[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
