Federal Register / Vol. 61, No. 123 / Tuesday, June 25, 1996 / Rules and Regulations 32653

mycoplasmal pneumonia caused by

Mycoplasma hyopneumoniae.

(ii) Limitations. For weaned, growingfinishing swine. Feed as sole ration for

7 consecutive days followed by a

separate feed containing 200 grams per

ton lincomycin for an additional 14

days to complete the lincomycin

treatment. Withdraw 6 days before

slaughter. Not to be fed to swine that

weigh more than 250 pounds. Do not

allow rabbits, hamsters, guinea pigs,

horses, or ruminants access to feeds

containing lincomycin. Ingestion by

these species may result in severe

gastrointestinal effects. Consult your

veterinarian for assistance in the

diagnosis, treatment, and control of

parasitism.

3. Section 558.325 is amended by

adding new paragraph (c)(4)(iii) to read

as follows:

§ 558.325 Lincomycin.

* * * * *

(c) * * *

(4) * * *

(iii) Ivermectin as in § 558.300.

Dated: June 14,1996.

Stephen F. Sundlof,

Director, Center for Veterinary Medicine.

[FR Doc. 96–16103 Filed 6–24–96; 8:45 am]

BILLING CODE 4160–01–F

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 8676]

RIN 1545–AT14

Modifications of Bad Debts and Dealer

Assignments of Notional Principal

Contracts

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Temporary regulations.

SUMMARY: This document contains

temporary regulations relating to the

allowance of a deduction for a partially

worthless debt when the terms of a debt

instrument have been modified. The

temporary regulations provide guidance

to certain taxpayers that modify the

terms of a debt instrument after

deducting an amount for partial

worthlessness. This document also

contains temporary regulations relating

to certain assignments of notional

principal contracts by dealers in those

contracts. The temporary regulations

provide guidance to taxpayers relating

to consequences of these assignments.

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: These regulations are effective

September 23, 1996.

FOR FURTHER INFORMATION CONTACT:

Concerning the modifications of bad

debts, Craig R. Wojay, Office of

Assistant Chief Counsel (Financial

Institutions and Products), (202) 622–

3920 (not a toll-free number), and

concerning dealer assignments of

notional principal contracts, Thomas J.

Kelly, Office of the Assistant Chief

Counsel (Financial Institutions and

Products), (202) 622– 3940 (not a tollfree number).

SUPPLEMENTARY INFORMATION:

Background

On December 2, 1992, the IRS

published in the Federal Register (57

FR 57034) a notice of proposed

rulemaking that set forth proposed

income tax regulations (26 CFR part 1)

under section 1001 of the Internal

Revenue Code (Code). Under § 1.1001–

3(a) of the proposed regulations, a

significant modification of a debt

instrument is deemed to result in an

exchange of the original debt instrument

for a modified instrument that differs

materially either in kind or in extent.

This rule is retained in the final

regulations under § 1.1001–3, published

in the Rules and Regulations section of

this issue of the Federal Register. Thus,

when a debt is significantly modified, a

taxpayer (holder) is required to

recognize gain or loss based on the

difference between the issue price of the

significantly modified debt and the

taxpayer’s adjusted issue price in the

original instrument.

Prior to finalizing the § 1.1001–3

regulations, the IRS and Treasury

received comments that gain recognized

as the result of a significant

modification of a debt instrument often

is attributable to the fact that the

taxpayer previously claimed a

deduction for partial worthlessness with

respect to the debt. According to the

commentators, the modification does

not alter the fact that a portion of the

debt remains uncollectible. Thus, the

commentators suggested that, in this

situation, a taxpayer should be

permitted to offset the gain with a

corresponding bad debt deduction.

The IRS and Treasury also received

comments that the assignment by a

dealer in notional principal contracts of

its position in a contract to another

dealer should not result in a deemed

exchange under section 1001. Although

the dealer will recognize gain or loss on

the disposition of its position, treating

the transaction as a deemed exchange

would force the counterparty to realize

the gain or loss on the contract even

though the counterparty is maintaining

its position. The commentators argued

that dealer-to-dealer assignments are a

common business practice and that

these assignments have relatively little

significance to the dealers’

counterparties.

Explanation of Provisions

Section 166(a)(2) and § 1.166–3(a)

provide that a deduction for a partially

worthless debt is allowed only to the

extent the debt is charged off in the

taxable year. The charge-off requirement

is also contained in § 1.166–2(d) (1) and

(3), which provides for a conclusive

presumption of worthlessness under

certain circumstances.

In general, the amount of a deduction

on account of partial worthlessness is

the amount by which the adjusted basis

of a debt (as determined under section

1011) exceeds the amount recoverable

on the debt. The amount of the

deduction, however, may not exceed the

amount charged off during the taxable

year. The charge-off requirement is

satisfied for a debt when a portion of the

debt is removed from a taxpayer’s books

and records. This generally is

accomplished by reducing the debt’s

book basis. Thus, when an amount has

been deducted for partial worthlessness,

there is generally a reduction of both the

book basis and tax basis of a debt.

When a taxpayer is required to

recognize gain under section 1001

because of a modification of a debt

instrument, the taxpayer’s tax basis in

the debt is increased by the amount of

gain recognized. Commentators on the

proposed § 1.1001–3 regulations have

indicated, however, that regulatory and

general accounting principles generally

would not permit a corresponding

increase in the book basis of the debt.

Because the prior charge-off is not

restored (that is, the book basis of the

debt is not increased), there is no

opportunity for the taxpayer to take a

new charge-off for pre-existing

worthlessness. Thus, the charge-off

requirement of section 166(a)(2) can

never be satisfied with respect to the

amount by which the debt’s tax basis

exceeds its book basis as a result of the

modification, and the excess would not

be allowed as a deduction until the debt

becomes totally worthless.

The temporary regulations contained

in this document set forth limited

circumstances under which a taxpayer

will be permitted to deduct an amount

on account of a partially worthless debt
32654 Federal Register / Vol. 61, No. 123 / Tuesday, June 25, 1996 / Rules and Regulations

even though no amount has been

charged off within the taxable year. The

purpose of these temporary regulations

is to preserve the portion of a taxpayer’s

bad debt deduction with respect to a

partially worthless debt that

corresponds to the amount the taxpayer

would have been entitled to deduct for

partial worthlessness with respect to the

modified debt if the book basis of the

modified debt were increased to the

same extent as the tax basis of that debt.

Thus, these temporary regulations apply

only if all of the following conditions

are satisfied. First, a significant

modification of a debt instrument

(within the meaning of § 1.1001–3) must

result in a taxpayer’s recognition of gain

under § 1.1001–1(a). In addition, the

debt must have been previously charged

off and deducted by the taxpayer, and

the prior charge-off and deduction must

have satisfied the requirements of

§ 1.166–3(a)(1) and (2). If these

conditions are satisfied, then a modified

debt is deemed to have been charged off

in the year in which gain is recognized.

The amount of the charge-off, however,

is limited to the difference between the

tax basis of the debt and the greater of

the book basis or the fair market value

of the debt.

Both the proposed and the final

regulations under § 1.1001–3 deal only

with modifications of debt instruments.

In response to comments on the

proposed regulations, however, the

temporary regulations contained in this

document provide a limited rule dealing

with a dealer’s assignment of its

position in an interest rate or

commodity swap, or other notional

principal contract to another dealer. If

the assignment is permitted by the terms

of the contract, the assignment will not

be treated as a deemed exchange by the

nonassigning party of the original

contract for a new contract that differs

materially either in kind or in extent.

Thus, an assignment to which the rule

applies does not trigger gain or loss to

the dealer’s counterparty. No inference

is intended with respect to whether an

assignment of rights by one party to

other types of bilateral contracts results

in an exchange or other disposition

under section 1001 by the nonassigning

party.

Effective Dates

The temporary regulations apply to

significant modifications of debt

instruments and assignments of interest

rate swaps, commodity swaps, and other

notional principal contracts occurring

on or after September 23, 1996.

Special Analyses

It has been determined that this

Treasury decision is not a significant

regulatory action as defined in EO

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) and the Regulatory

Flexibility Act (5 U.S.C. chapter 6) do

not apply to these regulations, and,

therefore, a Regulatory Flexibility

Analysis is not required. Pursuant to

section 7805(f) of the Internal Revenue

Code, these temporary regulations will

be 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 the

regulations concerning the modification

of bad debts is Craig R. Wojay, Office of

the Assistant Chief Counsel (Financial

Institutions and Products), IRS. The

principal author of the regulations

concerning the dealer assignments of

certain notional principal contracts is

Thomas J. Kelly, Office of the Assistant

Chief Counsel (Financial Institutions

and Products), IRS. However, other

personnel from the IRS and Treasury

Department participated in their

development.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and

recordkeeping requirements.

Adoption of Amendments to the

Regulations

Accordingly, 26 CFR part 1 is

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 1.166–3T is added to

read as follows:

§ 1.166–3T Partial or total worthlessness

(temporary).

(a)(1) and (2) [Reserved]. For

guidance, see § 1.166– 3(a)(1) and (2).

(3) Significantly modified debt—(i)

Deemed charge-off. If a significant

modification of a debt instrument

(within the meaning of § 1.1001–3)

during a taxable year results in the

recognition of gain by a taxpayer under

§ 1.1001–1(a), and if the requirements of

paragraph (a)(3)(ii) of this section are

met, there is a deemed charge-off of the

debt during that taxable year in the

amount specified in paragraph (a)(3)(iii)

of this section.

(ii) Requirements for deemed chargeoff. A debt is deemed to have been

charged off only if—

(A) The taxpayer (or, in the case of a

debt that constitutes transferred basis

property within the meaning of section

7701(a)(43), a transferor taxpayer) has

claimed a deduction for partial

worthlessness of the debt in any prior

taxable year; and

(B) Each prior charge-off and

deduction for partial worthlessness

satisfied the requirements of paragraphs

(a)(1) and (2) of this section.

(iii) Amount of deemed charge-off.

The amount of the deemed charge-off, if

any, is the amount by which the tax

basis of the debt exceeds the greater of

the fair market value of the debt or the

amount of the debt recorded on the

taxpayer’s books and records reduced as

appropriate for a specific allowance for

loan losses. The amount of the deemed

charge-off, however, may not exceed the

amount of recognized gain described in

paragraph (a)(3)(i) of this section.

(iv) Effective date. This paragraph

(a)(3) is effective September 23, 1996.

(b) [Reserved]. For further guidance,

see § 1.166–3(b).

Par. 3. Section 1.1001–4T is added to

read as follows:

§ 1.1001–4T Modifications of certain

notional principal contracts.

(a) Dealer assignments. For purposes

of § 1.1001–1(a), the substitution of a

new party on an interest rate or

commodity swap, or other notional

principal contract (as defined in

§ 1.446–3(c)(1)) is not treated as a

deemed exchange by the nonassigning

party of the original contract for a

modified contract that differs materially

either in kind or in extent if—

(1) The party assigning its rights and

obligations under the contract and the

party to which the rights and obligations

are assigned are both dealers in notional

principal contracts, as defined in

§ 1.446–3(c)(4)(iii); and

(2) The terms of the contract permit

the substitution.

(b) Effective date. This section is

effective September 23, 1996.

Margaret Milner Richards,

Commissioner of Internal Revenue.

Approved: May 31, 1996.

Leslie Samuels,

Assistant Secretary of the Treasury.

[FR Doc. 96–15829 Filed 6–24–96; 8:45 am]

BILLING CODE 4830–01–P