[Federal Register Volume 59, Number 22 (Wednesday, February 2, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-2075]


[[Page Unknown]]

[Federal Register: February 2, 1994]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 8518]
RIN 1545-AS36

 

Debt Instruments with Original Issue Discount; Anti-Abuse Rule

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary regulations.

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SUMMARY: This document contains a temporary regulation that adds an 
anti-abuse rule to the final regulations relating to the tax treatment 
of debt instruments with original issue discount. The rule allows the 
Commissioner of Internal Revenue, in certain circumstances, to apply or 
depart from the final regulations in a manner that ensures a reasonable 
result in light of the purposes of the statutes governing original 
issue discount. The text of this temporary regulation also serves as 
the text of the proposed regulation set forth in the notice of proposed 
rulemaking on this subject in the Proposed Rules section of this issue 
of the Federal Register.

DATES: This temporary regulation is effective April 4, 1994.
    This temporary regulation applies to debt instruments issued on or 
after April 4, 1994, and to lending transactions, sales, and exchanges 
that occur on or after April 4, 1994.

FOR FURTHER INFORMATION CONTACT: Andrew C. Kittler at (202) 622-3940 or 
William E. Blanchard at (202) 622-3950 (not toll-free calls).

SUPPLEMENTARY INFORMATION

Background

    Elsewhere in this issue of the Federal Register, the IRS published 
final regulations relating to original issue discount (OID) and other 
related matters under sections 163(e), 446, 483, 1001, 1012, and 
sections 1271 through 1275 of the Internal Revenue Code. In general, 
the regulations finalize the proposed regulations that were published 
in the Federal Register on December 22, 1992 (57 FR 60750).

Explanation of provision

    The final regulations provide rules for the computation of OID and 
other related matters. In many cases, the final regulations provide 
bright-line or mechanical rules to simplify computations and to permit 
flexibility in structuring debt instruments.
    The Service and Treasury believe that the rules in the final 
regulations work appropriately in most situations. Nonetheless, it may 
be possible to structure debt instruments or transactions, or to apply 
the bright-line or mechanical rules of the regulations, in a way that 
produces an unreasonable result. The purpose of the temporary 
regulation is to allow the Commissioner to apply or depart from the 
final regulations where necessary or appropriate to ensure that the tax 
result is reasonable in light of the purposes of the applicable 
statutes.
    Under the temporary regulation, if a principal purpose in 
structuring a debt instrument, engaging in a transaction, or applying 
the final regulations is to achieve a result that is unreasonable in 
light of the purposes of the applicable statutes, then the Commissioner 
can apply or depart from the regulations as necessary or appropriate to 
achieve a reasonable result. A result will not be considered 
unreasonable, however, in the absence of a substantial effect on the 
present value of a taxpayer's tax liability.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866. It 
has also been determined that section 553(b) of the Administrative 
Procedure Act (5 U.S.C. chapter 5) and the Regulatory Flexibility Act 
(5 U.S.C. chapter 6) do not apply to this regulation, and, therefore, a 
Regulatory Flexibility Analysis is not required. Pursuant to section 
7805(f) of the Internal Revenue Code, this temporary regulation will be 
submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on its impact on small business.

List of Subjects in 26 CFR part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 is amended by adding 
an entry in numerical order to read as follows:

    Authority: 26 U.S.C. 7805 * * * Sec. 1.1275-2T also issued under 
26 U.S.C. 1275(d).

    Par. 2. Section 1.1275-2T is added to read as follows:


Sec. 1.1275-2T  Special rules relating to debt instruments (temporary).

    (a) through (f) [Reserved]
    (g) Anti-abuse rule--(1) In general. If a principal purpose in 
structuring a debt instrument, engaging in a transaction, or applying 
the regulations under section 163(e) or sections 1271 through 1275 is 
to achieve a result that is unreasonable in light of the purposes of 
the applicable statutes, then the Commissioner can apply or depart from 
the regulations as necessary or appropriate to achieve a reasonable 
result. Whether a result is unreasonable is determined based on all the 
facts and circumstances. A result will not be considered unreasonable, 
however, in the absence of a substantial effect on the present value of 
a taxpayer's tax liability. For example, if a principal purpose of 
including an early call option that is not expected to be exercised by 
the issuer in the terms of a current-pay, increasing-rate note is to 
protect the holder from taxable income in excess of the interest 
payments by virtue of the option rules of Sec. 1.1272-1(c)(5), and if 
the effect would be to substantially reduce the present value of a 
holder's tax liability arising from the note, the Commissioner can 
apply the regulations (in whole or in part) without regard to the rules 
of Sec. 1.1272-1(c)(5). On the other hand, it generally would be 
reasonable for a corporation to issue convertible bonds, rather than 
investment units consisting of bonds and warrants, to reduce or 
eliminate the amount of taxable OID on the bonds. See Sec. 1.1272-1(e).
    (2) Effective date. Paragraph (g) of this section applies to debt 
instruments issued on or after April 4, 1994, and to lending 
transactions, sales, and exchanges that occur on or after April 4, 
1994.

    Approved: January 14, 1994.
Margaret Milner Richardson,
Commissioner of Internal Revenue.
Leslie Samuels,
Assistant Secretary of the Treasury.
[FR Doc. 94-2075 Filed 1-27-94; 11:10 am]
BILLING CODE 4830-01-U