Source: https://www.federalregister.gov/articles/2011/01/07/2011-86/modifications-of-debt-instruments
Timestamp: 2015-04-02 09:42:24
Document Index: 368566988

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Federal Register | Modifications of Debt Instruments
Publication Date: Friday, January 07, 2011
-1065 (3 pages)
Document Number: 2011-86
Shorter URL: https://federalregister.gov/a/2011-86 Related Topics
This document contains final regulations relating to the modification of debt instruments. The regulations clarify the extent to which the deterioration in the financial condition of the issuer is taken into account to determine whether a modified debt instrument will be recharacterized as an instrument or property right that is not debt. The regulations provide needed guidance to issuers and holders of debt instruments.
Modifications of Debt Instruments 5 actions from June 4th, 2010 to January 7th, 2011
75 FR 31736
Final Action Completed by TD 9513
Applicability Date: For dates of applicability, see § 1.1001-3(h).
This document contains amendments to 26 CFR part 1. On June 4, 2010, a notice of proposed rulemaking (REG-106750-10, 2010-25 IRB 765) was published in the Federal Register (75 FR 31736) that proposed amendments to § 1.1001-3 to clarify the circumstances in which the credit quality of the issuer should be considered in determining the nature of the instrument resulting from an alteration or modification of a debt instrument. Because no requests to speak were submitted by August 11, 2010, no public hearing was held. One written comment was received in response to the notice of proposed rulemaking. After consideration of this comment, the proposed regulations are adopted as revised by this Treasury decision. The revisions are discussed in this preamble.
Explanation and Summary of Comments Back to Top
The only comment received on the proposed regulations requested that the regulations clarify that § 1.1001-3 applies not only to determine whether an exchange of the original debt instrument for a modified instrument has occurred but also to classify the modified instrument resulting from the exchange. The IRS and the Treasury Department intend that Federal income tax principles be used to determine the classification of a modified instrument resulting from an exchange except as specifically provided in § 1.1001-3(f)(7). To avoid doubt on the operation of the rules in the proposed regulations, the final regulations add language to the general rule of § 1.1001-3(b) to make clear that the rules provided in § 1.1001-3(f)(7) apply to determine whether the modified instrument received in an exchange will be classified as debt for Federal income tax purposes. Thus, unless there is a substitution of a new obligor or the addition or deletion of a co-obligor, all relevant factors (for example, creditor rights or subordination) other than any deterioration in the financial condition of the issuer are taken into account in determining whether a modified instrument is properly classified as debt for Federal income tax purposes.
The regulations apply to alterations of the terms of a debt instrument on or after January 7, 2011. A taxpayer, however, may rely on § 1.1001-3(f)(7) for alterations of the terms of a debt instrument occurring before that date.
Adoption of the Amendments to the Regulations Back to Top
Par. 2. Section 1.1001-3 is amended by:
1.Revising paragraphs (b), (c)(2)(ii), (e)(5)(i) and (h). 2.Adding paragraph (f)(7). The revisions and addition read as follows:
(b) General rule. For purposes of § 1.1001-1(a), a significant modification of a debt instrument, within the meaning of this section, results in an exchange of the original debt instrument for a modified instrument that differs materially either in kind or in extent. A modification that is not a significant modification is not an exchange for purposes of § 1.1001-1(a). Paragraphs (c) and (d) of this section define the term modification and contain examples illustrating the application of the rule. Paragraphs (e) and (f) of this section provide rules for determining when a modification is a significant modification. Paragraph (f) of this section also provides rules for determining whether the modified instrument received in an exchange will be classified as an instrument or property right that is not debt for federal income tax purposes. Paragraph (g) of this section contains examples illustrating the application of the rules in paragraphs (e) and (f) of this section.