26 U.S.C. § 1255 — Gain from disposition of section 126 prop-

Page 2368 TITLE 26—INTERNAL REVENUE CODE § 1255 1986—Pub. L. 99–514 amended section generally, sub- stituting ‘‘geothermal, or other mineral properties’’ for ‘‘or geothermal property’’ in section catchline, revising and restating subsec. (a), pars. (1) to (4) as pars. (1) to (3), and reenacting subsec. (b) without change except for substituting ‘‘rule of subsection (g)’’ for ‘‘rules of subsection (g)’’ in par. (1). 1982—Subsec. (b)(2). Pub. L. 97–354 substituted ‘‘an S corporation’’ for ‘‘an electing small business corpora- tion (as defined in section 1371(b))’’. 1978—Pub. L. 95–618, § 402(c)(3), substituted ‘‘oil, gas, or geothermal’’ for ‘‘oil or gas’’ in section catchline. Subsec. (a)(1), (2). Pub. L. 95–618, § 402(c)(1), sub- stituted ‘‘oil, gas, or geothermal property’’ for ‘‘oil or gas property’’ wherever appearing. Subsec. (a)(3). Pub. L. 95–618, § 402(c)(2), substituted ‘‘Oil, gas, or geothermal’’ for ‘‘Oil or gas’’ in heading and in text substituted ‘‘The term ‘oil, gas, or geo- thermal property’ means’’ for ‘‘The term ‘oil or gas property’ means’’. Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 1988 AMENDMENT Amendment by Pub. L. 100–647 effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99–514, to which such amendment relates, see section 1019(a) of Pub. L. 100–647, set out as a note under section 1 of this title. EFFECTIVE DATE OF 1986 AMENDMENT Pub. L. 99–514, title IV, § 413(c), Oct. 22, 1986, 100 Stat. 2229, provided that: ‘‘(1) IN GENERAL.—The amendments made by this sec- tion [amending this section and section 617 of this title] shall apply to any disposition of property which is placed in service by the taxpayer after December 31, 1986. ‘‘(2) EXCEPTION FOR BINDING CONTRACTS.—The amend- ments made by this section shall not apply to any dis- position of property placed in service after December 31, 1986, if such property was acquired pursuant to a written contract which was entered into before Sep- tember 26, 1985, and which was binding at all times thereafter.’’ EFFECTIVE DATE OF 1982 AMENDMENT Amendment by Pub. L. 97–354 applicable to taxable years beginning after Dec. 31, 1982, see section 6(a) of Pub. L. 97–354, set out as an Effective Date note under section 1361 of this title. EFFECTIVE DATE OF 1978 AMENDMENT Amendment by Pub. L. 95–618 applicable with respect to wells commenced on or after Oct. 1, 1978, in taxable years ending on or after such date, see section 402(e) of Pub. L. 95–618, set out as a note under section 263 of this title. EFFECTIVE DATE Pub. L. 94–455, title II, § 205(e), Oct. 4, 1976, 90 Stat. 1535, provided that: ‘‘The amendments made by this section [enacting this section and amending sections 163, 170, 301, 312, 341, 453, and 751 of this title] shall apply with respect to taxable years ending after De- cember 31, 1975.’’ § 1255. Gain from disposition of section 126 prop- erty (a) General rule (1) Ordinary income Except as otherwise provided in this section, if section 126 property is disposed of, the lower of— (A) the applicable percentage of the aggre- gate payments, with respect to such prop- erty, excluded from gross income under sec- tion 126, or (B) the excess of— (i) the amount realized (in the case of a sale, exchange, or involuntary conversion), or the fair market value of such section 126 property (in the case of any other disposi- tion), over (ii) the adjusted basis of such property, shall be treated as ordinary income. Such gain shall be recognized notwithstanding any other provision of this subtitle, except that this section shall not apply to the ex- tent such gain is recognized as ordinary in- come under any other provision of this part. (2) Section 126 property For purposes of this section, ‘‘section 126 property’’ means any property acquired, im- proved, or otherwise modified by the applica- tion of payments excluded from gross income under section 126. (3) Applicable percentage For purposes of this section, if section 126 property is disposed of less than 10 years after the date of receipt of payments excluded from gross income under section 126, the applicable percentage is 100 percent. If section 126 prop- erty is disposed of more than 10 years after such date, the applicable percentage is 100 per- cent reduced (but not below zero) by 10 percent for each year or part thereof in excess of 10 years such property was held after the date of receipt of the payments. (b) Special rules Under regulations prescribed by the Sec- retary— (1) rules similar to the rules applicable under section 1245 shall be applied for purposes of this section, and (2) for purposes of sections 170(e) and 751(c), amounts treated as ordinary income under this section shall be treated in the same man- ner as amounts treated as ordinary income under section 1245. (Added Pub. L. 95–600, title V, § 543(c)(1), Nov. 6, 1978, 92 Stat. 2890; amended Pub. L. 96–222, title I, § 105(a)(7)(B), (D), Apr. 1, 1980, 94 Stat. 221; Pub. L. 96–471, § 2(b)(6), Oct. 19, 1980, 94 Stat. 2254; Pub. L. 99–514, title V, § 511(d)(2)(A), title VI, § 631(e)(14), Oct. 22, 1986, 100 Stat. 2248, 2275; Pub. L. 100–647, title I, § 1005(c)(10), Nov. 10, 1988, 102 Stat. 3392; Pub. L. 108–27, title III, § 302(e)(4)(B)(ii), May 28, 2003, 117 Stat. 764; Pub. L. 115–141, div. U, title IV, § 401(a)(175), Mar. 23, 2018, 132 Stat. 1192.) Editorial Notes AMENDMENTS 2018—Subsec. (b)(2). Pub. L. 115–141 substituted ‘‘170(e)’’ for ‘‘170(e),’’. 2003—Subsec. (b)(2). Pub. L. 108–27 struck out ‘‘, 341(e)(12),’’ after ‘‘170(e)’’. 1988—Subsec. (b)(2). Pub. L. 100–647 amended Pub. L. 99–514, § 511(d)(2)(A), see 1986 Amendment note below. 1986—Subsec. (b)(2). Pub. L. 99–514, § 511(d)(2)(A), as amended by Pub. L. 100–647, struck out ‘‘163(d),’’ after ‘‘sections’’. Pub. L. 99–514, § 631(e)(14), struck out ‘‘453B(d)(2)’’ after ‘‘341(e)(12),’’. Page 2369 TITLE 26—INTERNAL REVENUE CODE § 1256 1980—Subsec. (a)(1)(B). Pub. L. 96–222, § 105(a)(7)(B), in- serted following cl. (ii) provisions requiring that such gain be recognized notwithstanding any other provision of this subtitle, except that this section shall not apply to the extent such gain is recognized as ordinary in- come under any other provision of this part. Subsec. (b)(2). Pub. L. 96–471 substituted ‘‘453B(d)(2)’’ for ‘‘453(d)(4)(B)’’. Pub. L. 96–222, § 105(a)(7)(D), inserted ‘‘for purposes of sections 163(d), 170(e), 341(e)(12), 453(d)(4)(B), and 751(c)’’ before ‘‘amounts treated as’’. Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 2003 AMENDMENT Amendment by Pub. L. 108–27 applicable, except as otherwise provided, to taxable years beginning after Dec. 31, 2002, see section 302(f) of Pub. L. 108–27, set out as an Effective and Termination Dates of 2003 Amend- ment note under section 1 of this title. EFFECTIVE DATE OF 1988 AMENDMENT Amendment by Pub. L. 100–647 effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99–514, to which such amendment relates, see section 1019(a) of Pub. L. 100–647, set out as a note under section 1 of this title. EFFECTIVE DATE OF 1986 AMENDMENT Amendment by section 511(d)(2)(A) of Pub. L. 99–514 applicable to taxable years beginning after Dec. 31, 1986, see section 511(e) of Pub. L. 99–514, set out as a note under section 163 of this title. Amendment by section 631(e)(14) of Pub. L. 99–514 ap- plicable to any distribution in complete liquidation, and any sale or exchange, made by a corporation after July 31, 1986, unless such corporation is completely liq- uidated before Jan. 1, 1987, any transaction described in section 338 of this title for which the acquisition date occurs after Dec. 31, 1986, and any distribution, not in complete liquidation, made after Dec. 31, 1986, with ex- ceptions and special and transitional rules, see section 633 of Pub. L. 99–514, set out as an Effective Date note under section 336 of this title. EFFECTIVE DATE OF 1980 AMENDMENTS For effective date of amendment by Pub. L. 96–471, see section 6(a)(1) of Pub. L. 96–471, set out as an Effec- tive Date note under section 453 of this title. Amendment by Pub. L. 96–222 effective, except as oth- erwise provided, as if it had been included in the provi- sions of the Revenue Act of 1978, Pub. L. 95–600, to which such amendment relates, see section 201 of Pub. L. 96–222, set out as a note under section 32 of this title. EFFECTIVE DATE Section effective with respect to grants made under the programs after Sept. 30, 1979, see section 543(d) of Pub. L. 95–600, set out as a note under section 126 of this title. § 1256. Section 1256 contracts marked to market (a) General rule For purposes of this subtitle— (1) each section 1256 contract held by the taxpayer at the close of the taxable year shall be treated as sold for its fair market value on the last business day of such taxable year (and any gain or loss shall be taken into account for the taxable year), (2) proper adjustment shall be made in the amount of any gain or loss subsequently real- ized for gain or loss taken into account by rea- son of paragraph (1), (3) any gain or loss with respect to a section 1256 contract shall be treated as— (A) short-term capital gain or loss, to the extent of 40 percent of such gain or loss, and (B) long-term capital gain or loss, to the extent of 60 percent of such gain or loss, and (4) if all the offsetting positions making up any straddle consist of section 1256 contracts to which this section applies (and such strad- dle is not part of a larger straddle), sections 1092 and 263(g) shall not apply with respect to such straddle. (b) Section 1256 contract defined (1) In general For purposes of this section, the term ‘‘sec- tion 1256 contract’’ means— (A) any regulated futures contract, (B) any foreign currency contract, (C) any nonequity option, (D) any dealer equity option, and (E) any dealer securities futures contract. (2) Exceptions The term ‘‘section 1256 contract’’ shall not include— (A) any securities futures contract or op- tion on such a contract unless such contract or option is a dealer securities futures con- tract, or (B) any interest rate swap, currency swap, basis swap, interest rate cap, interest rate floor, commodity swap, equity swap, equity index swap, credit default swap, or similar agreement. (c) Terminations, etc. (1) In general The rules of paragraphs (1), (2), and (3) of subsection (a) shall also apply to the termi- nation (or transfer) during the taxable year of the taxpayer’s obligation (or rights) with re- spect to a section 1256 contract by offsetting, by taking or making delivery, by exercise or being exercised, by assignment or being as- signed, by lapse, or otherwise. (2) Special rule where taxpayer takes delivery on or exercises part of straddle If— (A) 2 or more section 1256 contracts are part of a straddle (as defined in section 1092(c)), and (B) the taxpayer takes delivery under or exercises any of such contracts, then, for purposes of this section, each of the other such contracts shall be treated as termi- nated on the day on which the taxpayer took delivery. (3) Fair market value taken into account For purposes of this subsection, fair market value at the time of the termination (or trans- fer) shall be taken into account. (d) Elections with respect to mixed straddles (1) Election The taxpayer may elect to have this section not to apply to all section 1256 contracts which are part of a mixed straddle. (2) Time and manner An election under paragraph (1) shall be made at such time and in such manner as the Secretary may by regulations prescribe.