Title 26 — Internal Revenue CodeRelease 119-73
§1274A Special rules for certain transactions where stated principal amount does not exceed $2,800,000
Title 26 › Subtitle Subtitle A— - Income Taxes › Chapter CHAPTER 1— - NORMAL TAXES AND SURTAXES › Subchapter Subchapter P— - Capital Gains and Losses › Part PART V— - SPECIAL RULES FOR BONDS AND OTHER DEBT INSTRUMENTS › Subpart Subpart A— - Original Issue Discount › § 1274A
Summary
Caps the discount rate used for certain small promissory notes at 9 percent, compounded semiannually. Qualified debt instrument: a note given for the sale or exchange of property with a stated principal of $2,800,000 or less. If the note meets that test, the discount rate for rules in sections 483 and 1274 cannot be more than 9 percent, with semiannual compounding. Cash method debt instrument: a qualified note with stated principal $2,000,000 or less where the lender does not use accrual accounting, is not a dealer, and both borrower and lender jointly choose the cash-method treatment. For those notes, section 1274 does not apply and both parties report interest on a cash basis. Successors are treated the same unless the lender transfers the note to someone who uses accrual accounting, in which case the cash rule stops after the transfer. All related sales are treated as one sale and related notes as one note. Dollar limits for sales after 1989 are increased for inflation using the cost-of-living formula in section 1(f)(3) with “calendar year 1988” substituted for “calendar year 2016.” The Treasury must write rules to make these parts work, prevent abuse of the cash-method election, and cover transfers of cash-method notes.
Full Legal Text
Title 26, §1274A
Internal Revenue Code — Source: USLM XML via OLRC
(a)In the case of any qualified debt instrument, the discount rate used for purposes of section 483 and 1274 shall not exceed 9 percent, compounded semiannually.
(b)For purposes of this section, the term “qualified debt instrument” means any debt instrument given in consideration for the sale or exchange of property (other than new section 38 property within the meaning of section 48(b), as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990) if the stated principal amount of such instrument does not exceed $2,800,000.
(c)(1)In the case of any cash method debt instrument—
(A)section 1274 shall not apply, and
(B)interest on such debt instrument shall be taken into account by both the borrower and the lender under the cash receipts and disbursements method of accounting.
(2)For purposes of paragraph (1), the term “cash method debt instrument” means any qualified debt instrument if—
(A)the stated principal amount does not exceed $2,000,000,
(B)the lender does not use an accrual method of accounting and is not a dealer with respect to the property sold or exchanged,
(C)section 1274 would have applied to such instrument but for an election under this subsection, and
(D)an election under this subsection is jointly made with respect to such debt instrument by the borrower and lender.
(3)(A)Except as provided in subparagraph (B), paragraph (1) shall apply to any successor to the borrower or lender with respect to a cash method debt instrument.
(B)If the lender (or any successor) transfers any cash method debt instrument to a taxpayer who uses an accrual method of accounting, this paragraph shall not apply with respect to such instrument for periods after such transfer.
(4)In the case of any cash method debt instrument, section 483 shall be applied as if it included provisions similar to the provisions of section 1274(b)(3).
(d)(1)For purposes of this section—
(A)all sales or exchanges which are part of the same transaction (or a series of related transactions) shall be treated as 1 sale or exchange, and
(B)all debt instruments arising from the same transaction (or a series of related transactions) shall be treated as 1 debt instrument.
(2)In the case of any debt instrument arising out of a sale or exchange during any calendar year after 1989, each dollar amount contained in the preceding provisions of this section shall be increased by an amount equal to—
(A)such amount, multiplied by
(B)the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, by substituting “calendar year 1988” for “calendar year 2016” in subparagraph (A)(ii) thereof.
(e)The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this subsection, including—
(1)regulations coordinating the provisions of this section with other provisions of this title,
(2)regulations necessary to prevent the avoidance of tax through the abuse of the provisions of subsection (c), and
(3)regulations relating to the treatment of transfers of cash method debt instruments.
Legislative History
Notes & Related Subsidiaries
Inflation Adjusted Items for Certain YearsFor inflation adjustment of certain items in this section, see Revenue Rulings listed in a table below and Revenue Procedures listed in a table under section 1 of this title.
Editorial Notes
References in Text
The date of the enactment of the Revenue Reconciliation Act of 1990, referred to in subsec. (b), is the date of enactment of Pub. L. 101–508, which was approved Nov. 5, 1990.
Amendments
2017—Subsec. (d)(2). Pub. L. 115–97 amended par. (2) generally. Prior to amendment, text read as follows: “(A) In general.—In the case of any debt instrument arising out of a sale or exchange during any calendar year after 1989, each dollar amount contained in the preceding provisions of this section shall be increased by the inflation adjustment for such calendar year. Any increase under the preceding sentence shall be rounded to the nearest multiple of $100 (or, if such increase is a multiple of $50, such increase shall be increased to the nearest multiple of $100). “(B) Inflation adjustment.—For purposes of subparagraph (A), the inflation adjustment for any calendar year is the percentage (if any) by which— “(i) the CPI for the preceding calendar year exceeds “(ii) the CPI for calendar year 1988. For purposes of the preceding sentence, the CPI for any calendar year is the average of the Consumer Price Index as of the close of the 12-month period ending on September 30 of such calendar year.” 1996—Subsec. (c)(1)(B). Pub. L. 104–188 substituted “instrument” for “instument”. 1990—Subsec. (b). Pub. L. 101–508 inserted “, as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990” after “section 48(b)”.
Statutory Notes and Related Subsidiaries
Effective Date
of 2017 AmendmentAmendment by Pub. L. 115–97 applicable to taxable years beginning after Dec. 31, 2017, see section 11002(e) of Pub. L. 115–97, set out as a note under section 1 of this title.
Effective Date
of 1990 AmendmentAmendment by Pub. L. 101–508 applicable to property placed in service after Dec. 31, 1990, but not applicable to any transition property (as defined in section 49(e) of this title), any property with respect to which qualified progress expenditures were previously taken into account under section 46(d) of this title, and any property described in section 46(b)(2)(C) of this title, as such sections were in effect on Nov. 4, 1990, see section 11813(c) of Pub. L. 101–508, set out as a note under section 45K of this title.
Effective Date
Section applicable to sales and exchanges after June 30, 1985, in taxable years ending after such date, see section 105(a)(1) of Pub. L. 99–121, set out as an
Effective Date
of 1985 Amendment note under section 1274 of this title.
Savings Provision
For provisions that nothing in amendment by Pub. L. 101–508 be construed to affect treatment of certain transactions occurring, property acquired, or items of income, loss, deduction, or credit taken into account prior to Nov. 5, 1990, for purposes of determining liability for tax for periods ending after Nov. 5, 1990, see section 11821(b) of Pub. L. 101–508, set out as a note under section 45K of this title. Inflation Adjusted Items for Certain YearsPer Revenue Procedure 2018–57, after 2018, a separate Revenue Ruling relating to inflation-adjusted amounts under this section will not be published. Starting with 2019, see the table of Revenue Procedures set out under section 1 of this title. Provisions relating to inflation adjustment of items in this section for years before 2019 were contained in the following: 2018—Revenue Ruling 2018–11. 2017—Revenue Ruling 2016–30. 2016—Revenue Ruling 2015–24. 2015—Revenue Ruling 2014–30. 2014—Revenue Ruling 2013–23. 2013—Revenue Ruling 2012–33. 2012—Revenue Ruling 2011–27. 2011—Revenue Ruling 2010–30. 2010—Revenue Ruling 2010–2. 2009—Revenue Ruling 2008–52. 2008—Revenue Ruling 2008–3. 2007—Revenue Ruling 2007–4. 2006—Revenue Ruling 2005–76. 2005—Revenue Ruling 2004–107. 2004—Revenue Ruling 2003–119. 2003—Revenue Ruling 2002–79. 2002—Revenue Ruling 2001–65. 2001—Revenue Ruling 2000–55. 2000—Revenue Ruling 99–50. 1999—Revenue Ruling 98–58. 1998—Revenue Ruling 97–56. 1997—Revenue Ruling 96–63. 1996—Revenue Ruling 96–4.
Reference
Citations & Metadata
Citation
26 U.S.C. § 1274A
Title 26 — Internal Revenue Code
Last Updated
Apr 6, 2026
Release point: 119-73