§ 1271. Treatment of amounts received on retirement or sale or exchange of debt instruments
(a)
General rule
For purposes of this title—
(1)
Retirement
Amounts received by the holder on retirement of any debt instrument shall be considered as amounts received in exchange therefor.
(2)
Ordinary income on sale or exchange where intention to call before maturity
(A)
In general
If at the time of original issue there was an intention to call a debt instrument before maturity, any gain realized on the sale or exchange thereof which does not exceed an amount equal to—
(ii)
the portion of original issue discount previously includible in the gross income of any holder (without regard to subsection (a)(7) or (b)(4) of section
1272 (or the corresponding provisions of prior law)),
shall be treated as ordinary income.
(3)
Certain short-term Government obligations
(A)
In general
On the sale or exchange of any short-term Government obligation, any gain realized which does not exceed an amount equal to the ratable share of the acquisition discount shall be treated as ordinary income.
(B)
Short-term Government obligation
For purposes of this paragraph, the term “short-term Government obligation” means any obligation of the United States or any of its possessions, or of a State or any political subdivision thereof, or of the District of Columbia, which has a fixed maturity date not more than 1 year from the date of issue. Such term does not include any tax-exempt obligation.
(C)
Acquisition discount
For purposes of this paragraph, the term “acquisition discount” means the excess of the stated redemption price at maturity over the taxpayer’s basis for the obligation.
(D)
Ratable share
For purposes of this paragraph, except as provided in subparagraph (E), the ratable share of the acquisition discount is an amount which bears the same ratio to such discount as—
(E)
Election of accrual on basis of constant interest rate
At the election of the taxpayer with respect to any obligation, the ratable share of the acquisition discount is the portion of the acquisition discount accruing while the taxpayer held the obligation determined (under regulations prescribed by the Secretary) on the basis of—
An election under this subparagraph, once made with respect to any obligation, shall be irrevocable.
(4)
Certain short-term nongovernment obligations
(A)
In general
On the sale or exchange of any short-term nongovernment obligation, any gain realized which does not exceed an amount equal to the ratable share of the original issue discount shall be treated as ordinary income.
(B)
Short-term nongovernment obligation
For purposes of this paragraph, the term “short-term nongovernment obligation” means any obligation which—
(C)
Ratable share
For purposes of this paragraph, except as provided in subparagraph (D), the ratable share of the original issue discount is an amount which bears the same ratio to such discount as—
(D)
Election of accrual on basis of constant interest rate
At the election of the taxpayer with respect to any obligation, the ratable share of the original issue discount is the portion of the original issue discount accruing while the taxpayer held the obligation determined (under regulations prescribed by the Secretary) on the basis of—
Any election under this subparagraph, once made with respect to any obligation, shall be irrevocable.
(c)
Transition rules
(1)
Special rule for certain obligations issued before January 1, 1955
Paragraph (1) of subsection (a) shall apply to a debt instrument issued before January 1, 1955, only if such instrument was issued with interest coupons or in registered form, or was in such form on March 1, 1954.
(2)
Special rule for certain obligations with respect to which original issue discount not currently includible
(A)
In general
On the sale or exchange of debt instruments issued by a government or political subdivision thereof after December 31, 1954, and before July 2, 1982, or by a corporation after December 31, 1954, and on or before May 27, 1969, any gain realized which does not exceed—
(ii)
if at the time of original issue there was no intention to call the debt instrument before maturity, an amount which bears the same ratio to the original issue discount as the number of complete months that the debt instrument was held by the taxpayer bears to the number of complete months from the date of original issue to the date of maturity,
shall be considered as ordinary income.