§ 1271.
Treatment of amounts received on retirement or sale or exchange of debt instruments
(a)
General rule
For purposes of this title—
(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—
(i)
the original issue discount, reduced by
(ii)
the portion of original issue discount previously includible in the gross income of any holder (without regard to section 1272(a)(7) (or the corresponding provisions of prior law)),
shall be treated as ordinary income.
(B)
Exceptions
This paragraph shall not apply to—
(i)
any tax-exempt obligation, or
(ii)
any holder who has purchased the debt instrument at a premium.
(3)
Certain short-term Government obligations
(B)
Short-term Government 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—
(i)
the number of days which the taxpayer held the obligation, bears to
(ii)
the number of days after the date the taxpayer acquired the obligation and up to (and including) the date of its maturity.
(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—
(i)
the taxpayer’s yield to maturity based on the taxpayer’s cost of acquiring the obligation, and
An election under this subparagraph, once made with respect to any obligation, shall be irrevocable.
(4)
Certain short-term nongovernment obligations
(B)
Short-term nongovernment obligation
For purposes of this paragraph, the term “short-term nongovernment obligation” means any obligation which—
(i)
has a fixed maturity date not more than 1 year from the date of the issue, and
(ii)
is not a short-term Government obligation (as defined in paragraph (3)(B) without regard to the last sentence thereof).
(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—
(i)
the number of days which the taxpayer held the obligation, bears to
(ii)
the number of days after the date of original issue and up to (and including) the date of its maturity.
(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—
(i)
the yield to maturity based on the issue price of the obligation, and
Any election under this subparagraph, once made with respect to any obligation, shall be irrevocable.
(Added [Pub. L. 98–369, div. A, title I, § 41(a)], July 18, 1984, [98 Stat. 531]; amended [Pub. L. 99–514, title XVIII, § 1803(a)(1)(A)], (2), (3), Oct. 22, 1986, [100 Stat. 2791], 2792; [Pub. L. 100–647, title I, § 1006(u)(4)], Nov. 10, 1988, [102 Stat. 3427]; [Pub. L. 105–34, title X, § 1003(c)(1)], Aug. 5, 1997, [111 Stat. 910]; [Pub. L. 113–295, div. A, title II, § 221(a)(86)], Dec. 19, 2014, [128 Stat. 4049]; [Pub. L. 115–141, div. U, title IV, § 401(c)(1)(A)], (D), (E), Mar. 23, 2018, [132 Stat. 1205].)