[Federal Register Volume 61, Number 123 (Tuesday, June 25, 1996)]
[Proposed Rules]
[Pages 32728-32729]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-15831]



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DEPARTMENT OF THE TREASURY
Internal Revenue Service

26 CFR Part 1

[FI-59-94]
RIN 1545-AT08


Modifications of Bad Debts and Dealer Assignments of Notional 
Principal Contracts

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking by cross-reference to temporary 
regulations.

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SUMMARY: In the Rules and Regulations section of this issue of the 
Federal Register, the IRS is issuing temporary regulations relating to 
the allowance of a deduction for a partially worthless debt when the 
terms of a debt instrument have been modified. The temporary 
regulations provide relief to certain taxpayers that are required to 
recognize gain as the result of modifying a debt instrument, when a 
portion of the gain is in part caused by a reduction of the debt's 
basis attributable to a bad debt deduction claimed in a prior taxable 
year. The temporary regulations provide guidance to taxpayers that 
modify the terms of a debt instrument after deducting an amount for 
partial worthlessness.
    In the Rules and Regulations section of this issue of the Federal 
Register, the IRS is also issuing temporary regulations relating to 
certain assignments of notional principal contracts by dealers in those 
contracts. The temporary regulations provide guidance to taxpayers 
relating to consequences of these assignments.
    The text of those temporary regulations also serves as the text of 
these proposed regulations.

DATES: Written comments and requests for a public hearing must be 
received by September 23, 1996.

ADDRESSES: Send submissions to: CC:DOM:CORP:R (FI-59-94), room 5228, 
Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, 
DC 20044. In the alternative, submissions may be hand delivered between 
the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (FI-59-94), Courier's 
Desk, Internal Revenue Service, 1111 Constitution Avenue NW., 
Washington, D.C.

FOR FURTHER INFORMATION CONTACT: Craig R. Wojay, Office of Assistant 
Chief Counsel, Financial Institutions and Products, (202) 622-3920 (not 
a toll-free number) concerning the modifications of bad debts, and 
Thomas J. Kelly, Office of Assistant Chief Counsel, Financial 
Institutions and Products, (202) 622-3940 (not a toll-free number) 
concerning dealer assignments of notional principal contracts.

SUPPLEMENTARY INFORMATION:

Background

    Temporary regulations in the Rules and Regulations section of this 
issue of the Federal Register amend the Income Tax Regulations (26 CFR 
part 1) relating to section 166. The temporary regulations contain 
rules relating to the requirement that a debt be charged off before a 
deduction on account of partial worthlessness is allowed. The rules 
apply to certain taxpayers who are required to recognize gain as the 
result of a significant modification of a debt instrument.
    Temporary regulations in the Rules and Regulations section of this 
issue of the Federal Register amend the Income Tax Regulations (26 CFR 
part 1) relating to section 1001. The temporary regulations contain 
rules relating to certain assignments of notional principal contracts 
by dealers in those contracts.
    The text of those temporary regulations also serves as the text of 
these proposed regulations. The preamble to the temporary regulations 
explains the temporary regulations.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in EO 12866. Therefore, 
a regulatory assessment is not required. It also has

[[Page 32729]]

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 these regulations, and, therefore, a 
Regulatory Flexibility Analysis is not required. Pursuant to section 
7805(f) of the Internal Revenue Code, this notice of proposed 
rulemaking will be submitted to the Chief Counsel for Advocacy of the 
Small Business Administration for comment on its impact on small 
business.

Comments and Requests for a 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) that are submitted timely to the IRS. All 
comments will be available for public inspection and copying. A public 
hearing may be scheduled if requested in writing by any person that 
timely submits written comments. If a public hearing is scheduled, 
notice of the date, time, and place for the hearing will be published 
in the Federal Register.

Drafting Information

    The principal author of the regulations concerning the 
modifications of bad debts is Craig R. Wojay, Office of Assistant Chief 
Counsel (Financial Institutions and Products), IRS. The principal 
author of the regulations concerning dealer assignments of notional 
principal contracts is Thomas J. Kelly, Office of Assistant Chief 
Counsel (Financial Institutions and Products), IRS. However, other 
personnel from the IRS and Treasury Department participated in their 
development.

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 1.166-3 is amended by adding paragraph (a)(3) to 
read as follows:


Sec. 1.166-3  Partial or total worthlessness.

    (The text of proposed paragraph (a)(3) is the same as the text of 
Sec. 1.166-3T(a)(3) published elsewhere in this issue of the Federal 
Register).
    Par. 3. Section 1.1001-4 is added to read as follows:


Sec. 1.1001-4  Modifications of notional principal contracts.

    (The text of proposed section 1.1001-4 is the same as the text of 
Sec. 1.1001-4T published elsewhere in this issue of the Federal 
Register).
Margaret Milner Richardson,
Commissioner of Internal Revenue,
[FR Doc. 96-15831 Filed 6-24-96; 8:45 am]
BILLING CODE 4830-01-P