Final Tax Regulations Issued on Publicly Traded Debt | Practical Law

Final Tax Regulations Issued on Publicly Traded Debt | Practical Law

The IRS issued final regulations on the definition of "publicly traded" debt which significantly expand the definition and make several changes to the proposed regulations issued in January 2011.

Final Tax Regulations Issued on Publicly Traded Debt

Practical Law Legal Update 1-521-3859 (Approx. 4 pages)

Final Tax Regulations Issued on Publicly Traded Debt

by PLC Corporate & Securities and PLC Finance
Published on 13 Sep 2012 • USA (National/Federal)
The IRS issued final regulations on the definition of "publicly traded" debt which significantly expand the definition and make several changes to the proposed regulations issued in January 2011.
On September 12, 2012, the IRS issued final regulations on the definition of "publicly traded" debt, which make several changes to the proposed regulations that were issued in January 2011. The final regulations also further expand the definition of "qualified reopening" under Treasury Regulation Section 1.1275-2(k).
The final regulations, like the proposed regulations, significantly expand the definition of publicly traded debt. The determination of whether a debt instrument is publicly traded for tax purposes is significant because restructurings of discounted debt that is publicly traded (unlike non-publicly traded debt) often triggers cancellation of indebtedness income (CODI) for a US issuer or borrower.
Under the current regulations, debt is publicly traded for tax purposes if at any time during the 60-day period ending 30 days after the issue date of the relevant debt instrument:
  • The debt is listed on a national securities exchange, interdealer quotation system or certain foreign securities exchanges (commonly referred to as exchange-listed debt).
  • The debt is traded on a board of trade designated as a contract market by the Commodities Futures Trading Commission (such as the New York Mercantile Exchange and the Chicago Board of Trade) or an interbank market.
  • The debt appears on a quotation medium (including a computer listing) that provides recent price quotations of brokers, dealers or traders, or that provides actual prices of recent sales.
  • Price quotations are readily available from dealers, brokers or traders.
The proposed regulations issued in January 2011 significantly expanded the definition of publicly traded debt. The final regulations make several important changes to the proposed regulations, including:
  • Removing the "exchange-listed" category from the definition of publicly traded debt because the small amount of debt that is listed rarely trades over the exchange.
  • Expanding the exception for small debt issues from $50 million to $100 million. This expansion should be particularly helpful for middle market loans.
  • Expanding the definition of "qualified reopening" under Treasury Regulation Section 1.1275-2(k) to include an issuance that satisfies a 100 percent yield test for a reopening after six months.
  • Requiring that the issue price of a debt instrument be reported consistently by issuers and holders.
Under the final regulations, debt is publicly traded for tax purposes if at any time during the 31-day period ending 15 days after the issue date of the relevant debt instrument:
  • There is a "sales price" for the debt instrument. There is a sales price for a debt instrument if the price for an executed purchase or sale of the debt instrument is reasonably available within a reasonable period of time after the sale (Treas. Reg. § 1.1273-2(f)(2)).
  • There are one or more "firm quotes" for the debt instrument. There is a firm quote for a debt instrument if a price quote is available from at least one broker, dealer or pricing service (including a price provided only to certain customers or to subscribers) for the debt instrument and the quoted price is substantially the same as the price for which the person receiving the quoted price could purchase or sell the debt instrument (Treas. Reg. § 1.1273-2(f)(3)).
  • There are one or more "indicative quotes" for the debt instrument. There is an indicative quote for a debt instrument if a price quote (other than a "firm quote") is available from at least one broker, dealer or pricing service (including a price provided only to certain customers or to subscribers) for the debt instrument (Treas. Reg. § 1.1273-2(f)(4)).
The final regulations are effective on September 13, 2012 and generally apply to debt instruments issued on or after November 13, 2012.