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Title 26 — Internal Revenue CodeRelease 119-73

§1288 Treatment of original issue discount on tax-exempt obligations

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 D— - Miscellaneous Provisions › § 1288

Last updated Apr 6, 2026|Official source

Summary

Treat original issue discount on tax-exempt bonds as accruing in two ways. For the rules under section 163 (about interest), use the accrual method in section 1272(a) but do not apply paragraph (7) of that section. For figuring the bondholder’s adjusted basis (cost), use section 1272(a) and include paragraph (7). “Original issue discount” means what section 1273(a) says, except paragraph (3) is ignored. When applying sections 483 or 1274, the Secretary must adjust the applicable Federal rate to reflect the tax-exempt interest. “Tax-exempt obligation” means what section 1275(a)(3) says. For obligations maturing in 1 year or less, use rules like section 1283(b).

Full Legal Text

Title 26, §1288

Internal Revenue Code — Source: USLM XML via OLRC

(a)Original issue discount on any tax-exempt obligation shall be treated as accruing—
(1)for purposes of section 163, in the manner provided by section 1272(a) (determined without regard to paragraph (7) thereof), and
(2)for purposes of determining the adjusted basis of the holder, in the manner provided by section 1272(a) (determined with regard to paragraph (7) thereof).
(b)For purposes of this section—
(1)The term “original issue discount” has the meaning given to such term by section 1273(a) without regard to paragraph (3) thereof. In applying section 483 or 1274, under regulations prescribed by the Secretary, appropriate adjustments shall be made to the applicable Federal rate to take into account the tax exemption for interest on the obligation.
(2)The term “tax-exempt obligation” has the meaning given to such term by section 1275(a)(3).
(3)In applying this section to obligations with maturity of 1 year or less, rules similar to the rules of section 1283(b) shall apply.

Legislative History

Notes & Related Subsidiaries

Editorial Notes

Amendments

1988—Subsec. (a). Pub. L. 100–647 substituted “paragraph (7)” for “paragraph (6)” in pars. (1) and (2).

Statutory Notes and Related Subsidiaries

Effective Date

of 1988 AmendmentAmendment by Pub. L. 100–647 effective, 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) of Pub. L. 100–647, set out as a note under section 1 of this title.

Effective Date

Section applicable to taxable years ending after July 18, 1984, and applicable to obligations issued after Sept. 3, 1982, and acquired after Mar. 1, 1984, see section 44 of Pub. L. 98–369, set out as a note under section 1271 of this title.

Reference

Citations & Metadata

Citation

26 U.S.C. § 1288

Title 26 — Internal Revenue Code

Last Updated

Apr 6, 2026

Release point: 119-73