[Federal Register Volume 78, Number 173 (Friday, September 6, 2013)]
[Rules and Regulations]
[Pages 54758-54761]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-21752]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 48

[TD 9637]
RIN 1545-BK27


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 regulations and removal of temporary regulations.

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SUMMARY: This document contains final 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. These regulations affect persons subject to various 
provisions of the Code.

DATES: Effective Date: These regulations are effective on September 6, 
2013.
    Applicability Dates: For dates of applicability, see Sec. Sec.  
1.150-1(a)(4), 1.171-1 (f), 1.197-2(b)(7), 1.249-1(f)(3), 1.475(a)-
4(d)(4), 1.860G-2(g)(3), 1.1001-3(d), (e), and (g), and 48.4101-
1(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 its regulations regarding credit ratings. Section 
939A(b) directs each agency to 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 Internal Revenue Code (Code) are affected.
    These regulations amend the Income Tax Regulations (26 CFR part 1) 
under sections 150, 171, 197, 249, 475, 860G, and 1001 of the Code (the 
existing regulations). These sections were added to the Code during 
different years to serve different purposes. These regulations also 
amend the Manufacturers and Retailers Excise Tax Regulations (26 CFR 
part 48) under section 4101, which provides registration requirements 
related to Federal fuel taxes.
    On July 6, 2011, temporary regulations (TD 9533) under sections 
150, 171, 197, 249, 475, 860G, and 1001 of the Code were published in 
the Federal Register (76 FR 39278) that modify or eliminate the 
reference to credit ratings in the relevant regulations. Additional 
temporary regulations (26 CFR part 48) under section 4101 were 
published as part of TD 9533. A notice of proposed rulemaking (REG-
118809-11) cross-referencing the temporary regulations was published in 
the Federal Register the same day (76 FR 39341). No written comments 
responding to the notice of proposed rulemaking were received. No 
public hearing was requested or held. The regulations are adopted as 
proposed without substantive changes.

Explanation of Provisions

    These 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 one or more sentences to 
remove the credit rating references. 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 to the existing 
regulations are intended.

[[Page 54759]]

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866, as 
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. 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 its 
impact on small business. No comments were received.

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 the development of the regulations.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 48

    Excise taxes, Reporting and recordkeeping requirements.

Adoption of 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:
    1. Paragraph heading (a)(2) is revised.
    2. Paragraph (a)(4) is revised.
    3. In paragraph (b), the definition of ``Issuance costs'' is 
revised.
    The revisions read as follows:


Sec.  1.150-1  Definitions.

    (a) * * *
    (2) Effective/applicability date * * *
* * * * *
    (4) Additional exception to the general applicability date. Section 
1.150-1(b), Issuance costs, applies on and after July 6, 2011.
    (b) * * *
    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.
* * * * *


Sec.  1.150-1T  [Removed]

0
Par. 3. Section 1.150-1T is removed.

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. Convertible bond--(i) Facts. On January 1, A 
purchases for $1,100 B corporation's bond maturing in three years 
from the purchase date, 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 the purchase date, 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 the purchase date, 
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 paragraph (e)(1)(iii)(A) of 
this section, A's basis is $980 ($1,100-$120) for purposes of this 
section and Sec. Sec.  1.171-2 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 paragraph 
(e)(1)(iii)(A) of this section) does not exceed $1,000, A does not 
acquire the bond at a premium.

    (iii) Applicability date. Notwithstanding Sec.  1.171-5(a)(1), this 
Example 2 applies to bonds acquired on or after July 6, 2011.


Sec.  1.171-1T  [Removed]

0
Par. 5. Section 1.171-1T is removed.

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) 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 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 
paragraph 2(c) of this section, including the exception in paragraph 
2(c)(6) of this section for certain rights to receive tangible property 
or services from another person.
    (ii) Applicability date. This section applies to supplier-based 
intangibles acquired after July 6, 2011.
* * * * *


Sec.  1.197-2T  [Removed]

0
Par. 7. Section 1.197-2T is removed.

0
Par. 8. Section 1.249-1 is amended by revising paragraphs (e)(2)(ii) 
and (f)(3) to read as follows:


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

* * * * *
    (e) * * *
    (2) * * *
    (ii) In determining the amount under paragraph (e)(2)(i) of this 
section, 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

[[Page 54760]]

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).
* * * * *
    (f) * * *
    (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.
* * * * *


Sec.  1.249-1T  [Removed]

0
Par. 9. Section 1.249-1T is removed.

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. (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 
paragraph (d)(2) of this section 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 
paragraph (d)(3)(iii) of this section that the same cost or risk not 
be taken into account, directly or indirectly, more than once.
    (iv) Applicability date. 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 
paragraph (d)(3)(iii) of this section that the same cost or risk not 
be taken into account, directly or indirectly, more than once.
    (iii) Applicability date. 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 paragraph 
(d)(3)(iii) of this section 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) Applicability date. This Example 3 applies to valuations 
of securities on or after July 6, 2011.
* * * * *


Sec.  1.475(a)-4T  [Removed]

0
Par. 11. Section 1.475(a)-4T is removed.

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


Sec.  1.860G-2  Other rules.

* * * * *
    (g) * * *
    (3) * * *
    (ii) * * *
    (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 Sec.  
1.860D-1(b)(1)), as a condition of providing credit enhancement.
    (C) Presumption may be rebutted. The presumption in paragraph 
(g)(3)(ii)(B) of this section may be rebutted if the amounts required 
by the third party insurer are not commercially reasonable considering 
the factors described in paragraph (g)(3)(ii)(A) of this section.
    (D) Applicability date. Paragraphs (g)(3)(ii)(B) and (g)(3)(ii)(C) 
of this section apply on and after July 6, 2011.
* * * * *


Sec.  1.860G-2T  [Removed]

0
Par. 13. Section 1.860G-2T is removed.

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. 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 paragraph (c)(3) of this 
section.
    (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 paragraph (c)(2) of this section. 
Thus, the change in interest rate is not a modification.

[[Page 54761]]

    (iii) Applicability date. This Example 9 applies to 
modifications occurring on or after July 6, 2011.
* * * * *
    (e) * * *
    (4) * * *
    (iv) * * *
    (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) Applicability date. Paragraph (e)(4)(iv)(B)(1) of this section 
applies to modifications occurring on or after July 6, 2011.
* * * * *
    (5) * * *
    (ii) * * *
    (B) * * *
    (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) Applicability date. Paragraph (e)(5)(ii)(B)(2)(i) of this 
section applies to modifications occurring on or after July 6, 2011.
* * * * *
    (g) * * *

    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 paragraph (e)(2)(ii) of this section.
    (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 paragraphs (e)(2) 
through (e)(6) of this section do not address this modification, the 
significance of the modification must be determined under the 
general rule of paragraph (e)(1) of this section.
    (iv) Applicability date. This Example 1 applies to modifications 
occurring on or after July 6, 2011.
* * * * *
    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 paragraph (e)(4)(i)(B) or paragraph 
(e)(4)(i)(C) of this section, the substitution of the purchaser as 
the obligor is a significant modification under paragraph 
(e)(4)(i)(A) of this section.
    (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 paragraph (e)(2) of this section, 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 paragraph (e)(4)(i)(C) of this section 
and is a significant modification under paragraph (e)(4)(i)(A) of 
this section.
    (v) Applicability date. This Example 5 applies to modifications 
occurring on or after July 6, 2011.
* * * * *
    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 paragraph (e)(4)(iv)(A) of this section, 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) Applicability date. This Example 8 applies to 
modifications occurring on or after July 6, 2011.
* * * * *


Sec.  1.1001-3T  [Removed]

0
Par. 15. Section 1.1001-3T is removed.

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 revised.
0
2. Paragraph (l)(5) is revised.
    The revisions read as follows:


Sec.  48.4101-1  Taxable fuel; registration.

* * * * *
    (f) * * *
    (4) * * *
    (ii) * * *
    (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.
* * * * *
    (l) * * *
    (5) Applicability date. Paragraph (f)(4)(ii)(B) of this section 
applies on and after July 6, 2011.


Sec.  48.4101-1T  [Removed]

0
Par. 18. Section 48.4101-1T is removed.

Beth Tucker,
Deputy Commissioner for Operations Support.
    Approved: August 14, 2013.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2013-21752 Filed 9-5-13; 8:45 am]
BILLING CODE 4830-01-P