{"identifier":"/us/usc/t26/s1278","title":26,"num":"\u00a7\u202f1278.","heading":"Definitions and special rules","text":"\u00a7\u202f1278.\nDefinitions and special rules\n(a)\nIn general\nFor purposes of this part\u2014\n(1)\nMarket discount bond\n(A)\nIn general\nExcept as provided in subparagraph (B), the term \u201cmarket discount bond\u201d means any bond having market discount.\n(B)\nExceptions\nThe term \u201cmarket discount bond\u201d shall not include\u2014\n(i)\nShort-term obligations\nAny obligation with a fixed maturity date not exceeding 1 year from the date of issue.\n(ii)\nUnited States savings bonds\nAny United States savings bond.\n(iii)\nInstallment obligations\nAny installment obligation to which section 453B applies.\n(C)\nSection 1277 not applicable to tax-exempt obligations\nFor purposes of section 1277, the term \u201cmarket discount bond\u201d shall not include any tax-exempt obligation (as defined in section 1275(a)(3)).\n(D)\nTreatment of bonds acquired at original issue\n(i)\nIn general\nExcept as otherwise provided in this subparagraph or in regulations, the term \u201cmarket discount bond\u201d shall not include any bond acquired by the taxpayer at its original issue.\n(ii)\nTreatment of bonds acquired for less than issue price\nClause (i) shall not apply to any bond if\u2014\n(I) the basis of the taxpayer in such bond is determined under section 1012, and\n(II) such basis is less than the issue price of such bond determined under subpart A of this part.\n(iii)\nBonds acquired in certain reorganizations\nClause (i) shall not apply to any bond issued pursuant to a plan of reorganization (within the meaning of section 368(a)(1)) in exchange for another bond having market discount. Solely for purposes of section 1276, the preceding sentence shall not apply if such other bond was issued on or before\nJuly 18, 1984\n(iv)\nTreatment of certain transferred basis property\nFor purposes of clause (i), if the adjusted basis of any bond in the hands of the taxpayer is determined by reference to the adjusted basis of such bond in the hands of a person who acquired such bond at its original issue, such bond shall be treated as acquired by the taxpayer at its original issue.\n(2)\nMarket discount\n(A)\nIn general\nThe term \u201cmarket discount\u201d means the excess (if any) of\u2014\n(i) the stated redemption price of the bond at maturity, over\n(ii) the basis of such bond immediately after its acquisition by the taxpayer.\n(B)\nCoordination where bond has original issue discount\nIn the case of any bond having original issue discount, for purposes of subparagraph (A), the stated redemption price of such bond at maturity shall be treated as equal to its revised issue price.\n(C)\nDe minimis rule\nIf the market discount is less than \u00bc of 1 percent of the stated redemption price of the bond at maturity multiplied by the number of complete years to maturity (after the taxpayer acquired the bond), then the market discount shall be considered to be zero.\n(3)\nBond\nThe term \u201cbond\u201d means any bond, debenture, note, certificate, or other evidence of indebtedness.\n(4)\nRevised issue price\nThe term \u201crevised issue price\u201d means the sum of\u2014\n(A) the issue price of the bond, and\n(B) the aggregate amount of the original issue discount includible in the gross income of all holders for periods before the acquisition of the bond by the taxpayer (determined without regard to section 1272(a)(7)) or, in the case of a tax-exempt obligation, the aggregate amount of the original issue discount which accrued in the manner provided by section 1272(a) (determined without regard to paragraph (7) thereof) during periods before the acquisition of the bond by the taxpayer.\n(5)\nOriginal issue discount, etc.\nThe terms \u201coriginal issue discount\u201d, \u201cstated redemption price at maturity\u201d, and \u201cissue price\u201d have the respective meanings given such terms by subpart A of this part.\n(b)\nElection to include market discount currently\n(1)\nIn general\nIf the taxpayer makes an election under this subsection\u2014\n(A) sections 1276 and 1277 shall not apply, and\n(B) market discount on any market discount bond shall be included in the gross income of the taxpayer for the taxable years to which it is attributable (as determined under the rules of subsection (b) of section 1276).\nExcept for purposes of sections 103, 871(a), 881, 1441, 1442, and 6049 (and such other provisions as may be specified in regulations), any amount included in gross income under subparagraph (B) shall be treated as interest for purposes of this title.\n(2)\nScope of election\nAn election under this subsection shall apply to all market discount bonds acquired by the taxpayer on or after the 1st day of the 1st taxable year to which such election applies.\n(3)\nPeriod to which election applies\nAn election under this subsection shall apply to the taxable year for which it is made and for all subsequent taxable years, unless the taxpayer secures the consent of the Secretary to the revocation of such election.\n(4)\nBasis adjustment\nThe basis of any bond in the hands of the taxpayer shall be increased by the amount included in gross income pursuant to this subsection.\n(c)\nRegulations\nThe Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this subpart, including regulations providing proper adjustments in the case of a bond the principal of which may be paid in 2 or more payments.","url":"https://projectusc.org/usc/t26/s1278.html","content":[{"t":"sec","id":"/us/usc/t26/s1278","children":[{"t":"num","text":"\u00a7\u202f1278."},{"t":"heading","text":"Definitions and special rules"},{"t":"subsec","id":"/us/usc/t26/s1278/a","children":[{"t":"num","text":"(a)"},{"t":"heading","text":"In general"},{"t":"chapeau","text":"For purposes of this part\u2014"},{"t":"para","id":"/us/usc/t26/s1278/a/1","children":[{"t":"num","text":"(1)"},{"t":"heading","text":"Market discount bond"},{"t":"subpara","id":"/us/usc/t26/s1278/a/1/A","children":[{"t":"num","text":"(A)"},{"t":"heading","text":"In general"},{"t":"content","children":[{"t":"p","text":"Except as provided in subparagraph (B), the term \u201cmarket discount bond\u201d means any bond having market discount.","tail":"\n"}],"tail":"\n"}],"tail":"\n"},{"t":"subpara","id":"/us/usc/t26/s1278/a/1/B","children":[{"t":"num","text":"(B)"},{"t":"heading","text":"Exceptions"},{"t":"chapeau","text":"The term \u201cmarket discount bond\u201d shall not include\u2014"},{"t":"clause","id":"/us/usc/t26/s1278/a/1/B/i","children":[{"t":"num","text":"(i)"},{"t":"heading","text":"Short-term obligations"},{"t":"content","children":[{"t":"p","text":"Any obligation with a fixed maturity date not exceeding 1 year from the date of issue.","tail":"\n"}],"tail":"\n"}],"tail":"\n"},{"t":"clause","id":"/us/usc/t26/s1278/a/1/B/ii","children":[{"t":"num","text":"(ii)"},{"t":"heading","text":"United States savings bonds"},{"t":"content","children":[{"t":"p","text":"Any United States savings bond.","tail":"\n"}],"tail":"\n"}],"tail":"\n"},{"t":"clause","id":"/us/usc/t26/s1278/a/1/B/iii","children":[{"t":"num","text":"(iii)"},{"t":"heading","text":"Installment obligations"},{"t":"content","children":[{"t":"p","text":"Any installment obligation to which section 453B applies.","tail":"\n"}],"tail":"\n"}],"tail":"\n"}],"tail":"\n"},{"t":"subpara","id":"/us/usc/t26/s1278/a/1/C","children":[{"t":"num","text":"(C)"},{"t":"heading","text":"Section 1277 not applicable to tax-exempt obligations"},{"t":"content","children":[{"t":"p","text":"For purposes of section 1277, the term \u201cmarket discount bond\u201d shall not include any tax-exempt obligation (as defined in section 1275(a)(3)).","tail":"\n"}],"tail":"\n"}],"tail":"\n"},{"t":"subpara","id":"/us/usc/t26/s1278/a/1/D","children":[{"t":"num","text":"(D)"},{"t":"heading","text":"Treatment of bonds acquired at original issue"},{"t":"clause","id":"/us/usc/t26/s1278/a/1/D/i","children":[{"t":"num","text":"(i)"},{"t":"heading","text":"In general"},{"t":"content","children":[{"t":"p","text":"Except as otherwise provided in this subparagraph or in regulations, the term \u201cmarket discount bond\u201d shall not include any bond acquired by the taxpayer at its original issue.","tail":"\n"}],"tail":"\n"}],"tail":"\n"},{"t":"clause","id":"/us/usc/t26/s1278/a/1/D/ii","children":[{"t":"num","text":"(ii)"},{"t":"heading","text":"Treatment of bonds acquired for less than issue price"},{"t":"chapeau","text":"Clause (i) shall not apply to any bond if\u2014"},{"t":"subclause","id":"/us/usc/t26/s1278/a/1/D/ii/I","children":[{"t":"num","text":"(I)"},{"t":"content","text":" the basis of the taxpayer in such bond is determined under section 1012, and","tail":"\n"}],"tail":"\n"},{"t":"subclause","id":"/us/usc/t26/s1278/a/1/D/ii/II","children":[{"t":"num","text":"(II)"},{"t":"content","text":" such basis is less than the issue price of such bond determined under subpart A of this part.","tail":"\n"}],"tail":"\n"}],"tail":"\n"},{"t":"clause","id":"/us/usc/t26/s1278/a/1/D/iii","children":[{"t":"num","text":"(iii)"},{"t":"heading","text":"Bonds acquired in certain reorganizations"},{"t":"content","children":[{"t":"p","text":"Clause (i) shall not apply to any bond issued pursuant to a plan of reorganization (within the meaning of section 368(a)(1)) in exchange for another bond having market discount. Solely for purposes of section 1276, the preceding sentence shall not apply if such other bond was issued on or before ","children":[{"t":"text","text":"July 18, 1984","tail":" (the date of the enactment of section 1276) and if the bond issued pursuant to such plan of reorganization has the same term and the same interest rate as such other bond had."}],"tail":"\n"}],"tail":"\n"}],"tail":"\n"},{"t":"clause","id":"/us/usc/t26/s1278/a/1/D/iv","children":[{"t":"num","text":"(iv)"},{"t":"heading","text":"Treatment of certain transferred basis property"},{"t":"content","children":[{"t":"p","text":"For purposes of clause (i), if the adjusted basis of any bond in the hands of the taxpayer is determined by reference to the adjusted basis of such bond in the hands of a person who acquired such bond at its original issue, such bond shall be treated as acquired by the taxpayer at its original issue.","tail":"\n"}],"tail":"\n"}],"tail":"\n"}],"tail":"\n"}],"tail":"\n"},{"t":"para","id":"/us/usc/t26/s1278/a/2","children":[{"t":"num","text":"(2)"},{"t":"heading","text":"Market discount"},{"t":"subpara","id":"/us/usc/t26/s1278/a/2/A","children":[{"t":"num","text":"(A)"},{"t":"heading","text":"In general"},{"t":"chapeau","text":"The term \u201cmarket discount\u201d means the excess (if any) of\u2014"},{"t":"clause","id":"/us/usc/t26/s1278/a/2/A/i","children":[{"t":"num","text":"(i)"},{"t":"content","text":" the stated redemption price of the bond at maturity, over","tail":"\n"}],"tail":"\n"},{"t":"clause","id":"/us/usc/t26/s1278/a/2/A/ii","children":[{"t":"num","text":"(ii)"},{"t":"content","text":" the basis of such bond immediately after its acquisition by the taxpayer.","tail":"\n"}],"tail":"\n"}],"tail":"\n"},{"t":"subpara","id":"/us/usc/t26/s1278/a/2/B","children":[{"t":"num","text":"(B)"},{"t":"heading","text":"Coordination where bond has original issue discount"},{"t":"content","children":[{"t":"p","text":"In the case of any bond having original issue discount, for purposes of subparagraph (A), the stated redemption price of such bond at maturity shall be treated as equal to its revised issue price.","tail":"\n"}],"tail":"\n"}],"tail":"\n"},{"t":"subpara","id":"/us/usc/t26/s1278/a/2/C","children":[{"t":"num","text":"(C)"},{"t":"heading","text":"De minimis rule"},{"t":"content","children":[{"t":"p","text":"If the market discount is less than \u00bc of 1 percent of the stated redemption price of the bond at maturity multiplied by the number of complete years to maturity (after the taxpayer acquired the bond), then the market discount shall be considered to be zero.","tail":"\n"}],"tail":"\n"}],"tail":"\n"}],"tail":"\n"},{"t":"para","id":"/us/usc/t26/s1278/a/3","children":[{"t":"num","text":"(3)"},{"t":"heading","text":"Bond"},{"t":"content","children":[{"t":"p","text":"The term \u201cbond\u201d means any bond, debenture, note, certificate, or other evidence of indebtedness.","tail":"\n"}],"tail":"\n"}],"tail":"\n"},{"t":"para","id":"/us/usc/t26/s1278/a/4","children":[{"t":"num","text":"(4)"},{"t":"heading","text":"Revised issue price"},{"t":"chapeau","text":"The term \u201crevised issue price\u201d means the sum of\u2014"},{"t":"subpara","id":"/us/usc/t26/s1278/a/4/A","children":[{"t":"num","text":"(A)"},{"t":"content","text":" the issue price of the bond, and","tail":"\n"}],"tail":"\n"},{"t":"subpara","id":"/us/usc/t26/s1278/a/4/B","children":[{"t":"num","text":"(B)"},{"t":"content","text":" the aggregate amount of the original issue discount includible in the gross income of all holders for periods before the acquisition of the bond by the taxpayer (determined without regard to section 1272(a)(7)) or, in the case of a tax-exempt obligation, the aggregate amount of the original issue discount which accrued in the manner provided by section 1272(a) (determined without regard to paragraph (7) thereof) during periods before the acquisition of the bond by the taxpayer.","tail":"\n"}],"tail":"\n"}],"tail":"\n"},{"t":"para","id":"/us/usc/t26/s1278/a/5","children":[{"t":"num","text":"(5)"},{"t":"heading","text":"Original issue discount, etc."},{"t":"content","children":[{"t":"p","text":"The terms \u201coriginal issue discount\u201d, \u201cstated redemption price at maturity\u201d, and \u201cissue price\u201d have the respective meanings given such terms by subpart A of this part.","tail":"\n"}],"tail":"\n"}],"tail":"\n"}],"tail":"\n"},{"t":"subsec","id":"/us/usc/t26/s1278/b","children":[{"t":"num","text":"(b)"},{"t":"heading","text":"Election to include market discount currently"},{"t":"para","id":"/us/usc/t26/s1278/b/1","children":[{"t":"num","text":"(1)"},{"t":"heading","text":"In general"},{"t":"chapeau","text":"If the taxpayer makes an election under this subsection\u2014"},{"t":"subpara","id":"/us/usc/t26/s1278/b/1/A","children":[{"t":"num","text":"(A)"},{"t":"content","text":" sections 1276 and 1277 shall not apply, and","tail":"\n"}],"tail":"\n"},{"t":"subpara","id":"/us/usc/t26/s1278/b/1/B","children":[{"t":"num","text":"(B)"},{"t":"content","text":" market discount on any market discount bond shall be included in the gross income of the taxpayer for the taxable years to which it is attributable (as determined under the rules of subsection (b) of section 1276).","tail":"\n"}],"tail":"\n\n"},{"t":"continuation","text":"Except for purposes of sections 103, 871(a), 881, 1441, 1442, and 6049 (and such other provisions as may be specified in regulations), any amount included in gross income under subparagraph (B) shall be treated as interest for purposes of this title.","tail":"\n"}],"tail":"\n"},{"t":"para","id":"/us/usc/t26/s1278/b/2","children":[{"t":"num","text":"(2)"},{"t":"heading","text":"Scope of election"},{"t":"content","children":[{"t":"p","text":"An election under this subsection shall apply to all market discount bonds acquired by the taxpayer on or after the 1st day of the 1st taxable year to which such election applies.","tail":"\n"}],"tail":"\n"}],"tail":"\n"},{"t":"para","id":"/us/usc/t26/s1278/b/3","children":[{"t":"num","text":"(3)"},{"t":"heading","text":"Period to which election applies"},{"t":"content","children":[{"t":"p","text":"An election under this subsection shall apply to the taxable year for which it is made and for all subsequent taxable years, unless the taxpayer secures the consent of the Secretary to the revocation of such election.","tail":"\n"}],"tail":"\n"}],"tail":"\n"},{"t":"para","id":"/us/usc/t26/s1278/b/4","children":[{"t":"num","text":"(4)"},{"t":"heading","text":"Basis adjustment"},{"t":"content","children":[{"t":"p","text":"The basis of any bond in the hands of the taxpayer shall be increased by the amount included in gross income pursuant to this subsection.","tail":"\n"}],"tail":"\n"}],"tail":"\n"}],"tail":"\n"},{"t":"subsec","id":"/us/usc/t26/s1278/c","children":[{"t":"num","text":"(c)"},{"t":"heading","text":"Regulations"},{"t":"content","children":[{"t":"p","text":"The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this subpart, including regulations providing proper adjustments in the case of a bond the principal of which may be paid in 2 or more payments.","tail":"\n"}],"tail":"\n"}],"tail":"\n"},{"t":"text","text":"\n"},{"t":"text","text":"\n"}]}]}