(a) General rule
For purposes of this subpart—
(1) In general
The term “original issue discount” means the excess (if any) of—
(A) the stated redemption price at maturity, over
(B) the issue price.
(2) Stated redemption price at maturity
The term “stated redemption price at maturity” means the amount fixed by the last modification of the purchase agreement and includes interest and other amounts payable at that time (other than any interest based on a fixed rate, and payable unconditionally at fixed periodic intervals of 1 year or less during the entire term of the debt instrument).
(3) ¼ of 1 percent de minimis rule
If the original issue discount determined under paragraph (1) is less than—
(A) ¼ of 1 percent of the stated redemption price at maturity, multiplied by
(B) the number of complete years to maturity,
then the original issue discount shall be treated as zero.
(b) Issue price
For purposes of this subpart—
(1) Publicly offered debt instruments not issued for property
In the case of any issue of debt instruments—
(A) publicly offered, and
(B) not issued for property,
the issue price is the initial offering price to the public (excluding bond houses and brokers) at which price a substantial amount of such debt instruments was sold.
(2) Other debt instruments not issued for property
In the case of any issue of debt instruments not issued for property and not publicly offered, the issue price of each such instrument is the price paid by the first buyer of such debt instrument.
(3) Debt instruments issued for property where there is public trading
In the case of a debt instrument which is issued for property and which—
(A) is part of an issue a portion of which is traded on an established securities market, or
(B)(i) is issued for stock or securities which are traded on an established securities market, or
(ii) to the extent provided in regulations, is issued for property (other than stock or securities) of a kind regularly traded on an established market,
the issue price of such debt instrument shall be the fair market value of such property.
(4) Other cases
Except in any case—
(A) to which paragraph (1), (2), or (3) of this subsection applies, or
(B) to which section 1274 applies,
the issue price of a debt instrument which is issued for property shall be the stated redemption price at maturity.
In applying this subsection, the term “property” includes services and the right to use property, but such term does not include money.
(c) Special rules for applying subsection (b)
For purposes of subsection (b)—
(1) Initial offering price; price paid by the first buyer
The terms “initial offering price” and “price paid by the first buyer” include the aggregate payments made by the purchaser under the purchase agreement, including modifications thereof.
(2) Treatment of investment units
In the case of any debt instrument and an option, security, or other property issued together as an investment unit—
(A) the issue price for such unit shall be determined in accordance with the rules of this subsection and subsection (b) as if it were a debt instrument,
(B) the issue price determined for such unit shall be allocated to each element of such unit on the basis of the relationship of the fair market value of such element to the fair market value of all elements in such unit, and
(C) the issue price of any debt instrument included in such unit shall be the portion of the issue price of the unit allocated to the debt instrument under subparagraph (B).
(Added Pub. L. 98–369, div. A, title I, §41(a), July 18, 1984, 98 Stat. 536; amended Pub. L. 99– 4, title XVIII, §1803(a)(10), Oct. 22, 1986, 100 Stat. 2794.)
1986—Subsec. (b)(3)(B). Pub. L. 99– 4 amended subpar. (B) generally, designating existing provisions as cl. (i) and adding cl. (ii).
Effective Date of 1986 Amendment
Amendment by Pub. L. 99– 4 effective, except as otherwise provided, as if included in the provisions of the Tax Reform Act of 1984, Pub. L. 98–369, div. A, to which such amendment relates, see section 1881 of Pub. L. 99– 4, set out as a note under section 48 of this title.
Section applicable to taxable years ending after July 18, 1984, except as otherwise provided, 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, 1989
For 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– 4 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– 4, as amended, set out as a note under section 401 of this title.