[Federal Register Volume 76, Number 129 (Wednesday, July 6, 2011)]
[Rules and Regulations]
[Pages 39278-39283]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-16856]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 48

[TD 9533]
RIN 1545-BK28


Modification of Treasury Regulations Pursuant to Section 939A of 
the Dodd-Frank Wall Street Reform and Consumer Protection Act

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

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SUMMARY: This document contains temporary regulations that remove any 
reference to, or requirement of reliance on, ``credit ratings'' in 
regulations under the Internal Revenue Code (Code) and provides 
substitute standards of credit-worthiness where appropriate. This 
action is required by the Dodd-Frank Wall Street Reform and Consumer 
Protection Act, which requires Federal agencies to remove any reference 
to, or requirement of reliance on, credit ratings from their 
regulations and to substitute such standard of credit-worthiness as the 
agency deems appropriate for such regulations. These regulations affect 
persons subject to various provisions of the Code. The text of these 
temporary regulations also serves as the text of the proposed 
regulations set forth in the notice of proposed rulemaking on this 
subject in the Proposed Rules section of this issue of the Federal 
Register.

DATES: Effective Date: These regulations are effective on July 6, 2011.
    Applicability Dates: For dates of applicability, see Sec. Sec.  
1.150-1T(a)(4), 1.171-1T(f), 1.197-2T(b)(7), 1.249-1T(f)(3), 1.475(a)-
4T(d)(4), 1.860G-2T(g)(3), 1.1001-3T(d), (e), and (g), and 48.4101-
1T(l)(5).

FOR FURTHER INFORMATION CONTACT: Arturo Estrada, (202) 622-3900 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION: 

Background

    Section 939A(a) of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act, Public Law 111-203 (124 Stat. 1376 (2010)), (the 
``Dodd-Frank Act''), requires each Federal agency to review its 
regulations that require the use of an assessment of credit-worthiness 
of a security or money market instrument, and to review any references 
or requirements in those regulations regarding credit ratings. Section 
939A(b) directs each agency to

[[Page 39279]]

modify any regulation identified in the review required under section 
939A(a) by removing any reference to, or requirement of reliance on, 
credit ratings and substituting a standard of credit-worthiness that 
the agency deems appropriate. Numerous provisions under the Code are 
affected.
    These temporary regulations amend the Income Tax Regulations (26 
CFR part 1) under sections 150, 171, 197, 249, 475, 860G, and 1001 of 
the Code. These sections were added to the Code during different years 
to serve different purposes. These temporary regulations also amend the 
Manufacturers and Retailers Excise Tax Regulations (26 CFR part 48) 
under section 4101 that provides registration requirements related to 
Federal fuel taxes.

Explanation of Provisions

    These temporary regulations remove references to ``credit ratings'' 
and ``credit agencies'' or functionally similar terms in the existing 
regulations. Some changes involve simple word deletions or 
substitutions. Others reflect the revision of a sentence to remove the 
credit rating references. In some cases, multiple sentences have been 
modified. Where appropriate, substitute standards of credit-worthiness 
replace the prior references to credit ratings, credit agencies or 
functionally similar terms. Language revisions serve solely to remove 
the references prohibited by section 939A of the Dodd-Frank Act and no 
additional changes are intended.
    Section 1.150-1. Section 1.150-1 provides definitions for purposes 
of sections 103 and 141 through 150. Section 1.150-1(b) defines 
issuance costs to mean costs to the extent incurred in connection with, 
and allocable to, the issuance of an issue within the meaning of 
section 147(g). Section 1.150-1(b) lists as non-exclusive examples of 
issuance costs: Underwriters' spread; counsel fees; financial advisory 
fees; rating agency fees; trustee fees; paying agent fees; bond 
registrar, certification, and authentication fees; accounting fees; 
printing costs for bonds and offering documents; public approval 
process costs; engineering and feasibility study costs; guarantee fees, 
other than for qualified guarantees (as defined in Sec.  1.148-4(f)); 
and similar costs. These temporary regulations replace the Sec.  1.150-
1(b) reference to rating agency fees with ``fees paid to an 
organization to evaluate the credit quality of the issue.'' No 
substantive change is intended.
    Section 1.171-1. The temporary regulations change credit rating in 
Sec.  1.171-1(f) Example 2 (i) to credit quality. The change does not 
affect the analysis in the example. In addition, the temporary 
regulations make other nonsubstantive changes to the example (for 
example, the dates in the example are updated).
    Section 1.197-2(b)(7). The temporary regulations remove ``the 
existence of a favorable credit rating'' from the examples of supplier-
based intangibles in the third sentence of Sec.  1.197-2(b)(7). No 
substantive change in the treatment of a favorable credit rating as a 
supplier-based intangible under section 197 is intended.
    Section 1.249-1. The temporary regulations change credit rating and 
ratings of credit rating services in Sec.  1.249-1(e)(2)(ii) to credit 
quality and widely published financial information. In the existing 
regulations, a change in the credit rating of an issuer or obligation 
is one of the facts and circumstances used to determine how much of a 
repurchase premium is attributable to the cost of borrowing and not to 
the conversion feature of a convertible bond. Credit rating services is 
used as a means to determine the credit rating of an issuer or 
obligation. None of these changes affect the substantive rules in the 
existing regulations.
    Section 1.475(a)-4(d)(4). Example 1, Example 2, and Example 3 in 
Sec.  1.475(a)-4(d)(4) are revised to remove references to credit 
ratings or credit rating agencies. In these three examples in the 
existing regulations, credit rating or specific references to certain 
ratings by certain credit ratings agencies (such as AA/aa or AAA/aaa) 
were used to set up the factual scenario that illustrates the factors 
that go into the determination of whether it is appropriate for a 
dealer to take a credit risk adjustment. These terms were also used to 
describe the credit risk adjustment implicit in the yield curve used to 
discount the present value of the cash flows. This adjustment affects 
whether any additional credit risk adjustments are warranted. These 
examples also used credit rating agency to set up the factual scenario 
that a counterparty's credit-worthiness was based upon an industry 
standard of a certain credit quality and illustrates the factors that 
go into the determination of whether it is appropriate for a dealer to 
take a credit risk adjustment. The changes that have been made to the 
language of the examples do not alter the purpose of the illustrations 
and present the factual issues in a more generalized way.
    Section 1.860G-2. Section 1.860G-2(g)(2) defines qualified reserve 
fund as an amount that is reasonably required to fund expenses of the 
REMIC or amounts due on regular or residual interests in the event of 
defaults on the underlying pool of mortgages. In defining the amount 
reasonably required, Sec.  1.860G-2(g)(3)(ii) refers to the amount 
required by a nationally recognized independent rating agency as a 
condition of providing the rating for the REMIC interest desired by the 
sponsor. Because an alternative and fully adequate standard of 
reference is already set forth in these regulations, these temporary 
regulations remove the rating agency alternative standard.
    Section 1.1001-3. Section 1.1001-3 provides rules for determining 
whether a modification of a debt instrument results in an exchange for 
purposes of Sec.  1.1001-1(a). These temporary regulations remove the 
terms rating and credit rating from Sec.  1.1001-3 and generally 
replace those terms with credit quality. Section 1.1001-3(d) Example 9 
is revised so that the event that triggers an option to increase a 
note's rate of interest is a breach of certain covenants in the note, 
rather than a specific decline in the corporation's credit rating. The 
temporary regulations also revise Sec.  1.1001-3(g) Example 5 so that 
the debt instrument described in the example allows a party to be 
substituted for the instrument's original obligor on the basis of the 
party's credit-worthiness, rather than the party's credit rating. The 
temporary regulations also revise Sec.  1.1001-3(g) Example 8 to 
explain that a bank's letter of credit supporting a debt instrument is 
substituted for another bank's letter of credit when the first bank 
encounters financial difficulty, thus removing references to rating 
agencies and either bank's credit rating.
    Section 48.4101-1(f)(4). Section 4101 requires certain persons to 
be registered by the IRS for purposes of several fuel tax provisions of 
the Code. Under Sec.  48.4101-1, the IRS will register an applicant for 
registration only if, among other conditions, the applicant has 
adequate financial resources to pay its expected fuel tax liability. To 
make this determination, Sec.  48.4101-1(f)(4)(ii)(B) instructs the IRS 
to look to the applicant's financial information. These temporary 
regulations remove the examples of the types of documents the IRS 
should review and instructs the IRS to look at all information relevant 
to the applicant's financial status.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866, as

[[Page 39280]]

supplemented by Executive Order 13563. 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. For applicability of the Regulatory 
Flexibility Act (5 U.S.C. chapter 6), please refer to the Special 
Analysis section in the preamble to the cross-referenced notice of 
proposed rulemaking in the Proposed Rules section in this issue of the 
Federal Register. Pursuant to section 7805(f) of the Code, these 
regulations have been submitted to the Chief Counsel for Advocacy of 
the Small Business Administration for comment on their impact on small 
business.

Drafting Information

    These regulations were drafted by personnel in the Office of 
Associate Chief Counsel (Financial Institutions and Products), the 
Office of Associate Chief Counsel (Income Tax and Accounting), the 
Office of the Associate Chief Counsel (International) and the Office of 
the Associate Chief Counsel (Passthroughs and Special Industries). 
However, other personnel from the IRS and the Treasury Department 
participated in their development.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 48

    Excise taxes, Reporting and recordkeeping requirements.

Amendments to the Regulations

    Accordingly, 26 CFR parts 1 and 48 are amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *


0
Par. 2. Section 1.150-1 is amended as follows:
0
1. Paragraph (a)(4) is added.
0
2. In paragraph (b), the definition of Issuance costs is revised.
    The additions and revisions read as follows:


Sec.  1.150-1  Definitions.

    (a) * * *
    (4) [Reserved] For further guidance, see Sec.  1.150-1T(a)(4).
    (b) * * *
    Issuance costs [Reserved]. For further guidance, see Sec.  1.150-
1T(b), Issuance costs.
* * * * *

0
Par. 3. Section 1.150-1T is added to read as follows:


Sec.  1.150-1T  Definitions (temporary).

    (a) through (a)(3) [Reserved]. For further guidance, see Sec.  
1.150-1(a) through (a)(3).
    (4) Additional exception to the general applicability date. Section 
1.150-1T(b), Issuance costs, applies on and after July 6, 2011.
    (5) Expiration date. The applicability of Sec.  1.150-1T(b), 
Issuance costs, expires on or before July 1, 2014.
    (b) Bond through the definition of Governmental bond [Reserved]. 
For further guidance, see Sec.  1.150-1(b) Bond through the definition 
of Governmental bond.
    Issuance costs means costs to the extent incurred in connection 
with, and allocable to, the issuance of an issue within the meaning of 
section 147(g). For example, issuance costs include the following costs 
but only to the extent incurred in connection with, and allocable to, 
the borrowing: Underwriters' spread; counsel fees; financial advisory 
fees; fees paid to an organization to evaluate the credit quality of an 
issue; trustee fees; paying agent fees; bond registrar, certification, 
and authentication fees; accounting fees; printing costs for bonds and 
offering documents; public approval process costs; engineering and 
feasibility study costs; guarantee fees, other than for qualified 
guarantees (as defined in Sec.  1.148-4(f)); and similar costs.
    (c) Issue date through paragraph (e) [Reserved]. For further 
guidance, see Sec.  1.150-1(b) Issue date through paragraph (e).

0
Par. 4. Section 1.171-1(f) Example 2 is revised to read as follows:


Sec.  1.171-1  Bond premium.

* * * * *
    (f) * * *
    Example 2. [Reserved]. For further guidance, see Sec.  1.171-1T(f) 
Example 2.
* * * * *

0
Par. 5. Section 1.171-1T is added to read as follows:


Sec.  1.171-1T  Bond premium (temporary).

    (a) through (f) Example 1 [Reserved]. For further guidance, see 
Sec.  1.171-1(a) through (f) Example 1.

    Example 2. Convertible bond--(i) Facts. On January 1, 2012, A 
purchases for $1,100 B corporation's bond maturing on January 1, 
2015, with a stated principal amount of $1,000, payable at maturity. 
The bond provides for unconditional payments of interest of $30 on 
January 1 and July 1 of each year. In addition, the bond is 
convertible into 15 shares of B corporation stock at the option of 
the holder. On January 1, 2012, B corporation's nonconvertible, 
publicly-traded, three-year debt of comparable credit quality trades 
at a price that reflects a yield of 6.75 percent, compounded 
semiannually.
    (ii) Determination of basis. A's basis for determining loss on 
the sale or exchange of the bond is $1,100. As of January 1, 2012, 
discounting the remaining payments on the bond at the yield at which 
B's similar nonconvertible bonds trade (6.75 percent, compounded 
semiannually) results in a present value of $980. Thus, the value of 
the conversion option is $120. Under Sec.  1.171-1(e)(1)(iii)(A), 
A's basis is $980 ($1,100 -$120) for purposes of Sec. Sec.  1.171-1 
through 1.171-5. The sum of all amounts payable on the bond other 
than qualified stated interest is $1,000. Because A's basis (as 
determined under Sec.  1.171-1(e)(1)(iii)(A)) does not exceed 
$1,000, A does not acquire the bond at a premium.

    (iii) Effective/applicability date. This Example 2 applies to bonds 
acquired on or after July 6, 2011.
    (g) Expiration date. The applicability of this section expires on 
or before July 1, 2014.

0
Par. 6. Section 1.197-2 is amended by revising paragraph (b)(7) to read 
as follows:


Sec.  1.197-2  Amortization of goodwill and certain other intangibles.

* * * * *
    (b) * * *
    (7) [Reserved]. For further guidance, see Sec.  1.197-2T(b)(7).
* * * * *

0
Par. 7. Section 1.197-2T is added to read as follows:


Sec.  1.197-2T  Amortization of goodwill and certain other intangibles 
(temporary).

    (a) through (b)(6) [Reserved]. For further guidance, see Sec.  
1.197-2(a) through (b)(6).
    (7) Supplier-based intangibles--(i) In general. Section 197 
intangibles include any supplier-based intangible. A supplier-based 
intangible is the value resulting from the future acquisition, pursuant 
to contractual or other relationships with suppliers in the ordinary 
course of business, of goods or services that will be sold or used by 
the taxpayer. Thus, the amount paid or incurred for supplier-based 
intangibles includes, for example, any portion of the purchase price of 
an acquired trade or business attributable to the existence of a 
favorable relationship with persons providing distribution services 
(such as favorable shelf or display space at a retail outlet), or the 
existence of favorable supply contracts. The amount

[[Page 39281]]

paid or incurred for supplier-based intangibles does not include any 
amount required to be paid for the goods or services themselves 
pursuant to the terms of the agreement or other relationship. In 
addition, see the exceptions in Sec.  1.197-2(c), including the 
exception in Sec.  1.197-2(c)(6) for certain rights to receive tangible 
property or services from another person.
    (ii) Effective/applicability date. This section applies to 
supplier-based intangibles acquired after July 6, 2011.
    (iii) Expiration date. The applicability of this section expires on 
or before July 1, 2014.
    (b)(8) through (l) [Reserved]. For further guidance, see Sec.  
1.197-2(b)(8) through (l).

0
Par. 8. Section 1.249-1 is amended as follows:
0
1. Paragraph (e)(2)(ii) is revised.
0
2. The paragraph heading for paragraph (f) is revised.
0
3. Paragraph (f)(3) is added.
    The revisions and addition read as follows:


Sec.  1.249-1  Limitation on deduction of bond premium on repurchase.

* * * * *
    (e) * * *
    (2) * * *
    (ii) [Reserved]. For further guidance, see Sec.  1.249-
1T(e)(2)(ii).
* * * * *
    (f) Effective/applicability dates. * * *
    (3) [Reserved]. For further guidance, see Sec.  1.249-1T(f)(3).
* * * * *

0
Par. 9. Section 1.249-1T is added to read as follows:


Sec.  1.249-1T  Limitation on deduction of bond premium on repurchase 
(temporary).

    (a) through (e)(2)(i) [Reserved]. For further guidance, see Sec.  
1.249-1(a) through (e)(2)(i).
    (ii) In determining the amount under Sec.  1.249-1(e)(2)(i), 
appropriate consideration shall be given to all factors affecting the 
selling price or yields of comparable nonconvertible obligations. Such 
factors include general changes in prevailing yields of comparable 
obligations between the dates the convertible obligation was issued and 
repurchased and the amount (if any) by which the selling price of the 
nonconvertible obligation was affected by reason of any change in the 
issuing corporation's credit quality or the credit quality of the 
obligation during such period (determined on the basis of widely 
published financial information or on the basis of other relevant facts 
and circumstances which reflect the relative credit quality of the 
corporation or the comparable obligation).
    (e)(2)(iii) through (f)(2) [Reserved]. For further guidance, see 
Sec.  1.249-1(e)(2)(iii) through (f)(2).
    (3) Portion of repurchase premium attributable to cost of 
borrowing. Paragraph (e)(2)(ii) of this section applies to any 
repurchase of a convertible obligation occurring on or after July 6, 
2011.
    (g) [Reserved]. For further guidance, see Sec.  1.249-1(g).
    (h) Expiration date. The applicability of this section expires on 
or before July 1, 2014.

0
Par. 10. Section 1.475(a)-4 is amended by revising paragraph (d)(4) 
Example 1, Example 2, and Example 3 to read as follows:


Sec.  1.475(a)-4  Valuation safe harbor.

* * * * *
    (d) * * *
    (4) * * *
    Example 1. [Reserved]. For further guidance, see Sec.  1.475(a)-
4T(d)(4) Example 1.
    Example 2. [Reserved]. For further guidance, see Sec.  1.475(a)-
4T(d)(4) Example 2.
    Example 3. [Reserved]. For further guidance, see Sec.  1.475(a)-
4T(d)(4) Example 3.
* * * * *

0
Par. 11. Section 1.475(a)-4T is added to read as follows:


Sec.  1.475(a)-4T  Valuation safe harbor (temporary).

    (a) through (d)(4) introductory text [Reserved]. For further 
guidance, see Sec.  1.475(a)-4(a) through (d)(4) introductory text.

    Example 1. (i) X, a calendar year taxpayer, is a dealer in 
securities within the meaning of section 475(c)(1). X generally 
maintains a balanced portfolio of interest rate swaps and other 
interest rate derivatives, capturing bid-ask spreads and keeping its 
market exposure within desired limits (using, if necessary, 
additional derivatives for this purpose). X uses a mark-to-market 
method on a statement that it is required to file with the United 
States Securities and Exchange Commission and that satisfies Sec.  
1.475(a)-4(d)(2) with respect to both the contracts with customers 
and the additional derivatives. When determining the amount of any 
gain or loss realized on a sale, exchange, or termination of a 
position, X makes a proper adjustment for amounts taken into account 
respecting payments or receipts. X and all of its counterparties on 
the derivatives have the same general credit quality as each other.
    (ii) Under X's valuation method, as of each valuation date, X 
determines a mid-market probability distribution of future cash 
flows under the derivatives and computes the present values of these 
cash flows. In computing these present values, X uses an industry 
standard yield curve that is appropriate for obligations by persons 
with this same general credit quality. In addition, based on 
information that includes its own knowledge about the 
counterparties, X adjusts some of these present values either upward 
or downward to reflect X's reasonable judgment about the extent to 
which the true credit status of each counterparty's obligation, 
taking credit enhancements into account, differs from the general 
credit quality used in the yield curve to present value the 
derivatives.
    (iii) X's methodology does not violate the requirement in Sec.  
1.475(a)-4(d)(3)(iii) that the same cost or risk not be taken into 
account, directly or indirectly, more than once.
    (iv) This Example 1 applies to valuations of securities on or 
after July 6, 2011.
    Example 2. (i) The facts are the same as in Example 1, except 
that X uses a better credit quality in determining the yield curve 
to discount the payments to be received under the derivatives. Based 
on information that includes its own knowledge about the 
counterparties, X adjusts these present values to reflect X's 
reasonable judgment about the extent to which the true credit status 
of each counterparty's obligation, taking credit enhancements into 
account, differs from this better credit quality obligation.
    (ii) X's methodology does not violate the requirement in Sec.  
1.475(a)-4(d)(3)(iii) that the same cost or risk not be taken into 
account, directly or indirectly, more than once.
    (iii) This Example 2 applies to valuations of securities on or 
after July 6, 2011.
    Example 3. (i) The facts are the same as in Example 1, except 
that, after computing present values using the discount rates that 
are appropriate for obligors with the same general credit quality, 
and based on information that includes X's own knowledge about the 
counterparties, X adjusts some of these present values either upward 
or downward to reflect X's reasonable judgment about the extent to 
which the true credit status of each counterparty's obligation, 
taking credit enhancements into account, differs from a better 
credit quality.
    (ii) X's methodology violates the requirement in Sec.  1.475(a)-
4(d)(3)(iii) that the same cost or risk not be taken into account, 
directly or indirectly, more than once. By using the same general 
credit quality discount rate, X's method takes into account the 
difference between risk-free obligations and obligations with that 
lower credit quality. By adjusting values for the difference between 
a higher credit quality and that lower credit quality, X takes into 
account risks that it had already accounted for through the discount 
rates that it used. The same result would occur if X judged some of 
its counterparties' obligations to be of a higher credit quality but 
X failed to adjust the values of those obligations to reflect the 
difference between a higher credit quality and the lower credit 
quality.
    (iii) This Example 3 applies to valuations of securities on or 
after July 6, 2011.

    Example 4 and Example 5 and paragraphs (e) through (m). [Reserved]. 
For further guidance, see Sec.  1.475(a)-4(d)(4) Example 4 and Example 
5 and paragraphs (e) through (m).

[[Page 39282]]

    (n) Expiration date. The applicability of this section expires on 
or before July 1, 2014.

0
Par. 12. Section 1.860G-2 is amended by revising paragraphs 
(g)(3)(ii)(B) and (C) and adding paragraph (D) to read as follows:


Sec.  1.860G-2  Other rules.

* * * * *
    (g) * * *
    (3) * * *
    (ii) * * *
    (B) [Reserved]. For further guidance, see Sec.  1.860G-
2T(g)(3)(ii)(B).
    (C) [Reserved]. For further guidance, see Sec.  1.860G-
2T(g)(3)(ii)(C).
    (D) [Reserved]. For further guidance, see Sec.  1.860G-
2T(g)(3)(ii)(D).
* * * * *

0
Par. 13. Section 1.860G-2T is added to read as follows:


Sec.  1.860G-2T  Other rules (temporary).

    (a) through (g)(3)(ii)(A) [Reserved]. For further guidance, see 
Sec.  1.860G-2(a) through (g)(3)(ii)(A).
    (B) Presumption that a reserve is reasonably required. The amount 
of a reserve fund is presumed to be reasonable (and an excessive 
reserve is presumed to have been promptly and appropriately reduced) if 
it does not exceed the amount required by a third party insurer or 
guarantor, who does not own directly or indirectly (within the meaning 
of section 267(c)) an interest in the REMIC (as defined in section 
1.860D-1(b)(1)), as a condition of providing credit enhancement.
    (C) Presumption may be rebutted. The presumption in Sec.  1.860G-
2(g)(3)(ii)(B) may be rebutted if the amounts required by the third 
party insurer are not commercially reasonable considering the factors 
described in Sec.  1.860G-2(g)(3)(ii)(A).
    (D) Effective/applicability date. Paragraphs (g)(3)(ii)(B) and (C) 
of this section apply on and after July 6, 2011.
    (E) Expiration date. The applicability of paragraphs (g)(3)(ii)(B) 
and (C) of this section expires on or before July 1, 2014.
    (h) through (k) [Reserved]. For further guidance, see Sec.  1.860G-
2(h) through (k).

0
Par. 14. Section 1.1001-3 is amended as follows:
0
1. Paragraph (d) Example 9 is revised.
0
2. Paragraph (e)(4)(iv)(B) is revised.
0
3. Paragraph (e)(5)(ii)(B)(2) is revised.
0
4. Paragraph (g) Examples 1, 5 and 8 are revised.
    The revisions read as follows:


Sec.  1.1001-3  Modifications of debt instruments.

* * * * *
    (d) * * *
    Example 9. [Reserved]. For further guidance, see Sec.  1.1001-3T(d) 
Example 9.
* * * * *
    (e) * * *
    (4) * * *
    (iv) * * *
    (B) [Reserved]. For further guidance, see Sec.  1.1001-
3T(e)(4)(iv)(B).
* * * * *
    (5) * * *
    (ii) * * *
    (B) * * *
    (2) [Reserved]. For further guidance, see Sec.  1.1001-
3T(e)(5)(ii)(B)(2).
* * * * *
    (g) * * *
    Example 1. [Reserved]. For further guidance, see Sec.  1.1001-3T(g) 
Example 1.
* * * * *
    Example 5. [Reserved]. For further guidance, see Sec.  1.1001-3T(g) 
Example 5.
* * * * *
    Example 8. [Reserved]. For further guidance, see Sec.  1.1001-3T(g) 
Example 8.
* * * * *

0
Par. 15. Section 1.1001-3T is added to read as follows:


Sec.  1.1001-3T  Modifications of debt instruments (temporary).

    (a) through (d) Example 8 [Reserved]. For further guidance, see 
Sec.  1.1001-3(a) through (d) Example 8.

    Example 9. Holder's option to increase interest rate. (i) A 
corporation issues an 8-year note to a bank in exchange for cash. 
Under the terms of the note, the bank has the option to increase the 
rate of interest by a specified amount if certain covenants in the 
note are breached. The bank's right to increase the interest rate is 
a unilateral option as described in Sec.  1.1001-3(c)(3).
    (ii) A covenant in the note is breached. The bank exercises its 
option to increase the rate of interest. The increase in the rate of 
interest occurs by operation of the terms of the note and does not 
result in a deferral or a reduction in the scheduled payments or any 
other alteration described in Sec.  1.1001-3(c)(2). Thus, the change 
in interest rate is not a modification.
    (iii) Effective/applicability date. This Example 9 applies to 
modifications occurring on or after July 6, 2011.

    (d) Example 10 through (e)(4)(iv)(A) [Reserved]. For further 
guidance, see Sec.  1.1001-3(d) Example 10 through (e)(4)(iv)(A).
    (B) Nonrecourse debt instruments. (1) A modification that releases, 
substitutes, adds or otherwise alters a substantial amount of the 
collateral for, a guarantee on, or other form of credit enhancement for 
a nonrecourse debt instrument is a significant modification. A 
substitution of collateral is not a significant modification, however, 
if the collateral is fungible or otherwise of a type where the 
particular units pledged are unimportant (for example, government 
securities or financial instruments of a particular type and credit 
quality). In addition, the substitution of a similar commercially 
available credit enhancement contract is not a significant 
modification, and an improvement to the property securing a nonrecourse 
debt instrument does not result in a significant modification.
    (2) Effective/applicability date. This paragraph (e)(4)(iv)(B) 
applies to modifications occurring on or after July 6, 2011.
    (e)(4)(v) through (e)(5)(ii)(B)(1) [Reserved]. For further 
guidance, see Sec.  1.1001-3(e)(4)(v) through (e)(5)(ii)(B)(1).
    (2) Original collateral. (i) A modification that changes a recourse 
debt instrument to a nonrecourse debt instrument is not a significant 
modification if the instrument continues to be secured only by the 
original collateral and the modification does not result in a change in 
payment expectations. For this purpose, if the original collateral is 
fungible or otherwise of a type where the particular units pledged are 
unimportant (for example, government securities or financial 
instruments of a particular type and credit quality), replacement of 
some or all units of the original collateral with other units of the 
same or similar type and aggregate value is not considered a change in 
the original collateral.
    (ii) Effective/applicability date. This paragraph (e)(5)(ii)(B)(2) 
applies to modifications occurring on or after July 6, 2011.
    (e)(6) through (g) introductory text [Reserved]. For further 
guidance, see Sec.  1.1001-3(e)(6) through (g) introductory text.

    Example 1. Modification of call right. (i) Under the terms of a 
30-year, fixed-rate bond, the issuer can call the bond for 102 
percent of par at the end of ten years or for 101 percent of par at 
the end of 20 years. At the end of the eighth year, the holder of 
the bond pays the issuer to waive the issuer's right to call the 
bond at the end of the tenth year. On the date of the modification, 
the issuer's credit quality is approximately the same as when the 
bond was issued, but market rates of interest have declined from 
that date.
    (ii) The holder's payment to the issuer changes the yield on the 
bond. Whether the change in yield is a significant modification 
depends on whether the yield on the modified bond varies from the 
yield on the original bond by more than the change in yield as 
described in Sec.  1.1001-3(e)(2)(ii).
    (iii) If the change in yield is not a significant modification, 
the elimination of the issuer's call right must also be tested for 
significance. Because the specific rules of Sec.  1.1001-3(e)(2) 
through (e)(6) do not address

[[Page 39283]]

this modification, the significance of the modification must be 
determined under the general rule of Sec.  1.1001-3(e)(1).
    (iv) Effective/applicability date. This Example 1 applies to 
modifications occurring on or after July 6, 2011.

    Example 2 through Example 4 [Reserved]. For further guidance, see 
Sec.  1.1001-3(g) Example 2 through Example 4.

    Example 5. Assumption of mortgage with increase in interest 
rate. (i) A recourse debt instrument with a 9 percent annual yield 
is secured by an office building. Under the terms of the instrument, 
a purchaser of the building may assume the debt and be substituted 
for the original obligor if the purchaser is equally or more 
creditworthy than the original obligor and if the interest rate on 
the instrument is increased by one-half percent (50 basis points). 
The building is sold, the purchaser assumes the debt, and the 
interest rate increases by 50 basis points.
    (ii) If the purchaser's acquisition of the building does not 
satisfy the requirements of Sec.  1.1001-3(e)(4)(i)(B) or (C), the 
substitution of the purchaser as the obligor is a significant 
modification under Sec.  1.1001-3(e)(4)(i)(A).
    (iii) If the purchaser acquires substantially all of the assets 
of the original obligor, the assumption of the debt instrument will 
not result in a significant modification if there is not a change in 
payment expectations and the assumption does not result in a 
significant alteration.
    (iv) The change in the interest rate, if tested under the rules 
of Sec.  1.1001-3(e)(2), would result in a significant modification. 
The change in interest rate that results from the transaction is a 
significant alteration. Thus, the transaction does not meet the 
requirements of Sec.  1.1001-3(e)(4)(i)(C) and is a significant 
modification under Sec.  1.1001-3 (e)(4)(i)(A).
    (v) Effective/applicability date. Notwithstanding Sec.  1.1001-
3(h), this Example 5 applies to modifications occurring on or after 
July 6, 2011.

    Example 6 through Example 7 [Reserved]. For further guidance, see 
Sec.  1.1001-3(g) Example 6 through Example 7.

    Example 8. Substitution of credit enhancement contract. (i) 
Under the terms of a recourse debt instrument, the issuer's 
obligations are secured by a letter of credit from a specified bank. 
The debt instrument does not contain any provision allowing a 
substitution of a letter of credit from a different bank. The 
specified bank, however, encounters financial difficulty. The issuer 
and holder agree that the issuer will substitute a letter of credit 
from another bank.
    (ii) Under Sec.  1.1001-3(e)(4)(iv)(A), the substitution of a 
different credit enhancement contract is not a significant 
modification of a recourse debt instrument unless the substitution 
results in a change in payment expectations. While the substitution 
of a new letter of credit by a different bank does not itself result 
in a change in payment expectations, such a substitution may result 
in a change in payment expectations under certain circumstances (for 
example, if the obligor's capacity to meet payment obligations is 
dependent on the letter of credit and the substitution substantially 
enhances that capacity from primarily speculative to adequate).
    (iii) Effective/applicability date. This Example 8 applies to 
modifications occurring on or after July 6, 2011.

    Example 9 through (h) [Reserved]. For further guidance, see Sec.  
1.1001-3(g) Example 9 through (h).
    (i) Expiration date. The applicability of this section expires on 
or before July 1, 2014.

PART 48--MANUFACTURERS AND RETAILERS EXCISE TAXES

0
Par. 16. The authority citation for part 48 continues to read in part 
as follows:

    Authority: 26 U.S.C. 7805 * * *


0
Par. 17. Section 48.4101-1 is amended as follows:
0
1. Paragraph (f)(4)(ii)(B) is removed and reserved.
0
2. Paragraph (l)(5) is added and reserved.
    The additions read as follows:


Sec.  48.4101-1  Taxable fuel; registration.

* * * * *
    (f) * * *
    (4) * * *
    (ii) * * *
    (B) [Reserved]. For further guidance, see Sec.  48.4101-
1T(f)(4)(ii)(B).
* * * * *
    (l) * * *
    (5) [Reserved]. For further guidance, see Sec.  48.4101-1T(l)(5).

0
Par. 18. Section 48.4101-1T is amended as follows:
0
1. Paragraphs (a) through (f)(4)(ii)(A) are reserved.
0
2. Paragraph (f)(4)(ii)(B) is revised.
0
3. Paragraphs (f)(4)(iii) through (h)(3)(iii) are reserved.
0
4. Paragraphs (h)(3)(v) through (l)(4) are reserved.
0
5. Paragraphs (l)(5) and (l)(6) are added.
    The additions and revisions read as follows:


Sec.  48.4101-1T  Taxable fuel; registration (temporary).

    (a) through (f)(4)(ii)(A) [Reserved]. For further guidance see 
Sec.  48.4104-1(a) through (f)(4)(ii)(A).
    (B) Basis for determination. The determination under Sec.  48.4101-
1(f)(4)(ii) must be based on all information relevant to the 
applicant's financial status.
    (f)(4)(iii) through (h)(3)(iii) [Reserved]. For further guidance, 
see Sec.  48.4101-1(f)(4)(iii) through (h)(3)(iii).
* * * * *
    (h)(3)(v) through (l)(4) [Reserved]. For further guidance, see 
Sec.  48.4101-1(h)(3)(v) through (l)(4).
    (l)(5) Effective/applicability date. Paragraph (f)(4)(ii)(B) of 
this section applies on July 6, 2011.
    (l)(6) Expiration date. The applicability of paragraph 
(f)(4)(ii)(B) of this section expires on or before July 1, 2014.

Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
    Approved: June 29, 2011.
Emily S. McMahon,
Acting Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2011-16856 Filed 7-1-11; 11:15 am]
BILLING CODE 4830-01-P