Deferral of interest deduction allocable to accrued market discount

Except as otherwise provided in this section, the net direct interest expense with respect to any market discount bond shall be allowed as a deduction for the taxable year only to the extent that such expense exceeds the portion of the market discount allocable to the days during the taxable year on which such bond was held by the taxpayer (as determined under the rules of section 1276(b)). If— For purposes of subparagraph (A), the amount of the disallowed interest expense— For purposes of this paragraph, the term “net interest income” means the excess of the amount determined under paragraph (2) of subsection (c) over the amount determined under paragraph (1) of subsection (c). Except as otherwise provided in this paragraph, the amount of the disallowed interest expense with respect to any market discount bond shall be treated as interest paid or accrued by the taxpayer in the taxable year in which such bond is disposed of. If any market discount bond is disposed of in a nonrecognition transaction— the disallowed interest expense with respect to such property (to the extent not so treated) shall be treated as disallowed interest expense— For purposes of this paragraph, the amount of the disallowed interest expense shall not include any amount previously taken into account under paragraph (1). For purposes of this subsection, the term “disallowed interest expense” means the aggregate amount disallowed under subsection (a) with respect to the market discount bond. For purposes of this section, the term “net direct interest expense” means, with respect to any market discount bond, the excess (if any) of—