Sec. 3411. Current inclusion in income of market discount
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Subpart B of part V of subchapter P of chapter 1 is amended by redesignating section 1278 as section 1279 and by inserting after section 1277 the following new section: There shall be included in the gross income of the holder of any market discount bond acquired after December 31, 2014, an amount equal to the sum of the daily portions of the market discount for each day during the taxable year on which such holder held such bond. For purposes of subsection (a), the daily portion of the market discount on any market discount bond shall be an amount equal to the daily portion of original issue discount which would be includible in gross income under section 1272(a) (determined without regard to paragraph
(2)thereof) if such bond had been— originally issued on the date on which such bond was acquired by the taxpayer, for an issue price equal to the basis of such bond immediately after such acquisition. In the case of any bond having original issue discount, the daily portion determined under paragraph
(1)shall be reduced by the daily portion of original issue discount includible in gross income under section 1272(a) (determined without regard to paragraph
(2)thereof) with respect to such bond. In the case of a bond the principal of which may be paid in 2 or more payments, the daily portions of market discount shall be determined under regulations prescribed by the Secretary. The amount of market discount allocable to any accrual period for purposes of determining the sum of the daily portions under subsection
(a)shall not exceed the excess (if any) of— the product of— the maximum accrual rate determined under paragraph (2), properly adjusted for the length of the accrual period, multiplied by the adjusted basis of such bond at the beginning of such accrual period, over the sum of the qualified stated interest and original issue discount allocable to such accrual period. The maximum accrual rate determined under this paragraph with respect to any bond is the greater of— such bonds’s yield to maturity (determined as of the date of the issuance of such bond) plus 5 percentage points, or the applicable Federal rate for such bond (determined under section 1274(d) as of the date of the acquisition of such bond and on the basis of the remaining term of such bond as of such date) plus 10 percentage points. In the case of debt instruments to which section 1272(a)(6) applies, rules similar to the rules of such section shall apply for purposes of determining the daily portions of market discount. For purposes of this subsection, the term accrual period has the meaning given such term in section 1272(a)(5). Except for purposes of sections 103, 871(a), 881, 1441, 1442, and 6049 (and such other provisions as may be specified in regulations), any amount included in gross income under this section shall be treated as interest for purposes of this title. The basis of any market discount bond in the hands of the taxpayer shall be increased by the amount included in gross income pursuant to this section. So much of any loss recognized by the taxpayer on the disposition of a market discount bond as does not exceed the aggregate amounts included in the taxpayer’s gross income under subsection
(a)with respect to such bond shall be treated for purposes of this title as an ordinary loss. . Section 1283 is amended by striking subsection
(c)and redesignating subsection
(d)as subsection (c). Section 1271(a)(3) is amended— by striking all that precedes subparagraph
(C)and inserting the following: On the sale or exchange of any short-term obligation (as defined in section 1283(a)(1)), any gain realized which does not exceed an amount equal to the ratable share of the acquisition discount shall be treated as ordinary income. , and by redesignating subparagraphs (C), (D), and
(E)as subparagraphs (B), (C), and (D), respectively. Section 1271(a) is amended by striking paragraph (4). Section 1283(c)(3), as redesignated by paragraph (1), is amended by striking paragraphs
(3)and
(4)of section 1271(a) and inserting section 1271(a)(3) . Section 1276 is amended by adding at the end the following new subsection: This section shall not apply to any market discount bond to which section 1278 applies. . Section 1277 is amended by adding at the end the following new subsection: This section shall not apply to any market discount bond to which section 1278 applies. . Section 1279(b), as redesignated by subsection (a), is amended by adding at the end the following new paragraph: This subsection shall not apply to any market discount bond to which section 1278 applies. . Section 1279(a), as redesignated by subsection (a), is amended by adding at the end the following new paragraph: In the case of a transfer described in section 743 of an interest in a partnership holding a bond, the partnership shall be treated as acquiring the transferee partner’s proportionate share of such bond at the time of such transfer. . Section 1279(a)(2), as redesignated by subsection (a), is amended by adding at the end the following new subparagraph: If the basis of the taxpayer in a bond is determined under section 734(a)(2) or (b), for purposes of subparagraph (A)(ii), the basis of such bond shall not be less than its fair market value immediately after its acquisition by the taxpayer. . Section 1279(a)(1), as redesignated by subsection (a), is amended by striking subparagraph
(D)Section 1279(a)(4), as redesignated by subsection (a), is amended— by redesignating subparagraphs
(A)and
(B)as clauses
(i)and
(ii)and by indenting such clauses appropriately, by striking means the sum of— and inserting means the excess of— the sum of— , by striking the period at the end and inserting , over , and by adding at the end the following new subparagraph: the sum of— any payments other than qualified stated interest made under the bond during periods before the acquisition of the bond by the taxpayer, and any premium which has accrued during such periods (determined as if owned at all times by the original holder). . Section 1273(a)(2) is amended to read as follows: The term redemption price means the sum of all payments provided by the debt instrument other than qualified stated interest. The term qualified stated interest means stated interest that is unconditionally payable in money and other property (other than a debt instrument of the issuer) at least annually at a fixed rate (or to the extent provided by regulations, at a variable rate). The basis of any debt instrument shall be reduced by the amount of any payment received other than qualified stated interest. . Each of the following provisions is amended by striking stated redemption price at maturity and inserting redemption price : Section 1271(a)(3)(B) (as redesignated by subsection (b)). Section 1273(a)(1)(A). Section 1273(a)(3). Section 1273(b)(4). Section 1274(c)(1)(A). Section 1279(a)(5) (as redesignated by subsection (a)). Section 1283(a)(2)(A). Section 1286(a)(1). The heading and text of section 1286(e)(4). Section 108(e)(10)(B) is amended by striking stated both places it appears. Section 1272(a)(6)(A)(i) is amended by striking stated . Subparagraphs (A)(i) and
(C)of section 1279(a)(2) (as redesignated by subsection (a)) are each amended by striking the stated redemption price of the bond at maturity and inserting the redemption price of the bond . Section 1279(a)(2)(B) (as redesignated by subsection (a)) is amended by striking the stated redemption price of such bond at maturity and inserting the redemption price of such bond . Section 1275(a) is amended by adding at the end the following new paragraph: For purposes of this part, the adjusted issue price of any debt instrument is its issue price— increased by the aggregate of the original issue discount includible in the gross income of all holders for prior periods (determined without regard to paragraph
(7)of section 1272(a)), or, in the case of a tax-exempt obligation, the aggregate amount which accrued in the manner provided by this subsection (determined without regard to such paragraph (7)) for all prior periods, and reduced by the sum of— any payments other than qualified stated interest previously made on the debt instrument, and in the case of a debt instrument which was issued with amortizable bond premium (as defined in section 171(b)), the aggregate amount by which the basis of such instrument would have been reduced under section 1016(a)(5) for prior periods if the instrument had been held by the original holder at all times. The adjusted issue price of the issuer shall be properly adjusted to take into account that section 1273(a)(3) does not apply to the deduction under section 163 for original issue discount. . Paragraphs (3), (4), and
(5)of section 1272(a) are amended to read as follows: For purposes of paragraph (1), the daily portion of the original issue discount on any debt instrument shall be determined by allocating to each day in any accrual period its ratable share of the original issue discount allocable to such accrual period. For purposes of the preceding sentence, the original issue discount allocable to any accrual period is the excess (if any) of— the product of— the adjusted issue price of the debt instrument at the beginning of such accrual period, multiplied by the yield to maturity of the debt instrument properly adjusted for the length of the accrual period, over the amount of any qualified stated interest allocable to such accrual period. For purposes of this subsection, the term yield to maturity means the discount rate that, when used in computing the present value of all principal and interest payments to be made under the debt instrument produces an amount equal to the issue price of the debt instrument. For purposes of this subsection, the term accrual period shall be determined under regulations prescribed by the Secretary, provided that an accrual period shall in no event be longer than one year. . Section 6045 is amended by adding at the end the following new subsection: If any customer of a broker holds a covered bond in an account with such broker at any time during a calendar year— such broker shall file a return under subsection
(a)for such calendar year, and such return shall include with respect to each such covered bond— the amount (if any) includible in the gross income of such customer as original issue discount with respect to such bond under section 1272 for periods during such calendar year, and. the amount (if any) includible in the gross income of such customer as market discount with respect to such bond under section 1278(a) for periods during such calendar year. For purposes of this subsection, the term covered bond means any obligation to which section 1272 or 1278(a) applies if such obligation— was acquired after December 31, 2014, through a transaction in the account in which such obligation is held, or was transferred to such account from an account in which such obligation was a covered bond, but only if the broker received a statement under section 6045A with respect to the transfer. The requirements of subsections
(b)shall apply with respect to any return filed under subsection
(a)by reason of this subsection. . Subsection
(a)of section 6045A is amended— by inserting or a covered bond (as defined in section 6045(i)(2)) after covered security (as defined in section 6045(g)(3)) , and by striking section 6045(g) and inserting subsections
(g)and
(i)of section 6045 . Paragraph
(6)of section 6049(d) is amended by adding at the end the following new subparagraph: Except as otherwise provided by the Secretary, original issue discount with respect to any obligation shall not be required to be reported under this section if such original issue discount is required to be reported with respect to such obligation under section 6045(i). . Section 857(e)(2)(B)(i), as amended by the preceding provisions of this Act, is amended by striking or 1272 and inserting 1272, or 1278 . Section 1042(d) is amended by striking section 1278(a)(2)(A)(ii) in the matter following paragraph
(2)and inserting section 1279(a)(2)(A)(ii) . Section 1016(a), as amended by the preceding provisions of this Act, is amended by adding at the end the following new paragraph: in the case of any debt instrument, to extend provided in sections 1272(d)(1), 1273(a)(2)(C), and 1278(d)(2). . Section 1276 is amended by inserting after on bonds not subject to current inclusion in the heading thereof. accrued market discount Section 1277 is amended by inserting after on bonds not subject to current inclusion in the heading thereof. accrued market discount Section 1281 is amended by striking subsection (c). Section 1282 is amended by striking subsection (d). The table of sections for subpart B of part V of subchapter P of chapter 1 is amended to read as follows: Sec. 1276. Disposition gain representing accrued market discount on bonds not subject to current inclusion treated as ordinary income. Sec. 1277. Deferral of interest deduction allocable to accrued market discount on bonds not subject to current inclusion. Sec. 1278. Current inclusion in income of market discount on bonds acquired after 2014. Sec. 1279. Definitions and special rules. . Except as provided in paragraph (2), the amendments made by this section shall apply to obligations acquired after December 31, 2014. The amendments made by subsection
(e)shall take effect on January 1, 2015.