26 U.S.C. § 1277 | Deferral of interest deduction allocable to accrued market discount

(a)

General rule

Except as otherwise provided in this section, the net direct interest expense with respect to any market discount bond shall be allowed as a deduction for the taxable year only to the extent that such expense exceeds the portion of the market discount allocable to the days during the taxable year on which such bond was held by the taxpayer (as determined under the rules of section 1276(b)).

(b)

Disallowed deduction allowed for later years

(1)

Election to take into account in later year where net interest income from bond

(A)

In general

If—

(i)

there is net interest income for any taxable year with respect to any market discount bond, and

(ii)

the taxpayer makes an election under this subparagraph with respect to such bond,

any disallowed interest expense with respect to such bond shall be treated as interest paid or accrued by the taxpayer during such taxable year to the extent such disallowed interest expense does not exceed the net interest income with respect to such bond.

(B)

Determination of disallowed interest expense

For purposes of subparagraph (A), the amount of the disallowed interest expense—

(i)

shall be determined as of the close of the preceding taxable year, and

(ii)

shall not include any amount previously taken into account under subparagraph (A).

(C)

Net interest income

For purposes of this paragraph, the term “net interest income” means the excess of the amount determined under paragraph (2) of subsection (c) over the amount determined under paragraph (1) of subsection (c).

(2)

Remainder of disallowed interest expense allowed for year of disposition

(A)

In general

Except as otherwise provided in this paragraph, the amount of the disallowed interest expense with respect to any market discount bond shall be treated as interest paid or accrued by the taxpayer in the taxable year in which such bond is disposed of.

(B)

Nonrecognition transactions

If any market discount bond is disposed of in a nonrecognition transaction—

(i)

the disallowed interest expense with respect to such bond shall be treated as interest paid or accrued in the year of disposition only to the extent of the amount of gain recognized on such disposition, and

(ii)

the disallowed interest expense with respect to such property (to the extent not so treated) shall be treated as disallowed interest expense—

(I)

in the case of a transaction described in section 1276(c)(1), of the transferee with respect to the transferred basis property, or

(II)

in the case of a transaction described in section 1276(c)(2), with respect to the exchanged basis property.

(C)

Disallowed interest expense reduced for amounts previously taken into account under paragraph (1)

For purposes of this paragraph, the amount of the disallowed interest expense shall not include any amount previously taken into account under paragraph (1).

(3)

Disallowed interest expense

For purposes of this subsection, the term “disallowed interest expense” means the aggregate amount disallowed under subsection (a) with respect to the market discount bond.

(c)

Net direct interest expense

For purposes of this section, the term “net direct interest expense” means, with respect to any market discount bond, the excess (if any) of—

(1)

the amount of interest paid or accrued during the taxable year on indebtedness which is incurred or continued to purchase or carry such bond, over

(2)

the aggregate amount of interest (including original issue discount) includible in gross income for the taxable year with respect to such bond.

In the case of any financial institution which is a bank (as defined in section 585(a)(2)), the determination of whether interest is described in paragraph (1) shall be made under principles similar to the principles of section 291(e)(1)(B)(ii). Under rules similar to the rules of section 265(a)(5), short sale expenses shall be treated as interest for purposes of determining net direct interest expense.

Pub. L. 98–369, div. A, title I, § 41(a)July 18, 198498 Stat. 545 Pub. L. 99–514, title IXOct. 22, 1986100 Stat. 2380 Pub. L. 100–647, title I, § 1018(u)(31)Nov. 10, 1988102 Stat. 3592 Pub. L. 103–66, title XIII, § 13206(b)(1)(B)Aug. 10, 1993107 Stat. 465 Pub. L. 104–188, title I, § 1616(b)(14)Aug. 20, 1996110 Stat. 1857(Added , , ; amended , §§ 901(d)(4)(F), § 902(e)(2), title XVIII, § 1899A(29)–(31), , , 2382, 2960; , , ; , , ; , , .)

Editorial Notes

Amendments

Pub. L. 104–1881996—Subsec. (c). struck out “or to which section 593 applies” after “585(a)(2))” in closing provisions.

Pub. L. 103–66July 18, 19841993—Subsec. (d). struck out heading and text of subsec. (d). Text read as follows: “In the case of a market discount bond issued on or before , any gain recognized by the taxpayer on any disposition of such bond shall be treated as ordinary income to the extent the amount of such gain does not exceed the amount allowable with respect to such bond under subsection (b)(2) for the taxable year in which such bond is disposed of.”

Pub. L. 100–6471988—Subsec. (c). inserted a closing parenthesis after “section 585(a)(2)”.

Pub. L. 99–514, § 1899A(29)1986—Subsec. (b)(1)(C). , substituted “this paragraph” for “this paragaph”.

Pub. L. 99–514, § 1899A(30)Subsec. (b)(2)(C). , substituted “paragraph (1)” for “paragraph 1” in heading.

Pub. L. 99–514, § 901(d)(4)(F)Subsec. (c). , substituted “which is a bank (as defined in section 585(a)(2) or to which section 593 applies” for “to which section 585 or 593 applies”.

Pub. L. 99–514, § 902(e)(2), substituted “section 265(a)(5)” for “section 265(5)”.

Pub. L. 99–514, § 1899A(31)July 18, 1984Subsec. (d). , substituted “” for “the date of the enactment of this section”.

Statutory Notes and Related Subsidiaries

Effective Date of 1996 Amendment

Pub. L. 104–188Dec. 31, 1995section 1616(c) of Pub. L. 104–188 section 593 of this titleAmendment by applicable to taxable years beginning after , see , set out as a note under .

Effective Date of 1993 Amendment

Pub. L. 103–66Apr. 30, 1993section 13206(b)(3) of Pub. L. 103–66 section 1276 of this titleAmendment by applicable to obligations purchased (within the meaning of section 1272(d)(1) [now 1272(c)(1)] of this title) after , see , set out as a note under .

Effective Date of 1988 Amendment

Pub. L. 100–647 Pub. L. 99–514 section 1019(a) of Pub. L. 100–647 section 1 of this titleAmendment by effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, , to which such amendment relates, see , set out as a note under .

Effective Date of 1986 Amendment

section 901(d)(4)(F) of Pub. L. 99–514Dec. 31, 1986section 901(e) of Pub. L. 99–514 section 166 of this titleAmendment by applicable to taxable years beginning after , see , set out as a note under .

section 902(e)(2) of Pub. L. 99–514Dec. 31, 1986section 902(f) of Pub. L. 99–514 section 265 of this titleAmendment by applicable to taxable years ending after , with certain exceptions and qualifications, see , set out as a note under .

Effective Date

July 18, 1984July 18, 1984section 44 of Pub. L. 98–369 section 1271 of this titleSection applicable to taxable years ending after , and applicable to obligations acquired after , in taxable years ending after such date, see , set out as a note under .

Plan Amendments Not Required Until January 1, 1989

Pub. L. 99–514Jan. 1, 1989section 1140 of Pub. L. 99–514 section 401 of this titleFor provisions directing that if any amendments made by subtitle A or subtitle C of title XI [§§ 1101–1147 and 1171–1177] or title XVIII [§§ 1800–1899A] of require an amendment to any plan, such plan amendment shall not be required to be made before the first plan year beginning on or after , see , as amended, set out as a note under .