558 
section shall not apply to any market discount bond 
to which section 1278 applies.’’. 
(d) TREATMENT
OF CERTAIN BONDS HELD
BY 
PARTNERSHIPS.— 
(1) TRANSFERS
OF
PARTNERSHIP
INTER-
ESTS.—Section 1279(a), as redesignated by sub-
section (a), is amended by adding at the end the fol-
lowing new paragraph: 
‘‘(6) TRANSFERS
OF
PARTNERSHIP
INTER-
ESTS.—In the case of a transfer described in section 
743 of an interest in a partnership holding a bond, 
the partnership shall be treated as acquiring the 
transferee partner’s proportionate share of such 
bond at the time of such transfer.’’. 
(2) DISTRIBUTION
OF
BONDS
BY
PARTNER-
SHIPS.—Section 1279(a)(2), as redesignated by sub-
section (a), is amended by adding at the end the fol-
lowing new subparagraph: 
‘‘(D) DISTRIBUTION BY PARTNERSHIP.—If 
the basis of the taxpayer in a bond is deter-
mined under section 734(a)(2) or (b), for pur-
poses of subparagraph (A)(ii), the basis of such 
bond shall not be less than its fair market value 
immediately after its acquisition by the tax-
payer.’’. 
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(e) MODERNIZATION OF CERTAIN DEFINITIONS.— 
(1) REPEAL OF SUPERCEDED EXCEPTION FOR 
MARKET DISCOUNT BONDS ACQUIRED AT ISSUE.— 
Section 1279(a)(1), as redesignated by subsection 
(a), is amended by striking subparagraph (D) 
(2) 
REVISED
ISSUE
PRICE.—Section 
1279(a)(4), as redesignated by subsection (a), is 
amended— 
(A) by redesignating subparagraphs (A) 
and (B) as clauses (i) and (ii) and by indenting 
such clauses appropriately, 
(B) by striking ‘‘means the sum of—’’ and 
inserting ‘‘means the excess of— 
‘‘(A) the sum of—’’, 
(C) by striking the period at the end and 
inserting ‘‘, over’’, and 
(D) by adding at the end the following new 
subparagraph: 
‘‘(B) the sum of— 
‘‘(i) any payments other than quali-
fied stated interest made under the bond 
during periods before the acquisition of the 
bond by the taxpayer, and 
‘‘(ii) any premium which has accrued 
during such periods (determined as if 
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owned at all times by the original hold-
er).’’. 
(3) REDEMPTION PRICE .— 
(A) IN GENERAL.—Section 1273(a)(2) is 
amended to read as follows: 
‘‘(2) REDEMPTION PRICE.— 
‘‘(A) IN GENERAL.—The term ‘redemption 
price’ means the sum of all payments provided 
by the debt instrument other than qualified 
stated interest. 
‘‘(B) QUALIFIED STATED INTEREST.—The 
term ‘qualified stated interest’ means stated in-
terest that is unconditionally payable in money 
and other property (other than a debt instru-
ment of the issuer) at least annually at a fixed 
rate (or to the extent provided by regulations, 
at a variable rate). 
‘‘(C) BASIS
ADJUSTMENT.—The basis of 
any debt instrument shall be reduced by the 
amount of any payment received other than 
qualified stated interest.’’. 
(B) CONFORMING AMENDMENTS.— 
(i) Each of the following provisions is 
amended by striking ‘‘stated redemption 
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price at maturity’’ and inserting ‘‘redemp-
tion price’’: 
(I) Section 1271(a)(3)(B) (as re-
designated by subsection (b)). 
(II) Section 1273(a)(1)(A). 
(III) Section 1273(a)(3). 
(IV) Section 1273(b)(4). 
(V) Section 1274(c)(1)(A). 
(VI) Section 1279(a)(5) (as re-
designated by subsection (a)). 
(VII) Section 1283(a)(2)(A). 
(VIII) Section 1286(a)(1). 
(IX) The heading and text of sec-
tion 1286(e)(4). 
(ii) Section 108(e)(10)(B) is amended 
by striking ‘‘stated’’ both places it appears. 
(iii) 
Section 
1272(a)(6)(A)(i) 
is 
amended by striking ‘‘stated’’. 
(iv) Subparagraphs (A)(i) and (C) of 
section 1279(a)(2) (as redesignated by 
subsection (a)) are each amended by strik-
ing ‘‘the stated redemption price of the 
bond at maturity’’ and inserting ‘‘the re-
demption price of the bond’’. 
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(v) Section 1279(a)(2)(B) (as redesig-
nated by subsection (a)) is amended by 
striking ‘‘the stated redemption price of 
such bond at maturity’’ and inserting ‘‘the 
redemption price of such bond’’. 
(4) ADJUSTED ISSUE PRICE.—Section 1275(a) 
is amended by adding at the end the following new 
paragraph: 
‘‘(5) ADJUSTED ISSUE PRICE.— 
‘‘(A) IN GENERAL.—For purposes of this 
part, the adjusted issue price of any debt in-
strument is its issue price— 
‘‘(i) increased by the aggregate of the 
original issue discount includible in the 
gross income of all holders for prior peri-
ods (determined without regard to para-
graph (7) of section 1272(a)), or, in the 
case of a tax-exempt obligation, the aggre-
gate amount which accrued in the manner 
provided by this subsection (determined 
without regard to such paragraph (7)) for 
all prior periods, and 
‘‘(ii) reduced by the sum of— 
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‘‘(I) any payments other than 
qualified stated interest previously 
made on the debt instrument, and 
‘‘(II) in the case of a debt instru-
ment which was issued with amortiz-
able bond premium (as defined in sec-
tion 171(b)), the aggregate amount by 
which the basis of such instrument 
would have been reduced under sec-
tion 1016(a)(5) for prior periods if 
the instrument had been held by the 
original holder at all times. 
‘‘(B) DE
MINIMIS
RULE.—The adjusted 
issue price of the issuer shall be properly ad-
justed to take into account that section 
1273(a)(3) does not apply to the deduction 
under section 163 for original issue discount.’’. 
(5) CERTAIN OTHER TERMS.—Paragraphs (3), 
(4), and (5) of section 1272(a) are amended to read 
as follows: 
‘‘(3) DETERMINATION OF DAILY PORTIONS.— 
For purposes of paragraph (1), the daily portion of 
the original issue discount on any debt instrument 
shall be determined by allocating to each day in any 
accrual period its ratable share of the original issue 
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discount allocable to such accrual period. For pur-
poses of the preceding sentence, the original issue 
discount allocable to any accrual period is the excess 
(if any) of— 
‘‘(A) the product of— 
‘‘(i) the adjusted issue price of the 
debt instrument at the beginning of such 
accrual period, multiplied by 
‘‘(ii) the yield to maturity of the debt 
instrument properly adjusted for the 
length of the accrual period, over 
‘‘(B) the amount of any qualified stated in-
terest allocable to such accrual period. 
‘‘(4) YIELD
TO
MATURITY.—For purposes of 
this subsection, the term ‘yield to maturity’ means 
the discount rate that, when used in computing the 
present value of all principal and interest payments 
to be made under the debt instrument produces an 
amount equal to the issue price of the debt instru-
ment. 
‘‘(5) ACCRUAL PERIOD.—For purposes of this 
subsection, the term ‘accrual period’ shall be deter-
mined under regulations prescribed by the Secretary, 
provided that an accrual period shall in no event be 
longer than one year.’’. 
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(f) BROKER REPORTING OF INCLUDIBLE DISCOUNT 
ON BONDS.— 
(1) IN GENERAL.—Section 6045 is amended by 
adding at the end the following new subsection: 
‘‘(i) DISCOUNT ON BONDS.— 
‘‘(1) IN GENERAL.—If any customer of a broker 
holds a covered bond in an account with such broker 
at any time during a calendar year— 
‘‘(A) such broker shall file a return under 
subsection (a) for such calendar year, and 
‘‘(B) such return shall include with respect 
to each such covered bond— 
‘‘(i) the amount (if any) includible in 
the gross income of such customer as origi-
nal issue discount with respect to such 
bond under section 1272 for periods dur-
ing such calendar year, and. 
‘‘(ii) the amount (if any) includible in 
the gross income of such customer as mar-
ket discount with respect to such bond 
under section 1278(a) for periods during 
such calendar year. 
‘‘(2) COVERED
BOND.—For purposes of this 
subsection, the term ‘covered bond’ means any obli-
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gation to which section 1272 or 1278(a) applies if 
such obligation— 
‘‘(A) was acquired after December 31, 
2014, through a transaction in the account in 
which such obligation is held, or 
‘‘(B) was transferred to such account from 
an account in which such obligation was a cov-
ered bond, but only if the broker received a 
statement under section 6045A with respect to 
the transfer. 
‘‘(3) STATEMENTS
TO
CUSTOMERS.—The re-
quirements of subsections (b) shall apply with re-
spect to any return filed under subsection (a) by 
reason of this subsection.’’. 
(2) INFORMATION REQUIRED IN CONNECTION 
WITH
TRANSFERS
OF
COVERED
BONDS
TO
BRO-
KERS.—Subsection (a) of section 6045A is amend-
ed— 
(A) by inserting ‘‘or a covered bond (as de-
fined in section 6045(i)(2))’’ after ‘‘covered se-
curity (as defined in section 6045(g)(3))’’, and 
(B) by striking ‘‘section 6045(g)’’ and in-
serting ‘‘subsections (g) and (i) of section 
6045’’. 
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(3) 
COORDINATION
WITH
REPORTING
BY 
ISSUER OF ORIGINAL ISSUE DISCOUNT.—Paragraph 
(6) of section 6049(d) is amended by adding at the 
end the following new subparagraph: 
‘‘(C) PREVENTION
OF
DOUBLE
REPORT-
ING.—Except as otherwise provided by the Sec-
retary, original issue discount with respect to 
any obligation shall not be required to be re-
ported under this section if such original issue 
discount is required to be reported with respect 
to such obligation under section 6045(i).’’. 
(g) CONFORMING AMENDMENTS.— 
(1) Section 857(e)(2)(B)(i), as amended by the 
preceding provisions of this Act, is amended by 
striking ‘‘or 1272’’ and inserting ‘‘1272, or 1278’’. 
(2) Section 1042(d) is amended by striking 
‘‘section 1278(a)(2)(A)(ii)’’ in the matter following 
paragraph 
(2) 
and 
inserting 
‘‘section 
1279(a)(2)(A)(ii)’’. 
(3) Section 1016(a), as amended by the pre-
ceding provisions of this Act, is amended by adding 
at the end the following new paragraph: 
‘‘(39) in the case of any debt instrument, to ex-
tend provided in sections 1272(d)(1), 1273(a)(2)(C), 
and 1278(d)(2).’’. 
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(4) Section 1276 is amended by inserting ‘‘ON 
BONDS
NOT
SUBJECT
TO
CURRENT
INCLU-
SION’’ after ‘‘ACCRUED MARKET DISCOUNT’’ in 
the heading thereof. 
(5) Section 1277 is amended by inserting ‘‘ON 
BONDS
NOT
SUBJECT
TO
CURRENT
INCLU-
SION’’ after ‘‘ACCRUED MARKET DISCOUNT’’ in 
the heading thereof. 
(6) Section 1281 is amended by striking sub-
section (c). 
(7) Section 1282 is amended by striking sub-
section (d). 
(8) The table of sections for subpart B of part 
V of subchapter P of chapter 1 is amended to read 
as follows: 
‘‘Sec. 1276. Disposition gain representing accrued market discount on bonds 
not subject to current inclusion treated as ordinary income. 
‘‘Sec. 1277. Deferral of interest deduction allocable to accrued market discount 
on bonds not subject to current inclusion. 
‘‘Sec. 1278. Current inclusion in income of market discount on bonds acquired 
after 2014. 
‘‘Sec. 1279. Definitions and special rules.’’. 
(h) EFFECTIVE DATE.— 
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by this section 
shall apply to obligations acquired after December 
31, 2014. 
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(2) MODERNIZATION OF TERMS.—The amend-
ments made by subsection (e) shall take effect on 
January 1, 2015. 
SEC. 3412. TREATMENT OF CERTAIN EXCHANGES OF DEBT 
INSTRUMENTS. 
(a) DETERMINATION OF ISSUE PRICE.— 
(1) IN GENERAL.—Subpart A of part V of sub-
chapter P is amended by inserting after section 
1274A the following new section: 
‘‘SEC. 1274B. DETERMINATION OF ISSUE PRICE IN THE 
CASE OF AN EXCHANGE OF DEBT INSTRU-
MENTS. 
‘‘(a) IN GENERAL.—In the case of an exchange (in-
cluding by significant modification) by an issuer of a new 
debt instrument for an existing debt instrument issued by 
the same issuer, the issue price of the new debt instrument 
shall be the least of— 
‘‘(1) the adjusted issue price of the existing 
debt instrument, 
‘‘(2) the stated principal amount of the new 
debt instrument, or 
‘‘(3) the imputed principal amount of the new 
debt instrument. 
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‘‘(b) APPLICABLE RATE.—The discount rate used to 
determine the imputed principal amount of the new debt 
instrument under subsection (a)(3) shall be the lesser of— 
‘‘(1) the applicable Federal rate determined 
under section 1274(d) with respect to the new debt 
instrument, or 
‘‘(2) the greater of— 
‘‘(A) the rate of qualified stated interest 
with respect to the existing debt instrument, or 
‘‘(B) the applicable Federal rate deter-
mined under section 1274(d) with respect to 
the existing debt instrument. 
‘‘(c) TREATMENT
OF INVESTMENT UNITS.—Rules 
similar to the rules of section 1273(c)(2) shall apply for 
purposes of this section.’’. 
(2) CONFORMING AMENDMENTS.— 
(A) Section 108(e)(10)(B) is amended by 
striking ‘‘and 1274’’ and inserting ‘‘, 1274, and 
1274B’’. 
(B) Section 1274(c)(3), as amended by the 
preceding provisions of this Act, is amended by 
adding at the end the following new subpara-
graph: 
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‘‘(F) CERTAIN MODIFIED DEBT.—Any debt 
instrument the issue price of which is deter-
mined under section 1274B.’’. 
(C) The table of sections for subpart A of 
part V of subchapter P is amended by inserting 
after the item relating to section 1274A the fol-
lowing new item: 
‘‘Sec. 1274B. Determination of issue price in the case of an exchange of debt 
instruments.’’. 
(b) NONRECOGNITION OF GAIN OR LOSS BY HOLD-
ER.— 
(1) IN GENERAL.—Section 1037 is amended to 
read as follows: 
‘‘SEC. 1037. CERTAIN EXCHANGES OF DEBT INSTRUMENTS. 
‘‘(a) NONRECOGNITION OF GAIN OR LOSS.—No gain 
or loss shall be recognized to the holder of a debt instru-
ment if such existing debt instrument is exchanged solely 
for a new debt instrument (whether by exchange or signifi-
cant modification) issued by the same issuer. 
‘‘(b) PROPERTY ATTRIBUTABLE TO ACCRUED INTER-
EST.—Subsection (a) shall not apply to the extent that 
any property received is attributable to interest which ac-
crued on the existing debt instrument on or after the be-
ginning of the holder’s holding period of such instrument. 
‘‘(c) LIMITATION ON GAIN RECOGNITION IN CASE OF 
EXCHANGE NOT SOLELY FOR A NEW DEBT INSTRU-
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MENT.—In the case of an exchange of a debt instrument 
to which section 1035(d) applies, the amount of gain rec-
ognized shall not exceed the amount of gain which would 
have been recognized if section 1274B did not apply. 
‘‘(d) CROSS REFERENCES.— 
‘‘(1) For rules relating to securities exchanged 
or distributed in a reorganization, etc., see sections 
354, 355, and 356. 
‘‘(2) For rules relating to recognition of gain or 
loss where exchange was not made solely for another 
debt instrument of the issuer, see subsections (d) 
and (e) of section 1035. 
‘‘(3) For rules relating to basis of obligations 
acquired in an exchange described in subsection (a), 
see subsection (f) of section 1035.’’. 
(2) CLERICAL AMENDMENT.—The table of sec-
tions for part III of subchapter O of chapter 1 is 
amended by striking the item relating to section 
1037 and inserting the following new item: 
‘‘Sec. 1037. Certain exchanges of debt instruments.’’. 
(c) APPLICATION TO EXCESS PRINCIPAL RULES FOR 
CORPORATE REORGANIZATIONS.— 
(1) EXCHANGES
OF
SECURITIES
IN
REORGA-
NIZATIONS.— 
(A) IN GENERAL.—Section 354(a)(2)(A)(i) 
is amended to read as follows: 
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573 
‘‘(i) the issue price of any such securi-
ties received exceeds the adjusted issue 
price of any such securities surrendered, 
or’’. 
(B) DEFINITIONS.—Section 354(a)(2) is 
amended by inserting after subparagraph (C) 
the following new subparagraph: 
‘‘(D) DEFINITIONS.—For purposes of this 
paragraph— 
‘‘(i) ISSUE PRICE.—The issue price of 
any security shall be determined under sec-
tions 1273, 1274, and 1274B. 
‘‘(ii) ADJUSTED
ISSUE
PRICE.—The 
adjusted issue price of any security shall 
be determined under section 1275(a)(5).’’. 
(2) 
SECTION
355
TRANSACTIONS.—Section 
355(a)(3)(A)(i) is amended to read as follows: 
‘‘(i) the issue price (as defined in sec-
tion 354(a)(2)(D)) of the securities in the 
controlled corporation which are received 
exceeds the adjusted issue price (as so de-
fined) of the securities which are surren-
dered in connection with such distribution, 
or’’. 
(3) SECTION 356 TRANSACTIONS.— 
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574 
(A) 
IN
GENERAL.—Section 
356(d)(2)(B)(ii) is amended to read as follows: 
‘‘(ii) the issue price (as defined in sec-
tion 354(a)(2)(D)) of such securities re-
ceived exceeds the adjusted issue price (as 
so defined) of such securities surren-
dered,’’. 
(B) CONFORMING AMENDMENTS.— 
(i) Section 356(d)(2)(B) is amended 
in the matter following clause (ii)— 
(I) by striking ‘‘the fair market 
value of such excess’’ and inserting 
‘‘the amount of such excess’’, and 
(II) by striking ‘‘the entire prin-
cipal amount’’ and inserting ‘‘the en-
tire issue price (as so defined)’’. 
(ii) Section 356(d)(2)(C) is amended 
to read as follows: 
‘‘(C) GREATER
PRINCIPAL
AMOUNT
IN 
SECTION 355 TRANSACTION.—If, in an exchange 
or distribution described in section 355, the 
issue price (as defined in section 354(a)(2)(D)) 
of the securities in the controlled corporation 
which are received exceeds the adjusted issue 
price (as so defined) of the securities in the dis-
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575 
tributing corporation which are surrendered, 
then, with respect to such securities received, 
the term ‘other property’ means only the 
amount of such excess.’’. 
(d) EFFECTIVE DATE.—The amendments made by 
this section shall apply to transactions after December 31, 
2014. 
SEC. 3413. COORDINATION WITH RULES FOR INCLUSION 
NOT LATER THAN FOR FINANCIAL ACCOUNT-
ING PURPOSES. 
(a) IN GENERAL.—Section 451(b), as amended by 
the preceding provisions of this Act, is amended by insert-
ing immediately after the heading thereof (and before 
paragraph (1) thereof) the following: ‘‘Notwithstanding 
any other provision of law (including part V of subchapter 
P)—’’. 
(b) EFFECTIVE DATE; CHANGE IN METHOD OF AC-
COUNTING.—The amendment made by subsection (a) shall 
be treated for purposes of section 3303(g) as though such 
amendment were made by section 3303(a). 
SEC. 3414. RULES REGARDING CERTAIN GOVERNMENT 
DEBT. 
(a) REPEAL OF CERTAIN SUPERCEDED RULES.— 
Subpart B of part II of subchapter E of chapter 1 is 
amended by striking section 454 (and by striking the item 
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576 
relating to such section in the table of sections for such 
subpart). 
(b) PRESERVATION OF RULES RELATED TO UNITED 
STATES SAVINGS BONDS.—Subpart A of part V of sub-
chapter P of chapter 1 is amended by inserting after sec-
tion 1272 the following new section: 
‘‘SEC. 1272A. UNITED STATES SAVINGS BONDS. 
‘‘(a) ELECTION TO INCLUDE INCREASE IN REDEMP-
TION PRICE IN INCOME.—A taxpayer holding a United 
States savings bond may elect (on the taxpayer’s return 
for the taxable year) to treat any increase in the redemp-
tion price as income received in the taxable year. If any 
such election is made with respect to any such obligation, 
it shall apply also to all such obligations owned by the 
taxpayer at the beginning of the first taxable year to which 
it applies and to all such obligations thereafter acquired 
by the taxpayer and shall be binding for all subsequent 
taxable years, unless revoked with the consent of the Sec-
retary. In the case of any such obligations owned by the 
taxpayer at the beginning of the first taxable year to which 
the taxpayer’s election applies, the increase in the redemp-
tion price of such obligations occurring between the date 
of acquisition and the first day of such taxable year shall 
also be treated as income received in such taxable year. 
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