26 U.S.C. § 1277
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)).
If-
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.
For purposes of subparagraph (A), the amount of the disallowed interest expense-
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).
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.
If any market discount bond is disposed of in a nonrecognition transaction-
For purposes of this paragraph, the amount of the disallowed interest expense shall not include any amount previously taken into account under paragraph (1).
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.
For purposes of this section, the term "net direct interest expense" means, with respect to any market discount bond, the excess (if any) of-
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.
26 U.S.C. § 1277
EDITORIAL NOTES
AMENDMENTS1996-Subsec. (c). Pub. L. 104-188 struck out "or to which section 593 applies" after "585(a)(2))" in closing provisions. 1993-Subsec. (d). Pub. L. 103-66 struck out heading and text of subsec. (d). Text read as follows: "In the case of a market discount bond issued on or before July 18, 1984, 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."1988-Subsec. (c). Pub. L. 100-647 inserted a closing parenthesis after "section 585(a)(2)". 1986-Subsec. (b)(1)(C). Pub. L. 99-514, §1899A(29), substituted "this paragraph" for "this paragaph".Subsec. (b)(2)(C). Pub. L. 99-514, §1899A(30), substituted "paragraph (1)" for "paragraph 1" in heading.Subsec. (c). Pub. L. 99-514, §901(d)(4)(F), 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)".Subsec. (d). Pub. L. 99-514, §1899A(31), substituted "July 18, 1984" for "the date of the enactment of this section".
STATUTORY NOTES AND RELATED SUBSIDIARIES
EFFECTIVE DATE OF 1996 AMENDMENT Amendment by Pub. L. 104-188 applicable to taxable years beginning after Dec. 31, 1995, see section 1616(c) of Pub. L. 104-188, set out as a note under section 593 of this title.
EFFECTIVE DATE OF 1993 AMENDMENT Amendment by Pub. L. 103-66 applicable to obligations purchased (within the meaning of section 1272(d)(1) [now 1272(c)(1)] of this title) after Apr. 30, 1993, see section 13206(b)(3) of Pub. L. 103-66, set out as a note under section 1276 of this title.
EFFECTIVE DATE OF 1988 AMENDMENT Amendment by Pub. L. 100-647 effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99-514, to which such amendment relates, see section 1019(a) of Pub. L. 100-647, set out as a note under section 1 of this title.
EFFECTIVE DATE OF 1986 AMENDMENT Amendment by section 901(d)(4)(F) of Pub. L. 99-514 applicable to taxable years beginning after Dec. 31, 1986, see section 901(e) of Pub. L. 99-514, set out as a note under section 166 of this title. Amendment by section 902(e)(2) of Pub. L. 99-514 applicable to taxable years ending after Dec. 31, 1986, with certain exceptions and qualifications, see section 902(f) of Pub. L. 99-514, set out as a note under section 265 of this title.
EFFECTIVE DATESection applicable to taxable years ending after July 18, 1984, and applicable to obligations acquired after July 18, 1984, in taxable years ending after such date, see section 44 of Pub. L. 98-369, set out as a note under section 1271 of this title.
PLAN AMENDMENTS NOT REQUIRED UNTIL JANUARY 1, 1989For 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 Pub. L. 99-514 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 Jan. 1, 1989, see section 1140 of Pub. L. 99-514, as amended, set out as a note under section 401 of this title.
- exchanged basis property
- The term "exchanged basis property" means property having a basis determined under any provision of subtitle A (or under any corresponding provision of prior income tax law) providing that the basis shall be determined in whole or in part by reference to other property held at any time by the person for whom the basis is to be determined.
- nonrecognition transaction
- The term "nonrecognition transaction" means any disposition of property in a transaction in which gain or loss is not recognized in whole or in part for purposes of subtitle A.
- taxable year
- The term "taxable year" means the calendar year, or the fiscal year ending during such calendar year, upon the basis of which the taxable income is computed under subtitle A. "Taxable year" means, in the case of a return made for a fractional part of a year under the provisions of subtitle A or under regulations prescribed by the Secretary, the period for which such return is made.
- taxpayer
- The term "taxpayer" means any person subject to any internal revenue tax.
- transaction
- The term "transaction" includes a series of transactions.
- transferred basis property
- The term "transferred basis property" means property having a basis determined under any provision of subtitle A (or under any corresponding provision of prior income tax law) providing that the basis shall be determined in whole or in part by reference to the basis in the hands of the donor, grantor, or other transferor.