The Internal Revenue Service (the “IRS”), in proposed Treasury Regulations (REG-131947-10) (the “Proposed Regulations”) released on January 6, 2011, clarifies and expands the circumstances that cause property to be “publicly traded” for purposes of determining the issue price of a debt instrument. The Proposed Regulations have been issued in response to commentary from practitioners regarding the meaning of such term in the current Treasury Regulations. The Proposed Regulations, if enacted in a form substantially similar to the proposed form, would result in debt instruments purchased and sold in current financial markets to be more easily characterized as “publicly traded.” This characterization could have significant consequences for creditors and debtors that engage in debt modifications that result in a deemed exchange of the old debt obligation for a new modified obligation.

The issue price of a debt instrument that is issued in exchange for property that is traded on an established market, or publicly traded, is equal to the fair market value of the publicly traded property. Treasury Regulations issued in 1994 address when property is considered to be “traded on an established market” at any time during the 60-day period ending 30 days after the issue date. Property is considered to be traded on an established market for this purpose if it is listed on (1) a national securities exchange registered under Section 6 of the Securities Exchange Act of 1934 (the “Act”), (2) an “interdealer quotation system sponsored by a national securities association registered” under Section 15A of the Act (e.g., NASDAQ), or (3) a foreign exchange or board of trade recognized by the Treasury Regulations or the IRS. Property also qualifies if it is traded on an interbank market or on a board of trade designated as a contract market by the Commodities Futures Trading Commission. Property is traded on an established market if it appears on a “quotation medium,” which is defined as “a system of general circulation . . . that provides a reasonable basis to determine fair market value by disseminating either recent price quotations . . . of one or more identified brokers, dealers, or traders or actual prices . . . of recent sales transactions.” In addition, property is traded on an established market if price quotations are “readily available” from brokers, dealers, or traders. However, this category is subject to a number of limitations.