Determining the Issue Price of a Debt Instrument: Final Treasury Regulations Clarify When Property Is Publicly Traded

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On September 12, 2012, the US Internal Revenue Service (the “Service”) released final regulations (the “Final Regulations”) detailing when property is publicly traded for purposes of determining the issue price of a debt instrument. The issue price of a debt instrument has important income tax consequences and is relevant for determining, among other things, original issue discount (“OID”) associated with the instrument, cancellation of indebtedness (“COD”) income of the issuer and the gain or loss on the sale of the instrument by a holder. The new rules should be of particular interest to borrowers and lenders in a variety of bank finance and capital markets transactions, including consent solicitations, debt-for-debt exchanges, recapitalization transactions, workouts, reopenings and any transaction that involves amendments or modifications to an existing debt obligation (including a bank loan) that results in a deemed reissuance of the debt obligation for US federal income tax purposes. These rules do not change the determination of the issue price of debt issued for cash.

Background -

In general, a debt instrument that is issued for property and is part of an issue, some or all of which is “publicly traded” for US tax purposes (i.e., is traded on an established securities market), has an issue price equal to the fair market value of the debt instrument. Similarly, if a non-publicly traded debt instrument is issued for property that is publicly traded (such as stock or securities), the issue price of the debt instrument is the fair market value of the stock, securities or other property. If a debt instrument issued for property is neither publicly traded nor issued for property that is publicly traded, the issue price of the debt instrument generally is equal to the stated principal amount of the debt instrument if such instrument provides for adequate stated interest.

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