[Code of Federal Regulations]
[Title 26, Volume 11]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.1271-1]

[Page 512-513]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.1271-1  Special rules applicable to amounts received on retirement, 
sale, or exchange of debt instruments.

    (a) Intention to call before maturity--(1) In general. For purposes 
of section 1271(a)(2), all or a portion of gain realized on a sale or 
exchange of a debt instrument to which section 1271 applies is treated 
as interest income if there was an intention to call the debt instrument 
before maturity. An intention to call a debt instrument before

[[Page 513]]

maturity means a written or oral agreement or understanding not provided 
for in the debt instrument between the issuer and the original holder of 
the debt instrument that the issuer will redeem the debt instrument 
before maturity. In the case of debt instruments that are part of an 
issue, the agreement or understanding must be between the issuer and the 
original holders of a substantial amount of the debt instruments in the 
issue. An intention to call before maturity can exist even if the 
intention is conditional (e.g., the issuer's decision to call depends on 
the financial condition of the issuer on the potential call date) or is 
not legally binding. For purposes of this section, original holder means 
the first holder (other than an underwriter or dealer that purchased the 
debt instrument for resale in the ordinary course of its trade or 
business).
    (2) Exceptions. In addition to the exceptions provided in sections 
1271(a)(2)(B) and 1271(b), section 1271(a)(2) does not apply to--
    (i) A debt instrument that is publicly offered (as defined in Sec. 
1.1275-1(h));
    (ii) A debt instrument to which section 1272(a)(6) applies (relating 
to certain interests in or mortgages held by a REMIC, and certain other 
debt instruments with payments subject to acceleration); or
    (iii) A debt instrument sold pursuant to a private placement 
memorandum that is distributed to more than ten offerees and that is 
subject to the sanctions of section 12(2) of the Securities Act of 1933 
(15 U.S.C. 77l) or the prohibitions of section 10(b) of the Securities 
Exchange Act of 1934 (15 U.S.C. 78j).
    (b) Short-term obligations--(1) In general. Under sections 1271 
(a)(3) and (a)(4), all or a portion of the gain realized on the sale or 
exchange of a short-term government or nongovernment obligation is 
treated as interest income. Sections 1271 (a)(3) and (a)(4), however, do 
not apply to any short-term obligation subject to section 1281. See 
Sec. 1.1272-1(f) for rules to determine if an obligation is a short-
term obligation.
    (2) Method of making elections. Elections to accrue on a constant 
yield basis under sections 1271 (a)(3)(E) and (a)(4)(D) are made on an 
obligation-by-obligation basis by reporting the transaction on the basis 
of daily compounding on the taxpayer's timely filed Federal income tax 
return for the year of the sale or exchange. These elections are 
irrevocable.
    (3) Counting conventions. In computing the ratable share of 
acquisition discount under section 1271(a)(3) or OID under section 
1271(a)(4), any reasonable counting convention may be used (e.g., 30 
days per month/360 days per year).

[T.D. 8517, 59 FR 4809, Feb. 2, 1994]