IRS to propose regs on market discount for bonds

The Internal Revenue Service and the Treasury Department said Friday that, in response to taxpayer requests for guidance, they will issue proposed regulations clarifying that the market discount on a bond is not includible in income under Section 451(b) of the Tax Code, which was added by the Tax Cuts and Jobs Act passed last year.

The guidance will be applicable as of Jan. 1, 2018.

A market discount is the difference between a bond’s purchase price and the stated redemption price when it matures. In Notice 2018-80, the IRS said Section 451(b) provides that the “all-events test” is met with respect to an item of gross income no later than when the taxpayer takes that item of gross income into account as revenue for financial accounting purposes in an “applicable financial statement.”

For accrual method taxpayers, the income is includible in gross income when it passes an "all-events test" -- i.e., when all the events that fix the right to receive such income have occurred, and when the amount of the income can be determined reasonably accurately.

According to Section 451(b)(1)(A) of the Tax Code, the all-events test is met for an item of gross income "no later than when the taxpayer takes that item of gross income into account as revenue for financial accounting purposes in an 'applicable financial statement.'” The general rule doesn’t apply to any item of gross income for which the taxpayer uses a special method of accounting, other than those included in a provision of Part V of Subchapter P, which contains Sections 1271 through 1288.

Section 1276(a)(1) treats any gain on the sale or other disposition of a market discount bond as ordinary income to the extent that the gain does not exceed the accrued market discount on the bond. Per Section 1276(a)(3), any partial principal payment on a market discount bond is includible in gross income to the extent the payment does not exceed the accrued market discount on the bond.

IRS-Building-light
The IRS headquarters building in Washington, D.C.

For reprint and licensing requests for this article, click here.