IRS TO ISSUE REGS ON ACCRUED MARKET DISCOUNT AND “ALL EVENTS TEST”

Posted by Kim Chen on December 20th, 2018

Notice 2018-80, 2018-42 IRB
In a Notice, IRS has announced that it intends to issue proposed regs providing that market discount is not includible in income under Code Sec. 451(b), as amended by the Tax Cuts and Jobs Act (TCJA; P.L. 115-97, 12/22/2017).Code Sec. 451(b) provides that the all events test is met with respect to an item of gross income no later than when the taxpayer takes that item of gross income into account as revenue for financial accounting purposes in an “applicable financial statement”.
Background. For an accrual method taxpayer, income is includible in gross income when all the events have occurred which fix the right to receive such income, and the amount can be determined with reasonable accuracy (the “all events test”). (Code Sec. 451(b)(1)(C), Reg § 1.451-1(a))
Generally effective for tax years beginning after Dec. 31, 2017, Code Sec. 451(b)(1)(A), as amended by the TCJA, provides that for an accrual method taxpayer, the all events test for any item of gross income will not be treated as met any later than when the item is taken into account as revenue for financial accounting purposes in an “applicable financial statement” (as defined in Code Sec. 451(b)(3)). Under Code Sec. 451(b)(2), the general rule in Code Sec. 451(b)(1) doesn’t apply to any item of gross income for which the taxpayer uses a special method of accounting, other than items accounted for under a provision of part V of subchapter P, which contains Code Sec. 1271 through Code Sec. 1288.
Code Sec. 1276(a)(1) treats gain (if any) on the disposition of a market discount bond as ordinary income to the extent that the gain does not exceed the accrued market discount on the bond. Under Code Sec. 1276(a)(3), any partial principal payment on a market discount bond is includible in gross income to the extent the payment does not exceed accrued market discount on the bond.
New guidance. In Notice 2018-80, IRS announced that it intends to issue proposed regs providing that accrued market discount is not includible in income under Code Sec. 451(b). This guidance will be applicable as of Jan. 1, 2018