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From the Federal Register Online via the Government Publishing Office
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[FR Doc No: 94-2073]
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[TD 8517]
RIN 1545-AH46
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SUPPLEMENTARY INFORMATION:
Background
Explanation of Provisions
The final regulations modify the rule to determine the test rate
for purposes of sections 483 and 1274. Under the modified rule, the
test rate is generally the lowest of the applicable Federal rates
(based on the appropriate compounding period) in effect during either
(i) the 3-month period ending with the first month in which there is a
binding written contract that substantially sets forth the terms under
which the sale or exchange is ultimately consummated, or (ii) the 3-
month period ending with the month in which the sale or exchange
occurs.
The proposed regulations generally provide that the imputed
principal amount of a contingent payment debt instrument is the sum of
the present values of the noncontingent payments and the fair market
value of the contingent payments. Several comments and questions were
received on this rule, including the comment that the rule should be
reserved pending the resolution of the contingent payment rules in
regulations under section 1275. To allow further study of this issue
and coordination with the contingent payment regulations under section
1275, the final regulations do not adopt the rule in the proposed
regulations. Thus, for example, consistent with existing authorities,
the value of contingent payments is not taken into account for purposes
of determining the basis of property under section 1012. With the
publication of the final regulations in the Federal Register,
Sec. 1.1274-2(e) of the proposed regulations no longer remains as a
proposed regulation. Pending resolution of the issue and publication of
new proposed regulations, paragraphs (c) and (d) of Sec. 1.1275-4 of
the proposed regulations, as proposed in 1986, remain authority under
section 6662 of the Code for a nonpublicly traded debt instrument
issued in exchange for nonpublicly traded property.
Effective Dates
Special Analyses
It has been determined that these regulations are not major rules
as defined in Executive Order 12291. Therefore, a Regulatory Impact
Analysis is not required. It also has been determined that section
553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) and the
Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to these
regulations, and, therefore, a Regulatory Flexibility Analysis is not
required. Pursuant to section 7805(f) of the Code, the notice of
proposed rulemaking was submitted to the Small Business Administration
for comment on its impact on small business.
Drafting Information
List of Subjects
26 CFR part 1
(i) [Reserved]
(j) Effective date. This section applies to debt instruments issued
on or after April 4, 1994, and to lending transactions, sales, and
exchanges that occur on or after April 4, 1994. Taxpayers, however, may
rely on this section for debt instruments issued after December 21,
1992, and before April 4, 1994, and for lending transactions, sales,
and exchanges that occur after December 21, 1992, and before April 4,
1994.
Par. 5. Sections 1.483-1 and 1.483-2 are revised to read as
follows:
(a) General rule. For purposes of section 483, the test rate of
interest for a contract is the same as the test rate that would apply
under Sec. 1.1274-4 if the contract were a debt instrument. Paragraph
(b) of this section, however, provides for a lower test rate in the
case of certain sales or exchanges of land between related individuals.
(b) Lower rate for certain sales or exchanges of land between
related individuals--(1) Test rate. In the case of a qualified sale or
exchange of land between related individuals (described in section
483(e)), the test rate is not greater than 6 percent, compounded
semiannually, or an equivalent rate based on an appropriate compounding
period.
(2) Special rules. The following rules and definitions apply in
determining whether a sale or exchange is a qualified sale under
section 483(e):
(i) Definition of family members. The members of an individual's
family are determined as of the date of the sale or exchange. The
members of an individual's family include those individuals described
in section 267(c)(4) and the spouses of those individuals. In addition,
for purposes of section 267(c)(4), full effect is given to a legal
adoption, ancestor means parents and grandparents, and lineal
descendants means children and grandchildren.
(ii) $500,000 limitation. Section 483(e) does not apply to the
extent that the stated principal amount of the debt instrument issued
in the sale or exchange, when added to the aggregate stated principal
amount of any other debt instruments to which section 483(e) applies
that were issued in prior qualified sales between the same two
individuals during the same calendar year, exceeds $500,000. See
Example 3 of paragraph (b)(3) of this section.
(iii) Other limitations. Section 483(e) does not apply if the
parties to a contract include persons other than the related
individuals and the parties enter into the contract with an intent to
circumvent the purposes of section 483(e). In addition, if the property
sold or exchanged includes any property other than land, section 483(e)
applies only to the extent that the stated principal amount of the debt
instrument issued in the sale or exchange is attributable to the land
(based on the relative fair market values of the land and the other
property).
(3) Examples. The following examples illustrate the rules of this
paragraph (b).
* * * * *
(g) Debt instruments issued in exchange for property. If a debt
instrument is issued in exchange for property, the amount realized
attributable to the debt instrument is the issue price of the debt
instrument as determined under Sec. 1.1273-2 or Sec. 1.1274-2(b),
whichever is applicable. If, however, the issue price of the debt
instrument is determined under section 1273(b)(4), the amount realized
attributable to the debt instrument is its stated principal amount
reduced by any unstated interest (as determined under section 483).
This paragraph (g) applies to sales or exchanges that occur on or after
April 4, 1994. Taxpayers, however, may rely on this paragraph (g) for
sales and exchanges that occur after December 21, 1992, and before
April 4, 1994.
Par. 8. In Sec. 1.1012-1, paragraph (f) is amended by removing the
last sentence and paragraph (g) is added to read as follows:
* * * * *
(g) Debt instruments issued in exchange for property. For purposes
of paragraph (a) of this section, if a debt instrument is issued in
exchange for property, the cost of the property that is attributable to
the debt instrument is the issue price of the debt instrument as
determined under Sec. 1.1273-2 or Sec. 1.1274-2(b), whichever is
applicable. If, however, the issue price of the debt instrument is
determined under section 1273(b)(4), the cost of the property
attributable to the debt instrument is its stated principal amount
reduced by any unstated interest (as determined under section 483).
This paragraph (g) applies to sales or exchanges that occur on or after
April 4, 1994. Taxpayers, however, may rely on this paragraph (g) for
sales and exchanges that occur after December 21, 1992, and before
April 4, 1994.
Par. 9. Sections 1.1271-0, 1.1271-1, 1.1272-1 through 1.1272-3,
1.1273-1, 1.1273-2, 1.1274-1 through 1.1274-3 are added to read as
follows:
(a) Overview.
(1) In general.
(2) Debt instruments not subject to OID inclusion rules.
(b) Accrual of OID.
(1) Constant yield method.
(2) Exceptions.
(3) Modifications.
(4) Special rules for determining the OID allocable to an
accrual period.
(c) Yield and maturity of certain debt instruments subject to
contingencies.
(1) Applicability.
(2) General rule.
(3) Contingencies that are likely to occur.
(4) Consistency rule.
(5) Treatment of certain options.
(6) Subsequent adjustments.
(d) Certain debt instruments that provide for principal payments
uncertain as to time.
(e) Convertible debt instruments.
(f) Special rules to determine whether a debt instrument is a short-
term obligation.
(1) Counting of either the issue date or maturity date.
(2) Coordination with paragraph (c) of this section for certain
sections of the Internal Revenue Code.
(g) Basis adjustment.
(h) Debt instruments denominated in a currency other than the U.S.
dollar.
(i) [Reserved]
(j) Examples.
(a) In general.
(b) Definitions and special rules.
(1) Purchase.
(2) Premium.
(3) Acquisition premium.
(4) Acquisition premium fraction.
(5) Election to accrue discount on a constant yield basis.
(6) Special rules for determining basis.
(c) Examples.
(a) Election.
(b) Scope of election.
(1) In general.
(2) Exceptions, limitations, and special rules.
(c) Mechanics of the constant yield method.
(1) In general.
(2) Special rules to determine adjusted basis.
(d) Time and manner of making the election.
(e) Revocation of election.
(f) Effective date.
(a) In general.
(b) Stated redemption price at maturity.
(c) Qualified stated interest.
(1) Definition.
(2) Debt instruments subject to contingencies.
(3) Variable rate debt instrument.
(4) Stated interest in excess of qualified stated interest.
(5) Short-term obligations.
(d) De minimis OID.
(1) In general.
(2) De minimis amount.
(3) Installment obligations.
(4) Special rule for interest holidays, teaser rates, and other
interest shortfalls.
(5) Treatment of de minimis OID by holders.
(e) Definitions.
(1) Installment obligation.
(2) Self-amortizing installment obligation.
(3) Weighted average maturity.
(f) Examples.
(a) In general.
(b) Exceptions.
(1) Debt instrument with adequate stated interest and no OID .
(2) Exceptions under sections 1274(c)(1)(B), 1274(c)(3),
1274A(c), and 1275(b)(1).
(3) Other exceptions to section 1274.
(c) Examples.
(a) In general.
(b) Issue price.
(1) Debt instruments that provide for adequate stated interest;
stated principal amount.
(2) Debt instruments that do not provide for adequate stated
interest; imputed principal amount.
(3) Debt instruments issued in a potentially abusive situation;
fair market value.
(c) Determination of whether a debt instrument provides for adequate
stated interest.
(1) In general.
(2) Determination of present value.
(d) Treatment of certain options.
(e) Mandatory sinking funds.
(f) Treatment of variable rate debt instruments.
(1) Stated interest at a qualified floating rate.
(2) Stated interest at a single objective rate.
(g) Contingent payments. [Reserved]
(h) Examples.
(a) In general.
(b) Operating rules.
(1) Debt instrument exchanged for nonrecourse financing.
(2) Nonrecourse debt with substantial down payment.
(3) Clearly excessive interest.
(c) Other situations to be specified by Commissioner.
(d) Consistency rule.
(a) In general.
(b) Modifications of debt instruments.
(1) In general.
(2) Election to treat buyer as modifying the debt instrument.
(c) Wraparound indebtedness.
(d) Consideration attributable to assumed debt.
(a) In general.
(b) Rules for both qualified and cash method debt instruments.
(1) Sale-leaseback transactions.
(2) Debt instruments calling for contingent payments.
(3) Aggregation of transactions.
(4) Inflation adjustment of dollar amounts.
(c) Rules for cash method debt instruments.
(1) Time and manner of making cash method election.
(2) Successors of electing parties.
(3) Modified debt instrument.
(4) Debt incurred or continued to purchase or carry a cash
method debt instrument.
(a) Applicability.
(b) Adjusted issue price.
(1) In general.
(2) Adjusted issue price for subsequent holders.
(c) OID.
(d) Debt instrument.
(e) Tax-exempt obligations.
(f) Issue.
(g) Debt instruments issued by a natural person.
(h) Publicly offered debt instrument.
(a) In general.
(b) Information required to be set forth on face of debt instruments
that are not publicly offered.
(1) In general.
(2) Time for legending.
(3) Legend must survive reissuance upon transfer.
(4) Exceptions.
(c) Information required to be reported to Secretary upon issuance
of publicly offered debt instruments.
(1) In general.
(2) Time for filing information return.
(3) Exceptions.
(d) Application to foreign issuers and U.S. issuers of
foreigntargeted debt instruments.
(e) Penalties.
(f) Effective date.
(a) Applicability.
(1) In general.
(2) Principal payments.
(3) Stated interest.
(4) Current value.
(b) Qualified floating rate.
(1) In general.
(2) Certain rates based on a qualified floating rate.
(3) Restrictions on the stated rate of interest.
(c) Objective rate.
(1) In general.
(2) Other objective rates to be specified by Commissioner.
(3) Qualified inverse floating rate.
(4) Significant front-loading or back-loading of interest.
(5) Tax-exempt debt.
(d) Examples.
(e) Qualified stated interest and OID with respect to a variable
rate debt instrument.
(1) In general.
(2) Variable rate debt instrument that provides for annual
payments of interest at a single variable rate.
(3) All other variable rate debt instruments except for those
that provide for a fixed rate.
(4) Variable rate debt instrument that provides for a single
fixed rate.
(f) Special rule for certain reset bonds.
In which:
OIDshort=IP x (i/k) x f
In which:
(iv) Amount of OID for the initial short accrual period. Under
this method, the amount of OID for the initial short accrual period
is $1,537 ($80,000 x (11.53 percent/2) x (60/180)).
(v) Alternative method. Another reasonable method is to
calculate the amount of OID for the initial short accrual period
using the yield based on bi-monthly compounding, computed pursuant
to the formula set forth in Example 1 of paragraph (j) of this
section. Under this method, the amount of OID for the initial short
accrual period is $1,508.38 ($80,000 x (11.31 percent/6)).
Example 4. Impermissible accrual of OID using a method other
than constant yield method--(i) Facts. On July 1, 1994, B purchases
at original issue, for $100,000, C corporation's debt instrument
that matures on July 1, 1999, and has a stated principal amount of
$100,000. The debt instrument provides for a single payment at
maturity of $148,024.43. The yield of the debt instrument is 8
percent, compounded semiannually.
(ii) Determination of yield. Assume that C uses 6 monthly
accrual periods to compute its OID for 1994. The yield must reflect
monthly compounding (as determined using the formula described in
Example 1 of paragraph (j) of this section). As a result, the
monthly yield of the debt instrument is 7.87 percent, divided by 12.
C may not compute its monthly yield for the last 6 months in 1994 by
dividing 8 percent by 12.
Example 5. Debt instrument subject to put option--(i) Facts. On
January 1, 1995, G purchases at original issue, for $70,000, H
corporation's debt instrument maturing on January 1, 2010, with a
stated principal amount of $100,000, payable at maturity. The debt
instrument provides for semiannual payments of interest of $4,000,
payable on January 1 and July 1 of each year, beginning on July 1,
1995. The debt instrument gives G an unconditional right to put the
bond back to H, exercisable on January 1, 2005, in return for
$85,000 (exclusive of the $4,000 of stated interest payable on that
date).
(ii) Determination of yield and maturity. Yield determined
without regard to the put option is 12.47 percent, compounded
semiannually. Yield determined by assuming that the put option is
exercised (i.e., by using January 1, 2005, as the maturity date and
$85,000 as the stated principal amount payable on that date) is
12.56 percent, compounded semiannually. Thus, under paragraph (c)(5)
of this section, it is assumed that G will exercise the put option,
because exercise of the option would increase the yield of the debt
instrument. Thus, for purposes of calculating OID, the debt
instrument is assumed to be a 10-year debt instrument with an issue
price of $70,000, a stated redemption price at maturity of $85,000,
and a yield of 12.56 percent, compounded semiannually.
(iii) Consequences if put option is, in fact, not exercised. If
the put option is, in fact, not exercised, then, under paragraph
(c)(6) of this section, the debt instrument is treated, solely for
purposes of determining yield and maturity, as if it were reissued
on January 1, 2005, for an amount equal to its adjusted issue price
on that date, $85,000. The new debt instrument matures on January 1,
2010, with a stated principal amount of $100,000 payable on that
date and provides for semiannual payments of interest of $4,000. The
yield of the new debt instrument is 12.08 percent, compounded
semiannually.
Example 6. Debt instrument subject to partial call option--(i)
Facts. On January 1, 1995, H purchases at original issue, for
$95,000, J corporation's debt instrument that matures on January 1,
2000, and has a stated principal amount of $100,000, payable on that
date. The debt instrument provides for semiannual payments of
interest of $4,000, payable on January 1 and July 1 of each year,
beginning on July 1, 1995. On January 1, 1998, J has an
unconditional right to call 50 percent of the principal amount of
the debt instrument for $55,000 (exclusive of the $4,000 of stated
interest payable on that date). If the call is exercised, the
semiannual payments of interest made after the call date will be
reduced to $2,000.
(ii) Determination of yield and maturity. Yield determined
without regard to the call option is 9.27 percent, compounded
semiannually. Yield determined by assuming J exercises its call
option is 10.75 percent, compounded semiannually. Thus, under
paragraph (c)(5) of this section, it is assumed that J will not
exercise the call option because exercise of the option would
increase the yield of the debt instrument. Thus, for purposes of
calculating OID, the debt instrument is assumed to be a 5-year debt
instrument with a single principal payment at maturity of $100,000,
and a yield of 9.27 percent, compounded semiannually.
(iii) Consequences if the call option is, in fact, exercised. If
the call option is, in fact, exercised, then under paragraph (c)(6)
of this section, the debt instrument is treated as if the issuer
made a pro rata prepayment of $55,000 that is subject to
Sec. 1.1275-2(f). Consequently, under Sec. 1.1275-2(f)(1), the
instrument is treated as consisting of two debt instruments, one
that is retired on the call date and one that remains outstanding
after the call date. The adjusted issue price, adjusted basis in the
hands of the holder, and accrued OID of the original debt instrument
is allocated between the two instruments based on the portion of the
original instrument treated as retired. Since each payment remaining
to be made after the call date is reduced by one-half, one-half of
the adjusted issue price, adjusted basis, and accrued OID is
allocated to the debt instrument that is treated as retired. The
adjusted issue price of the original debt instrument immediately
prior to the call date is $97,725.12, which equals the issue price
of the original debt instrument ($95,000) increased by the OID
previously includible in gross income ($2,725.12). One-half of this
adjusted issue price is allocated to the debt instrument treated as
retired, and the other half is allocated to the debt instrument that
is treated as remaining outstanding. Thus, the debt instrument
treated as remaining outstanding has an adjusted issue price
immediately after the call date of $97,725.12/2, or $48,862.56. The
yield of this debt instrument continues to be 9.27 percent,
compounded semiannually. In addition, the portion of H's adjusted
basis allocated to the debt instrument treated as retired is
$97,725.12/2 or $48,862.56. Accordingly, under section 1271, H
realizes a gain on the deemed retirement equal to $6,137.44 ($55,000
- $48,862.56).
Example 7. Debt instrument issued at par that provides for
payment of interest in kind--(i) Facts. On January 1, 1995, A
purchases at original issue, for $100,000, X corporation's debt
instrument maturing on January 1, 2000, at a stated principal amount
of $100,000, payable on that date. The debt instrument provides for
annual payments of interest of $6,000 on January 1 of each year,
beginning on January 1, 1996. The debt instrument gives X the
unconditional right to issue, in lieu of the first interest payment,
a second debt instrument (PIK instrument) maturing on January 1,
2000, with a stated principal amount of $6,000. The PIK instrument,
if issued, would provide for annual payments of interest of $360 on
January 1 of each year, beginning on January 1, 1997.
(ii) Aggregation of PIK instrument with original debt
instrument. Under Sec. 1.1275-2(c)(3), the issuance of the PIK
instrument is not considered a payment made on the original debt
instrument, and the PIK instrument is aggregated with the original
debt instrument. The issue date of the PIK instrument is the same as
the original debt instrument.
(iii) Determination of yield and maturity. The right to issue
the PIK instrument is treated as an option to defer the initial
interest payment until maturity. Yield determined without regard to
the option is 6 percent, compounded annually, Yield determined by
assuming X exercises the option is 6 percent, compounded annually.
Thus, under paragraph (c)(5) of this section, it is assumed that X
will not exercise the option by issuing the PIK instrument because
exercise of the option would not decrease the yield of the debt
instrument. For purposes of calculating OID, the debt instrument is
assumed to be a 5-year debt instrument with a single principal
payment at maturity of $100,000 and ten semiannual interest payments
of $6,000, beginning on January 1, 1996. As a result, the debt
instrument's yield is 6 percent, compounded annually.
(iv) Determination of OID. Under the payment schedule that would
result if the option was exercised, none of the interest on the debt
instrument would be qualified stated interest. Accordingly, under
Sec. 1.1273-1(c)(2), no payments on the debt instrument are
qualified stated interest payments. Thus, $6,000 of OID accrues
during the first annual accrual period. If the PIK instrument is not
issued, $6,000 of OID accrues during each annual accrual period.
(v) Consequences if the PIK instrument is issued. Under
paragraph (c)(6) of this section, if X issues the PIK instrument on
January 1, 1996, the issuance of the PIK instrument is not a payment
on the debt instrument. Solely for purposes of determining yield and
maturity, the debt instrument is deemed reissued on January 1, 1996,
for an issue price of $106,000. The recomputed yield is 6 percent,
compounded annually. The OID for the first annual accrual period
after the deemed reissuance is $6,360. The adjusted issue price of
the debt instrument at the beginning of the next annual accrual
period is $106,000 ($106,000 + $6,360 - $6,360). The OID for each of
the four remaining annual accrual periods is $6,360.
Example 8. Debt instrument issued at a discount that provides
for payment of interest in kind--(i) Facts. On January 1, 1995, T
purchases at original issue, for $75,500, U corporation's debt
instrument maturing on January 1, 2000, at a stated principal amount
of $100,000, payable on that date. The debt instrument provides for
annual payments of interest of $4,000 on January 1 of each year,
beginning on January 1, 1996. The debt instrument gives U the
unconditional right to issue, in lieu of the first interest payment,
a second debt instrument (PIK instrument) maturing on January 1,
2000, with a stated principal amount of $4,000. The PIK instrument,
if issued, would provide for annual payments of interest of $160 on
January 1 of each year, beginning on January 1, 1997.
(ii) Aggregation of PIK instrument with original debt
instrument. Under Sec. 1.1275-2(c)(3), the issuance of the PIK
instrument is not considered a payment made on the original debt
instrument, and the PIK instrument is aggregated with the original
debt instrument. The issue date of the PIK instrument is the same as
the original debt instrument.
(iii) Determination of yield and maturity. The right to issue
the PIK instrument is treated as an option to defer the initial
interest payment until maturity. Yield determined without regard to
the option is 10.55 percent, compounded annually. Yield determined
by assuming U exercises the option is 10.32 percent, compounded
annually. Thus, under paragraph (c)(5) of this section, it is
assumed that U will exercise the option by issuing the PIK
instrument because exercise of the option would decrease the yield
of the debt instrument. For purposes of calculating OID, the debt
instrument is assumed to be a 5-year debt instrument with a single
principal payment at maturity of $104,000 and four annual interest
payments of $4,160, beginning on January 1, 1997. As a result, the
yield is 10.32 percent, compounded annually.
(iv) Consequences if the PIK instrument is not issued. Assume
that T chooses to compute OID accruals on the basis of an annual
accrual period. On January 1, 1996, the adjusted issue price of the
debt instrument, and T's adjusted basis in the instrument, is
$83,295.15. Under paragraph (c)(6) of this section, if U actually
makes the $4,000 interest payment on January 1, 1996, the debt
instrument is treated as if U made a pro rata prepayment (within the
meaning of Sec. 1.1275-2(f)(2)) of $4,000, which reduces the amount
of each payment remaining on the instrument by a factor of 4/104, or
1/26. Thus, under Sec. 1.1275-2(f)(1) and section 1271, T realizes a
gain of $796.34 ($4,000 -($83,295.15/26)). The adjusted issue price
of the debt instrument and T's adjusted basis immediately after the
payment is $80,091.49 ($83,295.15 x 25/26) and the yield continues
to be 10.32 percent, compounded annually.
Example 9. Debt instrument with stepped interest rate--(i)
Facts. On July 1, 1994, G purchases at original issue, for $85,000,
H corporation's debt instrument maturing on July 1, 2004. The debt
instrument has a stated principal amount of $100,000, payable on the
maturity date and provides for semiannual interest payments on
January 1 and July 1 of each year, beginning on January 1, 1995. The
amount of each payment is $2,000 for the first 5 years and $5,000
for the final 5 years.
(ii) Determination of OID. Assume that G computes its OID using
6-month accrual periods ending on January 1 and July 1 of each year.
The yield of the debt instrument, determined under paragraph
(b)(1)(i) of this section, is 8.65 percent, compounded semiannually.
Interest is unconditionally payable at a fixed rate of at least 4
percent, compounded semiannually, for the entire term of the debt
instrument. Consequently, under Sec. 1.1273-1(c)(1), the semiannual
payments are qualified stated interest payments to the extent of
$2,000. The amount of OID for the first 6-month accrual period is
$1,674.34 (the issue price of the debt instrument ($85,000) times
the yield of the debt instrument for that accrual period (.0865/2)
less the amount of any qualified stated interest allocable to that
accrual period ($2,000)).
Example 10. Debt instrument payable on demand that provides for
interest at a constant rate--(i) Facts. On January 1, 1995, V
purchases at original issue, for $100,000, W corporation's debt
instrument. The debt instrument calls for interest to accrue at a
rate of 9 percent, compounded annually. The debt instrument is
redeemable at any time at the option of V for an amount equal to
$100,000, plus accrued interest. V uses annual accrual periods to
accrue OID on the debt instrument.
(ii) Amount of OID. Pursuant to paragraph (d) of this section,
the yield of the debt instrument is 9 percent, compounded annually.
If the debt instrument is not redeemed during 1995, the amount of
OID allocable to the year is $9,000.
TR02FE94.000
TR02FE94.001
TR02FE94.002
(a) In general. Section 1274A allows the use of a lower test rate
for purposes of sections 483 and 1274 in the case of a qualified debt
instrument (as defined in section 1274A(b)) and, if elected by the
borrower and the lender, the use of the cash receipts and disbursements
method of accounting for interest on a cash method debt instrument (as
defined in section 1274A(c)(2)). This section provides special rules
for qualified debt instruments and cash method debt instruments.
(b) Rules for both qualified and cash method debt instruments--(1)
Sale-leaseback transactions. A debt instrument issued in a sale-
leaseback transaction (within the meaning of section 1274(e)) cannot be
either a qualified debt instrument or a cash method debt instrument.
(2) Debt instruments calling for contingent payments. A debt
instrument that provides for contingent payments cannot be a qualified
debt instrument unless it can be determined at the time of the sale or
exchange that the maximum stated principal amount due under the debt
instrument cannot exceed the amount specified in section 1274A(b).
Similarly, a debt instrument that provides for contingent payments
cannot be a cash method debt instrument unless it can be determined at
the time of the sale or exchange that the maximum stated principal
amount due under the debt instrument cannot exceed the amount specified
in section 1274A(c)(2)(A).
(3) Aggregation of transactions--(i) General rule. The aggregation
rules of section 1274A(d)(1) are applied using a facts and
circumstances test.
(ii) Examples. The following examples illustrate the application of
section 1274A(d)(1) and paragraph (b)(3)(i) of this section.
(4) Variable rate debt instrument that provides for a single fixed
rate--(i) General rule. If a variable rate debt instrument provides for
stated interest either at one or more qualified floating rates or at a
qualified inverse floating rate and in addition provides for stated
interest at a single fixed rate (other than an initial fixed rate
described in paragraph (a)(3)(ii) of this section), the amount of
interest and OID are determined using the method of paragraph (e)(3) of
this section, as modified by this paragraph (e)(4). For purposes of
paragraphs (e)(3)(i) through (e)(3)(iii) of this section, the variable
rate debt instrument is treated as if it provided for a qualified
floating rate (or a qualified inverse floating rate, if the debt
instrument provides for a qualified inverse floating rate), rather than
the fixed rate. The qualified floating rate (or qualified inverse
floating rate) replacing the fixed rate must be such that the fair
market value of the variable rate debt instrument as of the issue date
would be approximately the same as the fair market value of an
otherwise identical debt instrument that provides for the qualified
floating rate (or qualified inverse floating rate) rather than the
fixed rate.
(ii) Example. The following example illustrates the rule in
paragraph (e)(4)(i) of this section.
Par. 18. The authority citation for part 602 continues to read as
follows:
* * * * *
(c) * * *
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Current OMB
CFR part or section where identified and described control
number
------------------------------------------------------------------------
*****
1.1274-3T................................................. 1545-0887
1.1275-3.................................................. 1545-0887
1.1275-3T................................................. 1545-0887
*****
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* * * * *
(c) * * *
------------------------------------------------------------------------
Current OMB
CFR part or section where identified and described control
number
------------------------------------------------------------------------
*****
1.1272-1(c)(4)............................................ 1545-1353
1.1272-3.................................................. 1545-1353
1.1273-2(h)(2)............................................ 1545-1353
1.1274-3(d)............................................... 1545-1353
1.1274-5(b)............................................... 1545-1353
1.1274A-1(c).............................................. 1545-1353
1.1275-3(b)............................................... 1545-1353
1.1275-3(c)............................................... 1545-0887
*****
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