26 U.S.C. § 454 — Obligations issued at discount

submitted 72 years ago by ch. 736 to r/title-26-INTERNAL-REVENUE-CODE · 565 words · no verdicts yet

in plain englishAI-generated · not legal advice

This law covers savings bonds and other IOUs sold at a discount instead of paying interest. Normally the growing redemption value isn't taxed until later. But taxpayers can choose to report that growth as income each year instead.

(a) Non-interest-bearing obligations issued at a discount: Say a taxpayer owns a non-interest-bearing obligation bought at a discount, that pays off at fixed amounts increasing at set intervals (or owns an obligation described in (c)(2)). If the growth in that obligation's redemption price during a tax year doesn't normally count as income yet, under the taxpayer's accounting method, the taxpayer may still elect, on their return for any tax year, to treat that growth as income received that year. Once made, this election covers every such obligation the taxpayer owned at the start of the first year it applies to, plus every one acquired afterward — and it binds all future years, unless the Secretary lets the taxpayer switch to a different method, under whatever conditions the Secretary requires. For obligations already owned when the election starts, the growth in redemption price between the acquisition date (or, for an obligation under (c)(2), the date the related series E bond was acquired) and the first day of that first year is also treated as income received that year. (b) Short-term obligations issued on a discount basis: For an obligation of (1) the United States, or (2) a state, a U.S. possession, one of their political subdivisions, or the District of Columbia — issued on a discount basis, paying no interest, and maturing within 1 year of issue — the discount amount is not treated as accruing until the obligation is paid at maturity, sold, or otherwise disposed of. (c) Matured United States savings bonds: A taxpayer who (1) holds a series E U.S. savings bond at its maturity date, and (2), under regulations issued under chapter 31 of title 31, either (A) keeps the investment in that series E bond in another U.S. obligation, other than one that currently pays income, or (B) trades the series E bond for another nontransferable U.S. obligation in a tax-free exchange under section 1037 (or the part of section 1031 relating to section 1037), must include the increase in redemption value — above what was paid for the bond, to the extent not already included in income — in gross income. That income is reported for whichever year comes first: when the new obligation is finally redeemed, or when it reaches final maturity. This subsection does not apply to a corporation, and does not apply for any tax year where the taxpayer computes taxable income under an accrual method, or for which the election in (a) applies.

the actual law source: uscode.house.gov ↗public domain

(a) Non-interest-bearing obligations issued at a discount

If, in the case of a taxpayer owning any non-interest-bearing obligation issued at a discount and redeemable for fixed amounts increasing at stated intervals or owning an obligation described in paragraph (2) of subsection (c), the increase in the redemption price of such obligation occurring in the taxable year does not (under the method of accounting used in computing his taxable income) constitute income to him in such year, such taxpayer may, at his election made in his return for any taxable year, treat such increase as income received in such taxable year. If any such election is made with respect to any such obligation, it shall apply also to all such obligations owned by the taxpayer at the beginning of the first taxable year to which it applies and to all such obligations thereafter acquired by him and shall be binding for all subsequent taxable years, unless on application by the taxpayer the Secretary permits him, subject to such conditions as the Secretary deems necessary, to change to a different method. In the case of any such obligations owned by the taxpayer at the beginning of the first taxable year to which his election applies, the increase in the redemption price of such obligations occurring between the date of acquisition (or, in the case of an obligation described in paragraph (2) of subsection (c), the date of acquisition of the series E bond involved) and the first day of such taxable year shall also be treated as income received in such taxable year.

(b) Short-term obligations issued on discount basis

In the case of any obligation—

(1)

of the United States; or

(2)

of a State or a possession of the United States, or any political subdivision of any of the foregoing, or of the District of Columbia,

which is issued on a discount basis and payable without interest at a fixed maturity date not exceeding 1 year from the date of issue, the amount of discount at which such obligation is originally sold shall not be considered to accrue until the date on which such obligation is paid at maturity, sold, or otherwise disposed of.

In the case of a taxpayer who—

(1)

holds a series E United States savings bond at the date of maturity, and

(2)

pursuant to regulations prescribed under chapter 31 of title 31 (A) retains his investment in such series E bond in an obligation of the United States, other than a current income obligation, or (B) exchanges such series E bond for another nontransferable obligation of the United States in an exchange upon which gain or loss is not recognized because of section 1037 (or so much of section 1031 as relates to section 1037),

the increase in redemption value (to the extent not previously includible in gross income) in excess of the amount paid for such series E bond shall be includible in gross income in the taxable year in which the obligation is finally redeemed or in the taxable year of final maturity, whichever is earlier. This subsection shall not apply to a corporation, and shall not apply in the case of any taxable year for which the taxpayer’s taxable income is computed under an accrual method of accounting or for which an election made by the taxpayer under subsection (a) applies.

Source credit: (Aug. 16, 1954, ch. 736, 68A Stat. 156; Pub. L. 86–346, title I, § 102, Sept. 22, 1959, 73 Stat. 621; Pub. L. 94–455, title XIX, §§ 1901(c)(2), 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1803, 1834; Pub. L. 97–452, § 2(c)(2), Jan. 12, 1983, 96 Stat. 2478.)

history & why it existsrecord from the source credit

1954Enacted · Act of Aug. 16, 1954, ch. 736
1959Amended · Pub. L. 86-346 · 73 Stat. 621
1976Amended · Pub. L. 94-455 · 90 Stat. 1803, 1834
1983Amended · Pub. L. 97-452 · 96 Stat. 2478

A history note hasn’t been published yet. The record shows enactment by ch. 736 on 1954-08-16.

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