[Federal Register Volume 64, Number 214 (Friday, November 5, 1999)]
[Proposed Rules]
[Pages 60395-60399]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-28742]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-115932-99]
RIN 1545-AX60


Reopenings of Treasury Securities and Other Debt Instruments; 
Original Issue Discount

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking by cross-reference to temporary 
regulations, notice of proposed rulemaking, and notice of public 
hearing.

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SUMMARY: This document proposes, by cross reference to temporary 
regulations, amendments to the final regulations concerning the Federal 
income tax treatment of certain reopenings of Treasury securities. The 
temporary regulations, published in the Rules and Regulations section 
of this issue of the Federal Register, remove the requirement that the 
issuance of the Treasury securities in the reopening must be intended 
to alleviate an acute, protracted shortage of the original securities. 
The text of the temporary regulations also serves as the text of the 
proposed regulations. This document also contains proposed regulations 
that would provide guidance on the Federal income tax treatment of 
reopenings of debt instruments other than Treasury securities. The 
proposed regulations would provide guidance to holders and issuers of 
debt instruments. This document also provides notice of a public 
hearing on the proposed regulations.

DATES: Written and electronic comments must be received by February 3, 
2000. Requests to appear and outlines of topics to be discussed at the 
public hearing scheduled for March 22, 2000, at 10 a.m., must be 
received by March 1, 2000.

ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG-115932-99), room 
5226, Internal Revenue Service, POB 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand delivered between the 
hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (REG-115932-99), Courier's 
Desk, Internal Revenue Service, 1111 Constitution Avenue NW., 
Washington, DC. Alternatively, taxpayers may submit comments 
electronically via the Internet by selecting the ``Tax Regs'' option of 
the IRS Home Page or by submitting comments directly to the IRS 
Internet

[[Page 60396]]

site at http://www.irs.gov/tax__regs/regslist.html. A public hearing 
will be held in room 2615, Internal Revenue Building, 1111 Constitution 
Avenue NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, William E. 
Blanchard, (202) 622-3950; concerning submissions and the hearing, 
Michael L. Slaughter, (202) 622-7190 (not toll-free numbers).

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 1275 of the Internal Revenue Code (Code). 
The temporary regulations provide rules for qualified reopenings of 
Treasury securities. See Sec. 1.1275-2T(d).
    This document also proposes new rules under sections 163(e) and 
1275 of the Code for qualified reopenings of debt instruments other 
than Treasury securities.

Explanation of Provisions

Reopenings of Treasury Securities

    The text of the temporary regulations (Sec. 1.1275-2T(d)) also 
serves as the text of the proposed regulations. The preamble to the 
temporary regulations explains the temporary regulations.

Reopenings of Debt Instruments Other Than Treasury Securities

A. In General
    Over the past few years, a number of issuers have developed 
programs or practices where debt instruments with identical terms and 
CUSIP numbers are sold subsequent to their original issue date. These 
subsequent sales are often called ``reopenings.'' The original issue 
discount (OID) rules generally accommodate reopenings during periods of 
stable or falling market interest rates. As is explained in more detail 
below, during periods of rising market interest rates, the OID rules 
can effectively prohibit reopenings. The proposed regulations in this 
document would modify the OID rules to accommodate certain qualified 
reopenings.
    Under Sec. 1.1275-1(f), two or more debt instruments are part of 
the same issue if they have the same payment and credit terms and are 
sold reasonably close in time either pursuant to a common plan or as 
part of a single transaction or series of related transactions. 
Usually, there is little doubt as to what constitutes an issue because 
all of the relevant debt instruments have identical terms, have the 
same CUSIP number, and are sold on the same day. When the third 
condition is not met, however, there is a question as to whether the 
subsequently sold debt instruments are part of the original issue or 
are themselves a new issue.
    This question--whether the subsequently sold debt instruments are 
part of the original issue--has important tax consequences. If the 
subsequently sold debt instruments are considered part of the original 
issue, they have OID only to the extent the debt instruments in the 
original issue have OID. Thus, if the original debt instruments were 
issued without OID, the subsequently sold debt instruments also do not 
have OID. In this case, any discount on the subsequently sold debt 
instruments generally is market discount, not OID. Conversely, if the 
subsequently sold debt instruments are a separate issue for tax 
purposes, any discount that arises as part of their issuance is OID if 
it equals or exceeds the OID de minimis amount for the debt 
instruments. See Sec. 1.1273-1(d) to determine the de minimis amount.
    The holder and issuer have different tax consequences depending 
upon whether the discount is characterized as OID or market discount. 
For the holder, the primary difference is whether the holder has to 
include the discount in income on a current basis as it accrues. If it 
is OID, the holder must include the accruals in income currently; if it 
is market discount, the holder generally does not have to include 
discount in income until the debt instrument is disposed of or 
redeemed. The issuer's tax consequences also depend on whether the 
discount is OID or market discount. If the subsequently sold debt 
instruments are part of a separate issue and if the discount is OID, 
the issuer (or a broker or middleman) generally is required to make OID 
information reports for these debt instruments. See Sec. 1.6049-5. To 
comply with this reporting obligation, the issuer must be able to 
distinguish the subsequently sold debt instruments (which require OID 
information reports) from the originally sold debt instruments. As a 
practical matter, the only way the subsequently sold debt instruments 
can be distinguished is if they are assigned new CUSIP numbers. The 
assignment of new CUSIP numbers prevents the debt instruments from 
being fungible and, thereby, defeats the purpose of the reopening.
B. Qualified Reopenings
    This document proposes new qualified reopening rules. Under these 
rules, additional debt instruments sold in a qualified reopening would 
be part of the same issue as the original debt instruments. As a 
result, the additional debt instruments would have the same issue date, 
the same issue price, and (with respect to holders) the same adjusted 
issue price as the original debt instruments.
    A qualified reopening would be a reopening of original debt 
instruments that meets the following conditions: (1) The original debt 
instruments are publicly traded; (2) The issue date of the additional 
debt instruments (treated as a separate issue) is not more than 6 
months after the issue date of the original debt instruments; (3) Seven 
days before the date on which the price of the additional debt 
instruments is established, the yield of the original debt instruments 
(based on their fair market value) is not more than 107.5 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); and (4) The yield of the 
additional debt instruments (based on the sales price of the additional 
debt instruments) is not more than 115 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).
    A qualified reopening also would include a reopening of original 
debt instruments if the first two conditions described above are met 
and the additional debt instruments (treated as a separate issue) were 
issued with no more than a de minimis amount of OID. A qualified 
reopening, however, would not include a reopening of tax-exempt 
obligations or contingent payment debt instruments.
    The qualified reopening rules attempt to strike a balance between 
tax policy concerns about the conversion of OID into market discount 
and the need to have the tax rules reflect current capital market 
practices. The IRS and the Treasury Department believe the appropriate 
balance is to provide reopening rules for situations where the issuer 
can prove by objective, market-based information that the reopening 
will convert, at most, only a small amount of OID into market discount. 
To clearly and accurately measure the conversion benefit across 
different interest rate environments and debt instrument terms, the 
proposed regulations use a yield-based standard. The 107.5 percent 
standard was designed to give some relief to the reopening of 
relatively short-term issues (that is, issues with a remaining term of

[[Page 60397]]

10 years or less). These issues tend to be the most impacted by the OID 
de minimis rule standard.
    The two yield-based rules are designed to work in tandem. The 107.5 
percent of yield restriction is tested 7 days before the anticipated 
pricing date. This rule is designed to give the issuer a preliminary 
indication that its reopening will be a qualified reopening prior to 
the issuer's announcement of the reopening. Importantly, this 
preliminary indication is not controlling. Absent the 115 percent rule, 
if market interest rates were to move sharply upward in the week 
between the announcement date and the pricing date, the reopened debt 
instruments would go out with a significant amount of market discount 
(instead of OID) notwithstanding the fact that seven days before the 
pricing date the instruments satisfied the 107.5 percent rule. In this 
presumably rare and unusual case, the tax policy concern of converting 
a significant amount of OID into market discount becomes relatively 
more important. The proposed regulations, therefore, limit the total 
amount of discount that can be converted into market discount with the 
115 percent rule.
C. Definition of Issue
    The proposed regulations also change the definition of issue that 
is currently in Sec. 1.1275-1(f) of the final OID regulations 
(described above). Essentially, the proposed regulations limit the 
``reasonably close in time'' standard of current law to 13 days. The 
IRS and the Treasury Department believe that reopenings should be done 
through the proposed qualified reopening rule (discussed above), not 
through an expansive interpretation of the regulatory definition of 
issue. The 13-day limitation was chosen to prevent an issuer that comes 
to market every two weeks from stretching the definition of issue to 
cover two consecutive market sales. If an issuer wants to reopen more 
than 13 days after the initial offering, the sole test should be 
whether the reopening qualifies under the proposed qualified reopening 
rules.
D. Issuer's Treatment
    This document also proposes rules that clarify the issuer's 
treatment of the debt instruments comprising an issue when there is a 
qualified reopening. The proposed regulations require the issuer to 
take into account, as an adjustment to its interest expense, any 
difference between the amounts paid by the holders to acquire the 
additional debt instruments issued in the qualified reopening and the 
adjusted issue price of the original debt instruments. This difference 
would either increase or decrease the aggregate adjusted issue prices 
of all of the debt instruments in the issue (both original and 
additional) with respect to the issuer (but not the holder). The issuer 
would then, as of the reopening date, recompute the yield of the debt 
instruments in the issue based on this aggregate adjusted issue price 
and the remaining payment schedule of the debt instruments. The issuer 
would use this redetermined yield for purposes of applying the constant 
yield method to determine its accruals of interest expense over the 
remaining term of the debt instruments in the issue.
    During the consideration of the issuer's treatment of the 
additional debt instruments, a question arose as to whether the 
issuer's all-in-cost-of-capital should be used to determine the 
issuer's interest expense for a particular borrowing. Under current 
law, the costs of anticipatory hedges and bond issuance costs (such as 
underwriter fees) are not treated as interest expense even though they 
affect the issuer's cost of acquiring funds (the issuer's all-in-cost-
of-capital). The IRS and the Treasury Department request comments on 
whether the issuer's all-in-cost-of-capital should be used to determine 
the issuer's interest expense for a particular borrowing.
E. Proposed Effective Dates
    Section 1.163-7(e) of the proposed regulations would apply to 
qualified reopenings where the reopening date is on or after the date 
that is 60 days after the date final regulations are published in the 
Federal Register. Section 1.1275-2(k) of the proposed regulations would 
apply to debt instruments that are part of a reopening where the 
reopening date is on or after the date that is 60 days after the date 
final regulations are published in the Federal Register.
    The proposed revision to the definition of the term issue would 
apply to debt instruments whose issue date is on or after the date that 
is 60 days after the date final regulations are published in the 
Federal Register. For debt instruments issued prior to the effective 
date of the regulations, no inference is intended as to how the term 
issue should be interpreted under the current final regulations.

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 regulations do 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 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 Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written or electronic comments (a 
signed original and eight (8) copies, if written) that are submitted 
timely (in the manner described in the ADDRESSES portion of this 
preamble) to the IRS. The IRS and Treasury specifically request 
comments on the clarity of the proposed regulations and how the 
regulations may be made easier to understand. All comments will be 
available for public inspection and copying.
    A public hearing has been scheduled for March 22, 2000, at 10 a.m., 
in room 2615, Internal Revenue Building, 1111 Constitution Avenue NW., 
Washington, DC. Due to building security procedures, visitors must 
enter at the 10th Street entrance, located between Constitution and 
Pennsylvania Avenues, NW. In addition, all visitors must present photo 
identifications to enter the building. Because of access restrictions, 
visitors will not be admitted beyond the immediate entrance area more 
than 15 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 written 
comments by February 3, 2000, and submit an outline of the topics to be 
discussed and the time to be devoted to each topic (signed original and 
eight (8) copies) by March 1, 2000. 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

    The principal author of these regulations is William E. Blanchard, 
Office of Assistant Chief Counsel

[[Page 60398]]

(Financial Institutions and Products). However, other personnel from 
the IRS and the 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 1.163-7 is amended by:
    1. Redesignating paragraph (e) as paragraph (f).
    2. Adding a new paragraph (e).
    3. Revising newly designated paragraph (f).
    The revision and addition read as follows:


Sec. 1.163-7  Deduction for OID on certain debt instruments.

* * * * *
    (e) Qualified reopening--(1) In general. In a qualified reopening 
of an issue of debt instruments, if a holder pays more or less than the 
adjusted issue price of the original debt instruments to acquire an 
additional debt instrument, the issuer treats this difference as an 
adjustment to the issuer's interest expense for the original and 
additional debt instruments. As provided by paragraphs (e)(2) through 
(e)(5) of this section, the adjustment is taken into account over the 
term of the instrument using constant yield principles.
    (2) Positive adjustment. If the difference is positive (that is, 
the holder pays more than the adjusted issue price of the original debt 
instrument), then, with respect to the issuer but not the holder, the 
difference increases the aggregate adjusted issue prices of all of the 
debt instruments in the issue, both original and additional.
    (3) Negative adjustment. If the difference is negative (that is, 
the holder pays less than the adjusted issue price of the original debt 
instrument), then, with respect to the issuer but not the holder, the 
difference reduces the aggregate adjusted issue prices of all of the 
debt instruments in the issue, both original and additional.
    (4) Determination of issuer's interest accruals. As of the 
reopening date, the issuer must redetermine the yield of the debt 
instruments in the issue for purposes of applying the constant yield 
method described in Sec. 1.1272-1(b) to determine the issuer's accruals 
of interest expense over the remaining term of the debt instruments in 
the issue. This redetermined yield is based on the aggregate adjusted 
issue prices of the debt instruments in the issue (as determined under 
this paragraph (e)) and the remaining payment schedule of the debt 
instruments in the issue. If the aggregate adjusted issue prices of the 
debt instruments in the issue (as determined under this paragraph (e)) 
are less than the aggregate stated redemption price at maturity of the 
instruments (determined as of the reopening date) by a de minimis 
amount (within the meaning of Sec. 1.1273-1(d)), the issuer may use the 
rules in paragraph (b) of this section to determine the issuer's 
accruals of interest expense.
    (5) Effect of adjustments on issuer's adjusted issue price. The 
adjustments made under this paragraph (e) are taken into account for 
purposes of determining the issuer's adjusted issue price under 
Sec. 1.1275-1(b).
    (6) Definitions. The terms additional debt instrument, original 
debt instrument, qualified reopening, and reopening date have the same 
meanings as in Sec. 1.1275-2(k).
    (f) Effective dates. This section (other than paragraph (e) of this 
section) applies to debt instruments issued on or after April 4, 1994. 
Taxpayers, however, may rely on this section (other than paragraph (e) 
of this section) for debt instruments issued after December 21, 1992, 
and before April 4, 1994. Paragraph (e) of this section applies to 
qualified reopenings where the reopening date is on or after the date 
that is 60 days after the date final regulations are published in the 
Federal Register.
    Par. 3. In Sec. 1.1275-1, paragraph (f) is revised to read as 
follows:


Sec. 1.1275-1  Definitions.

* * * * *
    (f) Issue--(1) Definition. Two or more debt instruments are part of 
the same issue if the debt instruments--
    (i) Have the same credit and payment terms;
    (ii) Are issued either pursuant to a common plan or as part of a 
single transaction or a series of related transactions; and
    (iii) Are issued within a period of 13 days beginning with the date 
on which the first debt instrument that would be part of the issue is 
issued to a person other than a bond house, broker, or similar person 
or organization acting in the capacity of an underwriter, placement 
agent, or wholesaler.
    (2) Cross-references for reopening and aggregation rules. See 
Sec. 1.1275-2(d) and (k) for rules that treat debt instruments issued 
in certain reopenings as part of an issue of original (outstanding) 
debt instruments. See Sec. 1.1275-2(c) for rules that treat two or more 
debt instruments as a single debt instrument.
    (3) Effective date. This paragraph (f) applies to debt instruments 
whose issue date is on or after the date that is 60 days after the date 
final regulations are published in the Federal Register.
* * * * *
    Par. 4. In Sec. 1.1275-2, paragraph (d) is revised and paragraph 
(k) is added to read as follows:


Sec. 1.1275-2  Special rules relating to debt instruments.

* * * * *
    (d) [The text of this proposed paragraph (d) is the same as the 
text of Sec. 1.1275-2T(d) published elsewhere in this issue of the 
Federal Register.]
* * * * *
    (k) Reopenings--(1) In general. Notwithstanding Sec. 1.1275-1(f), 
additional debt instruments issued in a qualified reopening are part of 
the same issue as the original debt instruments. As a result, the 
additional debt instruments have the same issue date, the same issue 
price, and (with respect to holders) the same adjusted issue price as 
the original debt instruments.
    (2) Definitions--(i) Original debt instruments. Original debt 
instruments are debt instruments comprising any single issue of 
outstanding debt instruments. For purposes of determining whether a 
particular reopening is a qualified reopening, debt instruments issued 
in prior qualified reopenings are treated as original debt instruments 
and debt instruments issued in the particular reopening are not so 
treated.
    (ii) Additional debt instruments. Additional debt instruments are 
debt instruments that, without the application of this paragraph (k)--
    (A) Are part of a single issue of debt instruments;
    (B) Are not part of the same issue as the original debt 
instruments; and
    (C) Have terms that are in all respects identical to the terms of 
the original debt instruments as of the reopening date.
    (iii) Reopening date. The reopening date is the issue date of the 
additional debt instruments (determined without the application of this 
paragraph (k)).
    (iv) Qualified reopening. A qualified reopening is a reopening of 
original debt instruments (other than tax-exempt

[[Page 60399]]

obligations, as defined in section 1275(a)(3), and contingent payment 
debt instruments, within the meaning of Sec. 1.1275-4) that meets all 
of the following conditions:
    (A) The original debt instruments are publicly traded (within the 
meaning of Sec. 1.1273-2(f)).
    (B) The reopening date of the additional debt instruments is not 
more than 6 months after the issue date of the original debt 
instruments.
    (C) The debt instruments satisfy either the test described in 
paragraph (k)(3) of this section or the test described in paragraph 
(k)(4) of this section.
    (3) Yield test. For purposes of paragraph (k)(2)(iv)(C) of this 
section--
    (i) Seven days before the date on which the price of the additional 
debt instruments is established, the yield of the original debt 
instruments (based on their fair market value) is not more than 107.5 
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); and
    (ii) The yield of the additional debt instruments (based on the 
sales price of the additional debt instruments) is not more than 115 
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).
    (4) De minimis OID test. For purposes of paragraph (k)(2)(iv)(C) of 
this section, the additional debt instruments are issued with no more 
than a de minimis amount of OID (determined without the application of 
this paragraph (k)).
    (5) Special rule for Treasury reopenings. See paragraph (d) of this 
section for special rules for reopenings of Treasury securities.
    (6) Issuer's treatment of a qualified reopening. See Sec. 1.163-
7(e) for the issuer's treatment of the debt instruments that are part 
of a qualified reopening.
    (7) Effective date. This paragraph (k) applies to debt instruments 
that are part of a reopening where the reopening date is on or after 
the date that is 60 days after the date final regulations are published 
in the Federal Register.
David A. Mader,
Acting Deputy Commissioner of Internal Revenue.
[FR Doc. 99-28742 Filed 11-3-99; 8:45 am]
BILLING CODE 4830-01-U