Certain debt obligations not subject to AHYDO restrictions.

• Author: Cook, Mark G.
• Position: Applicable high-yield discount obligations

As a result of the recent deteriorating market conditions for debt obligations, the IRS has indicated that it will not regard specific debt obligations as applicable high-yield discount obligations (AHYDO) for purposes of Secs. 163(e)(5) and 163(i).

Generally, when a corporation issues a debt obligation subject to the AHYDO rules, the disqualified portion of the original issue discount (OLD) is considered to be a distribution akin to a dividend, rendering that portion nondeductible for tax purposes. The corporation defers the deduction for the remaining amount of OID until it is actually paid. Original issue discount is the discount from par value at the time a bond or other debt obligation is issued; it is the difference between the stated redemption price at maturity and the issue price (Sec. 1273(a)(1)).

Many tax professionals may be confused by the AHYDO rules or even unaware of the provisions. The recent market collapse for debt obligations makes having a working knowledge in this area more important than ever.

Rev. Proc. 2008-51

The IRS recently provided guidance on AHYDO in Rev. Proc. 2008-51, which is effective for debt obligations issued on or after August 8, 2008. This revenue procedure was issued to provide assurance to those who may have obtained financing commitments and, as a result of the recent deteriorating market conditions, discovered that the related debt obligation issue price may be significantly less than the monies advanced to the company under the financing commitment. In addition, certain mitigating actions may be necessary to reduce the impact of the reduced market price for debt obligations that, without this guidance, might lead one to conclude that the AHYDO rules do apply to the modified or exchanged obligation.

The new guidance provides more certainty with respect to certain potential AHYDO tax issues that may be affected by the issuance of specific debt obligations. The new guidance applies to debt obligations issued for money under a financing commitment and debt obligations issued in exchange for debt obligations issued under a financing commitment.

In anticipation of its needs, a company may seek to obtain a financing commitment from its lender in advance of borrowing the needed funds. These commitments guarantee that the company will have adequate debt financing at an upcoming date. When the company calls upon the commitment and the lender extends credit under terms previously negotiated, the company...