[Federal Register Volume 76, Number 233 (Monday, December 5, 2011)]
[Rules and Regulations]
[Pages 75781-75782]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-31179]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9561]
RIN 1545-BK46


Treasury Inflation-Protected Securities Issued at a Premium

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary regulations.

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SUMMARY: This document contains temporary regulations that provide 
guidance on the tax treatment of Treasury Inflation-Protected 
Securities issued with more than a de minimis amount of premium. The 
text of these temporary regulations also serves as the text of the 
proposed regulations (REG-130777-11) set forth in the Proposed Rules 
section in this issue of the Federal Register.

DATES: Effective Date: These regulations are effective on December 5, 
2011.
    Applicability Date: For the date of applicability, see Sec.  
1.1275-7T(k).

FOR FURTHER INFORMATION CONTACT: William E. Blanchard, (202) 622-3950 
(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    Treasury Inflation-Protected Securities (TIPS) are securities 
issued by the Department of the Treasury. The principal amount of a 
TIPS is adjusted for any inflation or deflation that occurs over the 
term of the security. The rules for the taxation of inflation-indexed 
debt instruments, including TIPS, are contained in Sec.  1.1275-7 of 
the Income Tax Regulations. See also Sec.  1.171-3(b) (rules for 
inflation-indexed debt instruments with bond premium).
    The coupon bond method described in Sec.  1.1275-7(d) has applied 
to TIPS rather than the more complex discount bond method described in 
Sec.  1.1275-7(e). Under Sec.  1.1275-7(d)(2)(i), however, the coupon 
bond method is not available with respect to inflation-indexed debt 
instruments that are issued with more than a de minimis amount of 
premium (that is, an amount greater than .0025 times the stated 
principal amount of the security times the number of complete years to 
the security's maturity).
    In Notice 2011-21 (2011-19 IRB 761), to provide a more uniform 
method for the federal income taxation of TIPS, the Department of the 
Treasury and the Internal Revenue Service announced that regulations 
would be issued to provide that taxpayers must use the coupon bond 
method described in Sec.  1.1275-7(d) for TIPS issued with more than a 
de minimis amount of premium. As a result, the discount bond method 
described in Sec.  1.1275-7(e) would not apply to TIPS issued with more 
than a de minimis amount of premium. Notice 2011-21 provided that the 
regulations would be effective for TIPS issued on or after April 8, 
2011.

Explanation of Provisions

    The temporary regulations in this document contain the rules 
described in Notice 2011-21. Under the temporary regulations, a 
taxpayer must use the coupon bond method described in Sec.  1.1275-7(d) 
for a TIPS that is issued with more than a de minimis amount of 
premium. The temporary regulations contain an example of how to apply 
the coupon bond method to a TIPS issued with more than a de minimis 
amount of premium. As stated in Notice 2011-21, the temporary 
regulations apply to TIPS issued on or after April 8, 2011. See Sec.  
601.601(d)(2)(ii)(b).

Special Analyses

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

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

Amendments to the Regulations

    Accordingly, 26 CFR part 1 is 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 * * *

    Section 1.1275-7T also issued under 26 U.S.C. 1275(d). * * *


0
Par. 2. Section 1.1275-7T is added to read as follows:


Sec.  1.1275-7T  Inflation-indexed debt instruments (temporary).

    (a) through (h) [Reserved]. For further guidance, see Sec.  1.1275-
7(a) through (h).
    (i) [Reserved]
    (j) Treasury Inflation-Protected Securities issued with more than a 
de minimis amount of premium--(1) Coupon bond method. Notwithstanding 
Sec.  1.1275-7(d)(2)(i), the coupon bond method described in Sec.  
1.1275-7(d) applies to Treasury Inflation-Protected Securities (TIPS) 
issued with more than a de minimis amount of premium. For this purpose, 
the de minimis amount is determined using the principles of Sec.  
1.1273-1(d).
    (2) Example. The following example illustrates the application of 
the bond premium rules to a TIPS issued with bond premium:

    Example. (i) Facts. X, a calendar year taxpayer, purchases at 
original issuance TIPS with a stated principal amount of $100,000 
and a stated interest rate of .125 percent, compounded semiannually. 
For purposes of this example, assume that the TIPS are issued in 
Year 1 on January 1, stated interest is payable on June 30 and 
December 31 of each year, and that the TIPS mature on December 31, 
Year 5. X pays $102,000 for the TIPS, which is the issue price for 
the TIPS as determined under Sec.  1.1275-2(d)(1). Assume that the 
inflation-adjusted principal amount for the first coupon in Year 1 
is $101,225 (resulting in an interest payment of $63.27) and for the 
second coupon in Year 1 is $102,500 (resulting in an interest 
payment of $64.06). X elects to amortize bond premium under Sec.  
1.171-4. (For simplicity, contrary to actual practice, the TIPS in 
this example were issued on the date with respect to which the 
calculation of the first coupon began.)
    (ii) Bond premium. The stated interest on the TIPS is qualified 
stated interest under Sec.  1.1273-1(c). X acquired the TIPS with 
bond premium of $2,000 (basis of $102,000 minus

[[Page 75782]]

the TIPS' stated principal amount of $100,000). See Sec. Sec.  
1.171-1(d), 1.171-3(b), and 1.1275-7(f)(3). The $2,000 is more than 
the de minimis amount of premium for the TIPS of $1,250 (.0025 times 
the stated principal amount of the TIPS ($100,000) times the number 
of complete years to the TIPS' maturity (5 years)). Under paragraph 
(j)(1) of this section, X must use the coupon bond method to 
determine X's income from the TIPS.
    (iii) Allocation of bond premium. Under Sec.  1.171-3(b), the 
bond premium of $2,000 is allocable to each semiannual accrual 
period by assuming that there will be no inflation or deflation over 
the term of the TIPS. Moreover, for purposes of Sec.  1.171-2, the 
yield of the securities is determined by assuming that there will be 
no inflation or deflation over their term. Based on this assumption, 
for purposes of section 171, the TIPS provide for semiannual 
interest payments of $62.50 and a $100,000 payment at maturity. As a 
result, the yield of the securities for purposes of section 171 is -
0.2720 percent, compounded semiannually. Under Sec.  1.171-2, the 
bond premium allocable to an accrual period is the excess of the 
qualified stated interest allocable to the accrual period ($62.50 
for each accrual period) over the product of the taxpayer's adjusted 
acquisition price at the beginning of the accrual period (determined 
without regard to any inflation or deflation) and the taxpayer's 
yield. Therefore, the $2,000 of bond premium is allocable to each 
semiannual accrual period in Year 1 as follows: $201.22 to the 
accrual period ending on June 30, Year 1 (the excess of the stated 
interest of $62.50 over ($102,000 x -0.002720/2)); and $200.95 to 
the accrual period ending on December 31, Year 1 (the excess of the 
stated interest of $62.50 over ($101,798.78 x -0.002720/2)). The 
adjusted acquisition price at the beginning of the accrual period 
ending on December 31, Year 1 is $101,798.78 (the adjusted 
acquisition price of $102,000 at the beginning of the accrual period 
ending on June 30, Year 1 reduced by the $201.22 of premium 
allocable to that accrual period).
    (iv) Income determined by applying the coupon bond method and 
the bond premium rules. Under Sec.  1.1275-7(d)(4), the application 
of the coupon bond method to the TIPS results in a positive 
inflation adjustment in Year 1 of $2,500, which is includible in X's 
income for Year 1. However, because X acquired the TIPS at a premium 
and elected to amortize the premium, the premium allocable to Year 1 
will offset the income on the TIPS as follows: The premium allocable 
to the first accrual period of $201.22 first offsets the interest 
payable for that period of $63.27. The remaining $137.95 of premium 
is treated as a deflation adjustment that offsets the positive 
inflation adjustment. See Sec.  1.171-3(b). The premium allocable to 
the second accrual period of $200.95 first offsets the interest 
payable for that period of $64.06. The remaining $136.89 of premium 
is treated as a deflation adjustment that further offsets the 
positive inflation adjustment. As a result, X does not include in 
income any of the stated interest received in Year 1 and includes in 
Year 1 income only $2,225.16 of the positive inflation adjustment 
for Year 1 ($2,500-$137.94-$136.89).

    (k) Effective/applicability date. Notwithstanding Sec.  1.1275-
7(h), this section applies to Treasury Inflation-Protected Securities 
issued on or after April 8, 2011.
    (l) Expiration date. The applicability of this section expires on 
or before December 2, 2014.

    Approved: November 21, 2011.
Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
Emily S. McMahon,
Acting Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2011-31179 Filed 12-2-11; 8:45 am]
BILLING CODE 4830-01-P