Internal Revenue Code · 26 U.S.C.

§ 1277. Deferral of interest deduction allocable to accrued market discount

In force Text current through Public Law 119-121 (October 9, 2026) release point 119-121

Official text, no changes From the Office of the Law Revision Counsel, release point 119-121 (current through Public Law 119-121 (October 9, 2026)). Compare it with the official text at uscode.house.gov (external site).

Cite as 26 U.S.C. § 1277

At a glance

Read from the text, the source credit and the official notes. Not part of the law.

Status: In force
Added: July 18, 1984 by Pub. L. 98–369
Last amended: August 20, 1996 by Pub. L. 104–188
Amendments: 4 dated changes in the source credit
Length: 3 subsections · 712 words · about 3 min to read
Defines: 3 terms
Cross-references: cites 4; cited by 4 Code sections and 2 other regulations

¶(a) General rule

Except as otherwise provided in this section, the net direct interest expense with respect to any market discount bond shall be allowed as a deduction for the taxable year only to the extent that such expense exceeds the portion of the market discount allocable to the days during the taxable year on which such bond was held by the taxpayer (as determined under the rules of section 1276(b)).

¶(b) Disallowed deduction allowed for later years

¶(1) Election to take into account in later year where net interest income from bond

¶(A) In general If—

¶(i) there is net interest income for any taxable year with respect to any market discount bond, and

¶(ii) the taxpayer makes an election under this subparagraph with respect to such bond,

any disallowed interest expense with respect to such bond shall be treated as interest paid or accrued by the taxpayer during such taxable year to the extent such disallowed interest expense does not exceed the net interest income with respect to such bond.

¶(B) Determination of disallowed interest expense For purposes of subparagraph (A), the amount of the disallowed interest expense—

¶(i) shall be determined as of the close of the preceding taxable year, and

¶(ii) shall not include any amount previously taken into account under subparagraph (A).

¶(C) Net interest income

For purposes of this paragraph, the term “net interest income” means the excess of the amount determined under paragraph (2) of subsection (c) over the amount determined under paragraph (1) of subsection (c).

¶(2) Remainder of disallowed interest expense allowed for year of disposition

¶(A) In general

Except as otherwise provided in this paragraph, the amount of the disallowed interest expense with respect to any market discount bond shall be treated as interest paid or accrued by the taxpayer in the taxable year in which such bond is disposed of.

¶(B) Nonrecognition transactions If any market discount bond is disposed of in a nonrecognition transaction—

¶(i) the disallowed interest expense with respect to such bond shall be treated as interest paid or accrued in the year of disposition only to the extent of the amount of gain recognized on such disposition, and

¶(ii) the disallowed interest expense with respect to such property (to the extent not so treated) shall be treated as disallowed interest expense—

¶(I) in the case of a transaction described in section 1276(c)(1), of the transferee with respect to the transferred basis property, or

¶(II) in the case of a transaction described in section 1276(c)(2), with respect to the exchanged basis property.

¶(C) Disallowed interest expense reduced for amounts previously taken into account under paragraph (1)

For purposes of this paragraph, the amount of the disallowed interest expense shall not include any amount previously taken into account under paragraph (1).

¶(3) Disallowed interest expense

For purposes of this subsection, the term “disallowed interest expense” means the aggregate amount disallowed under subsection (a) with respect to the market discount bond.

¶(c) Net direct interest expense For purposes of this section, the term “net direct interest expense” means, with respect to any market discount bond, the excess (if any) of—

¶(1) the amount of interest paid or accrued during the taxable year on indebtedness which is incurred or continued to purchase or carry such bond, over

¶(2) the aggregate amount of interest (including original issue discount) includible in gross income for the taxable year with respect to such bond.

In the case of any financial institution which is a bank (as defined in section 585(a)(2)), the determination of whether interest is described in paragraph (1) shall be made under principles similar to the principles of section 291(e)(1)(B)(ii). Under rules similar to the rules of section 265(a)(5), short sale expenses shall be treated as interest for purposes of determining net direct interest expense.

(Added Pub. L. 98–369, div. A, title I, § 41(a), July 18, 1984, 98 Stat. 545; amended Pub. L. 99–514, title IX, §§ 901(d)(4)(F), § 902(e)(2), title XVIII, § 1899A(29)–(31), Oct. 22, 1986, 100 Stat. 2380, 2382, 2960; Pub. L. 100–647, title I, § 1018(u)(31), Nov. 10, 1988, 102 Stat. 3592; Pub. L. 103–66, title XIII, § 13206(b)(1)(B), Aug. 10, 1993, 107 Stat. 465; Pub. L. 104–188, title I, § 1616(b)(14), Aug. 20, 1996, 110 Stat. 1857.)

Terms defined here

Where the text says “the term … means”. Select a term to jump to its definition.

disallowed interest expense § 1277(b)(3)
net direct interest expense § 1277(c)
net interest income § 1277(b)(1)(C)

Cross-references

Computed from the citations in the text of Title 26 and 26 CFR.

This section cites 4 other sections

Cited by 4 Code sections

Cited in 2 regulations not issued under it

Amendment history

From the source credit and the official notes, newest first.

August 20, 1996Amended by Pub. L. 104–188Parts changed in 1996: (c)
August 10, 1993Amended by Pub. L. 103–66Parts changed in 1993: (d)
November 10, 1988Amended by Pub. L. 100–647Parts changed in 1988: (c)
October 22, 1986Amended by Pub. L. 99–514Parts changed in 1986: (b)(1)(C) (b)(2)(C) (c) (d)
July 18, 1984Added by Pub. L. 98–369

Where it sits in the Code

Nearby sections

§ 1276 Disposition gain representing accrued market discount treated as ordinary income
§ 1277 Deferral of interest deduction allocable to accrued market discount
§ 1278 Definitions and special rules

Official notes

Show the Law Revision Counsel's notes (amendments, effective dates)

Editorial Notes

Amendments

1996—Subsec. (c). Pub. L. 104–188 struck out “or to which section 593 applies” after “585(a)(2))” in closing provisions.

1993—Subsec. (d). Pub. L. 103–66 struck out heading and text of subsec. (d). Text read as follows: “In the case of a market discount bond issued on or before July 18, 1984, any gain recognized by the taxpayer on any disposition of such bond shall be treated as ordinary income to the extent the amount of such gain does not exceed the amount allowable with respect to such bond under subsection (b)(2) for the taxable year in which such bond is disposed of.”

1988—Subsec. (c). Pub. L. 100–647 inserted a closing parenthesis after “section 585(a)(2)”.

1986—Subsec. (b)(1)(C). Pub. L. 99–514, § 1899A(29), substituted “this paragraph” for “this paragaph”.

Subsec. (b)(2)(C). Pub. L. 99–514, § 1899A(30), substituted “paragraph (1)” for “paragraph 1” in heading.

Subsec. (c). Pub. L. 99–514, § 901(d)(4)(F), substituted “which is a bank (as defined in section 585(a)(2) or to which section 593 applies” for “to which section 585 or 593 applies”.

Pub. L. 99–514, § 902(e)(2), substituted “section 265(a)(5)” for “section 265(5)”.

Subsec. (d). Pub. L. 99–514, § 1899A(31), substituted “July 18, 1984” for “the date of the enactment of this section”.

Effective Date of 1996 Amendment

Amendment by Pub. L. 104–188 applicable to taxable years beginning after Dec. 31, 1995, see section 1616(c) of Pub. L. 104–188, set out as a note under section 593 of this title.

Effective Date of 1993 Amendment

Amendment by Pub. L. 103–66 applicable to obligations purchased (within the meaning of section 1272(d)(1) [now 1272(c)(1)] of this title) after Apr. 30, 1993, see section 13206(b)(3) of Pub. L. 103–66, set out as a note under section 1276 of this title.

Effective Date of 1988 Amendment

Amendment by Pub. L. 100–647 effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99–514, to which such amendment relates, see section 1019(a) of Pub. L. 100–647, set out as a note under section 1 of this title.

Effective Date of 1986 Amendment

Amendment by section 901(d)(4)(F) of Pub. L. 99–514 applicable to taxable years beginning after Dec. 31, 1986, see section 901(e) of Pub. L. 99–514, set out as a note under section 166 of this title.

Amendment by section 902(e)(2) of Pub. L. 99–514 applicable to taxable years ending after Dec. 31, 1986, with certain exceptions and qualifications, see section 902(f) of Pub. L. 99–514, set out as a note under section 265 of this title.

Effective Date

Section applicable to taxable years ending after July 18, 1984, and applicable to obligations acquired after July 18, 1984, in taxable years ending after such date, see section 44 of Pub. L. 98–369, set out as a note under section 1271 of this title.

Plan Amendments Not Required Until January 1, 1989

For provisions directing that if any amendments made by subtitle A or subtitle C of title XI [§§ 1101–1147 and 1171–1177] or title XVIII [§§ 1800–1899A] of Pub. L. 99–514 require an amendment to any plan, such plan amendment shall not be required to be made before the first plan year beginning on or after Jan. 1, 1989, see section 1140 of Pub. L. 99–514, as amended, set out as a note under section 401 of this title.