Page 652

TITLE 26-INTERNAL REVENUE CODE (b) Application of section 1232 (1) Exchanges involving obligations issued at a dis- count In any case in which gain has been realized but not recognized because of the provisions of subsection (a) (or so much of section 1031(b) as relates to subsection (a) of this sec- tion), to the extent such gain is later recog- nized by reason of a disposition or redemption of an obligation received in an exchange sub- ject to such provisions, the first sentence of section 1232(a)(2)(B) shall apply to such gain as though the obligation disposed of or re- deemed were the obligation surrendered to the Government in the exchange rather than the obligation actually disposed of or re- deemed. For purposes of this paragraph and section 1232, if the obligation surrendered in the exchange is a nontransferable obligation described in subsection (a) or (c) of section 454- (A) the aggregate amount considered, with respect to the obligation surrendered, as ordinary income shall not exceed the dif- ference between the issue price and the stated redemption price which applies at the time of the exchange, and (B) the issue price of the obligation re- ceived in the exchange shall be considered to be the stated redemption price of the ob- ligation surrendered in the exchange, in- creased by the amount of other consider- ation (if any) paid to the United States as a part of the exchange. (2) Exchanges of transferable obligations issued at not less than par In any case in which subsection (a) (or so much of section 1031(b) or (c) as relates to subsection (a) of this section) has applied to the exchange of a transferable obligation which was issued at not less than par for an- other transferable obligation, the issue price of the obligation received from the Govern- ment in the exchange shall be considered for purposes of applying section 1232 to be the same as the issue price of the obligation sur- rendered to the Government in the exchange, increased by the amount of other consider- ation (if any) paid to the United States as a part of the exchange. (c) Cross references (1) For rules relating to the recognition of gain or loss in a case where subsection (a) would apply except for the fact that the exchange was not made solely for other ob- ligations of the United States, see subsections (b) and (c) of section 1031. (2) For rules relating to the basis of obligations of the United States acquired in an exchange for other obliga- tions described in subsection (a), see subsection (d) of section 1031. (Added Pub. L. 86-346, title II, § 201(a), Sept. 22, 1959, 73 Stat. 622, and amended Pub. L. 94- 455, title XIX, § 1901(a)(130), (b)(3)(I), Oct. 4, 1976, 90 Stat. 1786, 1793.) REFERENCES IN TEXT The Second Liberty Bond Act, referred to in subsec. (a) is act Sept. 24, 1917, ch. 56, 40 Stat. 288, as amended. For classification of this Act to the Code, see Refer- ences in Text note set out under section 774 of Title 31, Money and Finance and Tables volume. AMENDMENTs 1976-Subsec. (b)(1). Pub. L. 94-455, substituted in provisions preceding subpar. (A) "section 1232(a)(2)(B)" for "section 1232(a)(2)(A)" and in subpar. (A) "ordinary income" for "gain from the sale or exchange of property which is not a capital asset". E rCTvE DATE OF 1976 AMENDMENT Amendment of subsec. (b)(1) by section 1901(a)(130), (b)(3)(I) of Pub. L. 94-455 effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. EFFECTIVE DATE Section 203 of Pub. L. 86-346 provided that: "The amendments made by this title [enacting this section and amending section 1031 of this title and section 742a of Title 31] shall be effective for taxable years ending after the date of enactment of this Act [Sept. 22, 1959]." SECTION REEME TO IN OTHER SECTIONS This section is referred to in sections 454, 1031 of this title. § 1038. Certain reacquisitions of real property (a) General rule If- (1) a sale of real property gives rise to in- debtedness to the seller which is secured by the real property sold, and (2) the seller of such property reacquires such property in partial or full satisfaction of such indebtedness, then, except as provided in subsections (b) and (d), no gain or loss shall result to the seller from such reacquisition, and no debt shall become worthless or partially worthless as a result of such reacquisition. (b) Amount of gain resulting (1) In general In the case of a reacquisition of real proper- ty to which subsection (a) applies, gain shall result from such reacquisition to the extent that- (A) the amount of money and the fair market value of other property (other than obligations of the purchaser) received, prior to such reacquisition, with respect to the sale of such property, exceeds (B) the amount of the gain on the sale of such property returned as income for peri- ods prior to such reacquisition. (2) Limitation The amount of gain determined under para- graph (1) resulting from a reacquisition during any taxable year beginning after the date of the enactment of this section shall not exceed the amount by which the price at which the real property was sold exceeded its adjusted basis, reduced by the sum of- (A) the amount of the gain on the sale of such property returned as income for peri- ods prior to the reacquisition of such prop- erty, and (B) the amount of money and the fair market value of other property (other than obligations of the purchaser received with respect to the sale of such property) paid or transferred by the seller in connection with the reacquisition of such property. Page 652 § 1038