim-title26-section1271&num=0&edition=prelim).
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Federal law — U.S. Code and appendices · legal_authorities
Page 2403
TITLE 26—INTERNAL REVENUE CODE
§ 1286
(A) sections 1281 and 1282 shall be applied
by taking into account original issue dis-
count 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 (1) 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 tax-
payer 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 elec-
tion.
(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 includible in gross
income.
(3) Coordination with other provisions
Section 454(b) and paragraphs (3) and (4) of
section 1271(a) shall not apply to any short-
term obligation to which section 1281 applies.
(Added Pub. L. 98–369, div. A, title I, § 41(a), July
18, 1984, 98 Stat. 549; amended Pub. L. 99–514,
title XVIII, § 1803(a)(1)(B), Oct. 22, 1986, 100 Stat.
2792.)
Editorial Notes
AMENDMENTS
1986—Subsec. (d)(3). Pub. L. 99–514 substituted ‘‘para-
graphs (3) and (4) of section 1271(a)’’ for ‘‘section
1271(a)(3)’’.
Statutory Notes and Related Subsidiaries
EFFECTIVE DATE OF 1986 AMENDMENT
Amendment by Pub. L. 99–514 effective, ex
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