§1273 — Title 26 Internal Revenue Code | U.S. Code

Summary

When a bond or other debt instrument will pay back more at maturity than its issue price, the difference is called original issue discount. It equals the stated redemption price at maturity minus the issue price, not counting regular fixed interest paid at least once a year. If the discount is less than ¼ of 1 percent of the redemption price multiplied by the number of complete years to maturity, it is treated as too small to count. The issue price depends on how the debt was sold: publicly offered debt not issued for property uses its offering price, private deals use the price the first buyer paid, and special rules apply when debt is traded on a market or issued for traded stock or property. If a debt instrument is sold together with an option or other property as one investment unit, the price is split among the pieces based on their fair market values.

Title 26, §1273

Internal Revenue Code — Source: USLM XML via OLRC

(a)For purposes of this subpart—

(1)The term “original issue discount” means the excess (if any) of—

(A)the stated redemption price at maturity, over

(B)the issue price.

(2)The term “stated redemption price at maturity” means the amount fixed by the last modification of the purchase agreement and includes interest and other amounts payable at that time (other than any interest based on a fixed rate, and payable unconditionally at fixed periodic intervals of 1 year or less during the entire term of the debt instrument).

(3)If the original issue discount determined under paragraph (1) is less than—

(A)¼ of 1 percent of the stated redemption price at maturity, multiplied by

(B)the number of complete years to maturity,

(b)For purposes of this subpart—

(1)In the case of any issue of debt instruments—

(A)publicly offered, and

(B)not issued for property,

(2)In the case of any issue of debt instruments not issued for property and not publicly offered, the issue price of each such instrument is the price paid by the first buyer of such debt instrument.

(3)In the case of a debt instrument which is issued for property and which—

(A)is part of an issue a portion of which is traded on an established securities market, or

(B)(i)is issued for stock or securities which are traded on an established securities market, or

(ii)to the extent provided in regulations, is issued for property (other than stock or securities) of a kind regularly traded on an established market,

(4)Except in any case—

(A)to which paragraph (1), (2), or (3) of this subsection applies, or

(B)to which section 1274 applies,

(5)In applying this subsection, the term “property” includes services and the right to use property, but such term does not include money.

(c)For purposes of subsection (b)—

(1)The terms “initial offering price” and “price paid by the first buyer” include the aggregate payments made by the purchaser under the purchase agreement, including modifications thereof.

(2)In the case of any debt instrument and an option, security, or other property issued together as an investment unit—

(A)the issue price for such unit shall be determined in accordance with the rules of this subsection and subsection (b) as if it were a debt instrument,

(B)the issue price determined for such unit shall be allocated to each element of such unit on the basis of the relationship of the fair market value of such element to the fair market value of all elements in such unit, and

(C)the issue price of any debt instrument included in such unit shall be the portion of the issue price of the unit allocated to the debt instrument under subparagraph (B).

Notes & Related Subsidiaries

Editorial Notes

Amendments

1986—Subsec. (b)(3)(B). Pub. L. 99–514 amended subpar. (B) generally, designating existing provisions as cl. (i) and adding cl. (ii).

Statutory Notes and Related Subsidiaries

Effective Date

of 1986 AmendmentAmendment by Pub. L. 99–514 effective, except as otherwise provided, as if included in the provisions of the Tax Reform Act of 1984, Pub. L. 98–369, div. A, to which such amendment relates, see section 1881 of Pub. L. 99–514, set out as a note under section 48 of this title.

Effective Date

Section applicable to taxable years ending after July 18, 1984, except as otherwise provided, see section 44 of Pub. L. 98–369, set out as a note under section 1271 of this title. Plan

Amendments

Not Required Until January 1, 1989For 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. 99–514 require 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 of Pub. L. 99–514, as amended, set out as a note under section 401 of this title.

§1273 Determination of Amount of Original Issue Discount

Summary

Title 26, §1273

Notes & Related Subsidiaries

Editorial Notes

Amendments

Statutory Notes and Related Subsidiaries

Effective Date

Effective Date

Amendments

Amendments

Citations & Metadata