26 U.S.C. § 1286 — Tax treatment of stripped bonds

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, except as oth- erwise provided, as if included in the provisions of the Tax Reform Act of 1984, Pub. L. 98–369, div. A, to which such amendment relates, see section 1881 of Pub. L. 99–514, set out as a note under section 48 of this title. EFFECTIVE DATE Section applicable to taxable years ending after July 18, 1984, and to obligations acquired after that date, see section 44 of Pub. L. 98–369, set out as a note under sec- tion 1271 of this title. PLAN AMENDMENTS NOT REQUIRED UNTIL JANUARY 1, 1989 For provisions directing that if any amendments made by subtitle A or subtitle C of title XI [§§ 1101–1147 and 1171–1177] or title XVIII [§§ 1800–1899A] of Pub. L. 99–514 require an amendment to any plan, such plan amendment shall not be required to be made before the first plan year beginning on or after Jan. 1, 1989, see section 1140 of Pub. L. 99–514, as amended, set out as a note under section 401 of this title. SUBPART D—MISCELLANEOUS PROVISIONS Sec. 1286. Tax treatment of stripped bonds. 1287. Denial of capital gain treatment for gains on certain obligations not in registered form. 1288. Treatment of original issue discount on tax- exempt obligations. § 1286. Tax treatment of stripped bonds (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 origi- nally 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 respec- tive 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 dis- poses 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 in- come), 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 in- come under paragraph (1), (3) the basis of the bond and coupons imme- diately before the disposition (as adjusted pur- suant 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 al- located 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 pre- ceding sentence. Page 2404 TITLE 26—INTERNAL REVENUE CODE § 1286 1 See References in Text note below. (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 dis- count determined under subsection (a) with respect to any stripped bond or stripped cou- pon— (i) shall be treated as original issue dis- count 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 dis- count on an obligation which is not a tax- exempt obligation to the extent such dis- count 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 in- creasing the basis of the bond or coupon by the sum of— (i) the interest accrued but not paid be- fore 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-ex- empt portion of the original issue discount de- termined 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 ob- ligation from which the coupons were sep- arated, or (ii) the yield to maturity (on the basis of the purchase price) of the stripped obliga- tion or coupon. The purchaser of any stripped obligation or coupon may elect to apply clause (i) by sub- stituting ‘‘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 in- debtedness. (2) Stripped bond The term ‘‘stripped bond’’ means a bond issued at any time with interest coupons where there is a separation in ownership be- tween the bond and any coupon which has not yet become payable. (3) Stripped coupon The term ‘‘stripped coupon’’ means any cou- pon relating to a stripped bond. (4) Stated redemption price at maturity The term ‘‘stated redemption price at matu- rity’’ has the meaning given such term by sec- tion 1273(a)(2). (5) Coupon The term ‘‘coupon’’ includes any right to re- ceive interest on a bond (whether or not evi- denced by a coupon). (6) Purchase The term ‘‘purchase’’ has the meaning given such term by section 1272(d)(1).1 (e) Treatment of stripped interests in bond and preferred stock funds, etc. In the case of an account or entity substan- tially 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 pro- viding that where, by reason of varying rates of interest, put or call options, or other cir- cumstances, the tax treatment under this sec- tion 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 cou- pon, 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. (Added Pub. L. 98–369, div. A, title I, § 41(a), July 18, 1984, 98 Stat. 551; amended Pub. L. 99–514, title XVIII, §§ 1803(a)(13)(B), 1879(s)(1), Oct. 22, 1986, 100 Stat. 2796, 2912; Pub. L. 100–647, title I, § 1018(q)(4)(A), Nov. 10, 1988, 102 Stat. 3585; Pub. L. 108–357, title VIII, § 831(a), Oct. 22, 2004, 118 Stat. 1587; Pub. L. 115–141, div. U, title IV, § 401(a)(182), (c)(2)(A)–(C), Mar. 23, 2018, 132 Stat. 1193, 1205, 1206.) Editorial Notes REFERENCES IN TEXT Section 1272(d), referred to in subsec. (d)(6), was re- designated section 1272(c) by Pub. L. 115–141, div. U, title IV, § 401(c)(1)(B), Mar. 23, 2018, 132 Stat. 1205. AMENDMENTS 2018—Subsec. (a). Pub. L. 115–141, § 401(c)(2)(B), struck out ‘‘after July 1, 1982,’’ before ‘‘a stripped bond’’ in in- troductory provisions. Subsec. (b). Pub. L. 115–141, § 401(c)(2)(B), struck out ‘‘after July 1, 1982,’’ before ‘‘disposes of the bond’’ in in- troductory provisions. Subsec. (c). Pub. L. 115–141, § 401(c)(2)(A), redesignated subsec. (d) as (c) and struck out former subsec. (c) which related to retention of existing law for stripped bonds purchased before July 2, 1982. Subsec. (d). Pub. L. 115–141, § 401(c)(2)(A), redesignated subsec. (e) as (d). Former subsec. (d) redesignated (c). Subsec. (d)(5). Pub. L. 115–141, § 401(c)(2)(C), struck out at end ‘‘This paragraph shall apply for purposes of sub- section (c) only in the case of purchases after July 1, 1982.’’ Subsec. (e). Pub. L. 115–141, § 401(c)(2)(A), redesignated subsec. (f) as (e). Former subsec. (e) redesignated (d). Subsec. (f). Pub. L. 115–141, § 401(c)(2)(A), redesignated subsec. (g) as (f). Former subsec. (f) redesignated (e). Pub. L. 115–141, § 401(a)(182), substituted ‘‘and section 305(e),’’ for ‘‘and 305(e),’’. Page 2405 TITLE 26—INTERNAL REVENUE CODE § 1287 Subsec. (g). Pub. L. 115–141, § 401(c)(2)(A), redesignated subsec. (g) as (f). 2004—Subsecs. (f), (g). Pub. L. 108–357 added subsec. (f) and redesignated former subsec. (f) as (g). 1988—Subsec. (d). Pub. L. 100–647 amended subsec. (d) generally. Prior to amendment, subsec. (d) read as fol- lows: ‘‘In the case of any tax-exempt obligation (as de- fined in section 1275(a)(3)) from which 1 or more cou- pons have been stripped— ‘‘(1) the amount of original issue discount deter- mined under subsection (a) with respect to any stripped bond or stripped coupon from such obliga- tion shall be the amount which produces a yield to maturity (as of the purchase date) equal to the lower of— ‘‘(A) the coupon rate of interest on such obliga- tion before the separation of coupons, or ‘‘(B) the yield to maturity (on the basis of pur- chase price) of the stripped obligation or coupon, ‘‘(2) the amount of original issue discount deter- mined under paragraph (1) shall be taken into ac- count in determining the adjusted basis of the holder under section 1288, ‘‘(3) subsection (b)(1) shall not apply, and ‘‘(4) subsection (b)(2) shall be applied by increasing the basis of the bond or coupon by the interest ac- crued but not paid before the time such bond or cou- pon was disposed of (and not previously reflected in basis).’’ 1986—Subsec. (b)(1). Pub. L. 99–514, § 1803(a)(13)(B)(i), amended par. (1) generally, designating existing provi- sions as subpar. (A) and adding subpar. (B). Subsec. (b)(2). Pub. L. 99–514, § 1803(a)(13)(B)(ii), sub- stituted ‘‘the amount included in gross income under paragraph (1)’’ for ‘‘the amount of the accrued interest described in paragraph (1)’’. Subsec. (d). Pub. L. 99–514, § 1879(s)(1), amended sub- sec. (d) generally. Prior to amendment, subsec. (d) read as follows: ‘‘In the case of 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.’’ Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 2018 AMENDMENT Amendment by section 401(c)(2)(A)–(C) of Pub. L. 115–141 applicable to bonds purchased on or after July 2, 1982, see section 401(c)(2)(E) of Pub. L. 115–141, set out as a note under section 305 of this title. EFFECTIVE DATE OF 2004 AMENDMENT Amendment by Pub. L. 108–357 applicable to pur- chases and dispositions after Oct. 22, 2004, see section 831(c) of Pub. L. 108–357, set out as a note under section 305 of this title. EFFECTIVE DATE OF 1988 AMENDMENT Pub. L. 100–647, title I, § 1018(q)(4)(B), Nov. 10, 1988, 102 Stat. 3586, provided that: ‘‘(i) Except as provided in clause (ii), the amendment made by subparagraph (A) [amending this section] shall apply to any purchase or sale after June 10, 1987, of any stripped tax-exempt obligation or stripped coupon from such an obligation. ‘‘(ii) If— ‘‘(I) any person held any obligation or coupon in stripped form on June 10, 1987, and ‘‘(II) such obligation or coupon was held by such person on such date for sale in the ordinary course of such person’s trade or business, the amendment made by subparagraph (A) shall not apply to any sale of such obligation or coupon by such person and shall not apply to any such obligation or coupon while held by another person who purchased such obligation or coupon from the person referred to in subclause (I).’’ EFFECTIVE DATE OF 1986 AMENDMENT Amendment by section 1803(a)(13)(B) of Pub. L. 99–514 applicable to obligations acquired after Oct. 22, 1986, see section 1803(a)(13)(C) of Pub. L. 99–514, set out as a note under section 1276 of this title. Pub. L. 99–514, title XVIII, § 1879(s)(2), Oct. 22, 1986, 100 Stat. 2913, provided that: ‘‘The amendment made by paragraph (1) [amending this section] shall apply to any purchase or sale of any stripped tax-exempt obliga- tion or stripped coupon from such an obligation after the date of the enactment of this Act [Oct. 22, 1986].’’ EFFECTIVE DATE Section applicable to taxable years ending after July 18, 1984, except as otherwise provided, see section 44 of Pub. L. 98–369, set out as a note under section 1271 of this title. PLAN AMENDMENTS NOT REQUIRED UNTIL JANUARY 1, 1989 For provisions directing that if any amendments made by subtitle A or subtitle C of title XI [§§ 1101–1147 and 1171–1177] or title XVIII [§§ 1800–1899A] of Pub. L. 99–514 require an amendment to any plan, such plan amendment shall not be required to be made before the first plan year beginning on or after Jan. 1, 1989, see section 1140 of Pub. L. 99–514, as amended, set out as a note under section 401 of this title. § 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 ob- ligation 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). (2) Registered form The term ‘‘registered form’’ has the same meaning as when used in section 163(f). (Added Pub. L. 98–369, div. A, title I, § 41(a), July 18, 1984, 98 Stat. 552; amended Pub. L. 111–147, title V, § 502(a)(2)(D), Mar. 18, 2010, 124 Stat. 107.) Editorial Notes AMENDMENTS 2010—Subsec. (b)(1). Pub. L. 111–147 struck out ‘‘ex- cept that clause (iv) of subparagraph (A), and subpara- graph (B), of such section shall not apply’’ before pe- riod. Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 2010 AMENDMENT Amendment by Pub. L. 111–147 applicable to obliga- tions issued after the date which is 2 years after Mar. 18, 2010, see section 502(f) of Pub. L. 111–147, set out as a note under section 149 of this title. EFFECTIVE DATE Section applicable to taxable years ending after July 18, 1984, except as otherwise provided, see section 44 of