§ 1274.
Determination of issue price in the case of certain debt instruments issued for property
(a)
In general
In the case of any debt instrument to which this section applies, for purposes of this subpart, the issue price shall be—
(1)
where there is adequate stated interest, the stated principal amount, or
(2)
in any other case, the imputed principal amount.
(b)
Imputed principal amount
For purposes of this section—
(2)
Determination of present value
For purposes of paragraph (1), the present value of a payment shall be determined in the manner provided by regulations prescribed by the Secretary—
(A)
as of the date of the sale or exchange, and
(B)
by using a discount rate equal to the applicable Federal rate, compounded semiannually.
(3)
Fair market value rule in potentially abusive situations
(B)
Potentially abusive situation defined
For purposes of subparagraph (A), the term “potentially abusive situation” means—
(i)
a tax shelter (as defined in section 6662(d)(2)(C)(ii)), and
(ii)
any other situation which, by reason of—
(I)
recent sales transactions,
(II)
nonrecourse financing,
(III)
financing with a term in excess of the economic life of the property, or
(IV)
other circumstances,
is of a type which the Secretary specifies by regulations as having potential for tax avoidance.
(c)
Debt instruments to which section applies
(1)
In general
Except as otherwise provided in this subsection, this section shall apply to any debt instrument given in consideration for the sale or exchange of property if—
(A)
the stated redemption price at maturity for such debt instrument exceeds—
(i)
where there is adequate stated interest, the stated principal amount, or
(ii)
in any other case, the imputed principal amount of such debt instrument determined under subsection (b), and
(B)
some or all of the payments due under such debt instrument are due more than 6 months after the date of such sale or exchange.
(2)
Adequate stated interest
(3)
Exceptions
This section shall not apply to—
(A)
Sales for $1,000,000 or less of farms by individuals or small businesses
(i)
In general
Any debt instrument arising from the sale or exchange of a farm (within the meaning of section 6420(c)(2))—
(I)
by an individual, estate, or testamentary trust,
(II)
by a corporation which as of the date of the sale or exchange is a small business corporation (as defined in section 1244(c)(3)), or
(III)
by a partnership which as of the date of the sale or exchange meets requirements similar to those of section 1244(c)(3).
(ii)
$1,000,000 limitation
(B)
Sales of principal residences
(C)
Sales involving total payments of $250,000 or less
(i)
In general
Any debt instrument arising from the sale or exchange of property if the sum of the following amounts does not exceed $250,000:
(I)
the aggregate amount of the payments due under such debt instrument and all other debt instruments received as consideration for the sale or exchange, and
(II)
the aggregate amount of any other consideration to be received for the sale or exchange.
(ii)
Consideration other than debt instrument taken into account at fair market value
(iii)
Aggregation of transactions
(D)
Debt instruments which are publicly traded or issued for publicly traded property
(E)
Certain sales of patents
(F)
Sales or exchanges to which section 483(e) applies
(4)
Exception for assumptions
If any person—
(A)
in connection with the sale or exchange of property, assumes any debt instrument, or
(B)
acquires any property subject to any debt instrument,
in determining whether this section or section 483 applies to such debt instrument, such assumption (or such acquisition) shall not be taken into account unless the terms and conditions of such debt instrument are modified (or the nature of the transaction is changed) in connection with the assumption (or acquisition).
(d)
Determination of applicable Federal rate
For purposes of this section—
(1)
Applicable Federal rate
(B)
Determination of rates
(C)
Federal rate for any calendar month
For purposes of this paragraph—
(i)
Federal short-term rate
(ii)
Federal mid-term and long-term rates
(D)
Lower rate permitted in certain cases
(2)
Lowest 3-month rate applicable to any sale or exchange
(3)
Term of debt instrument
(Added [Pub. L. 98–369, div. A, title I, § 41(a)], July 18, 1984, [98 Stat. 538]; amended [Pub. L. 99–121, title I], §§ 101(a)(1), (b), (c), 102(b), Oct. 11, 1985, [99 Stat. 505], 506, 508; [Pub. L. 99–514, title XVIII, § 1803(a)(14)(A)], Oct. 22, 1986, [100 Stat. 2797]; [Pub. L. 101–239, title VII, § 7721(c)(11)], Dec. 19, 1989, [103 Stat. 2400]; [Pub. L. 104–188, title I, § 1704(t)(78)], Aug. 20, 1996, [110 Stat. 1891]; [Pub. L. 105–34, title III, § 312(d)(1)], Aug. 5, 1997, [111 Stat. 839]; [Pub. L. 115–141, div. U, title IV, § 401(a)(179)], Mar. 23, 2018, [132 Stat. 1193].)