7613. Is an investor who holds a short-term taxable corporate obligation required to include discount in income prior to sale or maturity? Is he or she required to include interest as it accrues?Nuco Employeercline202014-10-01T14:39:00Z2014-10-01T14:39:00Z36103478Summit Business Media288408014Site Map/Investments/Bonds/Corporate/Short-Term Corporate ObligationsTaxFactsDefaultArticle2007-01-30T00:00:00Z121261095-00-tf2.xml1095.00;#1855;#0x010100C568DB52D9D0A14D9B2FDCC96666E9F2007948130EC3DB064584E219954237AF3900242457EFB8B24247815D688C526CD44D009C4E67E972694125ABDA91AC61F5E51FTax Facts 2Is an investor who holds a short-term taxable corporate obligation required to include discount in income prior to sale or maturity? Is he required to include interest as it accrues?53800.0000000000TaxFactsDefaultArticle2010-01-14T23:12:25ZSBMEDIA\moss-admin7613. Is an investor who holds a short-term taxable corporate obligation required to include discount in income prior to sale or maturity? Is an investsor required to include interest as it accrues?Original issue discount (the difference between the issue price and the stated redemption price) on a taxable corporate debt instrument having a maturity date of one year or less is generally not included in income by a cash basis investor prior to sale or redemption.IRC Sec. 1272(a)(2). Interest payable on such bonds is generally not included in income by a cash basis taxpayer until it is received. However, a cash basis investor may elect to include original issue discount as it accrues. Such an election may not be limited to a particular obligation but applies to all short-term taxable corporate obligations (and to Treasury bills with respect to acquisition discount) acquired on or after the first day of the first taxable year for which the election is made, and it continues to apply until the Service consents to revocation of the election.IRC Secs. 1282(b), 1283(c). If a taxpayer elects to include discount as it accrues, he or she must also include stated interest (not otherwise included in income until it is paid) as it accrues.IRC Sec. 1281(a)(2).The taxpayer making the election must include as income an amount equal to the sum of the daily portions of original issue discount (in the case of T-bills, daily portions of acquisition discount) for each day that the taxpayer held the obligation in the tax year.An irrevocable election may be made, on an obligation-by-obligation basis, to determine the amount of original issue discount by using daily compounding at a constant interest rate.IRC Sec. 1271(a)(4); Treas. Reg. §1.1271-1(b)(2).Rather than electing to include original issue discount as it accrues, a taxpayer may elect to include “acquisition discount” (the difference between the stated redemption price at maturity and the basis in the obligation) as it accrues.IRC Sec. 1283(c)(2). The manner in which acquisition discount accrues is discussed in Q 7611. The election to accrue acquisition discount applies to all such obligations (and Treasury bills) acquired by the taxpayer on or after the first day of the first taxable year to which the election applies and thereafter until the Service consents to a revocation.Certain investors must include original issue discount (or, by election, acquisition discount) in income prior to sale or other disposition of corporate short-term taxable obligations. They must also include interest payable on the obligation as it accrues.IRC Sec. 1281(a). The mandatory inclusion rules apply to obligations if they are: (1) held by accrual basis taxpayers; (2) held by a bank; (3) held by a regulated investment company or common trust fund; (4) held as inventory; (5) identified as part of a hedging transaction;Under IRC Sec. 1256(e). or (6) held by a pass-through entity (e.g., a trust, partnership or S corporation) formed or availed of to avoid the mandatory inclusion rule, or a pass-through entity in any year in which taxpayers who would be subject to the rule held 20 percent or more of the value of the interests in the entity for 90 days or more.IRC Sec. 1281(b). Discount must also be included in income as it accrues on a stripped bond or stripped coupon held by the person who stripped the bond or coupon or by a person whose basis is determined by reference to the basis in the hands of the person who stripped the bond or coupon (e.g., a person who receives it as a gift) (see Q 7655).IRC Sec. 1281(b)(1)(F).The basis of a short-term taxable corporate obligation is increased by amounts of accrued discount included in income prior to disposition or redemption.IRC Sec. 1283(d). As to how gain or loss is treated upon disposition of corporate short-term taxable obligations with original issue discount when the taxpayer has not made an election to include discount as it accrues, see Q 7614.