Section 24674 - [FN*] Obligations Issued at Discount(a) Non-Interest-Bearing Obligations Issued at Discount. (1) Election to Include Increase in Income Currently. If a taxpayer owns a noninterest-bearing obligation issued at a discount and redeemable for fixed amounts increasing at stated intervals, and if the increase, if any, in redemption price of such obligation during the income year (as described in paragraph (2) of this subsection) does not constitute income for such year under the method of accounting used in computing its net income, then the taxpayer may, at its election, treat the increase as constituting income for the income year in which such increase occurs. If the election is not made, the taxpayer shall treat the increase as constituting income for the income year in which the obligation is redeemed or disposed of, or finally matures, whichever is earlier. Any such election must be made in the taxpayer's return and may be made for any income year. If an election is made with respect to any such obligation described in this paragraph, it shall apply also to all other obligations of the type described owned by the taxpayer at the beginning of the first income year to which the election applies, and to those thereafter acquired by it, and shall be binding for the income year for which the return is filed and for all subsequent income years, unless the Franchise Tax Board permits the taxpayer to change to a different method of reporting income from such obligations. See Section 24651(e) and subsection (e) of Reg. 24651, relating to requirement respecting a change of accounting method. Although the election once made is binding upon the taxpayer, it does not apply to a transferee of the taxpayer.
(2) Amount of Increase in Case of Non-Interest-bearing Obligations. In any case in which an election is made under Section 24674,the amount which accrues in any income year to which the election applies is measured by the actual increase in the redemption price occurring in that year. This amount does not accrue ratably between the dates on which the redemption price changes. For example, if two dates on which the redemption price increases (February 1 and August 1) fall within an income year and if the redemption price increases in the amount of 50 cents on each such date, the amount accruing in that year would be $1.00 ($0.50 on February 1 and $0.50 on August 1). If the taxpayer owns a non-interest-bearing obligation of the character described in paragraph (1) of this subsection acquired prior to the first income year to which its election applies, it must also include in gross income for such first income year the increase in the redemption price of such obligation occurring between the date of acquisition of the obligation and the first day of such first income year.(b) Short-Term Obligations Issued on a Discount Basis. In the case of obligations of the United States or any of its possessions, or of a state or territory, or any political subdivision thereof, or of the District of Columbia, issued on a discount basis and payable without interest at a fixed maturity date not exceeding one year from the date of issue, the amount of discount at which such obligation originally sold does not accrue until the date on which such obligation is redeemed, sold, or otherwise disposed of. This rule applies regardless of the method of accounting used by the taxpayer.[FN*] This regulation is based on Section 26 CFR 1.454-1.
Cal. Code Regs. Tit. 18, § 24674