[Federal Register Volume 76, Number 5 (Friday, January 7, 2011)]
[Proposed Rules]
[Pages 1101-1105]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-83]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-131947-10]
RIN 1545-BJ71
Property Traded on an Established Market
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
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SUMMARY: This document contains proposed regulations relating to
determining when property is traded on an established market (that is,
publicly traded) for purposes of determining the issue price of a debt
instrument. The regulations amend the current regulations to clarify
the circumstances that cause property to be publicly traded. The
regulations provide needed guidance to issuers and holders of debt
instruments. This document also provides a notice of a public hearing
on these proposed regulations.
DATES: Written or electronic comments must be received by March 8,
2011. Outlines of topics to be discussed at the public hearing
scheduled for April 13,
[[Page 1102]]
2011, at 10 a.m. must be received by March 4, 2011.
ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-131947-10), room
5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand-delivered Monday through
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
131947-10), Courier's Desk, Internal Revenue Service, 1111 Constitution
Avenue, NW., Washington, DC, or sent electronically, via the Federal
eRulemaking Portal at http://www.regulations.gov (IRS REG-131947-10).
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
William E. Blanchard at (202) 622-3950; concerning submission of
comments, the hearing, and/or to be placed on the building access list
to attend the hearing, [email protected], at
(202) 622-7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
The issue price of a debt instrument is determined under section
1273(b) of the Internal Revenue Code or, in the case of certain debt
instruments issued for property, under section 1274. Section 1273(b)(3)
generally provides that in the case of a debt instrument that is issued
for property and that is part of an issue some or all of which is
traded on an established securities market (often referred to as
``publicly traded''), the issue price of the debt instrument is the
fair market value of the debt instrument. Similarly, if the debt
instrument is issued for stock or securities (or other property) that
are publicly traded, the issue price of the debt instrument is the fair
market value of the property. Section 1.1273-2 of the Income Tax
Regulations (the ``current regulations'') also applies to determine the
issue price of a debt instrument that is publicly traded or is issued
for publicly traded property. Under Sec. 1.1273-2(c)(1), the term
property means a debt instrument, stock, security, contract, commodity,
or nonfunctional currency. Section 1.1273-2(f) defines when property is
traded on an established market (that is, publicly traded) for purposes
of section 1273(b)(3) and Sec. 1.1273-2.
In general, under Sec. 1.1273-2(f) of the current regulations, a
debt instrument is traded on an established market if either the debt
instrument or the property for which the debt instrument is exchanged
is described in Sec. 1.1273-2(f)(2) through (f)(5) in the time period
30 days before or after the exchange. Property is described in Sec.
1.1273-2(f)(2) if it is listed on a specified exchange. Property is
described in Sec. 1.1273-2(f)(3) if it is of a kind that is traded on
a contract market designated by the Commodities Futures Trading
Commission or an interbank market. Property is described in Sec.
1.1273-2(f)(4) if it appears on a system of general circulation that
disseminates price quotations or recent trading prices. Property is
described in Sec. 1.1273-2(f)(5) if price quotations are readily
available from dealers, brokers or traders, subject to certain
exceptions.
The issue price of a debt instrument has important income tax
consequences. As an initial matter, the difference between the issue
price of a debt instrument and its stated redemption price at maturity
measures whether there is any original issue discount associated with
the instrument. A debt-for-debt exchange (including a significant
modification of existing debt) in the context of a work-out may result
in a reduced issue price for the new debt, which generally would
produce cancellation of indebtedness income for the issuer, a loss to
the holder whose basis is greater than the issue price of the new debt,
and original issue discount that generally must be accounted for by
both the issuer and the holder of the new debt. These consequences,
exacerbated by recent turmoil in the debt markets, have focused
attention on the definition of when property is traded on an
established market for purposes of Sec. 1.1273-2(f).
Commenters have criticized the definition of an established market
in Sec. 1.1273-2(f) of the current regulations. They argue that
comparatively little debt is listed on an exchange described in Sec.
1.1273-2(f)(2), and that even debt that is listed rarely trades on the
exchange. They point out that the list of foreign exchanges in Sec.
1.1273-2(f)(2)(iii) is outdated. Commenters also struggle to interpret
the meaning of an interbank market in Sec. 1.1273-2(f)(3).
Even more troublesome for commenters is the question of what
constitutes a quotation medium for purposes of Sec. 1.1273-2(f)(4) of
the current regulations. Debt instruments typically trade in various
ways in the current markets, but the vast majority of debt instruments
are purchased or sold over-the-counter for a price negotiated between a
financial entity (such as a securities dealer or broker) and a
customer. A dealer or broker may quote a firm price, sometimes referred
to as a ``firm'' or ``executable'' quote, entitling a customer to
purchase or sell at that price, subject to volume limits or other
specified restrictions. Alternatively, a dealer, broker or listing
service may quote a price that indicates a willingness to purchase and/
or sell a specified debt instrument, again subject to volume limits or
other limitations, but not necessarily at the quoted price. This is
sometimes referred to as a ``soft'' or an ``indicative'' quote. The
decision to send a price quote to a customer (or customers) may be
initiated by a dealer or broker, or a customer may request a price
quote from one or more dealers or brokers. Additionally, a service
provider may provide subscribers with valuations based on data
collected from contributors that may reflect actual sales, price
quotes, or any other information it deems relevant to the value of the
debt instrument in question. Commenters struggled to apply the
description of a quotation medium in Sec. 1.1273-2(f)(4) to this
informal marketplace, which has evolved considerably since the
regulations were originally promulgated in 1994.
Finally, commenters pointed out that the general rule in Sec.
1.1273-2(f)(5) of the current regulations, which treats a debt
instrument as publicly traded if price quotations are readily available
from dealers, brokers or traders could cause almost every debt
instrument to be within this definition but for the safe harbors in
Sec. 1.1273-2(f)(5)(ii).
Explanation of Provisions
As a general matter, the Treasury Department and the IRS believe
that the ``traded on an established market'' standard established by
section 1273(b)(3) is intended to be interpreted broadly. When section
1275(a)(4) was repealed by section 11325(a)(2) of the Revenue
Reconciliation Act of 1990, Public Law 101-508, 104 Stat. 1388, 1388-
466 (1990), issue price was required to be determined under section
1273 and section 1274 even in a debt-for-debt exchange that qualified
as a corporate reorganization. As the depth of trading and the
transparency of the markets that trade debt instruments has improved,
the earlier concerns that trading prices may not reflect the fair
market value of a debt instrument have diminished. Thus, to the extent
accurate pricing information exists, whether it derives from executed
sales, reliable price quotations, or valuation estimates that are based
on some combination of sales and quotes, the Treasury Department and
the IRS believe that that information should be the basis for the issue
price determined under section 1273(b)(3).
To address concerns with the current regulations, the proposed
regulations
[[Page 1103]]
simplify and clarify the determination of when property is traded on an
established market. The proposed regulations identify four ways for
property to be traded on an established market. In each case, the time
period for determining whether the property is publicly traded is the
31-day period ending 15 days after the issue date of the debt
instrument.
First, property that is listed on an exchange continues to be
publicly traded property under Sec. 1.1273-2(f)(2) of the proposed
regulations. Although relatively few debt instruments are listed or
traded on an exchange, the regulations may still apply to other
property that is listed, such as stock for which a debt instrument is
issued in a debt-for-stock exchange. The proposed regulations, however,
delete the reference to an interdealer quotation system that is
sponsored by a national securities association registered under section
15A of the Securities Exchange Act of 1934 because none exist or are
contemplated. Rather than list foreign exchanges, the proposed
regulations specify that a foreign securities exchange that is
officially recognized, sanctioned, regulated or supervised by a
governmental authority of the foreign country in which the market is
located is an exchange that causes property to be publicly traded.
Second, Sec. 1.1273-2(f)(3) of the proposed regulations treats
property as publicly traded when a sales price for the property is
reasonably available. Market participants have access to information
about the securities markets from a variety of sources, which are
constantly changing and evolving. If information about the sales price
of a debt instrument (or information sufficient to calculate the sales
price) appears in a medium that is made available to persons that
regularly purchase or sell debt instruments, or persons that broker
purchases or sales of debt instruments, the sales price will be
considered reasonably available. For example, in the case of a debt
instrument, a sale that is reported electronically at any time in the
31-day time period, such as in the Trade Reporting and Compliance
Engine (``TRACE'') database maintained by the Financial Industry
Regulatory Authority, would cause the instrument to be publicly traded,
as would other pricing services and trading platforms that report
prices of executed sales on a general basis or to subscribers.
Third, property is considered to be traded on an established market
if a firm price quote to buy or sell the property is available. A firm,
or executable, price quote may be labeled as such, or a price quote may
function as a firm quote as a matter of law or industry practice. In
either case, Sec. 1.1273-2(f)(4) of the proposed regulations treats
property with a firm quote as publicly traded.
Finally, a price quote (other than a firm quote) that is provided
by a dealer, a broker, or a pricing service (an indicative quote) will
cause property to be publicly traded under Sec. 1.1273-2(f)(5) of the
proposed regulations.
The proposed regulations provide that the fair market value of
property described in Sec. 1.1273-2(f) will be presumed to be equal to
its trading price, sales price, or quoted price, whichever is
applicable. However, if there is more than one price or quote, a
taxpayer is permitted to reconcile competing prices or quotes in a
reasonable manner. In the case of an indicative quote, if a taxpayer
determines that the quoted price or prices misrepresents the fair
market value of the property by a material amount, Sec. 1.1273-
2(f)(6)(ii) of the proposed regulations permits the taxpayer to use any
method that provides a reasonable basis to determine the fair market
value of the property, provided the taxpayer can establish that the
method chosen more accurately reflects the value of the property than
the extant quote or quotes for the property.
In response to commenters, the proposed regulations also contain
guidance in areas ancillary to publicly traded debt, such as proposed
regulations clarifying and revising the rules to determine when an
issue of debt instruments is eligible to be part of a qualified
reopening under Sec. 1.1275-2(k) and proposed regulations clarifying
the treatment of a debt instrument issued in a debt-for-debt exchange
under the potentially abusive rules in section 1274(b)(3). In addition,
in response to commenters, the proposed regulations include a business
day convention to determine if certain stated interest payments affect
whether the payments are qualified stated interest.
Proposed Effective Date
The regulations, as proposed, apply to debt instruments that have
an issue date on or after the publication date of the Treasury decision
adopting these rules as final regulations in the Federal Register.
Special Analyses
It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in Executive Order
12866. Therefore, a regulatory assessment is not required. It also has
been determined that section 553(b) of the Administrative Procedure Act
(5 U.S.C. chapter 5) does not apply to these regulations, and because
the regulation does not impose a collection of information on small
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not
apply. Pursuant to section 7805(f) of the Internal Revenue Code, these
regulations have been submitted to the Chief Counsel for Advocacy of
the Small Business Administration for comment on its impact on small
business.
Comments and Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written comments (a signed original
and eight (8) copies) or electronic comments that are submitted timely
to the IRS. The IRS and the Treasury Department request comments on the
clarity of the proposed rules and how they can be made easier to
understand. All comments will be available for public inspection and
copying.
A public hearing has been scheduled for April 13, 2011, beginning
at 10 a.m. in the Auditorium, Internal Revenue Building, 1111
Constitution Avenue, NW., Washington, DC. Due to building security
procedures, visitors must enter at the Constitution Avenue entrance.
All visitors must present photo identification to enter the building.
Because of access restrictions, visitors will not be admitted beyond
the immediate entrance area more than 30 minutes before the hearing
starts. For information about having your name placed on the building
access list to attend the hearing, see the FOR FURTHER INFORMATION
CONTACT section of this preamble.
The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who
wish to present oral comments at the hearing must submit electronic or
written comments and an outline of the topics to be discussed and the
time to be devoted to each topic by March 4, 2011. A period of 10
minutes will be allotted to each person for making comments. An agenda
showing the scheduling of the speakers will be prepared after the
deadline for receiving outlines has passed. Copies of the agenda will
be available free of charge at the hearing.
Drafting Information
These regulations were drafted by personnel in the Office of
Associate Chief Counsel (Financial Institutions and Products) and the
Treasury Department.
[[Page 1104]]
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.1273-1 is amended by adding a new paragraph
(c)(6) to read as follows:
Sec. 1.1273-1 Definition of OID.
* * * * *
(c) * * *
(6) Business day convention--(i) Rule. For purposes of this
paragraph (c), if a scheduled payment date for stated interest falls on
a Saturday, Sunday, or Federal holiday (within the meaning of 5 U.S.C.
6103) but, under the terms of the debt instrument, the stated interest
is payable on the first business day that immediately follows the
scheduled payment date, the stated interest is treated as payable on
the scheduled payment date, provided no additional interest is payable
as a result of the deferral.
(ii) Effective/applicability date. Paragraph (c)(6)(i) of this
section applies to debt instruments that are issued on or after the
date of publication of the Treasury decision adopting these rules as
final regulations in the Federal Register. A taxpayer, however, may
rely on paragraph (c)(6)(i) of this section for debt instruments issued
before that date.
* * * * *
Par. 3. Section 1.1273-2 is amended by revising paragraph (f) to
read as follows:
Sec. 1.1273-2 Determination of issue price and issue date.
* * * * *
(f) Traded on an established market (publicly traded)--(1) In
general. Except as provided in paragraph (f)(7) or (f)(8) of this
section, property (including a debt instrument described in paragraph
(b)(1) of this section) is traded on an established market for purposes
of this section if, at any time during the 31-day period ending 15 days
after the issue date--
(i) The property is listed on an exchange described in paragraph
(f)(2) of this section;
(ii) There is a sales price for the property as described in
paragraph (f)(3) of this section;
(iii) There are one or more firm quotes for the property as
described in paragraph (f)(4) of this section; or
(iv) There are one or more indicative quotes for the property as
described in paragraph (f)(5) of this section.
(2) Exchange listed property. Property is listed on an exchange for
purposes of this paragraph (f)(2) if it is listed on--
(i) A national securities exchange registered under section 6 of
the Securities Exchange Act of 1934 (15 U.S.C. 78f);
(ii) A board of trade designated as a contract market by the
Commodities Futures Trading Commission;
(iii) A foreign securities exchange that is officially recognized,
sanctioned, regulated or supervised by a governmental authority of the
foreign country in which the market is located; or
(iv) Any other exchange, board of trade, or other market which the
Commissioner identifies in guidance published in the Internal Revenue
Bulletin (see Sec. 601.601(d)(2)(ii)) as an exchange for purposes of
this paragraph (f)(2).
(3) Sales price--(i) In general. A sales price exists if the price
for an executed purchase or sale of the property is reasonably
available.
(ii) Pricing information for a debt instrument. For purposes of
paragraph (f)(3)(i) of this section, the price of a debt instrument is
considered reasonably available if the sales price (or information
sufficient to calculate the sales price) appears in a medium that is
made available to persons that regularly purchase or sell debt
instruments (including a price provided only to certain customers or to
subscribers), or persons that broker purchases or sales of debt
instruments.
(4) Firm quote. A firm quote is considered to exist when a price
quote is available from at least one broker, dealer, or pricing service
(including a price provided only to certain customers or to
subscribers) for property and the quoted price is substantially the
same as the price for which the property could be purchased or sold.
The identity of the person providing the quote must be reasonably
ascertainable for a quote to be considered a firm quote for purposes of
this paragraph (f)(4). A quote will be considered a firm quote if
market participants typically purchase or sell, as the case may be, at
the quoted price, even if the party providing the quote is not legally
obligated to do so.
(5) Indicative quote. An indicative quote is considered to exist
when a price quote is available from at least one broker, dealer, or
pricing service (including a price provided only to certain customers
or to subscribers) for property and the price quote is not a firm quote
described in paragraph (f)(4) of this section.
(6) Presumption that price or quote is equal to fair market value--
(i) In general. The fair market value of property described in this
section will be presumed to be equal to its trading price on an
exchange described in paragraph (f)(2) of this section, or its sales
price or quoted price determined under paragraphs (f)(3) through (f)(5)
of this section. If there is more than one trading price under
paragraph (f)(2) of this section, sales price under paragraph (f)(3) of
this section, or quoted price under paragraph (f)(4) or (f)(5) of this
section, a taxpayer may use any reasonable method, consistently
applied, to determine the price.
(ii) Special rule for property for which there is only an
indicative quote. If property is described only in paragraph (f)(5) of
this section, and the taxpayer determines that the quote (or an average
of the quotes) materially misrepresents the fair market value of the
property, the taxpayer can use any method that provides a reasonable
basis to determine the fair market value of the property. A taxpayer
must establish that the method chosen more accurately reflects the
value of the property than the quote or quotes for the property to use
the method provided in this paragraph (f)(6)(ii). For an equity or debt
instrument, a volume discount or control premium will not be considered
to create a material misrepresentation of value for purposes of this
paragraph (f)(6).
(7) Exception for property for which there is de minimis trading--
(i) In general. Notwithstanding any other provision in this section,
property will not be treated as traded on an established market if
there is no more than de minimis trading of the property.
(ii) Definition of de minimis trading for debt instruments. For
purposes of paragraph (f)(7)(i) of this section, a debt instrument will
be treated as traded in de minimis quantities only if--
(A) Each trade of such debt instrument during the 31-day period
ending 15 days after the issue date is for quantities of US$1 million
or less (or, for debt denominated in a currency other than the U.S.
dollar, the equivalent amount in the currency in which the debt is
denominated); and
(B) The aggregate amount of all such trades does not exceed US$5
million (or, for debt denominated in a currency other than the U.S.
dollar, the equivalent amount in the currency in which the debt is
denominated).
[[Page 1105]]
(8) Exception for small debt issues. Notwithstanding any other
provision in this section, a debt instrument will not be treated as
traded on an established market if the original stated principal amount
of the issue that includes the debt instrument does not exceed US$50
million (or, for debt denominated in a currency other than the U.S.
dollar, the equivalent amount in the currency in which the debt is
denominated).
(9) Anti-abuse rules--(i) Effect of certain temporary restrictions
on trading. If there is any temporary restriction on trading, a purpose
of which is to avoid the characterization of the property as one that
is traded on an established market for Federal income tax purposes,
then the property is treated as traded on an established market. For
purposes of the preceding sentence, a temporary restriction on trading
need not be imposed by the issuer.
(ii) Artificial pricing information. If a principal purpose for the
existence of any sale or price quotation is to materially misrepresent
the value of property, that sale or price quotation may be disregarded.
(10) Convertible debt instruments. A debt instrument is not treated
as traded on an established market solely because the debt instrument
is convertible into property that is so traded.
(11) Effective/applicability date. Paragraph (f) of this section
applies to a debt instrument issued on or after the date of publication
of the Treasury decision adopting these rules as final regulations in
the Federal Register.
* * * * *
Par. 4. Section 1.1274-3 is amended by adding a new paragraph
(b)(4) to read as follows:
Sec. 1.1274-3 Potentially abusive situations defined.
* * * * *
(b) * * *
(4) Debt-for-debt exchange--(i) Rule. A debt instrument issued in a
debt-for-debt exchange, including a deemed exchange under Sec. 1.1001-
3, will not be treated as the subject of a recent sales transaction for
purposes of section 1274(b)(3)(B)(ii)(I) even if the debt instrument
exchanged for the newly issued debt instrument was recently acquired
prior to the exchange. Therefore, the issue price of the debt
instrument will not be determined under section 1274(b)(3). However, if
the debt instrument or the property for which the debt instrument is
issued is publicly traded within the meaning of Sec. 1.1273-2(f), the
rules of Sec. 1.1273-2 will apply to determine the issue price of the
debt instrument.
(ii) Effective/applicability date. Paragraph (b)(4)(i) of this
section applies to a debt instrument issued on or after the date of
publication of the Treasury decision adopting these rules as final
regulations in the Federal Register.
* * * * *
Par. 5. Section 1.1275-2 is amended by revising paragraphs
(k)(3)(ii)(A), (k)(3)(iii)(A) and (k)(5) and adding a new paragraph
(k)(3)(v) to read as follows:
Sec. 1.1275-2 Special rules relating to debt instruments.
* * * * *
(k) * * *
(3) * * *
(ii) * * *
(A) The original debt instruments are publicly traded (within the
meaning of Sec. 1.1273-2(f)) as of the reopening date of the
additional debt instruments;
* * * * *
(iii) * * *
(A) The original debt instruments are publicly traded (within the
meaning of Sec. 1.1273-2(f)) as of the reopening date of the
additional debt instruments;
* * * * *
(v) Non-publicly traded debt issued for cash. Notwithstanding
paragraphs (k)(3)(ii)(A) and (k)(3)(iii)(A) of this section, a
qualified reopening includes a reopening of original debt instruments
if the additional debt instruments are issued for cash to persons
unrelated to the issuer (as determined under section 267(b) or 707(b))
for an arm's length price and the other requirements in paragraph
(k)(3)(ii) or (k)(3)(iii) of this section are satisfied, whichever is
applicable. For purposes of paragraph (k)(3)(ii)(C) of this section,
the yield test is satisfied if, on the reopening date of the additional
debt instruments, the yield of the additional debt instruments (based
on their cash purchase price) is not more than 110 percent of the yield
of the original debt instruments on their issue date (or, if the
original debt instruments were issued with no more than a de minimis
amount of OID, the coupon rate).
* * * * *
(5) Effective/applicability dates--(i) Except as provided in
paragraph (k)(5)(ii) of this section, this paragraph (k) applies to
debt instruments that are part of a reopening where the reopening date
is on or after March 13, 2001.
(ii) Paragraph (k)(3)(v) of this section applies to debt
instruments that are part of a reopening if the reopening date is on or
after the date of publication of the Treasury decision adopting these
rules as final regulations in the Federal Register.
Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2011-83 Filed 1-6-11; 8:45 am]
BILLING CODE 4830-01-P