26 U.S. Code § 1272 - Current inclusion in income of original issue discount
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(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 instrument 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.
Paragraph (1) shall not apply to—
(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—
(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.
(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—
(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—
(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) Determination of daily portions where principal subject to acceleration
(A) In general
In the case of any debt instrument to which this paragraph applies, the daily portion of the original issue discount shall be determined by allocating to each day in any accrual period its ratable portion of the excess (if any) of—
(i) the sum of
(I) the present value determined under subparagraph (B) of all remaining payments under the debt instrument as of the close of such period, and
(II) the payments during the accrual period of amounts included in the stated redemption price of the debt instrument, over
(B) Determination of present value
For purposes of subparagraph (A), the present value shall be determined on the basis of—
(i) the original 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),
(C) Debt instruments to which paragraph applies
This paragraph applies to—
(ii) any other debt instrument if payments under such debt instrument may be accelerated by reason of prepayments of other obligations securing such debt instrument (or, to the extent provided in regulations, by reason of other events), or
(iii) any pool of debt instruments the yield on which may be affected by reason of prepayments (or to the extent provided in regulations, by reason of other events).
To the extent provided in regulations prescribed by the Secretary, in the case of a small business engaged in the trade or business of selling tangible personal property at retail, clause (iii) shall not apply to debt instruments incurred in the ordinary course of such trade or business while held by such business.
(7) Reduction where subsequent holder pays acquisition premium
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—
(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—
(2) Determination of ratable monthly portion
Except as provided in paragraph (4), the ratable monthly portion of original issue discount shall equal—
(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
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—
This section shall not apply to any holder—
(d) Definition and special rule
(1) Purchase defined
For purposes of this section, the term “purchase” means—
Source(Added Pub. L. 98–369, div. A, title I, § 41(a),July 18, 1984, 98 Stat. 533; amended Pub. L. 99–514, title VI, § 672,Oct. 22, 1986, 100 Stat. 2318; Pub. L. 105–34, title X, § 1004(a),Aug. 5, 1997, 111 Stat. 911.)
1997—Subsec. (a)(6)(C). Pub. L. 105–34added cl. (iii) and concluding provisions.
1986—Subsec. (a)(6), (7). Pub. L. 99–514added par. (6) and redesignated former par. (6) as (7).
Effective Date of 1997 Amendment
Pub. L. 105–34, title X, § 1004(b)(1),Aug. 5, 1997, 111 Stat. 911, provided that: “The amendment made by this section [amending this section] shall apply to taxable years beginning after the date of the enactment of this Act [Aug. 5, 1997].”
Effective Date of 1986 Amendment
Amendment by Pub. L. 99–514applicable to debt instruments issued after Dec. 31, 1986, in taxable years ending after such date, see section 675(b) ofPub. L. 99–514, set out as an Effective Date note under section 860A of this title.
Section applicable to taxable years ending after July 18, 1984, but not applicable to any obligation issued on or before Dec. 31, 1984, which is not a capital asset in the hands of the taxpayer, and subsec. (a)(6) of this section not applicable to any purchase on or before July 18, 1984, see section 44 ofPub. L. 98–369, as amended, set out as a note under section 1271 of this title.
Change in Method of Accounting
Pub. L. 105–34, title X, § 1004(b)(2),Aug. 5, 1997, 111 Stat. 911, provided that: “In the case of any taxpayer required by this section [amending this section and enacting provisions set out as a note above] to change its method of accounting for its first taxable year beginning after the date of the enactment of this Act [Aug. 5, 1997]—
“(A) such change shall be treated as initiated by the taxpayer,
“(B) such change shall be treated as made with the consent of the Secretary of the Treasury, and
“(C) the net amount of the adjustments required to be taken into account by the taxpayer under section 481 of the Internal Revenue Code of 1986 shall be taken into account ratably over the 4-taxable year period beginning with such first taxable year.”