Inflation-indexed debt instruments.

AuthorGaray, Mark

On May 16, 1996, the Treasury Department announced plans to issue securities that provide protection against inflation. The Treasury Inflation-Protection Securities (TIPSs) were issued on Jan. 29, 1997. Notice 96-51, released Sept. 25, 1996, describes, in general terms, these new debt instruments. In addition, the Service has recently issued proposed and temporary regulations under Secs. 1275(d) and 1286 to give guidance on tax issues involving TIPSs and inflation-indexed debt instruments in general.

TIPS

A TIPS will provide for semiannual payments of interest and a payment of principal at maturity. Each payment will be adjusted to take into account any changes inflation that occur between the security's issue date and the payment date. The principal amount of such a security will be adjusted based on monthly changes in the nonseasonally adjusted U.S. City Average All Items Consumer Price Index for All Urban Consumers (CPI-U).

Each semiannual payment of interest will be determined by multiplying a single fixed rate of interest by the inflation-adjusted principal amount of the security for the date of the interest payment. As a result, the interest rate will be fixed, but the amount of each interest payment will vary with changes in the principal of the security as adjusted for changes in inflation.

A TIPS also will provide for an additional payment at maturity if the security's inflation-adjusted principal amount for the maturity date is less than the security's principal amount at issuance. The amount of the additional payment will equal the excess of the security's principal amount at issuance over the security's inflation-adjusted principal amount for the maturity date.

Other Inflation-Indexed Debt

Instruments

Temp. Regs. Sec. 1.1275-7T also applies to other non-treasury issued inflation-indexed debt instruments. An inflation-indexed debt instrument must satisfy the following conditions:

* The debt instrument must be issued for US. dollars and all payments of principal and interest on the instruments must be in US. dollars.

* Each payment on the debt instrument must be indexed for changes in inflation or deflation (except for a minimum guarantee payment as defined in Temp. Regs. Sec.1.1275-7T(c)(5)).

* A payment is indexed for inflation or deflation if the payment is equal to the amount scheduled to be paid under the debt instrument multiplied by a ratio, the numerator of which is the value of the reference index at payment date and the...

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