Reg. § 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 , all or a portion of gain realized on a sale or exchange of a debt instrument to which section 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 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 and , section does not apply to—
(i) A debt instrument that is publicly offered (as defined in );
(ii) A debt instrument to which section 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 (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 (a)(3) and (a)(4), however, do not apply to any short-term obligation subject to section . See 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 (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 or OID under section , 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]