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Section 1272(a)(1) requires the holder of any debt
instrument having original issue discount issued after July 1,
1982, to include in gross income an amount equal to the sum of
the daily portions of the original issue discount for each day
during the taxable year on which the holder held such debt
instrument.4 Original issue discount is defined as the excess,
if any, of the stated redemption price at maturity over the issue
price. Sec. 1273(a). Furthermore, section 1286(a) provides
for a stripped bond to be treated as a bond originally issued on
the purchase date and having an original issue discount equal to
the excess of the stated redemption price at maturity over such
bond's ratable share of the purchase price.
Petitioners argue that because they use the cash receipts
and disbursements method of accounting they should not be
required to include the disputed amount of original issue
discount in their gross income until they actually receive the
original issue discount. We disagree with petitioners. Section
1272(a)(1) clearly requires the holder of a debt instrument
issued at a discount to include in gross income for the taxable
4 The requirement that debt instrument holders include
original issue discount in income ratably over the life of the
instrument was first enacted by the Tax Reform Act of 1969, Pub.
L. 91-172, sec. 413, 83 Stat. 487, 609, as former section
1232(a)(3). This requirement was carried forward as former
section 1232A(a)(1) by the Tax Equity and Fiscal Responsibility
Act of 1982, Pub. L. 97-248, sec. 231, 96 Stat. 324, 496. The
language of section 1272(a)(1), enacted by the Deficit Reduction
Act of 1984, Pub. L. 98-369, sec. 41, 98 Stat. 494, 531, is
substantively identical to former section 1232A(a)(1).
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Last modified: May 25, 2011