COUPON STRIPPING UNDER SECTION 1286: TREES, FRUITS, AND FELINES

Stripping coupons from Treasury bonds and then selling either the bonds or the coupons offered tax advantages to both buyer and seller. This practice first gained notice in the mid-1970s. A legislative proposal by the US Treasury aimed at discouraging coupon stripping led to enactment of Section 128...

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Bibliographic Details
Published in:The Tax lawyer 1985-01, Vol.38 (2), p.267-291
Main Author: McGrath, Joseph P.
Format: Article
Language:English
Subjects:
Bail bonds
Capital gains
Coupons
Discount coupons
Discounted
Discounts
Fair market value
Federal court decisions
Government bonds
Government securities
Income taxes
Internal Revenue Code
Losses
Ordinary income
Sales taxes
Supreme Court decisions
Tax attorneys
Tax exempt securities
Tax payments
Tax planning
Tax regulations
Taxable income
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Summary:Stripping coupons from Treasury bonds and then selling either the bonds or the coupons offered tax advantages to both buyer and seller. This practice first gained notice in the mid-1970s. A legislative proposal by the US Treasury aimed at discouraging coupon stripping led to enactment of Section 1286 of the Internal Revenue Code. It does not apply to bonds purchased before July 2, 1982, nor to tax-exempt bonds, but grants broad regulatory authority. The US Supreme Court decision in Helvering versus Horst (1940) can be reconciled with Section 1286 by limiting its applications. Carved-out interests were addressed by the Supreme Court in Commissioner versus P. G. Lake, Inc. (1958). Section 1286 suggests that alternatives are available that would honor the policy behind Horst and reflect the theory behind P. G. Lake. Additional considerations include: 1. character of the stripper's gain or loss, 2. reuniting of a stripped bond, 3. post-call coupons, and 4. tax-exempt obligations.
ISSN:0040-005X
2329-6089