26 U.S. Code § 1276 - Disposition gain representing accrued market discount treated as ordinary income
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(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.
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
(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 which bears the same ratio to the market discount on such bond as—
(2) Election of accrual on basis of constant interest rate (in lieu of ratable accrual)
(A) In general
At the election of the taxpayer with respect to any bond, the accrued market discount on such bond shall be the aggregate amount which would have been includible in the gross income of the taxpayer under section 1272 (a) (determined without regard to paragraph (2) thereof) with respect to such bond for all periods during which the bond was held by the taxpayer if such bond had been—
(B) Coordination where bond has original issue discount
In the case of any bond having original issue discount, for purposes of applying subparagraph (A)—
(i) the stated redemption price at maturity of such bond shall be treated as equal to its revised issue price, and
(c) Treatment of nonrecognition transactions
Under regulations prescribed by the Secretary—
(1) Transferred basis property
If a market discount bond is transferred in a nonrecognition transaction and such bond is transferred basis property in the hands of the transferee, for purposes of determining the amount of the accrued market discount with respect to the transferee—
(A) the transferee shall be treated as having acquired the bond on the date on which it was acquired by the transferor for an amount equal to the basis of the transferor, and
(2) Exchanged basis property
If any market discount bond is disposed of by the taxpayer in a nonrecognition transaction and paragraph (1) does not apply to such transaction, any accrued market discount determined with respect to the property disposed of to the extent not theretofore treated as ordinary income under subsection (a)—
(A) shall be treated as accrued market discount with respect to the exchanged basis property received by the taxpayer in such transaction if such property is a market discount bond, and
(3) Paragraph (1) to apply to certain distributions by corporations or partnerships
(d) Special rules
Under regulations prescribed by the Secretary—
(1) rules similar to the rules of subsection (b) ofsection 1245 shall apply for purposes of this section; except that—
(B) an exchange qualifying under section 354 (a), 355 (a), or 356 (a) (determined without regard to subsection (a) of this section) shall be treated as an exchange described in paragraph (3) of such subsection, and
 So in original.
Source(Added Pub. L. 98–369, div. A, title I, § 41(a),July 18, 1984, 98 Stat. 543; amended Pub. L. 99–514, title VI, § 631(e)(15), title XVIII, §§ 1803(a)(5), (13)(A), 1899A(28),Oct. 22, 1986, 100 Stat. 2275, 2793, 2796, 2960; Pub. L. 100–647, title I, § 1018(u)(46),Nov. 10, 1988, 102 Stat. 3592; Pub. L. 103–66, title XIII, § 13206(b)(1)(A), (2)(B)(i),Aug. 10, 1993, 107 Stat. 465.)
1993—Subsec. (a)(4). Pub. L. 103–66, § 13206(b)(2)(B)(i), substituted “sections 103, 871 (a),” for “sections 871 (a)”.
Subsec. (e). Pub. L. 103–66, § 13206(b)(1)(A), struck out heading and text of subsec. (e). Text read as follows: “This section shall not apply to any market discount bond issued on or before July 18, 1984.”
1988—Subsec. (b)(3). Pub. L. 100–647designated paragraph relating to special rule where there are partial principal payments as par. (3) and inserted period at end.
1986—Subsec. (a)(3). Pub. L. 99–514, § 1803(a)(13)(A)(i), added par. (3). Former par. (3) redesignated (4).
Subsec. (a)(4). Pub. L. 99–514, § 1803(a)(13)(A)(i), (ii), redesignated par. (3) as (4) and substituted “under paragraph (1) or (3)” for “under paragraph (1)”.
Subsec. (b). Pub. L. 99–514, § 1803(a)(13)(A)(iii), added undesignated par. at end relating to special rule where partial principal payments.
Subsec. (d)(1)(C). Pub. L. 99–514, § 1803(a)(5), added subpar. (C).
Subsec. (e). Pub. L. 99–514, § 1899A(28), substituted “July 18, 1984” for “the date of the enactment of this section”.
Effective Date of 1993 Amendment
Pub. L. 103–66, title XIII, § 13206(b)(3),Aug. 10, 1993, 107 Stat. 465, provided that: “The amendments made by this section [probably should be “subsection”, which amended this section and sections 1277 and 1278 of this title] shall apply to obligations purchased (within the meaning of section 1272(d)(1) of the Internal Revenue Code of 1986) after April 30, 1993.”
Effective Date of 1988 Amendment
Amendment by Pub. L. 100–647effective, 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) ofPub. L. 100–647, set out as a note under section 1 of this title.
Effective Date of 1986 Amendment
Amendment by section 631(e)(15) ofPub. L. 99–514applicable to any distribution in complete liquidation, and any sale or exchange, made by a corporation after July 31, 1986, unless such corporation is completely liquidated 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 exceptions and special and transitional rules, see section 633 ofPub. L. 99–514, set out as an Effective Date note under section 336 of this title.
Amendment by section 1803(a)(5) ofPub. L. 99–514effective, 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 ofPub. L. 99–514, set out as a note under section 48 of this title.
Pub. L. 99–514, title XVIII, § 1803(a)(13)(C),Oct. 22, 1986, 100 Stat. 2797, provided that: “The amendments made by this paragraph [amending this section and section 1286 of this title] shall apply to obligations acquired after the date of the enactment of this Act [Oct. 22, 1986].”
Section applicable to taxable years ending after July 18, 1984, and applicable to obligations issued after July 18, 1984, in taxable years ending after such date, see section 44 ofPub. 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. 99–514require 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 ofPub. L. 99–514, as amended, set out as a note under section 401 of this title.
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