U.S. Code > Title 26 Internal Revenue Code > Subtitle A—Income Taxes (§§ 1—1564) > CHAPTER 1—NORMAL TAXES AND SURTAXES (§§ 1—1400U3) > Subchapter P—Capital Gains and Losses (§§ 1201—1298) > PART V—SPECIAL RULES FOR BONDS AND OTHER DEBT INSTRUMENTS (§§ 1271—1288) > Subpart C—Discount on Short-Term Obligations (§§ 1281—1283) > § 1281. Current inclusion in income of discount on certain short-term obligations

§ 1281. Current inclusion in income of discount on certain short-term obligations

(a) General rule
In the case of any short-term obligation to which this section applies, for purposes of this title—
(1) there shall be included in the gross income of the holder an amount equal to the sum of the daily portions of the acquisition discount for each day during the taxable year on which such holder held such obligation, and
(2) any interest payable on the obligation (other than interest taken into account in determining the amount of the acquisition discount) shall be included in gross income as it accrues.
(b) Short-term obligations to which section applies
(1) In general
This section shall apply to any short-term obligation which—
(A) is held by a taxpayer using an accrual method of accounting,
(B) is held primarily for sale to customers in the ordinary course of the taxpayer’s trade or business,
(C) is held by a bank (as defined in section 581),
(D) is held by a regulated investment company or a common trust fund,
(E) is identified by the taxpayer under section 1256 (e)(2) as being part of a hedging transaction, or
(F) is a stripped bond or stripped coupon held by the person who stripped the bond or coupon (or by any other person whose basis is determined by reference to the basis in the hands of such person).
(2) Treatment of obligations held by pass-thru entities
(A) In general
This section shall apply also to—
(i) any short-term obligation which is held by a pass-thru entity which is formed or availed of for purposes of avoiding the provisions of this section, and
(ii) any short-term obligation which is acquired by a pass-thru entity (not described in clause (i)) during the required accrual period.
(B) Required accrual period
For purposes of subparagraph (A), the term “required accrual period” means the period—
(i) which begins with the first taxable year for which the ownership test of subparagraph (C) is met with respect to the pass-thru entity (or a predecessor), and
(ii) which ends with the first taxable year after the taxable year referred to in clause (i) for which the ownership test of subparagraph (C) is not met and with respect to which the Secretary consents to the termination of the required accrual period.
(C) Ownership test
The ownership test of this subparagraph is met for any taxable year if, on at least 90 days during the taxable year, 20 percent or more of the value of the interests in the pass-thru entity are held by persons described in paragraph (1) or by other pass-thru entities to which subparagraph (A) applies.
(D) Pass-thru entity
The term “pass-thru entity” means any partnership, S corporation, trust, or other pass-thru entity.
(c) Cross reference
For special rules limiting the application of this section to original issue discount in the case of nongovernmental obligations, see section 1283 (c).