26 U.S.C. § 1273 — Determination of amount of original issue discount

1. (a)General ruleFor purposes of this subpart—
   1. (1)In generalThe term “original issue discount” means the excess (if any) of—
      1. (A)the stated redemption price at maturity, over
      2. (B)the issue price.
   2. (2)Stated redemption price at maturityThe term “stated redemption price at maturity” means the amount fixed by the last modification of the purchase agreement and includes interest and other amounts payable at that time (other than any interest based on a fixed rate, and payable unconditionally at fixed periodic intervals of 1 year or less during the entire term of the debt instrument).
   3. (3)¼ of 1 percent de minimis ruleIf the original issue discount determined under paragraph (1) is less than—then the original issue discount shall be treated as zero.
      1. (A)¼ of 1 percent of the stated redemption price at maturity, multiplied by
      2. (B)the number of complete years to maturity,
2. (b)Issue priceFor purposes of this subpart—
   1. (1)Publicly offered debt instruments not issued for propertyIn the case of any issue of debt instruments—the issue price is the initial offering price to the public (excluding bond houses and brokers) at which price a substantial amount of such debt instruments was sold.
      1. (A)publicly offered, and
      2. (B)not issued for property,
   2. (2)Other debt instruments not issued for propertyIn the case of any issue of debt instruments not issued for property and not publicly offered, the issue price of each such instrument is the price paid by the first buyer of such debt instrument.
   3. (3)Debt instruments issued for property where there is public tradingIn the case of a debt instrument which is issued for property and which—the issue price of such debt instrument shall be the fair market value of such property.
      1. (A)is part of an issue a portion of which is traded on an established securities market, or
      2. (B)
         1. (i)is issued for stock or securities which are traded on an established securities market, or
         2. (ii)to the extent provided in regulations, is issued for property (other than stock or securities) of a kind regularly traded on an established market,
   4. (4)Other casesExcept in any case—the issue price of a debt instrument which is issued for property shall be the stated redemption price at maturity.
      1. (A)to which paragraph (1), (2), or (3) of this subsection applies, or
      2. (B)to which section 1274 applies,
   5. (5)PropertyIn applying this subsection, the term “property” includes services and the right to use property, but such term does not include money.
3. (c)Special rules for applying subsection (b)For purposes of subsection (b)—
   1. (1)Initial offering price; price paid by the first buyerThe terms “initial offering price” and “price paid by the first buyer” include the aggregate payments made by the purchaser under the purchase agreement, including modifications thereof.
   2. (2)Treatment of investment unitsIn the case of any debt instrument and an option, security, or other property issued together as an investment unit—
      1. (A)the issue price for such unit shall be determined in accordance with the rules of this subsection and subsection (b) as if it were a debt instrument,
      2. (B)the issue price determined for such unit shall be allocated to each element of such unit on the basis of the relationship of the fair market value of such element to the fair market value of all elements in such unit, and
      3. (C)the issue price of any debt instrument included in such unit shall be the portion of the issue price of the unit allocated to the debt instrument under subparagraph (B).