26 U.S.C. § 1286: Tax treatment of stripped bonds

the stated redemption price at maturity (or, in the case of coupon, the amount payable on the due date of such coupon), over such bond’s or coupon’s ratable share of the purchase price. 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 the accrued market discount on such bond determined as of the time such coupon or bond was disposed of (to the extent such discount has not theretofore been included in such person’s gross income), the basis of the bond and coupons shall be increased by the amount included in gross income under paragraph (1), 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 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). 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 shall be treated as original issue discount on an obligation which is not a tax-exempt obligation to the extent such discount exceeds the tax-exempt portion of such discount, subsection (b)(1)(A) shall not apply, and the interest accrued but not paid before such bond or coupon was disposed of (and not previously reflected in basis), plus the amount included in gross income under subsection (b)(1)(B). the amount referred to in subsection (a)(1), over the coupon rate of interest on the obligation from which the coupons were separated, or the yield to maturity (on the basis of the purchase price) of the stripped obligation or coupon. The term “bond” means a bond, debenture, note, or certificate or other evidence of indebtedness. 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. The term “stripped coupon” means any coupon relating to a stripped bond. The term “stated redemption price at maturity” has the meaning given such term by section 1273(a)(2). The term “coupon” includes any right to receive interest on a bond (whether or not evidenced by a coupon). The term “purchase” has the meaning given such term by section 1272(d)(1). 1 1 See References in Text note below. 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 section 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. 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. 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. any person held any obligation or coupon in stripped form on June 10, 1987 , and 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,