Amended 1986, 1993
- 1993 Pub. L. 103-66 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.”
- 1986 Pub. L. 99-514 Pub. L. 99–514, § 1899A(31), substituted “July 18, 1984” for “the date of the enactment of this section”.
(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)).
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(b) Disallowed deduction allowed for later years
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(1) Election to take into account in later year where net interest income from bond
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(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.
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(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).
Amended 1986
- 1986 Pub. L. 99-514 Pub. L. 99–514, § 1899A(29), substituted “this paragraph” for “this paragaph”.
(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).
Amended 1986
- 1986 Pub. L. 99-514 Pub. L. 99–514, § 1899A(30), substituted “paragraph (1)” for “paragraph 1” in heading.
(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—
Amended 1986, 1988, 1996
- 1996 Pub. L. 104-188 Pub. L. 104–188 struck out “or to which section 593 applies” after “585(a)(2))” in closing provisions.
- 1988 Pub. L. 100-647 Pub. L. 100–647 inserted a closing parenthesis after “section 585(a)(2)”.
- 1986 Pub. L. 99-514 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”.
- 1986 Pub. L. 99-514 Pub. L. 99–514, § 902(e)(2), substituted “section 265(a)(5)” for “section 265(5)”.
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(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
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(2) the aggregate amount of interest (including original issue discount) includible in gross income for the taxable year with respect to such bond.
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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.