Modifications of Debt Instruments, 1063-1065 [2011-86]
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Federal Register / Vol. 76, No. 5 / Friday, January 7, 2011 / Rules and Regulations
ECCN 5D002 that is subject to the EAR
(see § 734.3(b)(3) of the EAR). Such
source code is eligible for License
Exception TSU under this paragraph (e)
even if it is subject to an express
agreement for the payment of a licensing
fee or royalty for commercial production
or sale of any product developed using
the source code.
(2) Restrictions. This paragraph (e)
does not authorize:
(i) Export or reexport of any
encryption software classified under
ECCN 5D002 that does not meet the
requirements of paragraph (e)(1), even if
the software incorporates or is specially
designed to use other encryption
software that meets the requirements of
paragraph (e)(1) of this section; or
(ii) Any knowing export or reexport to
a country listed in Country Group E:1 in
Supplement No. 1 to part 740 of the
EAR.
(3) Notification requirement. You
must notify BIS and the ENC Encryption
Request Coordinator via e-mail of the
Internet location (e.g., URL or Internet
address) of the publicly available
encryption source code or provide each
of them a copy of the publicly available
encryption source code. If you update or
modify the source code, you must also
provide additional copies to each of
them each time the cryptographic
functionality of the source code is
updated or modified. In addition, if you
posted the source code on the Internet,
you must notify BIS and the ENC
Encryption Request Coordinator each
time the Internet location is changed,
but you are not required to notify them
of updates or modifications made to the
encryption source code at the
previously notified location. In all
instances, submit the notification or
copy to crypt@bis.doc.gov and to
enc@nsa.gov.
Note to paragraph (e): Posting
encryption source code on the Internet
(e.g., FTP or World Wide Web site)
where it may be downloaded by anyone
neither establishes ‘‘knowledge’’ of a
prohibited export or reexport for
purposes of this paragraph, nor triggers
any ‘‘red flags’’ imposing a duty to
inquire under the ‘‘Know Your
Customer’’ guidance provided in
Supplement No. 3 to part 732 of the
EAR. Publicly available encryption
object code software classified under
ECCN 5D002 is not subject to the EAR
when the corresponding source code
meets the criteria specified in this
paragraph (e), see § 734.3(b)(3) of the
EAR.
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PART 742—[AMENDED]
11. The authority citation for part 742
continues to read as follows:
■
Authority: 50 U.S.C. app. 2401 et seq.; 50
U.S.C. 1701 et seq.; 22 U.S.C. 3201 et seq.;
42 U.S.C. 2139a; 22 U.S.C. 7201 et seq.; 22
U.S.C. 7210; Sec 1503, Pub. L. 108–11, 117
Stat. 559; E.O. 12058, 43 FR 20947, 3 CFR,
1978 Comp., p. 179; E.O. 12851, 58 FR 33181,
3 CFR, 1993 Comp., p. 608; E.O. 12938, 59
FR 59099, 3 CFR, 1994 Comp., p. 950; E.O.
13026, 61 FR 58767, 3 CFR, 1996 Comp., p.
228; E.O. 13222, 66 FR 44025, 3 CFR, 2001
Comp., p. 783; Presidential Determination
2003–23 of May 7, 2003, 68 FR 26459, May
16, 2003; Notice of August 12, 2010, 75 FR
50681 (August 16, 2010); Notice of November
4, 2010, 75 FR 68673 (November 8, 2010).
11. Section 742.15 is amended:
a. By revising the fourth sentence of
paragraph (b) introductory text; and
■ b. By adding a note to paragraph (b)
introductory text to read as follows:
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*
*
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(b) * * * Exports and reexports
authorized under paragraphs (b)(1) and
(b)(3) of this section (including of mass
market encryption software that would
be considered publicly available under
§ 734.3(b)(3) of the EAR) must be
supported by an encryption registration
in accordance with paragraph (b)(7) of
this section and the specific instructions
of paragraph (r)(1) of Supplement No. 2
to part 748 of the EAR. * * *
■
■
Note to introductory text of paragraph (b):
Mass market encryption software that would
be considered publicly available under
§ 734.3(b)(3) of the EAR, and is authorized for
export and reexport under this paragraph (b),
remains subject to the EAR until the
encryption registration and all applicable
classification or self-classification
requirements set forth in this section are
fulfilled.
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1063
42 U.S.C. 2139a; 42 U.S.C. 6212; 43 U.S.C.
1354; 15 U.S.C. 1824a; 50 U.S.C. app. 5; 22
U.S.C. 7201 et seq.; 22 U.S.C. 7210; E.O.
13026, 61 FR 58767, 3 CFR, 1996 Comp., p.
228; E.O. 13222, 66 FR 44025, 3 CFR, 2001
Comp., p. 783; Notice of August 12, 2010, 75
FR 50681 (August 16, 2010).
14. In Supplement No. 1 to part 774
(the Commerce Control List), Category 5,
Part 2, Export Control Classification
Number (ECCN) 5D002 is amended by
adding the heading ‘‘License
Requirements’’ after the ECCN heading
and revising the last note in the License
Requirements section to read as follows:
■
Supplement No. 1 to Part 774
*
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*
*
5D002 Information Security—
‘‘Software as follows (see List of Items
Controlled).’’
License Requirements
*
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*
*
*
Note: Encryption source code classified
under this entry remains subject to the EAR
even when made publicly available in
accordance with part 734 of the EAR.
However, publicly available encryption
object code software classified under ECCN
5D002 is not subject to the EAR when the
corresponding source code meets the criteria
specified in § 740.13(e), see also § 734.3(b)(3)
of the EAR.
*
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*
*
Dated: December 20, 2010.
Kevin J. Wolf,
Assistant Secretary for Export
Administration.
[FR Doc. 2010–32803 Filed 1–6–11; 8:45 am]
BILLING CODE 3510–33–P
DEPARTMENT OF THE TREASURY
Internal Revenue Service
PART 772—[AMENDED]
11. The authority citation for part 772
continue to read as follows:
■
Authority: 50 U.S.C. app. 2401 et seq.; 50
U.S.C. 1701 et seq.; E.O. 13222, 66 FR 44025,
3 CFR, 2001 Comp., p. 783; Notice of August
12, 2010, 75 FR 50681 (August 16, 2010).
§ 772.1
12. In § 772.1, the definition of the
term ‘‘commodity’’ is amended by
removing the last two sentences of the
definition.
PART 774—[AMENDED]
13. The authority citation for part 774
continues to read as follows:
■
Authority: 50 U.S.C. app. 2401 et seq.; 50
U.S.C. 1701 et seq.; 10 U.S.C. 7420; 10 U.S.C.
7430(e); 22 U.S.C. 287c, 22 U.S.C. 3201 et
seq., 22 U.S.C. 6004; 30 U.S.C. 185(s), 185(u);
Frm 00005
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[TD 9513]
RIN 1545–BJ30
Modifications of Debt Instruments
Internal Revenue Service (IRS),
Treasury.
ACTION: Final regulation.
AGENCY:
[Amended]
■
PO 00000
26 CFR Part 1
Sfmt 4700
This document contains final
regulations relating to the modification
of debt instruments. The regulations
clarify the extent to which the
deterioration in the financial condition
of the issuer is taken into account to
determine whether a modified debt
instrument will be recharacterized as an
instrument or property right that is not
debt. The regulations provide needed
SUMMARY:
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Federal Register / Vol. 76, No. 5 / Friday, January 7, 2011 / Rules and Regulations
guidance to issuers and holders of debt
instruments.
DATES: Effective Date: These regulations
are effective on January 7, 2011.
Applicability Date: For dates of
applicability, see § 1.1001–3(h).
FOR FURTHER INFORMATION CONTACT:
Diana Imholtz at (202) 622–3920 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
This document contains amendments
to 26 CFR part 1. On June 4, 2010, a
notice of proposed rulemaking (REG–
106750–10, 2010–25 IRB 765) was
published in the Federal Register
(75 FR 31736) that proposed
amendments to § 1.1001–3 to clarify the
circumstances in which the credit
quality of the issuer should be
considered in determining the nature of
the instrument resulting from an
alteration or modification of a debt
instrument. Because no requests to
speak were submitted by August 11,
2010, no public hearing was held. One
written comment was received in
response to the notice of proposed
rulemaking. After consideration of this
comment, the proposed regulations are
adopted as revised by this Treasury
decision. The revisions are discussed in
this preamble.
Explanation and Summary of
Comments
jdjones on DSK8KYBLC1PROD with RULES
Effective/Applicability Date
The regulations apply to alterations of
the terms of a debt instrument on or
after January 7, 2011. A taxpayer,
however, may rely on § 1.1001–3(f)(7)
for alterations of the terms of a debt
instrument occurring before that date.
Special Analyses
Background
The only comment received on the
proposed regulations requested that the
regulations clarify that § 1.1001–3
applies not only to determine whether
an exchange of the original debt
instrument for a modified instrument
has occurred but also to classify the
modified instrument resulting from the
exchange. The IRS and the Treasury
Department intend that Federal income
tax principles be used to determine the
classification of a modified instrument
resulting from an exchange except as
specifically provided in § 1.1001–3(f)(7).
To avoid doubt on the operation of the
rules in the proposed regulations, the
final regulations add language to the
general rule of § 1.1001–3(b) to make
clear that the rules provided in
§ 1.1001–3(f)(7) apply to determine
whether the modified instrument
received in an exchange will be
classified as debt for Federal income tax
purposes. Thus, unless there is a
substitution of a new obligor or the
addition or deletion of a co-obligor, all
relevant factors (for example, creditor
rights or subordination) other than any
deterioration in the financial condition
of the issuer are taken into account in
determining whether a modified
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instrument is properly classified as debt
for Federal income tax purposes.
15:26 Jan 06, 2011
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It has been determined that this
Treasury decision is not a significant
regulatory action as defined in
Executive Order 12866. Therefore, a
regulatory assessment is not required. It
also has been determined that section
553(b) of the Administrative Procedure
Act (5 U.S.C. chapter 5) does not apply
to these regulations, and because the
regulation does not impose a collection
of information on small entities, the
Regulatory Flexibility Act (5 U.S.C.
chapter 6) does not apply. Pursuant to
section 7805(f) of the Internal Revenue
Code, the notice of proposed rulemaking
preceding this regulation was submitted
to the Chief Counsel for Advocacy of the
Small Business Administration for
comment on its impact on small
business.
Drafting Information
The principal author of these final
regulations is Diana Imholtz, Office of
Associate Chief Counsel (Financial
Institutions & Products), IRS. However,
other personnel from the IRS and the
Treasury Department participated in
their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.
Adoption of the Amendments to the
Regulations
Accordingly, 26 CFR part 1 is
amended as follows:
■
PART 1—INCOME TAXES
Paragraph 1. The authority citation
for part 1 continues to read in part as
follows:
■
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.1001–3 is amended
by:
■ 1. Revising paragraphs (b), (c)(2)(ii),
(e)(5)(i) and (h).
■ 2. Adding paragraph (f)(7).
The revisions and addition read as
follows:
■
§ 1.1001–3 Modifications of debt
instruments.
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(b) General rule. For purposes of
§ 1.1001–1(a), a significant modification
of a debt instrument, within the
meaning of this section, results in an
exchange of the original debt instrument
for a modified instrument that differs
materially either in kind or in extent. A
modification that is not a significant
modification is not an exchange for
purposes of § 1.1001–1(a). Paragraphs
(c) and (d) of this section define the
term modification and contain examples
illustrating the application of the rule.
Paragraphs (e) and (f) of this section
provide rules for determining when a
modification is a significant
modification. Paragraph (f) of this
section also provides rules for
determining whether the modified
instrument received in an exchange will
be classified as an instrument or
property right that is not debt for federal
income tax purposes. Paragraph (g) of
this section contains examples
illustrating the application of the rules
in paragraphs (e) and (f) of this section.
(c) * * *
(2) * * *
(ii) Property that is not debt. An
alteration that results in an instrument
or property right that is not debt for
Federal income tax purposes is a
modification unless the alteration
occurs pursuant to a holder’s option
under the terms of the instrument to
convert the instrument into equity of the
issuer (notwithstanding paragraph
(c)(2)(iii) of this section). The rules of
paragraph (f)(7) of this section apply to
determine whether an alteration or
modification results in an instrument or
property right that is not debt.
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*
*
*
*
(e) * * *
(5) Changes in the nature of a debt
instrument—(i) Property that is not
debt. A modification of a debt
instrument that results in an instrument
or property right that is not debt for
Federal income tax purposes is a
significant modification. The rules of
paragraph (f)(7) of this section apply to
determine whether a modification
results in an instrument or property
right that is not debt.
*
*
*
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*
(f) * * *
(7) Rules for determining whether an
alteration or modification results in an
instrument or property right that is not
debt—(i) In general. Except as provided
in paragraph (f)(7)(ii) of this section, the
determination of whether an instrument
resulting from an alteration or
modification of a debt instrument will
be recharacterized as an instrument or
property right that is not debt for
Federal income tax purposes shall take
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Federal Register / Vol. 76, No. 5 / Friday, January 7, 2011 / Rules and Regulations
jdjones on DSK8KYBLC1PROD with RULES
into account all of the factors relevant
to such a determination.
(ii) Financial condition of the
obligor—(A) Deterioration in financial
condition of the obligor generally
disregarded. Except as provided in
paragraph (f)(7)(ii)(B) of this section, in
making a determination as to whether
an instrument resulting from an
alteration or modification of a debt
instrument will be recharacterized as an
instrument or property right that is not
debt, any deterioration in the financial
condition of the obligor between the
issue date of the debt instrument and
the date of the alteration or modification
(as it relates to the obligor’s ability to
repay the debt instrument) is not taken
into account. For example, any decrease
in the fair market value of a debt
instrument (whether or not the debt
instrument is publicly traded) between
the issue date of the debt instrument
and the date of the alteration or
modification is not taken into account to
the extent that the decrease in fair
market value is attributable to the
deterioration in the financial condition
of the obligor and not to a modification
of the terms of the instrument.
(B) Substitution of a new obligor;
addition or deletion of co-obligor. If
there is a substitution of a new obligor
or the addition or deletion of a coobligor, the rules in paragraph
(f)(7)(ii)(A) of this section do not apply.
*
*
*
*
*
(h) Effective/applicability date—(1) In
general. Except as otherwise provided
in paragraph (h)(2) of this section, this
section applies to alterations of the
terms of a debt instrument on or after
September 24, 1996. Taxpayers,
however, may rely on this section for
alterations of the terms of a debt
instrument after December 2, 1992, and
before September 24, 1996.
(2) Exception. Paragraph (f)(7) of this
section applies to an alteration of the
terms of a debt instrument on or after
January 7, 2011. A taxpayer, however,
may rely on paragraph (f)(7) of this
section for alterations of the terms of a
debt instrument occurring before that
date.
Steven T. Miller,
Deputy Commissioner for Services and
Enforcement.
Approved: December 21, 2010.
Michael Mundaca,
Assistant Secretary of the Treasury (Tax
Policy).
[FR Doc. 2011–86 Filed 1–6–11; 8:45 am]
BILLING CODE 4830–01–P
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DEPARTMENT OF HOMELAND
SECURITY
Coast Guard
33 CFR Part 165
[Docket No. USCG–2010–1133]
RIN 1625–AA87
Security Zone; 23rd Annual North
American International Auto Show,
Detroit River, Detroit, MI
Coast Guard, DHS.
Temporary final rule.
AGENCY:
ACTION:
The Coast Guard is
establishing a temporary security zone
on the Detroit River, Detroit, Michigan.
This zone is intended to restrict vessels
from a portion of the Detroit River in
order to ensure the safety of
participants, visitors and public officials
at the 23rd Annual North American
International Auto Show (NAIAS) being
held at Cobo Hall in downtown Detroit,
MI.
DATES: This rule is effective from 9 a.m.
(local) on January 10, 2011, through 10
p.m. (local) on January 23, 2011.
ADDRESSES: Comments and material
received from the public, as well as
documents mentioned in this preamble
as being available in the docket, are part
of docket USCG–2010–1133 and are
available online by going to https://
www.regulations.gov, inserting USCG–
2010–1133 in the ‘‘Keyword’’ box, and
then clicking ‘‘Search.’’ This material is
also available for inspection or copying
at the Docket Management Facility (M–
30), U.S. Department of Transportation,
West Building Ground Floor, Room
W12–140, 1200 New Jersey Avenue, SE.,
Washington, DC 20590, between 9 a.m.
and 5 p.m., Monday through Friday,
except Federal holidays.
FOR FURTHER INFORMATION CONTACT: If
you have questions on this temporary
rule, call or e-mail LT Katie Stanko,
Prevention Department, Sector Detroit,
Coast Guard; telephone (313) 568–9508,
e-mail Katie.R.Stanko@uscg.mil. If you
have questions on viewing the docket,
call Renee V. Wright, Program Manager,
Docket Operations, telephone 202–366–
9826.
SUPPLEMENTARY INFORMATION:
SUMMARY:
Regulatory Information
The Coast Guard is issuing this
temporary final rule without prior
notice and opportunity to comment
pursuant to authority under section 4(a)
of the Administrative Procedure Act
(APA) (5 U.S.C. 553(b)). This provision
authorizes an agency to issue a rule
without prior notice and opportunity to
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1065
comment when the agency for good
cause finds that those procedures are
‘‘impracticable, unnecessary, or contrary
to the public interest.’’ Under 5 U.S.C.
553(b)(B), the Coast Guard finds that
good cause exists for not publishing a
notice of proposed rulemaking (NPRM)
with respect to this rule because
delaying this rule would be contrary to
the public interest of ensuring the
security of the spectators and
participants during this event should
immediate action be necessary to
prevent possible loss of life or property.
Under 5 U.S.C. 553(d)(3), the Coast
Guard finds that good cause exists for
making this rule effective less than 30
days after publication in the Federal
Register. Delaying this rule would be
contrary to the public interest of
ensuring the security of the spectators
and participants during this event
should immediate action be necessary to
prevent possible loss of life or property.
Background and Purpose
This temporary security zone is
necessary to ensure the safety of the
participants, visitors of the 23rd Annual
North American International Auto
Show (NAIAS) being held at Cobo Hall
in downtown Detroit, MI from possible
sabotage or other subversive acts. The
public showing days of the NAIAS
begin January 15 and extend through
January 23. Prior to the public showing,
there will also be multiple high profile
events; including the press preview
days (January 10–11, 2011), industry
preview days (January 12–13, 2011), and
the charity preview event (January 14,
2011). In 2010, the NAIAS attendance
for the public showing was over 650,000
people and industry preview days
attracted nearly 16,000 people
representing 1,700 companies from 23
countries. Attendance and participation
at the 2011 NAIAS is anticipated to rival
last year’s attendance and will likely be
one of the largest media events in North
America. Given the expected number of
attendees, which includes high-profile
visitors, at this event and the recent
terrorist threats directed toward the City
of Detroit, the Coast Guard is
establishing and enforcing a security
zone to safeguard the waterways from
destruction, loss, or injury from
sabotage or other subversive acts.
All persons other than those approved
by the Captain of the Port Detroit, or his
authorized on-scene representative, are
prohibited from entering or moving
within this security zone. The Captain
of the Port Detroit, or his authorized onscene representative, may be contacted
via VHF Channel 16 for further
instructions before transiting through
the restricted area. The public will be
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]]>Agencies
[Federal Register Volume 76, Number 5 (Friday, January 7, 2011)]
[Rules and Regulations]
[Pages 1063-1065]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-86]
=======================================================================
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9513]
RIN 1545-BJ30
Modifications of Debt Instruments
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulation.
-----------------------------------------------------------------------
SUMMARY: This document contains final regulations relating to the
modification of debt instruments. The regulations clarify the extent to
which the deterioration in the financial condition of the issuer is
taken into account to determine whether a modified debt instrument will
be recharacterized as an instrument or property right that is not debt.
The regulations provide needed
[[Page 1064]]
guidance to issuers and holders of debt instruments.
DATES: Effective Date: These regulations are effective on January 7,
2011.
Applicability Date: For dates of applicability, see Sec. 1.1001-
3(h).
FOR FURTHER INFORMATION CONTACT: Diana Imholtz at (202) 622-3920 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains amendments to 26 CFR part 1. On June 4,
2010, a notice of proposed rulemaking (REG-106750-10, 2010-25 IRB 765)
was published in the Federal Register (75 FR 31736) that proposed
amendments to Sec. 1.1001-3 to clarify the circumstances in which the
credit quality of the issuer should be considered in determining the
nature of the instrument resulting from an alteration or modification
of a debt instrument. Because no requests to speak were submitted by
August 11, 2010, no public hearing was held. One written comment was
received in response to the notice of proposed rulemaking. After
consideration of this comment, the proposed regulations are adopted as
revised by this Treasury decision. The revisions are discussed in this
preamble.
Explanation and Summary of Comments
The only comment received on the proposed regulations requested
that the regulations clarify that Sec. 1.1001-3 applies not only to
determine whether an exchange of the original debt instrument for a
modified instrument has occurred but also to classify the modified
instrument resulting from the exchange. The IRS and the Treasury
Department intend that Federal income tax principles be used to
determine the classification of a modified instrument resulting from an
exchange except as specifically provided in Sec. 1.1001-3(f)(7). To
avoid doubt on the operation of the rules in the proposed regulations,
the final regulations add language to the general rule of Sec. 1.1001-
3(b) to make clear that the rules provided in Sec. 1.1001-3(f)(7)
apply to determine whether the modified instrument received in an
exchange will be classified as debt for Federal income tax purposes.
Thus, unless there is a substitution of a new obligor or the addition
or deletion of a co-obligor, all relevant factors (for example,
creditor rights or subordination) other than any deterioration in the
financial condition of the issuer are taken into account in determining
whether a modified instrument is properly classified as debt for
Federal income tax purposes.
Effective/Applicability Date
The regulations apply to alterations of the terms of a debt
instrument on or after January 7, 2011. A taxpayer, however, may rely
on Sec. 1.1001-3(f)(7) for alterations of the terms of a debt
instrument occurring before that date.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory assessment is not required. It also has been
determined that section 553(b) of the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to these regulations, and because the
regulation does not impose a collection of information on small
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not
apply. Pursuant to section 7805(f) of the Internal Revenue Code, the
notice of proposed rulemaking preceding this regulation was submitted
to the Chief Counsel for Advocacy of the Small Business Administration
for comment on its impact on small business.
Drafting Information
The principal author of these final regulations is Diana Imholtz,
Office of Associate Chief Counsel (Financial Institutions & Products),
IRS. However, other personnel from the IRS and the Treasury Department
participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Adoption of the Amendments to the Regulations
0
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
0
Par. 2. Section 1.1001-3 is amended by:
0
1. Revising paragraphs (b), (c)(2)(ii), (e)(5)(i) and (h).
0
2. Adding paragraph (f)(7).
The revisions and addition read as follows:
Sec. 1.1001-3 Modifications of debt instruments.
* * * * *
(b) General rule. For purposes of Sec. 1.1001-1(a), a significant
modification of a debt instrument, within the meaning of this section,
results in an exchange of the original debt instrument for a modified
instrument that differs materially either in kind or in extent. A
modification that is not a significant modification is not an exchange
for purposes of Sec. 1.1001-1(a). Paragraphs (c) and (d) of this
section define the term modification and contain examples illustrating
the application of the rule. Paragraphs (e) and (f) of this section
provide rules for determining when a modification is a significant
modification. Paragraph (f) of this section also provides rules for
determining whether the modified instrument received in an exchange
will be classified as an instrument or property right that is not debt
for federal income tax purposes. Paragraph (g) of this section contains
examples illustrating the application of the rules in paragraphs (e)
and (f) of this section.
(c) * * *
(2) * * *
(ii) Property that is not debt. An alteration that results in an
instrument or property right that is not debt for Federal income tax
purposes is a modification unless the alteration occurs pursuant to a
holder's option under the terms of the instrument to convert the
instrument into equity of the issuer (notwithstanding paragraph
(c)(2)(iii) of this section). The rules of paragraph (f)(7) of this
section apply to determine whether an alteration or modification
results in an instrument or property right that is not debt.
* * * * *
(e) * * *
(5) Changes in the nature of a debt instrument--(i) Property that
is not debt. A modification of a debt instrument that results in an
instrument or property right that is not debt for Federal income tax
purposes is a significant modification. The rules of paragraph (f)(7)
of this section apply to determine whether a modification results in an
instrument or property right that is not debt.
* * * * *
(f) * * *
(7) Rules for determining whether an alteration or modification
results in an instrument or property right that is not debt--(i) In
general. Except as provided in paragraph (f)(7)(ii) of this section,
the determination of whether an instrument resulting from an alteration
or modification of a debt instrument will be recharacterized as an
instrument or property right that is not debt for Federal income tax
purposes shall take
[[Page 1065]]
into account all of the factors relevant to such a determination.
(ii) Financial condition of the obligor--(A) Deterioration in
financial condition of the obligor generally disregarded. Except as
provided in paragraph (f)(7)(ii)(B) of this section, in making a
determination as to whether an instrument resulting from an alteration
or modification of a debt instrument will be recharacterized as an
instrument or property right that is not debt, any deterioration in the
financial condition of the obligor between the issue date of the debt
instrument and the date of the alteration or modification (as it
relates to the obligor's ability to repay the debt instrument) is not
taken into account. For example, any decrease in the fair market value
of a debt instrument (whether or not the debt instrument is publicly
traded) between the issue date of the debt instrument and the date of
the alteration or modification is not taken into account to the extent
that the decrease in fair market value is attributable to the
deterioration in the financial condition of the obligor and not to a
modification of the terms of the instrument.
(B) Substitution of a new obligor; addition or deletion of co-
obligor. If there is a substitution of a new obligor or the addition or
deletion of a co-obligor, the rules in paragraph (f)(7)(ii)(A) of this
section do not apply.
* * * * *
(h) Effective/applicability date--(1) In general. Except as
otherwise provided in paragraph (h)(2) of this section, this section
applies to alterations of the terms of a debt instrument on or after
September 24, 1996. Taxpayers, however, may rely on this section for
alterations of the terms of a debt instrument after December 2, 1992,
and before September 24, 1996.
(2) Exception. Paragraph (f)(7) of this section applies to an
alteration of the terms of a debt instrument on or after January 7,
2011. A taxpayer, however, may rely on paragraph (f)(7) of this section
for alterations of the terms of a debt instrument occurring before that
date.
Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
Approved: December 21, 2010.
Michael Mundaca,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2011-86 Filed 1-6-11; 8:45 am]
BILLING CODE 4830-01-P
