(a)

General rule

Original issue discount on any tax-exempt obligation shall be treated as accruing -

(1)

for purposes of section 163, in the manner provided by section 1272(a) (determined without regard to paragraph (7) thereof), and

(2)

for purposes of determining the adjusted basis of the holder, in the manner provided by section 1272(a) (determined with regard to paragraph (7) thereof).

(b)

Definitions and special rules

For purposes of this section -

(1)

Original issue discount

The term "original issue discount" has the meaning given to such term by section 1273(a) without regard to paragraph (3) thereof. In applying section 483 or 1274, under regulations prescribed by the Secretary, appropriate adjustments shall be made to the applicable Federal rate to take into account the tax exemption for interest on the obligation.

(2)

Tax-exempt obligation

The term "tax-exempt obligation" has the meaning given to such term by section 1275(a)(3).

(3)

Short-term obligations

In applying this section to obligations with maturity of 1 year or less, rules similar to the rules of section 1283(b) shall apply.