§1272 — Current inclusion in income of original issue discount
13 cases·2 followed·5 distinguished·6 cited—15% support
Statute Text — 26 U.S.C. §1272
For purposes of this title, there shall be included in the gross income of the holder of any debt instrument having original issue discount, an amount equal to the sum of the daily portions of the original issue discount for each day during the taxable year on which such holder held such debt instrument.
Paragraph (1) shall not apply to—
Any tax-exempt obligation.
Any United States savings bond.
Any debt instrument which has a fixed maturity date not more than 1 year from the date of issue.
Any loan made by a natural person to another natural person if—
such loan is not made in the course of a trade or business of the lender, and
the amount of such loan (when increased by the outstanding amount of prior loans by such natural person to such other natural person) does not exceed $10,000.
Clause (i) shall not apply if the loan has as 1 of its principal purposes the avoidance of any Federal tax.
For purposes of this subparagraph, a husband and wife shall be treated as 1 person. The preceding sentence shall not apply where the spouses lived apart at all times during the taxable year in which the loan is made.
For purposes of paragraph (1), the daily portion of the original issue discount on any debt instrument shall be determined by allocating to each day in any accrual period its ratable portion of the increase during such accrual period in the adjusted issue price of the debt instrument. For purposes of the preceding sentence, the increase in the adjusted issue price for any accrual period shall be an amount equal to the excess (if any) of—
the product of—
the adjusted issue price of the debt instrument at the beginning of such accrual period, and
the yield to maturity (determined on the basis of compounding at the close of each accrual period and properly adjusted for the length of the accrual period), over
the sum of the amounts payable as interest on such debt instrument during such accrual period.
For purposes of this subsection, the adjusted issue price of any debt instrument at the beginning of any accrual period is the sum of—
the issue price of such debt instrument, plus
the adjustments under this subsection to such issue price for all periods before the first day of such accrual period.
Except as otherwise provided in regulations prescribed by the Secretary, the term “accrual period” means a 6-month period (or shorter period from the date of original issue of the debt instrument) which ends on a day in the calendar year corresponding to the maturity date of the debt instrument or the date 6 months before such maturity date.
In the case of any debt instrument to which this paragraph applies, the daily portion of the original issue discount shall be determined by allocating to each day in any accrual period its ratable portion of the excess (if any) of—
the sum of (I) the present value determined under subparagraph (B) of all remaining payments under the debt instrument as of the close of such period, and (II) the payments during the accrual period of amounts included in the stated redemption price of the debt instrument, over
the adjusted issue price of such debt instrument at the beginning of such period.
For purposes of subparagraph (A), the present value shall be determined on the basis of—
the original yield to maturity (determined on the basis of compounding at the close of each accrual period and properly adjusted for the length of the accrual period),
events which have occurred before the close of the accrual period, and
a prepayment assumption determined in the manner prescribed by regulations.
This paragraph applies to—
any regular interest in a REMIC or qualified mortgage held by a REMIC,
any other debt instrument if payments under such debt instrument may be accelerated by reason of prepayments of other obligations securing such debt instrument (or, to the extent provided in regulations, by reason of other events), or
any pool of debt instruments the yield on which may be affected by reason of prepayments (or to the extent provided in regulations, by reason of other events).
To the extent provided in regulations prescribed by the Secretary, in the case of a small business engaged in the trade or business of selling tangible personal property at retail, clause (iii) shall not apply to debt instruments incurred in the ordinary course of such trade or business while held by such business.
For purposes of this subsection, in the case of any purchase after its original issue of a debt instrument to which this subsection applies, the daily portion for any day shall be reduced by an amount equal to the amount which would be the daily portion for such day (without regard to this paragraph) multiplied by the fraction determined under subparagraph (B).
For purposes of subparagraph (A), the fraction determined under this subparagraph is a fraction—
the numerator of which is the excess (if any) of—
the cost of such debt instrument incurred by the purchaser, over
the issue price of such debt instrument, increased by the portion of original issue discount previously includible in the gross income of any holder (computed without regard to this paragraph), and
the denominator of which is the sum of the daily portions for such debt instrument for all days after the date of such purchase and ending on the stated maturity date (computed without regard to this paragraph).
This section shall not apply to any holder—
who has purchased the debt instrument at a premium, or
which is a life insurance company to which section 811(b) applies.
For purposes of this section, the term “purchase” means—
any acquisition of a debt instrument, where
the basis of the debt instrument is not determined in whole or in part by reference to the adjusted basis of such debt instrument in the hands of the person from whom acquired.
The basis of any debt instrument in the hands of the holder thereof shall be increased by the amount included in his gross income pursuant to this section.
Treasury Regulations
- Treas. Reg. §Treas. Reg. §1.1272-1 Current inclusion of OID in income
- Treas. Reg. §Treas. Reg. §1.1272-1(a) Overview—(1) In general.
- Treas. Reg. §Treas. Reg. §1.1272-1(b) Accrual of OID—(1) Constant yield method.
- Treas. Reg. §Treas. Reg. §1.1272-1(c) Yield and maturity of certain debt instruments subject to contingencies—(1) Applicability.
- Treas. Reg. §Treas. Reg. §1.1272-1(d) Certain debt instruments that provide for a fixed yield.
- Treas. Reg. §Treas. Reg. §1.1272-1(e) Convertible debt instruments.
- Treas. Reg. §Treas. Reg. §1.1272-1(f) Special rules to determine whether a debt instrument is a short-term obligation—(1) Counting of either the issue date or maturity date.
- Treas. Reg. §Treas. Reg. §1.1272-1(g) Basis adjustment.
- Treas. Reg. §Treas. Reg. §1.1272-1(h) Debt instruments denominated in a currency other than the U.
- Treas. Reg. §Treas. Reg. §1.1272-1(i) §1.1272-1(i)
- Treas. Reg. §Treas. Reg. §1.1272-1(j) Examples.
- Treas. Reg. §Treas. Reg. §1.1272-2 Treatment of debt instruments purchased at a premium
- Treas. Reg. §Treas. Reg. §1.1272-2(a) In general.
- Treas. Reg. §Treas. Reg. §1.1272-2(b) Definitions and special rules—(1) Purchase.
- Treas. Reg. §Treas. Reg. §1.1272-2(c) Examples.
- Treas. Reg. §Treas. Reg. §1.1272-2(i) Less than or equal to the sum of all amounts payable on the instrument after the purchase date other than payments of qualified stated interest (as defined in § 1.
- Treas. Reg. §Treas. Reg. §1.1272-3 Election by a holder to treat all interest on a debt instrument as OID
- Treas. Reg. §Treas. Reg. §1.1272-3(a) Election.
- Treas. Reg. §Treas. Reg. §1.1272-3(b) Scope of election—(1) In general.
- Treas. Reg. §Treas. Reg. §1.1272-3(c) Mechanics of the constant yield method—(1) In general.
- Treas. Reg. §Treas. Reg. §1.1272-3(d) Time and manner of making the election.
- Treas. Reg. §Treas. Reg. §1.1272-3(e) Revocation of election.
- Treas. Reg. §Treas. Reg. §1.1272-3(f) Effective date.
- Treas. Reg. §Treas. Reg. §1.1272-3(i) §1.1272-3(i)
13 Citing Cases
Although section 1 .1272-1(b)(1)(ii) and (4),(iii), Income Tax Regs ., provides reasonableness standards for computing .the length of accrual periods and the amount of OID allocable to the initial accrual periods, section 1 .1272-1(b)(2)(i), Income Tax Regs ., provides that paragraph (b)(1) does not apply to debt instruments subject to section 1272(a)(6) .
The pool of debt instruments consists of al credit card receivables held by the taxpayer . The proposed method is to account for interest and OID as required by Section 1272(a)(6) .
Conclusion With Respect to the Calculation of OID Although COB may enjoy some latitude in its method of calculating the accrual of OID, it may not run afoul of section 1272 and the OID regulations.
be more precise, petitioners assert that there are three possible interpretations for the overall effect of TRA 1986 secs. 1271, 1272, and 1277, 100 Stat. 2591, 2593, 2600, on old sec. 931 for the years in issue: (1) Sec. 931 as amended by TRA 1986 sec. 1272 is in effect, but only as to American Samoa; (2) old sec. 931 remains in effect; or (3) no sec. 931 remains in effect. Petitioners, however, argue that only interpretation (2) gives full effect to the terms and conditions of the statute and
be more precise, petitioners assert that there are three possible interpretations for the overall effect of TRA 1986 secs. 1271, 1272, and 1277, 100 Stat. 2591, 2593, 2600, on old sec. 931 for the years in issue: (1) Sec. 931 as amended by TRA 1986 sec. 1272 is in effect, but only as to American Samoa; (2) old sec. 931 remains in effect; or (3) no sec. 931 remains in effect. Petitioners, however, argue that only interpretation (2) gives full effect to the terms and conditions of the statute and
titioner failed to meet section 1031 like-kind exchange requirements. Further, respondent argues that because the substance ofeach test transaction is a loan rather than a lease, these loans should generate original issue discount (OID) income under section 1272. According to respondent, petitioner is - 97 - not entitled to depreciation deductions under section 168, interest deductions under section 467, or transaction cost deductions under section 162. In the alternative, respondent argues that
titioner failed to meet section 1031 like-kind exchange requirements. Further, respondent argues that because the substance ofeach test transaction is a loan rather than a lease, these loans should generate original issue discount (OID) income under section 1272. According to respondent, petitioner is - 97 - not entitled to depreciation deductions under section 168, interest deductions under section 467, or transaction cost deductions under section 162. In the alternative, respondent argues that
e informing petitioner that respondent was formally disallowing petitioner’s claim for refund of the $44,629 in taxes petitioner paid on his Raytheon wages earned in 1997. Respondent’s letter stated that “The Tax Reform Act of 1986 [Pub. L. 99-514, sec. 1272, 100 Stat. 2085 (TRA 1986)] amended IRC 931. Therefore, income from sources within the Johnston Islands does not qualify for the possession exclusion.”2 On December 21, 1999, after an audit of petitioner’s 1998 Federal income tax return, res