Page:United States Statutes at Large Volume 98 Part 1.djvu/593

 PUBLIC LAW 98-369—JULY 18, 1984

98 STAT. 545

"(B) shall be treated as ordinary income on the disposition of the exchanged basis property received by the taxpayer in such exchange if such property is not a market discount bond. "(3) PARAGRAPH (i) TO APPLY TO CERTAIN DISTRIBUTIONS BY

CORPORATIONS OR PARTNERSHIPS.—For purposes of paragraph (1), if the basis of any market discount bond in the hands of a transferee is determined under section 334(c), 732(a), or 732(b), such property shall be treated as transferred basis property in the hands of such transferee. "(d) SPECIAL RULES.—Under regulations prescribed by the Secretary— "(1) rules similar to the rules of subsection (b) of section 1245 shall apply for purposes of this section; except that— "(A) paragraph (1) of such subsection shall not apply, and "(B) an exchange qualifying under section 354(a), 355(a), or 356(a) (determined without regard to subsection (a) of j„. this section) shall be treated as an exchange described in paragraph (3) of such subsection, and "(2) appropriate adjustments shall be made to the basis of any property to reflect gain recognized under subsection (a).

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"(e) SECTION NOT TO APPLY TO MARKET DISCOUNT BONDS ISSUED ON OR BEFORE DATE OF ENACTMENT OF SECTION.—This section shall not

apply to any market discount bond issued on or before the date of the enactment of this section. "SEC. 1277. DEFERRAL OF INTEREST DEDUCTION ALLOCABLE TO ACCRUED MARKET DISCOUNT.

"(a) GENERAL RULE.—Except as otherwise provided in this section, the net direct interest expense with respect to any market discount bond shall be allowed as a deduction for the taxable year only to the extent that such expense exceeds the portion of the market discount allocable to the days during the taxable year on which such bond was held by the taxpayer (as determined under the rules of section 1276(b)).

26 USC 1277.

Ante, p. 543.

"(b) DISALLOWED DEDUCTION ALLOWED FOR LATER YEARS.— "(1) ELECTION TO TAKE INTO ACCOUNT IN LATER YEAR WHERE NET INTEREST INCOME FROM BOND.— "(A) IN GENERAL.—If—

"(i) there is net interest income for any taxable year with respect to any market discount bond, and "(ii) the taxpayer makes an election under this subparagraph with respect to such bond, any disallowed interest expense with respect to such bond shall be treated as interest paid or accrued by the taxpayer during such taxable year to the extent such disallowed interest expense does not exceed the net interest income with respect to such bond. "(B) DETERMINATION OF DISALLOWED INTEREST EXPENSE.—

For purposes of subparagraph (A), the amount of the disallowed interest expense— "(i) shall be determined as of the close of the preceding taxable year, and "(ii) shall not include any amount previously taken into account under subparagraph (A). "(C) NET INTEREST INCOME.—For purposes of this paragaph, the term 'net interest income' means the excess of the

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