Page:United States Statutes at Large Volume 100 Part 3.djvu/988

 100 STAT. 2796

PUBLIC LAW 99-514—OCT. 22, 1986 similar rule shall apply in the case of such bond while held by any other person whose basis is determined (in whole or in part) by reference to the basis in the hands of the person referred to in clause (i). "(B) SPECIAL RULE WHERE BOND EXCHANGED IN REORGA-

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NIZATION.—Subparagraph (A) shall not apply to an exchange by the taxpayer of a bond for another bond if such exchange is a part of a reorganization (as defined in section 368). If any portion of the basis of the taxpayer in a bond transferred in such an exchange is not taken into account in determining bond premium by reason of this paragraph, such portion shall not be taken into account in determining the amount of bond premium on any bond received in the exchange." (B) EFFECTIVE DATE.—The amendment made by subparagraph (A) shall apply to exchanges after May 6, 1986. (13) SPECIAL RULE FOR BONDS WITH PARTIAL PRINCIPAL PAYMENTS.— (A) TREATMENT OF ACCRUED MARKET DISCOUNT.—

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(i) Subsection (a) of section 1276 (relating to disposition gain representing accrued market discount treated as ordinary income) is amended by redesignating paragraph (3) as paragraph (4) and by inserting after paragraph (2) the following new paragraph: "(3) TREATMENT OF PARTIAL PRINCIPAL PAYMENTS.—

"(A) IN GENERAL.—Any partial principal payment on a market discount bond shall be included in gross income as ordinary income to the extent such payment does not exceed the accrued market discount on such bond. "(B) ADJUSTMENT.—If subparagraph (A) applies to any partial principal payment on any market discount bond, for purposes of applying this section to any disposition of (or subsequent partial principal payment on) such bond, the amount of accrued market discount shall be reduced by the amount of such partial principal payment included in gross income under subparagraph (A)." (ii) Paragraph (4) of section 1276(a) (as redesignated by subparagraph (A)) is amended by striking out "under paragraph (1)" and inserting in lieu thereof "under paragraph (1) or (3)". (iii) Subsection (b) of section 1276 is amended by adding at the end thereof the following new paragraph: "SPECIAL RULE WHERE PARTIAL PRINCIPAL PAYMENTS. In

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case of a bond the principal of which may be paid in 2 or more payments, the amount of accrued market discount shall be determined under regulations prescribed by the Secretary" (B) COORDINATION WITH TAX TREATMENT OF STRIPPED BONDS.—

(i) Paragraph (1) of section 1286(b) (relating to tax 1;t treatment of person stripping bond) is amended to read as follows: "(1) such person shall include in gross income an amount equal to the sum of— "(A) the interest accrued on such bond while held by such person and before the time such coupon or bond was disposed of (to the extent such interest has not theretofore been included in such person's gross income), and

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