Property Traded on an Established Market, 56533-56539 [2012-22526]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 77, Number 178 (Thursday, September 13, 2012)]
[Rules and Regulations]
[Pages 56533-56539]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-22526]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 9599]
RIN 1545-BJ71


Property Traded on an Established Market

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations that apply to 
determine when property is traded on an established market (that is, 
publicly traded) for purposes of determining the issue price of a debt 
instrument. The regulations amend the current regulations to clarify 
the circumstances that cause property to be publicly traded. The 
regulations also amend the current regulations for reopenings of debt 
instruments, potentially abusive situations, and the definition of 
qualified stated interest. The regulations provide guidance to issuers 
and holders of debt instruments.

DATES: Effective Date: These regulations are effective on September 13, 
2012.
    Applicability Dates: For the applicability dates, see Sec. Sec.  
1.1273-1(c)(6)(ii), 1.1273-2(f)(10), 1.1274-3(b)(4)(ii), and 1.1275-
2(k)(5).

FOR FURTHER INFORMATION CONTACT: William E. Blanchard at (202) 622-3950 
(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information contained in these regulations 
relating to the furnishing of information under Sec.  1.1273-2 to 
determine the issue price of a debt instrument was previously reviewed 
and approved by the Office of Management and Budget in accordance with 
the Paperwork Reduction Act of 1995 (44 U.S.C. 3507) under control 
number 1545-1353. The collection of information in these final 
regulations is in Sec.  1.1273-2(f)(9) and is an increase in the total 
annual burden in the current regulations under Sec.  1.1273-2. Under 
Sec.  1.1273-2(f)(9), the issuer of a debt instrument is required to 
make the fair market value of property (which can be stated as the 
issue price of the debt instrument) available to holders in a 
commercially reasonable fashion within 90 days of the date that the 
debt instruments are issued, including by electronic publication. The 
issuer's determinations are binding on all holders of the debt 
instrument unless the holder explicitly discloses that its 
determinations are different from the issuer's determinations on a 
timely filed Federal income tax return for the taxable year that 
includes the acquisition date of the debt instrument. The disclosure 
must include how the holder determined the value or issue price that it 
is using. This information is required by the IRS to ensure consistent 
treatment between the issuer and the holders or to alert the IRS when 
inconsistent positions are being taken by the issuer and one or more 
holders. This information will be used for audit and examination 
purposes. The likely respondents are businesses or other for-profit 
institutions.
    Estimated total annual reporting burden is 10,000 hours.
    Estimated average annual burden per respondent is .5 hours.
    Estimated average burden per response is 5 minutes.
    Estimated number of respondents is 20,000.
    Estimated total frequency of responses is 20,000.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number assigned by the Office of Management and Budget.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
return information are confidential, as required by 26 U.S.C. 6103.

Background

    The issue price of a debt instrument is determined under section 
1273(b) of the Internal Revenue Code (Code) or, in the case of certain 
debt instruments issued for property, under section 1274. Section 
1273(b)(3) generally provides that in the case of a debt instrument 
issued for property and part of an issue some or all of which is traded 
on an established securities market (often referred to as ``publicly 
traded''), the issue price of the debt instrument is the fair market 
value of the debt instrument. Similarly, if a debt instrument is issued 
for stock or securities (or other property) that are publicly traded, 
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 not publicly traded or is not issued for property that is 
publicly traded, the issue price of the debt instrument is usually 
determined under section 1274, which generally results in an issue 
price equal to the stated

[[Page 56534]]

principal amount of the debt instrument if the debt instrument provides 
for adequate stated interest.
    Section 1.1273-2 of the Income Tax Regulations (the ``current 
regulations'') contains the rules that generally apply to determine the 
issue price of a debt instrument that is publicly traded or is issued 
for publicly traded property and when property (including a debt 
instrument issued for property) is publicly traded. In general, under 
Sec.  1.1273-2(f) of the current regulations, property is traded on an 
established market (that is, publicly traded for purposes of section 
1273(b)(3) and Sec.  1.1273-2) if the property is exchange listed 
property, market traded property, property appearing on a quotation 
medium, or readily quotable property in the 60-day period ending 30 
days after the issue date of the debt instrument.
    The issue price of a debt instrument has important income tax 
consequences. As an initial matter, the difference between the issue 
price of a debt instrument and its stated redemption price at maturity 
measures whether there is any original issue discount (OID) associated 
with the instrument. A debt-for-debt exchange (including a significant 
modification of existing debt) in the context of a workout may result 
in a reduced issue price for the new debt, which generally would 
produce cancellation of indebtedness income for the issuer, a loss to 
the holder whose basis is greater than the issue price of the new debt, 
and OID that generally must be accounted for by both the issuer and the 
holder of the new debt. These consequences, exacerbated by the effects 
of the credit crisis on the debt markets in recent years, have focused 
attention on the definition of when property is traded on an 
established market for purposes of Sec.  1.1273-2(f).
    A notice of proposed rulemaking (REG-131947-10, 76 FR 1101) 
(proposed regulations) was published in the Federal Register on January 
7, 2011. No public hearing was requested or held. However, written 
comments responding to the notice of proposed rulemaking were received 
from the public. These comments were considered and are available for 
public inspection at https://www.regulations.gov or upon request. After 
consideration of the comments, the proposed regulations are adopted as 
amended by this Treasury decision. The comments and the revisions are 
discussed in this preamble.

Summary of Comments and Explanation of Provisions

    The increased liquidity and transparency of the debt markets in 
recent years has largely eliminated concerns about reliable information 
on sales and pricing being unavailable. The proposed regulations 
acknowledge this fact by updating and streamlining the ``publicly 
traded'' standard under the current regulations to reflect current 
market practice. To the extent that objective pricing information 
exists, the proposed regulations use that information to determine 
issue price for purposes of section 1273.
    Although the final regulations substantially follow the framework 
established in the proposed regulations, comments received on the 
proposed regulations prompted several changes. The final regulations 
dispense with the category of exchange listed property because the 
small amount of debt that is listed rarely actually trades over the 
exchange. Moreover, although stock, commodities, and similar property 
are commonly listed on and traded over a board or exchange, such 
property typically will be the subject of frequent sales or quotes and 
would be covered in a separate category of publicly traded property. A 
debt instrument that is issued for stock, commodities, or similar 
exchange traded property is therefore tested under the rule for 
property where there is a sales price or quote within the 31-day period 
ending 15 days after the issue date of the debt instrument. Eliminating 
the category of property listed on an exchange also eliminates the need 
for the de minimis trading exception in the proposed regulations, which 
was intended to exclude property that is listed on an exchange but 
trades in a negligible quantity.
    In response to commenters, the final regulations also expand and 
clarify the $50 million exception for small debt issues in the proposed 
regulations. Participants in the debt trading markets indicated that 
liquidity begins to noticeably diminish when an issue falls below $100 
million. The final regulations therefore expand the small debt issue 
exception from $50 million to $100 million, which creates an automatic 
exclusion for debt that is the least likely to be publicly traded. The 
final regulations also clarify that the exception applies based on the 
outstanding stated principal amount of the debt instruments in an issue 
when the determination is made.
    The other significant change made in the final regulations is to 
require that issue price be reported consistently by issuers and 
holders. In response to comments, the final regulations provide that an 
issuer's determination as to whether property is traded on an 
established market and, if it is, the fair market value of the property 
generally is binding on the holders of the debt instrument. Information 
on pricing and recent sales generally is easily accessible by the 
issuer of a debt instrument, making the issuer the logical person to 
determine issue price. The final regulations also require the issuer to 
make the fair market value of the property (which can be stated as the 
issue price of the debt instrument) available to holders in a 
commercially reasonable fashion, which can be a posting to a Web site 
or similar electronic publication, within 90 days of the date that the 
debt instruments are issued. If a holder makes a contrary determination 
that the property is or is not traded on an established market, or uses 
a fair market value that is different from the value determined by the 
issuer, the holder must file a statement with its income tax return 
that explicitly states that it is using a different determination, the 
reasons for the different determination and, if applicable, describes 
how fair market value was determined.
    There also was a comment urging that the final regulations be 
accompanied by additional regulations, possibly under section 446(b), 
that would require a matching of the cancellation of debt income that 
often accompanies a debt-for-debt exchange (with the issue price of the 
new debt instrument determined under these rules) with the OID 
deductions that accrue subsequently on the new debt instrument. As an 
alternative, commenters suggested that the Treasury Department and IRS 
provide a special rule that treats the issue price of the new debt 
instrument in a debt-for-debt exchange as being equal to the lesser of 
the issue price determined under the principles of section 1274 and the 
adjusted issue price of the old debt instrument, whether or not the old 
debt instrument or the new debt instrument is publicly traded. The same 
commenters recommended that the suspension of the application of the 
applicable high yield discount obligation rules in section 163(e)(5) be 
extended, as they were in Notice 2010-11, [2010-4 IRB 326, January 25, 
2010], or that similar relief be provided for all debt instruments 
issued in an exchange that meets certain conditions. These suggestions 
were not adopted because they are outside the scope of these 
regulations.
    The remaining comments relate to specific aspects of the proposed 
regulations. For example, one commenter recommended that the final 
regulations specify that property falls within the de minimis trading 
exception if no actual sales of the property occur during the 31-day 
period ending 15 days

[[Page 56535]]

after the issue date. As previously noted, because the de minimis 
trading exception was not adopted in the final regulations and the 
existence of price quotations can be used to accurately determine the 
fair market value of a debt instrument, this comment was not adopted in 
the final regulations.
    Several comments pertain to the rules for sales and price 
quotations. One commenter recommended that the final regulations 
provide that a sales price or quote for property must provide a 
reasonable basis to determine fair market value for the property to be 
treated as publicly traded. Another commenter recommended that if an 
available actual sales price or quote is from a date different than the 
issue date and the taxpayer has a reasonable basis to conclude that the 
fair market value as of the issue date is different from such sales 
price or quote, the taxpayer may use reasonable methods to modify such 
price or quote to arrive at the fair market value as of the issue date. 
Commenters also recommended that the final regulations clarify that a 
price quote must be a bona fide price quote to a third party to buy and 
sell, must be available to the issuer or the holder who is determining 
the issue price of the debt instrument in question, and must exist 
independently of any inquiry the issuer or the holder makes in 
connection with the issue price determination. The final regulations 
rely on sales information and price quotations from brokers, dealers, 
and pricing services, which are widely available to market participants 
that trade debt instruments. Recent financial information, whether in 
the form of sales or price quotes, is the most reliable objective 
information available on fair market value, and such information is 
readily available to participants in the debt trading markets. The 
final regulations are therefore responsive to the concerns expressed by 
commenters. Moreover, as discussed earlier in the preamble, the final 
regulations require the issuer to disclose the fair market value of 
property to the holders, which will ensure that the issue price is 
available to holders in most situations.
    In addressing the provision in the proposed regulations that 
permits taxpayers to use any reasonable method, consistently applied, 
to determine the fair market value when there is more than one sales 
price or price quotation, commenters requested that the final 
regulations describe various factors that taxpayers may consider in 
establishing fair market value. In response to this comment, the final 
regulations provide a non-exclusive list of factors a taxpayer may 
consider to establish fair market value. However, a method that may be 
reasonable in one situation may not be so in another situation. In 
addition, in response to another comment on this provision in the 
proposed regulations, the final regulations provide that a method will 
be regarded as consistently applied as long as it is consistently 
applied to the same or substantially similar facts to determine the 
fair market value.
    One commenter recommended that the final regulations clarify that a 
sales price exists within the meaning of proposed Sec.  1.1273-
2(f)(3)(i) only if the purchase and sale of the property occurs, and 
the sales price is reasonably available, during the testing period. The 
final regulations accept part of this suggestion by explicitly 
incorporating the 31-day time period in the description of when a sales 
price exists, but the suggestion that the sales price must be available 
in that same time period would be needlessly restrictive and is not 
adopted. The final regulations specifically provide that taxpayers are 
only required to search for executed sales for a reasonable period of 
time after the issue date (including a significant modification), but 
that time need not be within the 31 days surrounding the issue date. 
Here, too, the addition of the issuer-holder consistency rule described 
earlier in the preamble will considerably alleviate the burden of 
determining when a sale has occurred because the issuer is usually in 
the best position to know when its debt has been sold or modified.
    In response to a comment, the final regulations add a second anti-
abuse rule providing that if there is any sale or price quote a 
principal purpose of which is to cause the property to be traded on an 
established market or to materially misrepresent the value of property 
for federal income tax purposes, then the sale or price quote is 
disregarded.
    Finally, a commenter recommended that the effective date of the 
final regulations be modified to provide that the new rules do not 
apply to any debt instrument issued or exchanged pursuant to a written 
binding agreement entered into by the taxpayer before the date that the 
final regulations are published in the Federal Register. The final 
regulations do not adopt this comment. However, to minimize their 
effect on pending transactions, the final regulations under Sec.  
1.1273-2(f) apply only to debt instruments issued on or after 60 days 
after the publication date of the final regulations.

Other Provisions

    The proposed regulations expanded the definition of a qualified 
reopening under Sec.  1.1275-2(k) to debt instruments that are issued 
for cash to unrelated persons, provided that the other requirements of 
the regulations are satisfied. Commenters requested that the qualified 
reopening rules in Sec.  1.1275-2(k) be further liberalized. In 
response to these comments, the final regulations expand the definition 
of a qualified reopening to include an issuance that satisfies a 100 
percent yield test for a reopening after six months. This change is 
consistent with the intent of the reopening rules, which prevent 
taxpayers from converting OID into market discount. In response to 
comments, the final regulations also make slight revisions to the rules 
used to determine the testing date for a qualified reopening.
    Comments also were received on the proposed amendment to the 
regulations under section 1274 that address potentially abusive 
situations. One commenter suggested that the change to Sec.  1.1274-3 
be deferred and considered as part of a larger project addressing 
distorted gains from modifications, or, alternatively, that the 
proposed change be limited so that the recent sale rule continues to 
apply to a debt modification if all sales that are part of the recent 
sales transaction involve, in the aggregate, a large portion of the 
modified debt (for example, more than 50 percent by principal amount). 
Another commenter requested that the final regulations not apply if 
either a recent sale occurs or a binding contract providing for the 
recent sale is entered into prior to publication because investors may 
commit to buy pools of discount debt in reliance on existing law. 
Potential distortions created by distressed debt situations are the 
subject of a separate guidance project. In the meantime, the Treasury 
Department and the IRS believe that the proposed regulations reach the 
correct result in determining issue price under section 1274, and the 
final regulations do not adopt these suggestions. However, to minimize 
their effect on pending transactions, the final regulations under Sec.  
1.1274-3(b)(4) apply only to a debt instrument issued on or after 60 
days after the publication date of the final regulations.

Effective/Applicability Date

    The regulations generally apply to a debt instrument issued on or 
after November 13, 2012.

[[Page 56536]]

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866, as 
supplemented by Executive Order 13563. Therefore, a regulatory 
assessment is not required. It has also been determined that section 
553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does 
not apply to these regulations. It is hereby certified that the 
collection of information in these regulations will not have a 
significant economic impact on a substantial number of small entities. 
This certification is based on the fact that the collection of 
information imposed on a taxpayer generally only applies if the 
outstanding stated principal amount of the debt is more than $100 
million, which is anticipated to affect only a small number of small 
entities. Moreover, any economic impact is expected to be minimal 
because it should take a taxpayer no more than one-half hour to satisfy 
the information-sharing requirement in these regulations. Therefore, a 
regulatory flexibility analysis under the Regulatory Flexibility Act (5 
U.S.C. chapter 6) is not required. Pursuant to section 7805(f) of the 
Code, the proposed regulations preceding these regulations have been 
submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on its impact on small business, and no 
comments were received.

Drafting Information

    These regulations were drafted by personnel in the Office of 
Associate Chief Counsel (Financial Institutions and Products) and the 
Treasury Department.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 602

    Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR parts 1 and 602 are 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 1.1271-0 is amended as follows:
0
1. The introductory text for paragraph (b) is revised.
0
2. Adding the entry for Sec.  1.1273-1(c)(6).
0
3. Revising the entries for Sec.  1.1273-2(f)(2) through (7).
0
4. Adding the entries for Sec.  1.1273-2(f)(8) through (10).
0
5. Adding the entry for Sec.  1.1274-3(b)(4).
0
6. Revising the entry for Sec.  1.1275-2(k)(5).
    The revisions and additions read as follows:


Sec.  1.1271-0  Original issue discount; effective date; table of 
contents.

* * * * *
    (b) Table of contents. This section lists captioned paragraphs 
contained in Sec. Sec.  1.1271-1 through 1.1275-7.
* * * * *


Sec.  1.1273-1  Definition of OID.

* * * * *
    (c) * * *
    (6) Business day convention.
* * * * *


Sec.  1.1273-2  Determination of issue price and issue date.

* * * * *
    (f) * * *
    (2) Sales price.
    (3) Firm quote.
    (4) Indicative quote.
    (5) Presumption that price or quote is equal to fair market 
value.
    (6) Exception for small debt issues.
    (7) Anti-abuse rules.
    (8) Convertible debt instruments.
    (9) Issuer-holder consistency requirement.
    (10) Effective/applicability dates.
* * * * *


Sec.  1.1274-3  Potentially abusive situations defined.

* * * * *
    (b) * * *
    (4) Debt-for-debt exchange.
* * * * *


Sec.  1.1275-2  Special rules relating to debt instruments.

* * * * *
    (k) * * *
    (5) Effective/applicability dates.
* * * * *

0
Par. 3. Section 1.1273-1 is amended by adding a new paragraph (c)(6) to 
read as follows:


Sec.  1.1273-1  Definition of OID.

* * * * *
    (c) * * *
    (6) Business day convention--(i) Rule. For purposes of this 
paragraph (c), if a scheduled payment date for stated interest falls on 
a Saturday, Sunday, or Federal holiday (within the meaning of 5 U.S.C. 
6103) but, under the terms of the debt instrument, the stated interest 
is payable on the first business day that immediately follows the 
scheduled payment date, the stated interest is treated as payable on 
the scheduled payment date, provided no additional interest is payable 
as a result of the deferral.
    (ii) Effective/applicability date. Paragraph (c)(6)(i) of this 
section applies to a debt instrument issued on or after September 13, 
2012. A taxpayer, however, may rely on paragraph (c)(6)(i) of this 
section for a debt instrument issued before that date.
* * * * *

0
Par. 4. Section 1.1273-2 is amended by adding a sentence at the end of 
paragraphs (b)(1) and (c)(1) and revising paragraph (f) to read as 
follows:


Sec.  1.1273-2  Determination of issue price and issue date.

* * * * *
    (b) * * *
    (1) * * * See paragraph (f) of this section for rules to determine 
the fair market value of a debt instrument for purposes of this 
section.
* * * * *
    (c) * * *
    (1) * * * See paragraph (f) of this section for rules to determine 
the fair market value of property for purposes of this section.
* * * * *
    (f) Traded on an established market (publicly traded)--(1) In 
general. Except as provided in paragraph (f)(6) of this section, 
property (including a debt instrument described in paragraph (b)(1) of 
this section) is traded on an established market for purposes of this 
section if, at any time during the 31-day period ending 15 days after 
the issue date--
    (i) There is a sales price for the property as described in 
paragraph (f)(2) of this section;
    (ii) There are one or more firm quotes for the property as 
described in paragraph (f)(3) of this section; or
    (iii) There are one or more indicative quotes for the property as 
described in paragraph (f)(4) of this section.
    (2) Sales price--(i) In general. A sales price exists if the price 
for an executed purchase or sale of the property within the 31-day 
period described in paragraph (f)(1) of this section is reasonably 
available within a reasonable period of time after the sale.
    (ii) Pricing information for a debt instrument. For purposes of 
paragraph (f)(2)(i) of this section, the price of a debt instrument is 
considered

[[Page 56537]]

reasonably available if the sales price (or information sufficient to 
calculate the sales price) appears in a medium that is made available 
to issuers of debt instruments, persons that regularly purchase or sell 
debt instruments (including a price provided only to certain customers 
or to subscribers), or persons that broker purchases or sales of debt 
instruments.
    (3) Firm quote. A firm quote is considered to exist when a price 
quote is available from at least one broker, dealer, or pricing service 
(including a price provided only to certain customers or to 
subscribers) for property and the quoted price is substantially the 
same as the price for which the person receiving the quoted price could 
purchase or sell the property. A price quote is considered to be 
available whether the quote is initiated by a person providing the 
quote or provided at the request of the person receiving the quote. The 
identity of the person providing the quote must be reasonably 
ascertainable for a quote to be considered a firm quote for purposes of 
this paragraph (f)(3). A quote will be considered a firm quote if the 
quote is designated as a firm quote by the person providing the quote 
or if market participants typically purchase or sell, as the case may 
be, at the quoted price, even if the party providing the quote is not 
legally obligated to purchase or sell at that price.
    (4) Indicative quote. An indicative quote is considered to exist 
when a price quote is available from at least one broker, dealer, or 
pricing service (including a price provided only to certain customers 
or to subscribers) for property and the price quote is not a firm quote 
described in paragraph (f)(3) of this section.
    (5) Presumption that price or quote is equal to fair market value--
(i) In general. For purposes of this section, the fair market value of 
property will be presumed to be equal to its sales price or quoted 
price determined under paragraphs (f)(2) through (f)(4) of this 
section. If there is more than one sales price under paragraph (f)(2) 
of this section, more than one quoted price under paragraph (f)(3) or 
(f)(4) of this section, or both one or more sales prices under 
paragraph (f)(2) of this section and quoted prices under paragraph 
(f)(3) or (f)(4) of this section, a taxpayer may use any reasonable 
method, consistently applied to the same or substantially similar 
facts, to determine the fair market value. For example, to determine 
the fair market value under a reasonable method, a taxpayer may 
consider factors such as (but not necessarily limited to) the timing of 
each relevant sale or quote in relation to the issue date; whether the 
price is derived from a sale, a firm quote, or an indicative quote; the 
size of each relevant sale or quote; or whether the sales price or 
quote corresponds to pricing information provided by an independent 
bond or loan pricing service.
    (ii) Special rule for property for which there is only an 
indicative quote. If property is described only in paragraph (f)(4) of 
this section, and the taxpayer determines that the quote (or an average 
of the quotes) materially misrepresents the fair market value of the 
property, the taxpayer can use any method that provides a reasonable 
basis to determine the fair market value of the property. A taxpayer 
must establish that the method chosen more accurately reflects the 
value of the property than the quote or quotes for the property to use 
the method provided in this paragraph (f)(5)(ii). For an equity or debt 
instrument, a volume discount or control premium will not be considered 
to create a material misrepresentation of value for purposes of this 
paragraph (f)(5)(ii).
    (6) Exception for small debt issues. Notwithstanding any other 
provision in paragraph (f) of this section, a debt instrument will not 
be treated as traded on an established market if at the time the 
determination is made the outstanding stated principal amount of the 
issue that includes the debt instrument does not exceed US$100 million 
(or, for a debt instrument denominated in a currency other than the 
U.S. dollar, the equivalent amount in the currency in which the debt 
instrument is denominated).
    (7) Anti-abuse rules--(i) Effect of certain temporary restrictions 
on trading. If there is any temporary restriction on trading a purpose 
of which is to avoid the characterization of the property as one that 
is traded on an established market for Federal income tax purposes, 
then the property is treated as traded on an established market. For 
purposes of the preceding sentence, a temporary restriction on trading 
need not be imposed by the issuer.
    (ii) Artificial pricing information. If a principal purpose for the 
existence of any sale or price quotation is to cause the property to be 
traded on an established market or to materially misrepresent the value 
of property, that sale or price quotation is disregarded.
    (8) Convertible debt instruments. A debt instrument is not treated 
as traded on an established market solely because the debt instrument 
is convertible into property that is so traded.
    (9) Issuer-holder consistency requirement--(i) General rule. For 
purposes of this section, an issuer must determine whether property is 
traded on an established market and, if so, the fair market value of 
the property. An issuer is required to exercise reasonable diligence to 
determine whether purchases or sales have taken place, the quantity of 
purchases and sales, the price at which purchases or sales occurred, 
the existence of firm or indicative quotes, and any other relevant 
information using the rules provided in paragraph (f) of this section 
to determine the fair market value of the property. If an issuer 
determines that property is traded on an established market, the issuer 
is required to make that determination as well as the fair market value 
of the property (which can be stated as the issue price of the debt 
instrument) available to holders in a commercially reasonable fashion, 
including by electronic publication, within 90 days of the date that 
the debt instrument is issued. Each determination by an issuer is 
binding on a holder of the debt instrument unless the holder explicitly 
discloses that its determination is different from the issuer's 
determination (for example, the holder determines a different fair 
market value for the property or determines that the property is not 
traded on an established market). A holder must describe in the 
disclosure the reasons for its different determination and, if 
applicable, how the holder determined the fair market value. A holder's 
disclosure must be filed on a timely filed Federal income tax return 
for the taxable year that includes the acquisition date of the debt 
instrument. If an issuer for any reason does not make the fair market 
value or issue price of a debt instrument reasonably available to a 
holder, the holder must determine the fair market value of the property 
and issue price of the debt instrument using the rules provided in 
paragraph (f) of this section.
    (ii) Co-obligors. If a debt instrument has more than one obligor, 
the obligors must designate one obligor (issuer) to determine whether 
property is traded on an established market and, if so, the fair market 
value of the property and issue price of the debt instrument and make 
the price available to holders using the rules provided in paragraph 
(f)(9)(i) of this section.
    (10) Effective/applicability dates--(i) This paragraph (f) applies 
to a debt instrument issued on or after November 13, 2012.
    (ii) For rules applying to a debt instrument issued before November 
13, 2012, see paragraph (f) of this section as

[[Page 56538]]

contained in 26 CFR part 1, revised April 1, 2011.
* * * * *

0
Par. 5. Section 1.1274-3 is amended by adding a new paragraph (b)(4) to 
read as follows:


Sec.  1.1274-3  Potentially abusive situations defined.

* * * * *
    (b) * * *
    (4) Debt-for-debt exchange--(i) Rule. A debt instrument issued in a 
debt-for-debt exchange, including a deemed exchange under Sec.  1.1001-
3, will not be treated as the subject of a recent sales transaction for 
purposes of section 1274(b)(3)(B)(ii)(I) even if the debt instrument 
exchanged for the newly issued debt instrument was recently acquired 
prior to the exchange. Therefore, the issue price of the debt 
instrument will not be determined under section 1274(b)(3). However, if 
the debt instrument or the property for which the debt instrument is 
issued is publicly traded within the meaning of Sec.  1.1273-2(f), the 
rules of Sec.  1.1273-2 will apply to determine the issue price of the 
debt instrument.
    (ii) Effective/applicability date. Paragraph (b)(4)(i) of this 
section applies to a debt instrument issued on or after November 13, 
2012.
* * * * *

0
Par. 6. Section 1.1275-2 is amended by:
0
1. Adding a sentence at the end of paragraph (d)(2)(ii)(C).
0
2. Revising the first sentence of paragraph (k)(3)(i).
0
3. Revising paragraphs (k)(3)(ii)(A), (k)(3)(iii)(A) and (k)(5).
0
4. Redesignating paragraph (k)(3)(iv) as newly designated paragraph 
(k)(3)(vi).
0
5. Adding new paragraphs (k)(3)(iv) and (k)(3)(v).
    The revisions and additions read as follows:


Sec.  1.1275-2  Special rules relating to debt instruments.

* * * * *
    (d) * * *
    (2) * * *
    (ii) * * *
    (C) * * * For a reopening of Treasury securities that occurs on or 
after September 13, 2012, a qualified reopening also is a reopening of 
Treasury securities that is described in paragraph (k)(3)(v) of this 
section.
* * * * *
    (k) * * *
    (3) * * *
    (i) * * * A qualified reopening is a reopening of original debt 
instruments that is described in paragraph (k)(3)(ii), (k)(3)(iii), 
(k)(3)(iv), or (k)(3)(v) of this section. * * *
    (ii) * * *
    (A) The original debt instruments are publicly traded (within the 
meaning of Sec.  1.1273-2(f)) as of the date on which the price of the 
additional debt instruments is established (or, if earlier, the 
announcement date);
* * * * *
    (iii) * * *
    (A) The original debt instruments are publicly traded (within the 
meaning of Sec.  1.1273-2(f)) as of the date on which the price of the 
additional debt instruments is established (or, if earlier, the 
announcement date); and
* * * * *
    (iv) Non-publicly traded debt issued for cash. A reopening is 
described in this paragraph (k)(3)(iv) if the additional debt 
instruments are issued for cash to persons unrelated to the issuer (as 
determined under section 267(b) or 707(b)) for an arm's length price 
and either the requirements in paragraphs (k)(3)(ii)(B) and 
(k)(3)(ii)(C) of this section for a reopening within six months are 
satisfied or the requirements in paragraph (k)(3)(iii)(B) of this 
section for a reopening with de minimis OID are satisfied. For purposes 
of paragraph (k)(3)(ii)(C) of this section, the yield test is satisfied 
if, on the date on which the price of the additional debt instruments 
is established (or, if earlier, the announcement date), the yield of 
the additional debt instruments (based on their cash purchase price) is 
not more than 110 percent of the yield of the original debt instruments 
on their issue date (or, if the original debt instruments were issued 
with no more than a de minimis amount of OID, the coupon rate).
    (v) 100 Percent yield test for reopening after six months. A 
reopening is described in this paragraph (k)(3)(v) if the additional 
debt instruments are issued more than six months after the issue date 
of the original debt instruments and either the requirements in 
paragraphs (k)(3)(ii)(A) and (k)(3)(ii)(C) of this section are 
satisfied or the additional debt instruments are issued for cash to 
persons unrelated to the issuer (as determined under section 267(b) or 
707(b)) for an arm's length price and the requirements in paragraph 
(k)(3)(ii)(C) of this section are satisfied. For purposes of the 
preceding sentence, the yield test in paragraph (k)(3)(ii)(C) of this 
section is satisfied if, on the date on which the price of the 
additional debt instruments is established (or, if earlier, the 
announcement date), the yield of the additional debt instruments (based 
on their fair market value or cash purchase price, whichever is 
applicable) is not more than 100 percent of the yield of the original 
debt instruments on their issue date (or, if the original debt 
instruments were issued with no more than a de minimis amount of OID, 
the coupon rate).
* * * * *
    (5) Effective/applicability dates--(i) Except as provided in 
paragraph (k)(5)(ii) of this section, this paragraph (k) applies to 
debt instruments that are part of a reopening if the reopening date is 
on or after March 13, 2001.
    (ii) Paragraphs (k)(3)(ii)(A), (k)(3)(iii)(A), (k)(3)(iv) and 
(k)(3)(v) of this section apply to debt instruments that are part of a 
reopening if the reopening date is on or after September 13, 2012.

0
Par. 7. Section 1.1275-4 is amended by revising the first sentence in 
paragraph (b)(9)(i)(E) to read as follows:


Sec.  1.1275-4  Contingent payment debt instruments.

* * * * *
    (b) * * *
    (9) * * *
    (i) * * *
    (E) * * * If the debt instrument is exchange listed property 
(within the meaning of Sec.  1.1273-2(f)(2) as contained in 26 CFR part 
1, revised April 1, 2011), it is reasonable for the holder to allocate 
any difference between the holder's basis and the adjusted issue price 
of the debt instrument pro-rata to daily portions of interest (as 
determined under paragraph (b)(3)(iii) of this section) over the 
remaining term of the debt instrument.
* * * * *

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

0
Par. 8. The authority citation for part 602 continues to read as 
follows:

    Authority: 26 U.S.C. 7805.

0
Par. 9. In Sec.  602.101, paragraph (b) is amended by adding the 
following entry in numerical order to the table to read as follows:


Sec.  602.101  OMB Control numbers.

* * * * *
    (b) * * *

------------------------------------------------------------------------
                                                            Current OMB
   CFR part or section where identified and described       control No.
------------------------------------------------------------------------
 
                                * * * * *
1.1273-2(f)(9)..........................................       1545-1353
 
                                * * * * *
------------------------------------------------------------------------



[[Page 56539]]

Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
    Approved: August 17, 2012.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2012-22526 Filed 9-12-12; 8:45 am]
BILLING CODE 4830-01-P