26 U.S. Code § 1286 - Tax treatment of stripped bonds
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(a) Inclusion in income as if bond and coupons were original issue discount bonds
If any person purchases after July 1, 1982, 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 originally 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
For purposes of paragraph (2), ratable shares shall be determined on the basis of their respective 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 after July 1, 1982, disposes 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 income), and
(2) the basis of the bond and coupons shall be increased by the amount included in gross income under paragraph (1),
(3) the basis of the bond and coupons immediately before the disposition (as adjusted pursuant 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 allocated 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 preceding sentence.
(c) Retention of existing law for stripped bonds purchased before July 2, 1982
If a bond issued at any time with interest coupons—
(1) is purchased after August 16, 1954, and before January 1, 1958, and the purchaser does not receive all the coupons which first become payable more than 12 months after the date of the purchase, or
(2) is purchased after December 31, 1957, and before July 2, 1982, and the purchaser does not receive all the coupons which first become payable after the date of the purchase,
then the gain on the sale or other disposition of such bond by such purchaser (or by a person whose basis is determined by reference to the basis in the hands of such purchaser) shall be considered as ordinary income to the extent that the fair market value (determined as of the time of the purchase) of the bond with coupons attached exceeds the purchase price. If this subsection and section 1271 (a)(2)(A) apply with respect to gain realized on the sale or exchange of any evidence of indebtedness, then section 1271 (a)(2)(A) shall apply with respect to that part of the gain to which this subsection does not apply.
(d) 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 discount determined under subsection (a) with respect to any stripped bond or stripped coupon—
(i) shall be treated as original issue discount on a tax-exempt obligation to the extent such discount does not exceed the tax-exempt portion of such discount, and
(2) Tax-exempt portion
For purposes of paragraph (1), the tax-exempt portion of the original issue discount determined under subsection (a) is the excess of—
(B) an issue price which would produce a yield to maturity as of the purchase date equal to the lower of—
(ii) the yield to maturity (on the basis of the purchase price) of the stripped obligation or coupon.
The purchaser of any stripped obligation or coupon may elect to apply clause (i) by substituting “original yield to maturity of” for “coupon rate of interest on”.
(e) Definitions and special rules
For purposes of this section—
The term “bond” means a bond, debenture, note, or certificate or other evidence of indebtedness.
(2) Stripped bond
The term “stripped bond” means a bond issued at any time with interest coupons where there is a separation in ownership between the bond and any coupon which has not yet become payable.
(4) Stated redemption price at maturity
The term “coupon” includes any right to receive interest on a bond (whether or not evidenced by a coupon). This paragraph shall apply for purposes of subsection (c) only in the case of purchases after July 1, 1982.
(f) Treatment of stripped interests in bond and preferred stock funds, etc.
In the case of an account or entity substantially 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 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.
(g) Regulation authority
The Secretary may prescribe regulations providing that where, by reason of varying rates of interest, put or call options, or other circumstances, the tax treatment under this section 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 coupon, 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.
 So in original. Probably should be “section 305(e),”.
Source(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.)
2004—Subsecs. (f), (g). Pub. L. 108–357added subsec. (f) and redesignated former subsec. (f) as (g).
1988—Subsec. (d). Pub. L. 100–647amended subsec. (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)) from which 1 or more coupons have been stripped—
“(1) the amount of original issue discount determined under subsection (a) with respect to any stripped bond or stripped coupon from such obligation 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 obligation before the separation of coupons, or
“(B) the yield to maturity (on the basis of purchase price) of the stripped obligation or coupon,
“(2) the amount of original issue discount determined under paragraph (1) shall be taken into account 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 accrued but not paid before the time such bond or coupon 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 provisions as subpar. (A) and adding subpar. (B).
Subsec. (b)(2). Pub. L. 99–514, § 1803(a)(13)(B)(ii), substituted “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 subsec. (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.”
Effective Date of 2004 Amendment
Amendment by Pub. L. 108–357applicable to purchases and dispositions after Oct. 22, 2004, see section 831(c) ofPub. L. 108–357, set out as a note under section 305 of this title.
Effective Date of 1988 Amendment
“(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.
“(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) ofPub. L. 99–514applicable to obligations acquired after Oct. 22, 1986, see section 1803(a)(13)(C) ofPub. 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 obligation or stripped coupon from such an obligation after the date of the enactment of this Act [Oct. 22, 1986].”
Section applicable to taxable years ending after July 18, 1984, except as otherwise provided, 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.