Tax News

CCH (cch.taxgroup.com) reports:

  The IRS has issued procedures that describe circumstances in which it will not treat a debt instrument as an applicable high yield discount obligation (AHYDO), as defined under Code Sec. 163(i), for purposes of Code Sec. 163(e)(5). Under Code Sec. 163(e)(5), a C corporation may not deduct the "disqualified portion" of original issue discount (OID) on an AHYDO issued after July 10, 1989.

Background

  Corporations often obtain financing commitments in advance of borrowing money. According to the IRS, recent events have proven that market conditions can unexpectedly worsen between the time a binding financing commitment is obtained by a corporation and the time the corporation calls upon the lender to perform pursuant to the financing commitment. This can have certain collateral economic consequences, which can result in the issue price of a debt instrument being significantly less than the amount of cash actually received by the corporation for the debt instrument. For federal income tax purposes, this can potentially raise adverse income tax consequences, including the disallowance of interest deductions on the debt instrument under Code Sec. 163(e)(5).

New Procedures

  According to the IRS, the new procedures will provide certainty with respect to the potential tax issues that may result from the issuance of a debt instrument (including a deemed issuance under Reg. §1.1001-3 pursuant to a significant modification of the originally issued debt instrument) in several circumstances. These circumstances involve:

  (1) a debt instrument issued for money pursuant to a financing commitment;

  (2) a debt instrument exchanged for a debt instrument issued pursuant to a financing commitment; and

  (3) a debt instrument indirectly exchanged for a debt instrument issued pursuant to a financing commitment.

  If the procedures apply to a debt instrument, the IRS will not treat it as an AHYDO for purposes of Code Sec. 163(e)(5) and
163(i). The IRS noted that no inference should be drawn as to whether similar consequences would result if a debt instrument falls outside the scope of these procedures. There should also be no inference that, in the absence of these procedures, a debt instrument within its scope would be an AHYDO.

Comment Request

  The IRS is requesting public comments related to these procedures. Comments should be submitted no later than November 15, 2008.

Rev. Proc. 2008-51, 2008FED ¶46,535

Other References:

 
Code Sec. 163

  CCH Reference - 2008FED ¶9303.043

  CCH Reference - 2008FED ¶9303.044

  Tax Research Consultant

  CCH Reference - TRC ACCTNG: 36,262