This article described the U.S. federal income tax regime covering short-term debt instruments held by cash method taxpayers and a trait of the commercial paper market whereby CP maturing just after a given year provides both seemingly anomalous financial and tax benefits. It appears that Congress specifically intended that the short-term debt obligation rules not apply to cash method taxpayers (or, more precisely, that the short-term obligation rules not modify the general method of tax accounting employed by cash method taxpayers) because Section 1281 lists very specifically the taxpayers to whom/ to which it applies. Thus, the absence of the inclusion of cash method taxpayers in the list in Section 1281 of the taxpayers to whom and to which the section applies strongly indicates that taxpayers subject to the cash method must look to more general principles in order to determine how to account for CP maturing in the year after the year during which it is issued. Reference to the general principles of cash method tax accounting reveals that a tax benefit exists for cash method taxpayers investing in the CP market around the turn of the year because, for short-term debt issued at a discount, cash method taxpayers are not taxed on the original issue discount until the instrument matures. Hence, cash method taxpayers should prefer, after adjusting for risk, short-term debt maturing on January 1, Year 2, to debt maturing December 31, Year 1, where Year 2 is the year directly following Year 1. The pre-tax overpricing of CP risk around the turn of the year (resulting in higher than expected yields for paper maturing January 1 rather than December 31) provides an investment opportunity for certain cash method taxpayers, especially certain cash method taxpayers willing to hold low-rated CP.
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