§1273 — Determination of amount of original issue discount
14 citing cases
Statute Text — 26 U.S.C. §1273
For purposes of this subpart—
The term “original issue discount” means the excess (if any) of—
the stated redemption price at maturity, over
the issue price.
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).
If the original issue discount determined under paragraph (1) is less than—
¼ of 1 percent of the stated redemption price at maturity, multiplied by
the number of complete years to maturity,
then the original issue discount shall be treated as zero.
For purposes of this subpart—
In the case of any issue of debt instruments—
publicly offered, and
not issued for property,
the issue price is the initial offering price to the public (excluding bond houses and brokers) at which price a substantial amount of such debt instruments was sold.
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.
In the case of a debt instrument which is issued for property and which—
is part of an issue a portion of which is traded on an established securities market, or
is issued for stock or securities which are traded on an established securities market, or
to the extent provided in regulations, is issued for property (other than stock or securities) of a kind regularly traded on an established market,
the issue price of such debt instrument shall be the fair market value of such property.
Except in any case—
to which paragraph (1), (2), or (3) of this subsection applies, or
to which section 1274 applies,
the issue price of a debt instrument which is issued for property shall be the stated redemption price at maturity.
In applying this subsection, the term “property” includes services and the right to use property, but such term does not include money.
For purposes of subsection (b)—
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.
In the case of any debt instrument and an option, security, or other property issued together as an investment unit—
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,
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
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).
Treasury Regulations
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Treas. Reg. §1.1273-1Definition of OID
(a) In general. Section 1273(a)(1) defines OID as the excess of a debt instrument's stated redemption price at maturity over its issue price. Section 1.1273-2 defines issue price, and paragraph (b) of this section defines stated redemption price at maturity. Paragraph (d) of this section provides rules for de minimis amounts of OID. Although the total amount of OID for a debt instrument may be indeterminate, § 1.1272-1(d) provides a rule to determine OID accruals on certain debt instruments that provide for a fixed yield. See Example 10 in § 1.1272-1(j).
(b) Stated redemption price at maturity. A debt instrument's stated redemption price at maturity is the sum of all payments provided by the debt instrument other than qualified stated interest payments. If the payment schedule of a debt instrument is determined under § 1.1272-1(c) (relating to certain debt instruments subject to contingencies), that payment schedule is used to determine the instrument's stated redemption price at maturity.
(c) Qualified stated interest—(1) Definition—(i) In general. Qualified stated interest is stated interest that is unconditionally payable in cash or in property (other than debt instruments of the issuer), or that will be constructively received under section 451, at least annually at a single fixed rate (within the meaning of paragraph (c)(1)(iii) of this section).
(ii) Unconditionally payable. Interest is unconditionally payable only if reasonable legal remedies exist to compel timely payment or the debt instrument otherwise provides terms and conditions that make the likelihood of late payment (other than a late payment that occurs within a reasonable grace period) or nonpayment a remote contingency (within the meaning of § 1.1275-2(h)). For purposes of the preceding sentence, remedies or other terms and conditions are not taken into account if the lending transaction does not reflect arm's length dealing and the holder does not intend to enforce the remedies or other terms and conditions. For purposes of determining whether interest is unconditionally payable, the possibility of nonpayment due to default, insolvency, or similar circumstances, or due to the exercise of a conversion option described in § 1.1272-1(e) is ignored. This paragraph (c)(1)(ii) applies to debt instruments issued on or after August 13, 1996.
(iii) Single fixed rate—(A) In general. Interest is payable at a single fixed rate only if the rate appropriately takes into account the length of the interval between payments. Thus, if the interval between payments varies during the term of the debt instrument, the value of the fixed rate on which a payment is based generally must be adjusted to reflect a compounding assumption that is consistent with the length of the interval preceding the payment. See Example 1 in paragraph (f) of this section.
(B) Special rule for certain first and final payment intervals. Notwithstanding paragraph (c)(1)(iii)(A) of this section, if a debt instrument provides for payment intervals that are equal in length throughout the term of the instrument, except that the first or final payment interval differs in length from the other payment intervals, the first or final interest payment is considered to be made at a fixed rate if the value of the rate on which the payment is based is adjusted in any reasonable manner to take into account the length of the interval. See Example 2 of paragraph (f) of this section. The rule in this paragraph (c)(1)(iii)(B) also applies if the lengths of both the first and final payment intervals differ from the length of the other payment intervals.
(2) Debt instruments subject to contingencies. The determination of whether a debt instrument described in § 1.1272-1(c) (a debt instrument providing for an alternative payment schedule (or schedules) upon the occurrence of one or more contingencies) provides for qualified stated interest is made by analyzing each alternative payment schedule (including the stated payment schedule) as if it were the debt instrument's sole payment schedule. Under this analysis, the debt instrument provides for qualified stated interest to the extent of the lowest fixed rate at which qualified stated interest would be payable under any payment schedule. See Example (4) of paragraph (f) of this section.
(3) Variable rate debt instrument. In the case of a variable rate debt instrument, qualified stated interest is determined under § 1.1275-5(e).
(4) Stated interest in excess of qualified stated interest. To the extent that stated interest payable under a debt instrument exceeds qualified stated interest, the excess is included in the debt instrument's stated redemption price at maturity.
(5) Short-term obligations. In the case of a debt instrument with a term that is not more than 1 year from the date of issue, no payments of interest are treated as qualified stated interest payments.
(6) Business day convention—(i) Rule. For purposes of this paragraph (c), if a scheduled payment date for stated interest falls on a Saturday, Sunday, or Federal holiday (within the meaning of 5 U.S.C. 6103) but, under the terms of the debt instrument, the stated interest is payable on the first business day that immediately follows the scheduled payment date, the stated interest is treated as payable on the scheduled payment date, provided no additional interest is payable as a result of the deferral.
(ii) Effective/applicability date. Paragraph (c)(6)(i) of this section applies to a debt instrument issued on or after September 13, 2012. A taxpayer, however, may rely on paragraph (c)(6)(i) of this section for a debt instrument issued before that date.
(d) De minimis OID—(1) In general. If the amount of OID with respect to a debt instrument is less than the de minimis amount, the amount of OID is treated as zero, and all stated interest (including stated interest that would otherwise be characterized as OID) is treated as qualified stated interest.
(2) De minimis amount. The de minimis amount is an amount equal to 0.0025 multiplied by the product of the stated redemption price at maturity and the number of complete years to maturity from the issue date.
(3) Installment obligations. In the case of an installment obligation (as defined in paragraph (e)(1) of this section), paragraph (d)(2) of this section is applied by substituting for the number of complete years to maturity the weighted average maturity (as defined in paragraph (e)(3) of this section). Alternatively, in the case of a debt instrument that provides for payments of principal no more rapidly than a self-amortizing installment obligation (as defined in paragraph (e)(2) of this section), the de minimis amount defined in paragraph (d)(2) of this section may be calculated by substituting 0.00167 for 0.0025.
(4) Special rule for interest holidays, teaser rates, and other interest shortfalls—(i) In general. This paragraph (d)(4) provides a special rule to determine whether a debt instrument with a teaser rate (or rates), an interest holiday, or any other interest shortfall has de minimis OID. This rule applies if—
(A) The amount of OID on the debt instrument is more than the de minimis amount as otherwise determined under paragraph (d) of this section; and
(B) All stated interest provided for in the debt instrument would be qualified stated interest under paragraph (c) of this section except that for 1 or more accrual periods the interest rate is below the rate applicable for the remainder of the instrument's term (e.g., if as a result of an interest holiday, none of the stated interest is qualified stated interest).
(ii) Redetermination of OID for purposes of the de minimis test. For purposes of determining whether a debt instrument described in paragraph (d)(4)(i) of this section has de minimis OID, the instrument's stated redemption price at maturity is treated as equal to the instrument's issue price plus the greater of the amount of foregone interest or the excess (if any) of the instrument's stated principal amount over its issue price. The amount of foregone interest is the amount of additional stated interest that would be required to be payable on the debt instrument during the period of the teaser rate, holiday, or shortfall so that all stated interest would be qualified stated interest under paragraph (c) of this section. See Example 5 and Example 6 of paragraph (f) of this section. In addition, for purposes of computing the de minimis amount of OID, the weighted average maturity of the debt instrument is determined by treating all stated interest payments as qualified stated interest payments.
(5) Treatment of de minimis OID by holders—(i) Allocation of de minimis OID to principal payments. The holder of a debt instrument includes any de minimis OID (other than de minimis OID treated as qualified stated interest under paragraph (d)(1) of this section, such as de minimis OID attributable to a teaser rate or interest holiday) in income as stated principal payments are made. The amount includible in income with respect to each principal payment equals the product of the total amount of de minimis OID on the debt instrument and a fraction, the numerator of which is the amount of the principal payment made and the denominator of which is the stated principal amount of the instrument.
(ii) Character of de minimis OID—(A) De minimis OID treated as gain recognized on retirement. Any amount of de minimis OID includible in income under this paragraph (d)(5) is treated as gain recognized on retirement of the debt instrument. See section 1271 to determine whether a retirement is treated as an exchange of the debt instrument.
(B) Treatment of de minimis OID on sale or exchange. Any gain attributable to de minimis OID that is recognized on the sale or exchange of a debt instrument is capital gain if the debt instrument is a capital asset in the hands of the seller.
(iii) Treatment of subsequent holders. If a subsequent holder purchases a debt instrument issued with de minimis OID at a premium (as defined in § 1.1272-2(b)(2)), the subsequent holder does not include the de minimis OID in income. Otherwise, a subsequent holder includes any discount in income under the market discount rules (sections 1276 through 1278) rather than under the rules of this paragraph (d)(5).
(iv) Cross-reference. See § 1.1272-3 for an election by a holder to treat de minimis OID as OID.
(e) Definitions—(1) Installment obligation. An installment obligation is a debt instrument that provides for the payment of any amount other than qualified stated interest before maturity.
(2) Self-amortizing installment obligation. A self-amortizing installment obligation is an obligation that provides for equal payments composed of principal and qualified stated interest that are unconditionally payable at least annually during the entire term of the debt instrument with no significant additional payment required at maturity.
(3) Weighted average maturity. The weighted average maturity of a debt instrument is the sum of the following amounts determined for each payment under the instrument (other than a payment of qualified stated interest)—
(i) The number of complete years from the issue date until the payment is made; multiplied by
(ii) A fraction, the numerator of which is the amount of the payment and the denominator of which is the debt instrument's stated redemption price at maturity.
(f) Examples. The following examples illustrate the rules of this section.
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Treas. Reg. §1.1273-1(a)In general.
In general. Section 1273(a)(1) defines OID as the excess of a debt instrument's stated redemption price at maturity over its issue price. Section 1.1273-2 defines issue price, and paragraph (b) of this section defines stated redemption price at maturity. Paragraph (d) of this section provides rules for de minimis amounts of OID. Although the total amount of OID for a debt instrument may be indeterminate, § 1.1272-1(d) provides a rule to determine OID accruals on certain debt instruments that provide for a fixed yield. See Example 10 in § 1.1272-1(j).
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Treas. Reg. §1.1273-1(b)Stated redemption price at maturity.
Stated redemption price at maturity. A debt instrument's stated redemption price at maturity is the sum of all payments provided by the debt instrument other than qualified stated interest payments. If the payment schedule of a debt instrument is determined under § 1.1272-1(c) (relating to certain debt instruments subject to contingencies), that payment schedule is used to determine the instrument's stated redemption price at maturity.
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Treas. Reg. §1.1273-1(c)Qualified stated interest—(1) Definition—(i) In general.
Qualified stated interest—(1) Definition—(i) In general. Qualified stated interest is stated interest that is unconditionally payable in cash or in property (other than debt instruments of the issuer), or that will be constructively received under section 451, at least annually at a single fixed rate (within the meaning of paragraph (c)(1)(iii) of this section).
(ii) Unconditionally payable. Interest is unconditionally payable only if reasonable legal remedies exist to compel timely payment or the debt instrument otherwise provides terms and conditions that make the likelihood of late payment (other than a late payment that occurs within a reasonable grace period) or nonpayment a remote contingency (within the meaning of § 1.1275-2(h)). For purposes of the preceding sentence, remedies or other terms and conditions are not taken into account if the lending transaction does not reflect arm's length dealing and the holder does not intend to enforce the remedies or other terms and conditions. For purposes of determining whether interest is unconditionally payable, the possibility of nonpayment due to default, insolvency, or similar circumstances, or due to the exercise of a conversion option described in § 1.1272-1(e) is ignored. This paragraph (c)(1)(ii) applies to debt instruments issued on or after August 13, 1996.
(iii) Single fixed rate—(A) In general. Interest is payable at a single fixed rate only if the rate appropriately takes into account the length of the interval between payments. Thus, if the interval between payments varies during the term of the debt instrument, the value of the fixed rate on which a payment is based generally must be adjusted to reflect a compounding assumption that is consistent with the length of the interval preceding the payment. See Example 1 in paragraph (f) of this section.
(B) Special rule for certain first and final payment intervals. Notwithstanding paragraph (c)(1)(iii)(A) of this section, if a debt instrument provides for payment intervals that are equal in length throughout the term of the instrument, except that the first or final payment interval differs in length from the other payment intervals, the first or final interest payment is considered to be made at a fixed rate if the value of the rate on which the payment is based is adjusted in any reasonable manner to take into account the length of the interval. See Example 2 of paragraph (f) of this section. The rule in this paragraph (c)(1)(iii)(B) also applies if the lengths of both the first and final payment intervals differ from the length of the other payment intervals.
(2) Debt instruments subject to contingencies. The determination of whether a debt instrument described in § 1.1272-1(c) (a debt instrument providing for an alternative payment schedule (or schedules) upon the occurrence of one or more contingencies) provides for qualified stated interest is made by analyzing each alternative payment schedule (including the stated payment schedule) as if it were the debt instrument's sole payment schedule. Under this analysis, the debt instrument provides for qualified stated interest to the extent of the lowest fixed rate at which qualified stated interest would be payable under any payment schedule. See Example (4) of paragraph (f) of this section.
(3) Variable rate debt instrument. In the case of a variable rate debt instrument, qualified stated interest is determined under § 1.1275-5(e).
(4) Stated interest in excess of qualified stated interest. To the extent that stated interest payable under a debt instrument exceeds qualified stated interest, the excess is included in the debt instrument's stated redemption price at maturity.
(5) Short-term obligations. In the case of a debt instrument with a term that is not more than 1 year from the date of issue, no payments of interest are treated as qualified stated interest payments.
(6) Business day convention—(i) Rule. For purposes of this paragraph (c), if a scheduled payment date for stated interest falls on a Saturday, Sunday, or Federal holiday (within the meaning of 5 U.S.C. 6103) but, under the terms of the debt instrument, the stated interest is payable on the first business day that immediately follows the scheduled payment date, the stated interest is treated as payable on the scheduled payment date, provided no additional interest is payable as a result of the deferral.
(ii) Effective/applicability date. Paragraph (c)(6)(i) of this section applies to a debt instrument issued on or after September 13, 2012. A taxpayer, however, may rely on paragraph (c)(6)(i) of this section for a debt instrument issued before that date.
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Treas. Reg. §1.1273-1(d)De minimis OID—(1) In general.
De minimis OID—(1) In general. If the amount of OID with respect to a debt instrument is less than the de minimis amount, the amount of OID is treated as zero, and all stated interest (including stated interest that would otherwise be characterized as OID) is treated as qualified stated interest.
(2) De minimis amount. The de minimis amount is an amount equal to 0.0025 multiplied by the product of the stated redemption price at maturity and the number of complete years to maturity from the issue date.
(3) Installment obligations. In the case of an installment obligation (as defined in paragraph (e)(1) of this section), paragraph (d)(2) of this section is applied by substituting for the number of complete years to maturity the weighted average maturity (as defined in paragraph (e)(3) of this section). Alternatively, in the case of a debt instrument that provides for payments of principal no more rapidly than a self-amortizing installment obligation (as defined in paragraph (e)(2) of this section), the de minimis amount defined in paragraph (d)(2) of this section may be calculated by substituting 0.00167 for 0.0025.
(4) Special rule for interest holidays, teaser rates, and other interest shortfalls—(i) In general. This paragraph (d)(4) provides a special rule to determine whether a debt instrument with a teaser rate (or rates), an interest holiday, or any other interest shortfall has de minimis OID. This rule applies if—
(A) The amount of OID on the debt instrument is more than the de minimis amount as otherwise determined under paragraph (d) of this section; and
(B) All stated interest provided for in the debt instrument would be qualified stated interest under paragraph (c) of this section except that for 1 or more accrual periods the interest rate is below the rate applicable for the remainder of the instrument's term (e.g., if as a result of an interest holiday, none of the stated interest is qualified stated interest).
(ii) Redetermination of OID for purposes of the de minimis test. For purposes of determining whether a debt instrument described in paragraph (d)(4)(i) of this section has de minimis OID, the instrument's stated redemption price at maturity is treated as equal to the instrument's issue price plus the greater of the amount of foregone interest or the excess (if any) of the instrument's stated principal amount over its issue price. The amount of foregone interest is the amount of additional stated interest that would be required to be payable on the debt instrument during the period of the teaser rate, holiday, or shortfall so that all stated interest would be qualified stated interest under paragraph (c) of this section. See Example 5 and Example 6 of paragraph (f) of this section. In addition, for purposes of computing the de minimis amount of OID, the weighted average maturity of the debt instrument is determined by treating all stated interest payments as qualified stated interest payments.
(5) Treatment of de minimis OID by holders—(i) Allocation of de minimis OID to principal payments. The holder of a debt instrument includes any de minimis OID (other than de minimis OID treated as qualified stated interest under paragraph (d)(1) of this section, such as de minimis OID attributable to a teaser rate or interest holiday) in income as stated principal payments are made. The amount includible in income with respect to each principal payment equals the product of the total amount of de minimis OID on the debt instrument and a fraction, the numerator of which is the amount of the principal payment made and the denominator of which is the stated principal amount of the instrument.
(ii) Character of de minimis OID—(A) De minimis OID treated as gain recognized on retirement. Any amount of de minimis OID includible in income under this paragraph (d)(5) is treated as gain recognized on retirement of the debt instrument. See section 1271 to determine whether a retirement is treated as an exchange of the debt instrument.
(B) Treatment of de minimis OID on sale or exchange. Any gain attributable to de minimis OID that is recognized on the sale or exchange of a debt instrument is capital gain if the debt instrument is a capital asset in the hands of the seller.
(iii) Treatment of subsequent holders. If a subsequent holder purchases a debt instrument issued with de minimis OID at a premium (as defined in § 1.1272-2(b)(2)), the subsequent holder does not include the de minimis OID in income. Otherwise, a subsequent holder includes any discount in income under the market discount rules (sections 1276 through 1278) rather than under the rules of this paragraph (d)(5).
(iv) Cross-reference. See § 1.1272-3 for an election by a holder to treat de minimis OID as OID.
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Treas. Reg. §1.1273-1(e)Definitions—(1) Installment obligation.
Definitions—(1) Installment obligation. An installment obligation is a debt instrument that provides for the payment of any amount other than qualified stated interest before maturity.
(2) Self-amortizing installment obligation. A self-amortizing installment obligation is an obligation that provides for equal payments composed of principal and qualified stated interest that are unconditionally payable at least annually during the entire term of the debt instrument with no significant additional payment required at maturity.
(3) Weighted average maturity. The weighted average maturity of a debt instrument is the sum of the following amounts determined for each payment under the instrument (other than a payment of qualified stated interest)—
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Treas. Reg. §1.1273-1(f)Examples.
Examples. The following examples illustrate the rules of this section.
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Treas. Reg. §1.1273-1(i)§1.1273-1(i)
The number of complete years from the issue date until the payment is made; multiplied by
(ii) A fraction, the numerator of which is the amount of the payment and the denominator of which is the debt instrument's stated redemption price at maturity.
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Treas. Reg. §1.1273-2Determination of issue price and issue date
(a) Debt instruments issued for money—(1) Issue price. If a substantial amount of the debt instruments in an issue is issued for money, the issue price of each debt instrument in the issue is the first price at which a substantial amount of the debt instruments is sold for money. Thus, if an issue consists of a single debt instrument that is issued for money, the issue price of the debt instrument is the amount paid for the instrument. For example, in the case of a debt instrument evidencing a loan to a natural person, the issue price of the instrument is the amount loaned. See § 1.1275-2(d) for rules regarding Treasury securities. For purposes of this paragraph (a), money includes functional currency and, in certain circumstances, nonfunctional currency. See § 1.988-2(b)(2) for circumstances when nonfunctional currency is treated as money rather than as property.
(2) Issue date. The issue date of an issue described in paragraph (a)(1) of this section is the first settlement date or closing date, whichever is applicable, on which a substantial amount of the debt instruments in the issue is sold for money.
(b) Publicly traded debt instruments issued for property—(1) Issue price. If a substantial amount of the debt instruments in an issue is traded on an established market (within the meaning of paragraph (f) of this section) and the issue is not described in paragraph (a)(1) of this section, the issue price of each debt instrument in the issue is the fair market value of the debt instrument, determined as of the issue date (as defined in paragraph (b)(2) of this section). See paragraph (f) of this section for rules to determine the fair market value of a debt instrument for purposes of this section.
(2) Issue date. The issue date of an issue described in paragraph (b)(1) of this section is the first date on which a substantial amount of the traded debt instruments in the issue is issued.
(c) Debt instruments issued for publicly traded property—(1) Issue price. If a substantial amount of the debt instruments in an issue is issued for property that is traded on an established market (within the meaning of paragraph (f) of this section) and the issue is not described in paragraph (a)(1) or (b)(1) of this section, the issue price of each debt instrument in the issue is the fair market value of the property, determined as of the issue date (as defined in paragraph (c)(2) of this section). For purposes of the preceding sentence, property means a debt instrument, stock, security, contract, commodity, or nonfunctional currency. But see § 1.988-2(b)(2) for circumstances when nonfunctional currency is treated as money rather than as property. See paragraph (f) of this section for rules to determine the fair market value of property for purposes of this section.
(2) Issue date. The issue date of an issue described in paragraph (c)(1) of this section is the first date on which a substantial amount of the debt instruments in the issue is issued for traded property.
(d) Other debt instruments—(1) Issue price. If an issue of debt instruments is not described in paragraph (a)(1), (b)(1), or (c)(1) of this section, the issue price of each debt instrument in the issue is determined as if the debt instrument were a separate issue. If the issue price of a debt instrument that is treated as a separate issue under the preceding sentence is not determined under paragraph (a)(1), (b)(1), or (c)(1) of this section, and if section 1274 applies to the debt instrument, the issue price of the instrument is determined under section 1274. Otherwise, the issue price of the debt instrument is its stated redemption price at maturity under section 1273(b)(4). See section 1274(c) and § 1.1274-1 to determine if section 1274 applies to a debt instrument.
(2) Issue date. The issue date of an issue described in paragraph (d)(1) of this section is the date on which the debt instrument is issued for money or in a sale or exchange.
(e) Special rule for certain sales to bond houses, brokers, or similar persons. For purposes of determining the issue price and issue date of a debt instrument under this section, sales to bond houses, brokers, or similar persons or organizations acting in the capacity of underwriters, placement agents, or wholesalers are ignored.
(f) Traded on an established market (publicly traded)—(1) In general. Except as provided in paragraph (f)(6) of this section, property (including a debt instrument described in paragraph (b)(1) of this section) is traded on an established market for purposes of this section if, at any time during the 31-day period ending 15 days after the issue date—
(i) There is a sales price for the property as described in paragraph (f)(2) of this section;
(ii) There are one or more firm quotes for the property as described in paragraph (f)(3) of this section; or
(iii) There are one or more indicative quotes for the property as described in paragraph (f)(4) of this section.
(2) Sales price—(i) In general. A sales price exists if the price for an executed purchase or sale of the property within the 31-day period described in paragraph (f)(1) of this section is reasonably available within a reasonable period of time after the sale.
(ii) Pricing information for a debt instrument. For purposes of paragraph (f)(2)(i) of this section, the price of a debt instrument is considered reasonably available if the sales price (or information sufficient to calculate the sales price) appears in a medium that is made available to issuers of debt instruments, persons that regularly purchase or sell debt instruments (including a price provided only to certain customers or to subscribers), or persons that broker purchases or sales of debt instruments.
(3) Firm quote. A firm quote is considered to exist when a price quote is available from at least one broker, dealer, or pricing service (including a price provided only to certain customers or to subscribers) for property and the quoted price is substantially the same as the price for which the person receiving the quoted price could purchase or sell the property. A price quote is considered to be available whether the quote is initiated by a person providing the quote or provided at the request of the person receiving the quote. The identity of the person providing the quote must be reasonably ascertainable for a quote to be considered a firm quote for purposes of this paragraph (f)(3). A quote will be considered a firm quote if the quote is designated as a firm quote by the person providing the quote or if market participants typically purchase or sell, as the case may be, at the quoted price, even if the party providing the quote is not legally obligated to purchase or sell at that price.
(4) Indicative quote. An indicative quote is considered to exist when a price quote is available from at least one broker, dealer, or pricing service (including a price provided only to certain customers or to subscribers) for property and the price quote is not a firm quote described in paragraph (f)(3) of this section.
(5) Presumption that price or quote is equal to fair market value—(i) In general. For purposes of this section, the fair market value of property will be presumed to be equal to its sales price or quoted price determined under paragraphs (f)(2) through (f)(4) of this section. If there is more than one sales price under paragraph (f)(2) of this section, more than one quoted price under paragraph (f)(3) or (f)(4) of this section, or both one or more sales prices under paragraph (f)(2) of this section and quoted prices under paragraph (f)(3) or (f)(4) of this section, a taxpayer may use any reasonable method, consistently applied to the same or substantially similar facts, to determine the fair market value. For example, to determine the fair market value under a reasonable method, a taxpayer may consider factors such as (but not necessarily limited to) the timing of each relevant sale or quote in relation to the issue date; whether the price is derived from a sale, a firm quote, or an indicative quote; the size of each relevant sale or quote; or whether the sales price or quote corresponds to pricing information provided by an independent bond or loan pricing service.
(ii) Special rule for property for which there is only an indicative quote. If property is described only in paragraph (f)(4) of this section, and the taxpayer determines that the quote (or an average of the quotes) materially misrepresents the fair market value of the property, the taxpayer can use any method that provides a reasonable basis to determine the fair market value of the property. A taxpayer must establish that the method chosen more accurately reflects the value of the property than the quote or quotes for the property to use the method provided in this paragraph (f)(5)(ii). For an equity or debt instrument, a volume discount or control premium will not be considered to create a material misrepresentation of value for purposes of this paragraph (f)(5)(ii).
(6) Exception for small debt issues. Notwithstanding any other provision in paragraph (f) of this section, a debt instrument will not be treated as traded on an established market if at the time the determination is made the outstanding stated principal amount of the issue that includes the debt instrument does not exceed US$100 million (or, for a debt instrument denominated in a currency other than the U.S. dollar, the equivalent amount in the currency in which the debt instrument is denominated).
(7) Anti-abuse rules—(i) Effect of certain temporary restrictions on trading. If there is any temporary restriction on trading a purpose of which is to avoid the characterization of the property as one that is traded on an established market for Federal income tax purposes, then the property is treated as traded on an established market. For purposes of the preceding sentence, a temporary restriction on trading need not be imposed by the issuer.
(ii) Artificial pricing information. If a principal purpose for the existence of any sale or price quotation is to cause the property to be traded on an established market or to materially misrepresent the value of property, that sale or price quotation is disregarded.
(8) Convertible debt instruments. A debt instrument is not treated as traded on an established market solely because the debt instrument is convertible into property that is so traded.
(9) Issuer-holder consistency requirement—(i) General rule. For purposes of this section, an issuer must determine whether property is traded on an established market and, if so, the fair market value of the property. An issuer is required to exercise reasonable diligence to determine whether purchases or sales have taken place, the quantity of purchases and sales, the price at which purchases or sales occurred, the existence of firm or indicative quotes, and any other relevant information using the rules provided in paragraph (f) of this section to determine the fair market value of the property. If an issuer determines that property is traded on an established market, the issuer is required to make that determination as well as the fair market value of the property (which can be stated as the issue price of the debt instrument) available to holders in a commercially reasonable fashion, including by electronic publication, within 90 days of the date that the debt instrument is issued. Each determination by an issuer is binding on a holder of the debt instrument unless the holder explicitly discloses that its determination is different from the issuer's determination (for example, the holder determines a different fair market value for the property or determines that the property is not traded on an established market). A holder must describe in the disclosure the reasons for its different determination and, if applicable, how the holder determined the fair market value. A holder's disclosure must be filed on a timely filed Federal income tax return for the taxable year that includes the acquisition date of the debt instrument. If an issuer for any reason does not make the fair market value or issue price of a debt instrument reasonably available to a holder, the holder must determine the fair market value of the property and issue price of the debt instrument using the rules provided in paragraph (f) of this section.
(ii) Co-obligors. If a debt instrument has more than one obligor, the obligors must designate one obligor (issuer) to determine whether property is traded on an established market and, if so, the fair market value of the property and issue price of the debt instrument and make the price available to holders using the rules provided in paragraph (f)(9)(i) of this section.
(10) Effective/applicability dates—(i) This paragraph (f) applies to a debt instrument issued on or after November 13, 2012.
(ii) For rules applying to a debt instrument issued before November 13, 2012, see paragraph (f) of this section as contained in 26 CFR part 1, revised April 1, 2011.
(g) Treatment of certain cash payments incident to lending transactions—(1) Applicability. The provisions of this paragraph (g) apply to cash payments made incident to private lending transactions (including seller financing).
(2) Payments from borrower to lender—(i) Money lending transaction. In a lending transaction to which section 1273(b)(2) applies, a payment from the borrower to the lender (other than a payment for property or for services provided by the lender, such as commitment fees or loan processing costs) reduces the issue price of the debt instrument evidencing the loan. However, solely for purposes of determining the tax consequences to the borrower, the issue price is not reduced if the payment is deductible under section 461(g)(2).
(ii) Section 1274 transaction. In a lending transaction to which section 1274 applies, a payment from the buyer-borrower to the seller-lender that is designated as interest or points reduces the stated principal amount of the debt instrument evidencing the loan, but is included in the purchase price of the property. If the payment is deductible under section 461(g)(2), however, the issue price of the debt instrument (as otherwise determined under section 1274 and the rule in the preceding sentence) is increased by the amount of the payment to compute the buyer-borrower's interest deductions under section 163.
(3) Payments from lender to borrower. A payment from the lender to the borrower in a lending transaction is treated as an amount loaned.
(4) Payments between lender and third party. If, as part of a lending transaction, a party other than the borrower (the third party) makes a payment to the lender, that payment is treated in appropriate circumstances as made from the third party to the borrower followed by a payment in the same amount from the borrower to the lender and governed by the provisions of paragraph (g)(2) of this section. If, as part of a lending transaction, the lender makes a payment to a third party, that payment is treated in appropriate circumstances as an additional amount loaned to the borrower and then paid by the borrower to the third party. The character of the deemed payment between the borrower and the third party depends on the substance of the transaction.
(5) Examples. The following examples illustrate the rules of this paragraph (g).
(h) Investment units—(1) In general. Under section 1273(c)(2), an investment unit is treated as if the investment unit were a debt instrument. The issue price of the investment unit is determined under paragraph (a)(1), (b)(1), or (c)(1) of this section, if applicable. The issue price of the investment unit is then allocated between the debt instrument and the property right (or rights) that comprise the unit based on their relative fair market values. If paragraphs (a)(1), (b)(1), and (c)(1) of this section are not applicable, however, the issue price of the debt instrument that is part of the investment unit is determined under section 1273(b)(4) or 1274, whichever is applicable.
(2) Consistent allocation by holders and issuer. The issuer's allocation of the issue price of the investment unit is binding on all holders of the investment unit. However, the issuer's determination is not binding on a holder that explicitly discloses that its allocation is different from the issuer's allocation. Unless otherwise provided by the Commissioner, the disclosure must be made on a statement attached to the holder's timely filed Federal income tax return for the taxable year that includes the acquisition date of the investment unit. See § 1.1275-2(e) for rules relating to the issuer's obligation to disclose certain information to holders.
(i) [Reserved]
(j) Convertible debt instruments. The issue price of a debt instrument includes any amount paid for an option to convert the instrument into stock (or another debt instrument) of either the issuer or a related party (within the meaning of section 267(b) or 707(b)(1)) or into cash or other property in an amount equal to the approximate value of such stock (or debt instrument). For debt instruments issued on or after February 5, 2013, the term stock in the preceding sentence means an equity interest in any entity that is classified, for Federal tax purposes, as either a partnership or a corporation.
(k) Below-market loans subject to section 7872(b). The issue price of a below-market loan subject to section 7872(b) (a term loan other than a gift loan) is the issue price determined under this section, reduced by the excess amount determined under section 7872(b)(1).
(l) [Reserved]
(m) Treatment of amounts representing pre-issuance accrued interest—(1) Applicability. Paragraph (m)(2) of this section provides an alternative to the general rule of this section for determining the issue price of a debt instrument if—
(i) A portion of the initial purchase price of the instrument is allocable to interest that has accrued prior to the issue date (pre-issuance accrued interest); and
(ii) The instrument provides for a payment of stated interest on the first payment date within 1 year of the issue date that equals or exceeds the amount of the pre-issuance accrued interest.
(2) Exclusion of pre-issuance accrued interest from issue price. If a debt instrument meets the requirements of paragraph (m)(1) of this section, the instrument's issue price may be computed by subtracting from the issue price (as otherwise computed under this section) the amount of pre-issuance accrued interest. If the issue price of the debt instrument is computed in this manner, a portion of the stated interest payable on the first payment date must be treated as a return of the excluded pre-issuance accrued interest, rather than as an amount payable on the instrument.
(3) Example. The following example illustrates the rule of paragraph (m) of this section.
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Treas. Reg. §1.1273-2(a)Debt instruments issued for money—(1) Issue price.
Debt instruments issued for money—(1) Issue price. If a substantial amount of the debt instruments in an issue is issued for money, the issue price of each debt instrument in the issue is the first price at which a substantial amount of the debt instruments is sold for money. Thus, if an issue consists of a single debt instrument that is issued for money, the issue price of the debt instrument is the amount paid for the instrument. For example, in the case of a debt instrument evidencing a loan to a natural person, the issue price of the instrument is the amount loaned. See § 1.1275-2(d) for rules regarding Treasury securities. For purposes of this paragraph (a), money includes functional currency and, in certain circumstances, nonfunctional currency. See § 1.988-2(b)(2) for circumstances when nonfunctional currency is treated as money rather than as property.
(2) Issue date. The issue date of an issue described in paragraph (a)(1) of this section is the first settlement date or closing date, whichever is applicable, on which a substantial amount of the debt instruments in the issue is sold for money.
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Treas. Reg. §1.1273-2(b)Publicly traded debt instruments issued for property—(1) Issue price.
Publicly traded debt instruments issued for property—(1) Issue price. If a substantial amount of the debt instruments in an issue is traded on an established market (within the meaning of paragraph (f) of this section) and the issue is not described in paragraph (a)(1) of this section, the issue price of each debt instrument in the issue is the fair market value of the debt instrument, determined as of the issue date (as defined in paragraph (b)(2) of this section). See paragraph (f) of this section for rules to determine the fair market value of a debt instrument for purposes of this section.
(2) Issue date. The issue date of an issue described in paragraph (b)(1) of this section is the first date on which a substantial amount of the traded debt instruments in the issue is issued.
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Treas. Reg. §1.1273-2(c)Debt instruments issued for publicly traded property—(1) Issue price.
Debt instruments issued for publicly traded property—(1) Issue price. If a substantial amount of the debt instruments in an issue is issued for property that is traded on an established market (within the meaning of paragraph (f) of this section) and the issue is not described in paragraph (a)(1) or (b)(1) of this section, the issue price of each debt instrument in the issue is the fair market value of the property, determined as of the issue date (as defined in paragraph (c)(2) of this section). For purposes of the preceding sentence, property means a debt instrument, stock, security, contract, commodity, or nonfunctional currency. But see § 1.988-2(b)(2) for circumstances when nonfunctional currency is treated as money rather than as property. See paragraph (f) of this section for rules to determine the fair market value of property for purposes of this section.
(2) Issue date. The issue date of an issue described in paragraph (c)(1) of this section is the first date on which a substantial amount of the debt instruments in the issue is issued for traded property.
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Treas. Reg. §1.1273-2(d)Other debt instruments—(1) Issue price.
Other debt instruments—(1) Issue price. If an issue of debt instruments is not described in paragraph (a)(1), (b)(1), or (c)(1) of this section, the issue price of each debt instrument in the issue is determined as if the debt instrument were a separate issue. If the issue price of a debt instrument that is treated as a separate issue under the preceding sentence is not determined under paragraph (a)(1), (b)(1), or (c)(1) of this section, and if section 1274 applies to the debt instrument, the issue price of the instrument is determined under section 1274. Otherwise, the issue price of the debt instrument is its stated redemption price at maturity under section 1273(b)(4). See section 1274(c) and § 1.1274-1 to determine if section 1274 applies to a debt instrument.
(2) Issue date. The issue date of an issue described in paragraph (d)(1) of this section is the date on which the debt instrument is issued for money or in a sale or exchange.
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Treas. Reg. §1.1273-2(e)Special rule for certain sales to bond houses, brokers, or similar persons.
Special rule for certain sales to bond houses, brokers, or similar persons. For purposes of determining the issue price and issue date of a debt instrument under this section, sales to bond houses, brokers, or similar persons or organizations acting in the capacity of underwriters, placement agents, or wholesalers are ignored.
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Treas. Reg. §1.1273-2(f)Traded on an established market (publicly traded)—(1) In general.
Traded on an established market (publicly traded)—(1) In general. Except as provided in paragraph (f)(6) of this section, property (including a debt instrument described in paragraph (b)(1) of this section) is traded on an established market for purposes of this section if, at any time during the 31-day period ending 15 days after the issue date—
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Treas. Reg. §1.1273-2(g)Treatment of certain cash payments incident to lending transactions—(1) Applicability.
Treatment of certain cash payments incident to lending transactions—(1) Applicability. The provisions of this paragraph (g) apply to cash payments made incident to private lending transactions (including seller financing).
(2) Payments from borrower to lender—(i) Money lending transaction. In a lending transaction to which section 1273(b)(2) applies, a payment from the borrower to the lender (other than a payment for property or for services provided by the lender, such as commitment fees or loan processing costs) reduces the issue price of the debt instrument evidencing the loan. However, solely for purposes of determining the tax consequences to the borrower, the issue price is not reduced if the payment is deductible under section 461(g)(2).
(ii) Section 1274 transaction. In a lending transaction to which section 1274 applies, a payment from the buyer-borrower to the seller-lender that is designated as interest or points reduces the stated principal amount of the debt instrument evidencing the loan, but is included in the purchase price of the property. If the payment is deductible under section 461(g)(2), however, the issue price of the debt instrument (as otherwise determined under section 1274 and the rule in the preceding sentence) is increased by the amount of the payment to compute the buyer-borrower's interest deductions under section 163.
(3) Payments from lender to borrower. A payment from the lender to the borrower in a lending transaction is treated as an amount loaned.
(4) Payments between lender and third party. If, as part of a lending transaction, a party other than the borrower (the third party) makes a payment to the lender, that payment is treated in appropriate circumstances as made from the third party to the borrower followed by a payment in the same amount from the borrower to the lender and governed by the provisions of paragraph (g)(2) of this section. If, as part of a lending transaction, the lender makes a payment to a third party, that payment is treated in appropriate circumstances as an additional amount loaned to the borrower and then paid by the borrower to the third party. The character of the deemed payment between the borrower and the third party depends on the substance of the transaction.
(5) Examples. The following examples illustrate the rules of this paragraph (g).
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Treas. Reg. §1.1273-2(h)Investment units—(1) In general.
Investment units—(1) In general. Under section 1273(c)(2), an investment unit is treated as if the investment unit were a debt instrument. The issue price of the investment unit is determined under paragraph (a)(1), (b)(1), or (c)(1) of this section, if applicable. The issue price of the investment unit is then allocated between the debt instrument and the property right (or rights) that comprise the unit based on their relative fair market values. If paragraphs (a)(1), (b)(1), and (c)(1) of this section are not applicable, however, the issue price of the debt instrument that is part of the investment unit is determined under section 1273(b)(4) or 1274, whichever is applicable.
(2) Consistent allocation by holders and issuer. The issuer's allocation of the issue price of the investment unit is binding on all holders of the investment unit. However, the issuer's determination is not binding on a holder that explicitly discloses that its allocation is different from the issuer's allocation. Unless otherwise provided by the Commissioner, the disclosure must be made on a statement attached to the holder's timely filed Federal income tax return for the taxable year that includes the acquisition date of the investment unit. See § 1.1275-2(e) for rules relating to the issuer's obligation to disclose certain information to holders.
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Treas. Reg. §1.1273-2(i)§1.1273-2(i)
A portion of the initial purchase price of the instrument is allocable to interest that has accrued prior to the issue date (pre-issuance accrued interest); and
(ii) The instrument provides for a payment of stated interest on the first payment date within 1 year of the issue date that equals or exceeds the amount of the pre-issuance accrued interest.
(2) Exclusion of pre-issuance accrued interest from issue price. If a debt instrument meets the requirements of paragraph (m)(1) of this section, the instrument's issue price may be computed by subtracting from the issue price (as otherwise computed under this section) the amount of pre-issuance accrued interest. If the issue price of the debt instrument is computed in this manner, a portion of the stated interest payable on the first payment date must be treated as a return of the excluded pre-issuance accrued interest, rather than as an amount payable on the instrument.
(3) Example. The following example illustrates the rule of paragraph (m) of this section.
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Treas. Reg. §1.1273-2(j)Convertible debt instruments.
Convertible debt instruments. The issue price of a debt instrument includes any amount paid for an option to convert the instrument into stock (or another debt instrument) of either the issuer or a related party (within the meaning of section 267(b) or 707(b)(1)) or into cash or other property in an amount equal to the approximate value of such stock (or debt instrument). For debt instruments issued on or after February 5, 2013, the term stock in the preceding sentence means an equity interest in any entity that is classified, for Federal tax purposes, as either a partnership or a corporation.
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Treas. Reg. §1.1273-2(k)Below-market loans subject to section 7872(b).
Below-market loans subject to section 7872(b). The issue price of a below-market loan subject to section 7872(b) (a term loan other than a gift loan) is the issue price determined under this section, reduced by the excess amount determined under section 7872(b)(1).
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Treas. Reg. §1.1273-2(l)§1.1273-2(l)
[Reserved]
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Treas. Reg. §1.1273-2(m)Treatment of amounts representing pre-issuance accrued interest—(1) Applicability.
Treatment of amounts representing pre-issuance accrued interest—(1) Applicability. Paragraph (m)(2) of this section provides an alternative to the general rule of this section for determining the issue price of a debt instrument if—
14 Citing Cases
1273.4 (2016) (providing that employ- ees are to be on administrative leave during a state ofemergency); 4 sec. 1299.1 (defining "administrative leave" as an excused absence from duty without loss of pay and without charge to annual leave, sick leave, or compensatory time). - 23 - emergency days as declared by the Mayor"). This implies that "
1273; United States v. Midland-Ross Corp., 381 U.S. 54, 85 (1965); and John Hancock Life Ins. Co. (U.S.A.) v. Commissioner, 141 T.C. at 147. "The holder ofa debt instrument with OID generally accrues and includes in gross income, as interest, the OID over the life ofthe obligation, even though the interest may not be received until the maturit
1273; United States v. Midland-Ross Corp., 381 U.S. 54, 85 (1965); and John Hancock Life Ins. Co. (U.S.A.) v. Commissioner, 141 T.C. at 147. "The holder ofa debt instrument with OID generally accrues and includes in gross income, as interest, the OID over the life ofthe obligation, even though the interest may not be received until the maturit
A foreign corporation not engaged in a trade or business within the United States is taxable at a flat rate of 30 percent of the amount received from “interest (other than original issue discount as defined in section 1273), dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits, and income”, but only to the extent that the income is received from sources within the United States (U.S.
t of Guam, American Samoa, and the Northern Mariana Islands”. TRA 1986 section 1271, see supra note 12, does not appear in, or make any changes to, the Internal Revenue Code (Code). Rather, that provision grants Guam, American Samoa, and 16TRA 1986 sec. 1273, in pt. I of subtit. G of tit. XII, relates to the treatment of corporations organized in Guam, American Samoa, and the CNMI. TRA 1986 secs. 1274 and 1275, in pt. II of subtit. G, relate specifically to the Virgin Islands. TRA 1986 sec. 1276
t of Guam, American Samoa, and the Northern Mariana Islands”. TRA 1986 section 1271, see supra note 12, does not appear in, or make any changes to, the Internal Revenue Code (Code). Rather, that provision grants Guam, American Samoa, and 16TRA 1986 sec. 1273, in pt. I of subtit. G of tit. XII, relates to the treatment of corporations organized in Guam, American Samoa, and the CNMI. TRA 1986 secs. 1274 and 1275, in pt. II of subtit. G, relate specifically to the Virgin Islands. TRA 1986 sec. 1276
ribed by the Secretary under section 874) deduct and withhold from such items a tax equal to 30 percent thereof * * * (b) Income items.--The items of income referred to in subsection (a) are interest (other than original issue discount as defined in section 1273), dividends, rent, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable annual or periodical gains, profits, and income * * * - 145 - SEC.
Under the second regime, a flat tax of 30 percent is imposed on a foreign corporation’s gross income from "interest (other than original issue discount as defined in section 1273), dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits, and income", but only to the extent the amount is received from sources within the United States and is not effectively connected with the conduct of tr
Under the second regime, a flat tax of 30 percent is imposed on a foreign corporation’s gross income from "interest (other than original issue discount as defined in section 1273), dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits, and income", but only to the extent the amount is received from sources within the United States and is not effectively connected with the conduct of tr
ribed by the Secretary under section 874) deduct and withhold from such items a tax equal to 30 percent thereof * * * (b) Income items.--The items of income referred to in subsection (a) are interest (other than original issue discount as defined in section 1273), dividends, rent, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable annual or periodical gains, profits, and income * * * - 145 - SEC.
ribed by the Secretary under section 874) deduct and withhold from such items a tax equal to 30 percent thereof * * * (b) Income items.--The items of income referred to in subsection (a) are interest (other than original issue discount as defined in section 1273), dividends, rent, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable annual or periodical gains, profits, and income * * * - 145 - SEC.
ribed by the Secretary under section 874) deduct and withhold from such items a tax equal to 30 percent thereof * * * (b) Income items.--The items of income referred to in subsection (a) are interest (other than original issue discount as defined in section 1273), dividends, rent, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable annual or periodical gains, profits, and income * * * - 145 - SEC.