26 U.S.C. § 75 — Dealers in tax-exempt securities

(a) Adjustment for bond premium: This subsection applies to a dealer who holds a municipal bond (defined in (b)(1)) mainly to sell to customers as part of their regular business, during the tax year. (1) If the dealer figures their business income using inventories valued at something other than cost, then the "cost of securities sold" (defined in (b)(2)) for the year must be reduced. The reduction equals the amortizable bond premium that section 171(a)(2) would otherwise disallow as a deduction — calculated as if section 171(d)'s definition of "bond" did not exclude this municipal bond. (2) If instead the dealer figures income without inventories, or with inventories valued at cost, and the bond is sold or disposed of during the year, then the bond's adjusted basis (figured without this rule) must be reduced by the amount section 1016(a)(5) would otherwise require — again, as if section 171(d) did not exclude municipal bonds. There's an exception to rule (1): no reduction to cost of securities sold is required for certain bonds described in (b)(1)(A)(ii) — generally, longer-term bonds — while the dealer still holds them at year's end. But once such a bond is finally sold or disposed of, if it counts as a municipal bond under (b)(1), the cost of securities sold for that year must still be reduced by the amount described in rule (2), even though the dealer values inventory on a basis other than cost. (b) Definitions, for purposes of (a): (1) "Municipal bond" means any obligation issued by a government or a political subdivision, where the interest is excludable from gross income — except when both of the following are true: (A) either (i) the dealer sells or disposes of it within 30 days of acquiring it, or (ii) its earliest maturity or call date is more than 5 years after the dealer acquired it; and (B) when the dealer sells or disposes of it, the amount realized (on a sale) or fair market value (on any other disposition) is higher than its adjusted basis, figured without regard to this section or section 1016(a)(6). These comparisons in (B) exclude interest. When both (A) and (B) are true, the bond does not count as a "municipal bond" for this section. (2) "Cost of securities sold" means: the inventory value of the opening inventory for the year, plus the cost of securities and other property bought during the year that would properly belong in inventory if on hand at year's end — minus the inventory value of the closing inventory for the year.