IRS clarifies when debt instruments are publicly traded.

• Author: Jimenez, Julio

In September, the IRS issued final regulations (T.D. 9599) clarifying the circumstances in which property is traded on an established market (i.e., publicly traded) for purposes of determining the issue price of a debt instrument.

The issue price of a debt instrument has several important tax consequences. It determines the amount of original issue discount on a newly issued debt instrument and the amount of repurchase premium or cancellation of debt (COD) income for an issuer, and the gain or loss to the holder upon exchange of the debt. The IRS noted that these consequences have intensified in recent years because of the impact of the credit crisis on debt markets. The final regulations apply to debt instruments issued on or after Nov. 13, 2012.

Background

Under Sec. 1273(b)(3), the issue price of a debt instrument that is issued for property where there is public trading is its fair market value (FMV). Regs. Sec. 1.1273-2(f) defines when property (including a debt instrument) is publicly traded. Under the prior regulations, which were out of date and unclear, a debt instrument was publicly traded if, in the period 30 days before or after the exchange, either the debt instrument or the property for which the debt instrument is exchanged (1) is exchange listed; (2) is market traded; (3) appears on a quotation medium; or (4) is a readily quotable debt instrument or property. To update the prior regulations, the IRS issued proposed regulations (REG-131947-10) that prompted a number of comments from practitioners. In response, the IRS issued the revised final regulations.

The Final Regulations

The final regulations state that property is publicly traded if, at any time during the 31-day period ending 15 days after the debt's issue date (about half of the current period), the property has (1) a sales price; (2) one or more firm quotes; or (3) one or more indicative quotes.

Under the final rules, property is publicly traded if a sales price for the property is reasonably available. A sales price is considered reasonably available if the sales price or information sufficient to calculate the sales price appears in a medium that is made available to issuers of debt instruments, persons that regularly purchase or sell debt instruments, or persons that broker purchases or sales of debt instruments. Property is also considered to be publicly traded when a firm quote to buy or sell the property is available. A price quote is firm when it is labeled...