26 U.S.C. § 171 : US Code - Section 171: Amortizable bond premium

Search 26 U.S.C. § 171 : US Code - Section 171: Amortizable bond premium

(a) General rule
In the case of any bond, as defined in subsection (d), the
following rules shall apply to the amortizable bond premium
(determined under subsection (b)) on the bond:
(1) Taxable bonds
In the case of a bond (other than a bond the interest on which
is excludable from gross income), the amount of the amortizable
bond premium for the taxable year shall be allowed as a
deduction.
(2) Tax-exempt bonds
In the case of any bond the interest on which is excludable
from gross income, no deduction shall be allowed for the
amortizable bond premium for the taxable year.
(3) Cross reference
For adjustment to basis on account of amortizable bond
premium, see section 1016(a)(5).
(b) Amortizable bond premium
(1) Amount of bond premium
For purposes of paragraph (2), the amount of bond premium, in
the case of the holder of any bond, shall be determined -
(A) with reference to the amount of the basis (for
determining loss on sale or exchange) of such bond,
(B)(i) with reference to the amount payable on maturity or on
earlier call date, in the case of any bond other than a bond to
which clause (ii) applies, or and (!1)
(ii) with reference to the amount payable on maturity (or if
it results in a smaller amortizable bond premium attributable
to the period to earlier call date, with reference to the
amount payable on earlier call date), in the case of any bond
described in subsection (a)(1) which is acquired after December
31, 1957, and
(C) with adjustments proper to reflect unamortized bond
premium, with respect to the bond, for the period before the
date as of which subsection (a) becomes applicable with respect
to the taxpayer with respect to such bond.
In no case shall the amount of bond premium on a convertible bond
include any amount attributable to the conversion features of the
bond.
(2) Amount amortizable
The amortizable bond premium of the taxable year shall be the
amount of the bond premium attributable to such year. In the case
of a bond to which paragraph (1)(B)(ii) applies and which has a
call date, the amount of bond premium attributable to the taxable
year in which the bond is called shall include an amount equal to
the excess of the amount of the adjusted basis (for determining
loss on sale or exchange) of such bond as of the beginning of the
taxable year over the amount received on redemption of the bond
or (if greater) the amount payable on maturity.
(3) Method of determination
(A) In general
Except as provided in regulations prescribed by the
Secretary, the determinations required under paragraphs (1) and
(2) shall be made on the basis of the taxpayer's yield to
maturity determined by -
(i) using the taxpayer's basis (for purposes of determining
loss on sale or exchange) of the obligation, and
(ii) compounding at the close of each accrual period (as
defined in section 1272(a)(5)).
(B) Special rule where earlier call date is used
For purposes of subparagraph (A), if the amount payable on an
earlier call date is used under paragraph (1)(B)(ii) in
determining the amortizable bond premium attributable to the
period before the earlier call date, such bond shall be treated
as maturing on such date for the amount so payable and then
reissued on such date for the amount so payable.
(4) Treatment of certain bonds acquired in exchange for other
property
(A) In general
If -
(i) a bond is acquired by any person in exchange for other
property, and
(ii) the basis of such bond is determined (in whole or in
part) by reference to the basis of such other property,
for purposes of applying this subsection to such bond while
held by such person, the basis of such bond shall not exceed
its fair market value immediately after the exchange. A similar
rule shall apply in the case of such bond while held by any
other person whose basis is determined (in whole or in part) by
reference to the basis in the hands of the person referred to
in clause (i).
(B) Special rule where bond exchanged in reorganization
Subparagraph (A) shall not apply to an exchange by the
taxpayer of a bond for another bond if such exchange is a part
of a reorganization (as defined in section 368). If any portion
of the basis of the taxpayer in a bond transferred in such an
exchange is not taken into account in determining bond premium
by reason of this paragraph, such portion shall not be taken
into account in determining the amount of bond premium on any
bond received in the exchange.
(c) Election as to taxable bonds
(1) Eligibility to elect; bonds with respect to which election
permitted
In the case of bonds the interest on which is not excludible
from gross income, this section shall apply only if the taxpayer
has so elected.
(2) Manner and effect of election
The election authorized under this subsection shall be made in
accordance with such regulations as the Secretary shall
prescribe. If such election is made with respect to any bond
(described in paragraph (1)) of the taxpayer, it shall also apply
to all such bonds held by the taxpayer at the beginning of the
first taxable year to which the election applies and to all such
bonds thereafter acquired by him and shall be binding for all
subsequent taxable years with respect to all such bonds of the
taxpayer, unless, on application by the taxpayer, the Secretary
permits him, subject to such conditions as the Secretary deems
necessary, to revoke such election. In the case of bonds held by
a common trust fund, as defined in section 584(a), the election
authorized under this subsection shall be exercisable with
respect to such bonds only by the common trust fund. In case of
bonds held by an estate or trust, the election authorized under
this subsection shall be exercisable with respect to such bonds
only by the fiduciary.
(d) Bond defined
For purposes of this section, the term "bond" means any bond,
debenture, note, or certificate or other evidence of indebtedness,
but does not include any such obligation which constitutes stock in
trade of the taxpayer or any such obligation of a kind which would
properly be included in the inventory of the taxpayer if on hand at
the close of the taxable year, or any such obligation held by the
taxpayer primarily for sale to customers in the ordinary course of
his trade or business.
(e) Treatment as offset to interest payments
Except as provided in regulations, in the case of any taxable
bond -
(1) the amount of any bond premium shall be allocated among the
interest payments on the bond under rules similar to the rules of
subsection (b)(3), and
(2) in lieu of any deduction under subsection (a), the amount
of any premium so allocated to any interest payment shall be
applied against (and operate to reduce) the amount of such
interest payment.
For purposes of the preceding sentence, the term "taxable bond"
means any bond the interest of which is not excludable from gross
income.
(f) Dealers in tax-exempt securities
For special rules applicable, in the case of dealers in
securities, with respect to premium attributable to certain
wholly tax-exempt securities, see section 75.