26 U.S.C. § 1278 — Definitions and special rules

Page 2399 TITLE 26—INTERNAL REVENUE CODE § 1278 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. § 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) United States savings bonds Any United States savings bond. (iii) Installment obligations Any installment obligation to which sec- tion 453B applies. (C) Section 1277 not applicable to tax-exempt obligations For purposes of section 1277, the term ‘‘market discount bond’’ shall not include any tax-exempt obligation (as defined in sec- tion 1275(a)(3)). (D) Treatment of bonds acquired at original issue (i) In general Except as otherwise provided in this sub- paragraph or in regulations, the term ‘‘market discount bond’’ shall not include any bond acquired by the taxpayer at its original issue. (ii) Treatment of bonds acquired for less than issue price Clause (i) shall not apply to any bond if— (I) the basis of the taxpayer in such bond is determined under section 1012, and (II) such basis is less than the issue price of such bond determined under sub- part A of this part. (iii) Bonds acquired in certain reorganiza- tions Clause (i) shall not apply to any bond issued pursuant to a plan of reorganization (within the meaning of section 368(a)(1)) in exchange for another bond having market discount. Solely for purposes of section 1276, the preceding sentence shall not apply if such other bond was issued on or before July 18, 1984 (the date of the enact- ment of section 1276) and if the bond issued pursuant to such plan of reorganization has the same term and the same interest rate as such other bond had. (iv) Treatment of certain transferred basis property For purposes of clause (i), if the adjusted basis of any bond in the hands of the tax- payer is determined by reference to the ad- justed basis of such bond in the hands of a person who acquired such bond at its origi- nal issue, such bond shall be treated as ac- quired by the taxpayer at its original issue. (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 discount 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 1⁄4 of 1 percent of the stated redemption price of the bond at maturity multiplied by the number of complete years to maturity (after the tax- payer acquired the bond), then the market discount shall be considered to be zero. (3) Bond The term ‘‘bond’’ means any bond, deben- ture, note, certificate, or other evidence of in- debtedness. (4) Revised issue price The term ‘‘revised issue price’’ means 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 acquisi- tion of the bond by the taxpayer (determined without regard to section 1272(a)(7)) or, in the case of a tax-exempt obligation, the ag- gregate amount of the original issue dis- count which accrued in the manner provided by section 1272(a) (determined without re- gard to paragraph (7) thereof) during periods before the acquisition of the bond by the taxpayer. (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— Page 2400 TITLE 26—INTERNAL REVENUE CODE § 1278 (A) sections 1276 and 1277 shall not apply, and (B) market discount on any market dis- count bond shall be included in the gross in- come of the taxpayer for the taxable years to which it is attributable (as determined under the rules of subsection (b) of section 1276). 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 included in gross income under sub- paragraph (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 ap- plies. (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 Sec- retary to the revocation of such election. (4) Basis adjustment The basis of any bond in the hands of the taxpayer shall be increased by the amount in- cluded in gross income pursuant to this sub- section. (c) Regulations The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this subpart, including regulations providing proper adjustments in the case of a bond the principal of which may be paid in 2 or more pay- ments. (Added and amended Pub. L. 98–369, div. A, title I, § 41(a), title X, § 1001(b)(24), July 18, 1984, 98 Stat. 547; Pub. L. 99–514, title XVIII, §§ 1803(a)(6), 1878(a), 1899A(32), Oct. 22, 1986, 100 Stat. 2793, 2903, 2960; Pub. L. 100–647, title I, §§ 1006(u)(2), 1018(c)(2), (3), Nov. 10, 1988, 102 Stat. 3427, 3578; Pub. L. 103–66, title XIII, § 13206(b)(2), Aug. 10, 1993, 107 Stat. 465; Pub. L. 115–141, div. U, title IV, § 401(a)(181), (c)(1)(G), Mar. 23, 2018, 132 Stat. 1193, 1205.) Editorial Notes AMENDMENTS 2018—Subsec. (a)(4)(B). Pub. L. 115–141, § 401(c)(1)(G), struck out ‘‘or (b)(4)’’ after ‘‘1272(a)(7)’’. Subsec. (b)(1). Pub. L. 115–141, § 401(a)(181), substituted ‘‘871(a),’’ for ‘‘871(a),,’’ in concluding provisions. 1993—Subsec. (a)(1)(B)(ii)–(iv). Pub. L. 103–66, § 13206(b)(2)(A)(i), redesignated cls. (iii) and (iv) as (ii) and (iii), respectively, and struck out heading and text of former cl. (ii). Text read as follows: ‘‘Any tax-exempt obligation (as defined in section 1275(a)(3)).’’ Subsec. (a)(1)(C), (D). Pub. L. 103–66, § 13206(b)(2)(A)(ii), (iii), added subpar. (C) and redesig- nated former subpar. (C) as (D). Subsec. (a)(4)(B). Pub. L. 103–66, § 13206(b)(2)(B)(ii), in- serted before period at end ‘‘or, in the case of a tax-ex- empt obligation, the aggregate amount of the original issue discount which accrued in the manner provided by section 1272(a) (determined without regard to para- graph (7) thereof) during periods before the acquisition of the bond by the taxpayer’’. Subsec. (b)(1). Pub. L. 103–66, § 13206(b)(2)(B)(i), sub- stituted ‘‘sections 103, 871(a),’’ for ‘‘sections 871(a)’’ in last sentence. 1988—Subsec. (a)(4)(B). Pub. L. 100–647, § 1006(u)(2), substituted ‘‘section 1272(a)(7)’’ for ‘‘section 1272(a)(6)’’. Subsec. (b)(4). Pub. L. 100–647, § 1018(c)(3), added par. (4). Subsec. (c). Pub. L. 100–647, § 1018(c)(2), inserted before period at end ‘‘, including regulations providing proper adjustments in the case of a bond the principal of which may be paid in 2 or more payments’’. 1986—Subsec. (a)(1)(B)(i). Pub. L. 99–514, § 1878(a), amended Pub. L. 98–369, § 1001(b), by adding a par. (24), effective as if included in Pub. L. 98–369. See 1984 Amendment note below. Subsec. (a)(1)(C). Pub. L. 99–514, § 1803(a)(6), added sub- par. (C). Subsec. (a)(4). Pub. L. 99–514, § 1899A(32), substituted ‘‘means’’ for ‘‘means of’’ in introductory provisions. 1984—Subsec. (a)(1)(B)(i). Pub. L. 98–369, § 1001(b)(24), as added by Pub. L. 99–514, § 1878(a), substituted ‘‘6 months’’ for ‘‘1 year’’, applicable to property acquired after June 22, 1984, and before Jan. 1, 1988. See Effective Date of 1984 Amendment note below. Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 2018 AMENDMENT Amendment by section 401(c)(1)(G) of Pub. L. 115–141 applicable to debt instruments issued on or after July 2, 1982, see section 401(c)(1)(H) of Pub. L. 115–141, set out as a note under section 163 of this title. EFFECTIVE DATE OF 1993 AMENDMENT Amendments by Pub. L. 103–66 applicable to obliga- tions purchased (within the meaning of section 1272(d)(1) of this title) after Apr. 30, 1993, see section 13206(b)(3) of Pub. L. 103–66, set out as a note under sec- tion 1276 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 sections 1803(a)(6) and 1878(a) of Pub. L. 99–514 effective, except as otherwise 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 OF 1984 AMENDMENT Amendment by Pub. L. 98–369 applicable to property acquired after June 22, 1984, and before Jan. 1, 1988, see section 1001(e) of Pub. L. 98–369, set out as a note under section 166 of this title. 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. Page 2401 TITLE 26—INTERNAL REVENUE CODE § 1282 SUBPART C—DISCOUNT ON SHORT-TERM OBLIGATIONS Sec. 1281. Current inclusion in income of discount on certain short-term obligations. 1282. Deferral of interest deduction allocable to ac- crued discount. 1283. Definitions and special rules. § 1281. Current inclusion in income of discount on certain short-term obligations (a) General rule In the case of any short-term obligation to which this section applies, for purposes of this title— (1) there shall be included in the gross in- come 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, and (2) any interest payable on the obligation (other than interest taken into account in de- termining the amount of the acquisition dis- count) shall be included in gross income as it accrues. (b) Short-term obligations to which section ap- plies (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 com- pany or a common trust fund, (E) is identified by the taxpayer under sec- tion 1256(e)(2) as being part of a hedging transaction, or (F) is a stripped bond or stripped coupon held by the person who stripped the bond or coupon (or by any other person whose basis is determined by reference to the basis in the hands of such person). (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 pass-thru 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 de- scribed in clause (i)) during the required accrual period. (B) Required accrual period For purposes of subparagraph (A), the term ‘‘required accrual period’’ means the pe- riod— (i) which begins with the first taxable year for which the ownership test of sub- paragraph (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 re- spect to which the Secretary consents to the termination of the required accrual pe- riod. (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 de- scribed in paragraph (1) or by other pass- thru entities to which subparagraph (A) ap- plies. (D) Pass-thru entity The term ‘‘pass-thru entity’’ means any partnership, S corporation, trust, or other pass-thru entity. (c) Cross reference For special rules limiting the application of this section to original issue discount in the case of non- governmental obligations, see section 1283(c). (Added Pub. L. 98–369, div. A, title I, § 41(a), July 18, 1984, 98 Stat. 548; amended Pub. L. 99–514, title XVIII, § 1803(a)(7), (8)(A), Oct. 22, 1986, 100 Stat. 2793, 2794.) Editorial Notes AMENDMENTS 1986—Subsec. (a). Pub. L. 99–514, § 1803(a)(8), amended subsec. (a) generally, designating existing provisions as par. (1) and adding par. (2). Subsec. (b)(1)(F). Pub. L. 99–514, § 1803(a)(7), added sub- par. (F). Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 1986 AMENDMENT Amendment by section 1803(a)(7) of Pub. L. 99–514 ef- fective, except as otherwise 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. Section 1803(a)(8)(A) of Pub. L. 99–514, as amended by Pub. L. 100–647, title I, § 1018(c)(1), Nov. 10, 1988, 102 Stat. 3578, provided that the amendment made by sec- tion 1803(a)(8)(A) of Pub. L. 99–514 is effective with re- spect to obligations acquired after Dec. 31, 1985. EFFECTIVE DATE Section applicable to taxable years ending after July 18, 1984, and applicable to obligations acquired after that date, with certain elections available, 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. § 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