26 U.S.C. § 1271: Treatment of amounts received on retirement or sale or exchange of debt instruments

Amounts received by the holder on retirement of any debt instrument shall be considered as amounts received in exchange therefor. the original issue discount, reduced by the portion of original issue discount previously includible in the gross income of any holder (without regard to section 1272(a)(7) (or the corresponding provisions of prior law)), any tax-exempt obligation, or any holder who has purchased the debt instrument at a premium. On the sale or exchange of any short-term Government obligation, any gain realized which does not exceed an amount equal to the ratable share of the acquisition discount shall be treated as ordinary income. For purposes of this paragraph, the term “short-term Government obligation” means any obligation of the United States or any of its possessions, or of a State or any political subdivision thereof, or of the District of Columbia, which has a fixed maturity date not more than 1 year from the date of issue. Such term does not include any tax-exempt obligation. For purposes of this paragraph, the term “acquisition discount” means the excess of the stated redemption price at maturity over the taxpayer’s basis for the obligation. the number of days which the taxpayer held the obligation, bears to the number of days after the date the taxpayer acquired the obligation and up to (and including) the date of its maturity. the taxpayer’s yield to maturity based on the taxpayer’s cost of acquiring the obligation, and compounding daily. On the sale or exchange of any short-term nongovernment obligation, any gain realized which does not exceed an amount equal to the ratable share of the original issue discount shall be treated as ordinary income. has a fixed maturity date not more than 1 year from the date of the issue, and is not a short-term Government obligation (as defined in paragraph (3)(B) without regard to the last sentence thereof). the number of days which the taxpayer held the obligation, bears to the number of days after the date of original issue and up to (and including) the date of its maturity. the yield to maturity based on the issue price of the obligation, and compounding daily. This section shall not apply to any obligation issued by a natural person before June 9, 1997 . Paragraph (1) shall not apply to any obligation purchased (within the meaning of section 1272(d)(1)) 1 after 1 See References in Text note below. June 8, 1997 . This section and sections 1272 and 1286 shall not require the inclusion of any amount previously includible in gross income. Except as otherwise provided in this section, the amendments made by this subtitle [subtitle C (§§ 41–44) of title I of div. A of Pub. L. 98–369 , enacting this section and sections 1272 to 1288 and 6706, amending sections 103A, 163, 165, 249, 341, 405, 409, 453B, 483, 751, 811, 871, 881, 1016, 1037, 1351, 1441, 6049, 7701, and 7805, and repealing sections 1232, 1232A, and 1232B of this title] shall apply to taxable years ending after the date of the enactment of this Act [ July 18, 1984 ]. Except as otherwise provided in this subsection, section 1274 of the Internal Revenue Code of 1986 [formerly I.R.C. 1954] (as added by section 41) and the amendment made by section 41(b) (relating to amendment of section 483) shall apply to sales or exchanges after December 31, 1984 . Section 1274 of such Code and the amendment made by section 41(b) shall not apply to any sale or exchange pursuant to a written contract which was binding on March 1, 1984 , and at all times thereafter before the sale or exchange. Not later than 180 days after the date of the enactment of this Act [ July 18, 1984 ], the Secretary of the Treasury or his delegate shall modify the safe harbor interest rates applicable under the regulations prescribed under section 482 of the Internal Revenue Code of 1986 so that such rates are consistent with the rates applicable under section 483 of such Code by reason of the amendments made by section 41. after March 1, 1984 , nothing in section 483 of the Internal Revenue Code of 1986 shall permit any interest to be deductible before the period to which such interest is properly allocable, or after June 8, 1984 , notwithstanding section 483 of the Internal Revenue Code of 1986 or any other provision of law, no interest shall be deductible before the period to which such interest is properly allocable. In the case of any sale or exchange after March 1, 1984 , such section 483 shall be treated as including provisions similar to the provisions of section 1274(b)(3) of such Code (as added by section 41). Subparagraph (A)(i)(I) shall not apply to any sale or exchange pursuant to a written contract which was binding on March 1, 1984 , and at all times thereafter before the sale or exchange. Subparagraph (A)(i)(II) shall not apply to any sale or exchange pursuant to a written contract which was binding on June 8, 1984 , and at all times thereafter before the sale or exchange. Clause (i) of subparagraph (A) shall not apply to any debt instrument with substantially equal annual payments. sections 483(c)(1)(B) and 1274(c)(3) of the Internal Revenue Code of 1986 shall be applied by substituting the testing rate determined under subparagraph (B) for 110 percent of the applicable Federal rate determined under section 1274(d) of such Code, and sections 483(b) and 1274(b) of such Code shall be applied by substituting the imputation rate determined under subparagraph (C) for 120 percent of the applicable Federal rate determined under section 1274(d) of such Code. 9 percent, plus if the borrowed amount exceeds $2,000,000, the excess determined under clause (ii) multiplied by a fraction the numerator of which is the borrowed amount to the extent it exceeds $2,000,000, and the denominator of which is the borrowed amount. For purposes of clause (i), the excess determined under this clause is the excess of 110 percent of the applicable Federal rate determined under section 1274(d) of such Code over 9 percent. 10 percent, plus if the borrowed amount exceeds $2,000,000, the excess determined under clause (ii) multiplied by a fraction the numerator of which is the borrowed amount to the extent it exceeds $2,000,000, and the denominator of which is the borrowed amount. For purposes of clause (i), the excess determined under this clause is the excess of 120 percent of the applicable Federal rate determined under section 1274(d) of such Code over 10 percent. For purposes of this paragraph, the term ‘borrowed amount’ means the stated principal amount. all sales or exchanges which are part of the same transaction (or a series of related transactions) shall be treated as one sale or exchange, and all debt instruments arising from the same transaction (or a series of related transactions) shall be treated as one debt instrument. section 1274 of the Internal Revenue Code of 1986 shall not apply, and interest on the obligation issued in connection with such sale or exchange shall be taken into account by both buyer and seller on the cash receipts and disbursements method of accounting. This paragraph and paragraphs (5), (6), and (7) shall apply only in the case of sales or exchanges to which section 1274 or 483 of the Internal Revenue Code of 1986 [formerly I.R.C. 1954] (as amended by section 41) applies. assumes, in connection with the sale or exchange of property, any debt obligation, or acquires any property subject to any debt obligation, assumes, in connection with the sale or exchange of property, any debt obligation described in subparagraph (B) and issued on or before October 15, 1984 , or acquires any property subject to any such debt obligation issued on or before October 15, 1984 , was issued on or before October 15, 1984 , and was assumed (or property was taken subject to such obligation) in connection with the sale or exchange of property (including a deemed sale under section 338 (a)) the sales price of which is not greater than $100,000,000. The Secretary shall prescribe such regulations as may be appropriate to effect the purpose of this paragraph and paragraph (5), including regulations relating to tax-exempt obligations, government subsidized loans, or other instruments. The Secretary shall prescribe regulations under which any transaction shall be exempt from the application of this paragraph if such exemption is not likely to significantly reduce the tax liability of the purchaser by reason of the overstatement of the adjusted basis of the acquired asset. assumes, in connection with the sale or exchange of property described in subparagraph (B), any debt obligation, or acquires any such property subject to any such debt obligation, such residence on the date of such sale or exchange (or in the case of an estate or testamentary trust, on the date of death of the decedent) was the principal residence (within the meaning of section 1034) of the individual or decedent, or during the 2-year period ending on such date, no substantial portion of such residence was of a character subject to an allowance under this title [probably means the Internal Revenue Code of 1986] for depreciation (or amortization in lieu thereof) in the hands of such individual or decedent, and such residence was not at any time, in the hands of such individual, estate, testamentary trust, or decedent, described in section 1221(1) (relating to inventory, etc.). real property which was used as a farm (within the meaning of section 6420(c)(2)) at all times during the 3-year period ending on the date of such sale or exchange, or tangible personal property which was used in the active conduct of the trade or business of farming on such farm and is sold in connection with the sale of such farm, Any sale or exchange by a qualified person of any trade or business. This subparagraph shall not apply to any sale or exchange of any property described in subparagraph (B). This subparagraph shall not apply to the sale or exchange of any property which, in the hands of the transferee, is new section 38 property. Any sale or exchange of any real property used in an active trade or business by a person who would be a qualified person if he disposed of his entire interest. is an individual, estate, or testamentary trust, is a corporation which immediately prior to the date of the sale or exchange has 35 or fewer shareholders, or is a partnership which immediately prior to the date of the sale or exchange has 35 or fewer partners, is a 10-percent owner of a farm or a trade or business, an interest in a farm or farm property, or his entire interest in a trade or business and all substantially similar trades or businesses, and the ownership interest of whom may be readily established by reason of qualified allocations (of the type described in section 168(j)(9)(B), one class of stock, or the like). The term ‘10-percent owner’ means a person having at least a 10-percent ownership interest, applying the attribution rules of section 318 (other than subsection (a)(4)). The term ‘trade or business’ means any trade or business, including any line of business, qualifying as an active trade or business within the meaning of section 355. For purposes of this clause, the holding of real property for rental shall not be treated as an active trade or business. Section 1276 of the Internal Revenue Code of 1986 (as added by section 41) shall apply to obligations issued after the date of the enactment of this Act [ July 18, 1984 ] in taxable years ending after such date. Section 1277 of such Code (as added by section 41) shall apply to obligations acquired after the date of the enactment of this Act in taxable years ending after such date. Subpart C of part V of subchapter P of chapter 1 of such Code (as added by section 41) shall apply to obligations acquired after the date of the enactment of this Act [ July 18, 1984 ]. A taxpayer may elect for his first taxable year ending after the date of the enactment of this Act [ July 18, 1984 ] to have section 1281 of the Internal Revenue Code of 1986 apply to all short-term obligations described in subsection (b) of such section which were held by the taxpayer at any time during such first taxable year. the provisions of section 1281 of the Internal Revenue Code of 1986 (as added by section 41) shall be treated as a change in the method of accounting of the taxpayer, such change shall be treated as having been made with the consent of the Secretary, and the net amount of the adjustments required by section 481(a) of such Code to be taken into account by the taxpayer in computing taxable income (hereinafter in this paragraph referred to as the ‘net adjustments’) shall be taken into account during the spread period with the amount taken into account in each taxable year in such period determined under subparagraph (B). one-fifth of the net adjustments, and the excess (if any) of— the cash basis income over the accrual basis income, over one-fifth of the net adjustments. the portion of the net adjustments not taken into account in the preceding taxable year of the spread period divided by the number of remaining taxable years in the spread period (including the year for which the determination is being made), and the excess (if any) of— the excess of the cash basis income over the accrual basis income, over one-fifth of the net adjustments, multiplied by 5 minus the number of years remaining in the spread period (not including the current year). For purposes of this paragraph, the term ‘spread period’ means the period consisting of the 5 taxable years beginning with the year for which the election is made under paragraph (1). For purposes of this paragraph, the term ‘cash basis income’ means for any taxable year the aggregate amount which would be includible in the gross income of the taxpayer with respect to short-term obligations described in subsection (b) of section 1281 of such Code if the provisions of section 1281 of such Code did not apply to such taxable year and all prior taxable years within the spread period. Section 1288 of such Code (as added by section 41) shall apply to obligations issued after September 3, 1982 , and acquired after March 1, 1984 . Section 1272 of such Code (as added by section 41) shall not apply to any obligation issued on or before December 31, 1984 , which is not a capital asset in the hands of the taxpayer. Section 1275(c) of such Code (as added by section 41) and the amendments made by section 41(c) [enacting section 6706 of this title ] shall take effect on the day 30 days after the date of the enactment of this Act [ July 18, 1984 ]. In the case of any obligation issued after July 1, 1982 , and before January 1, 1985 , the accrual period, for purposes of section 1272(a) of the Internal Revenue Code of 1986 (as amended by section 41(a)), shall be a 1-year period (or shorter period to maturity) beginning on the day in the calendar year which corresponds to the date of original issue of the obligation. Section 1272(a)(6) of such Code (as so amended) shall not apply to any purchase on or before the date of the enactment of this Act [ July 18, 1984 ], and the rules of section 1232A(a)(6) of such Code (as in effect on the day before the date of the enactment of this Act) shall continue to apply to such purchase. Nothing in the amendment made by section 41(a) shall affect the application of any effective date provision (including any transitional rule) for any provision which was a predecessor to any provision contained in part V of subchapter P of chapter 1 of the Internal Revenue Code of 1954 (as added by section 41).”