Guidance on the Definition of Registered Form, 43720-43730 [2017-19753]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 82, Number 180 (Tuesday, September 19, 2017)]
[Proposed Rules]
[Pages 43720-43730]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-19753]


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1, 5f, and 46

[REG-125374-16]
RIN 1545-BN60


Guidance on the Definition of Registered Form

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Partial withdrawal of notice of proposed rulemaking and notice 
of proposed rulemaking.

-----------------------------------------------------------------------

SUMMARY: This document contains proposed regulations that provide 
guidance on the definitions of registration-required obligation and 
registered form, including guidance on

[[Page 43721]]

the issuance of pass-through certificates and participation interests 
in registered form. This document also withdraws a portion of 
previously proposed regulations regarding the definition of a 
registration-required obligation. The proposed regulations generally 
are necessary to address changes in market practices as well as issues 
raised by the statutory repeal of the foreign-targeted bearer 
obligation exception to the registered form requirement. The proposed 
regulations will affect issuers and holders of obligations in 
registered form as well as issuers and holders of registration-required 
obligations that are not issued in registered form.

DATES: Comments and requests for a public hearing must be received by 
December 18, 2017.

ADDRESSES: Send submissions to CC:PA:LPD:PR (REG-125374-16), Room 5203, 
Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand-delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
125374-16), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue NW., Washington, DC 20224, or sent electronically via the 
Federal eRulemaking Portal at www.regulations.gov (IRS REG-125374-16).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Spence Hanemann at (202) 317-6980; concerning submissions of comments 
and requesting a hearing, Regina Johnson at (202) 317-6901 (not toll-
free numbers).

SUPPLEMENTARY INFORMATION: 

Paperwork Reduction Act

    The collection of information contained in this notice of proposed 
rulemaking has been submitted to the Office of Management and Budget 
for review under control number 1545-0945 in accordance with the 
Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)). The collection of 
information in this proposed regulation is in Sec.  1.163-5(b), which 
permits issuers of registration-required obligations to satisfy the 
requirement for those obligations to be in registered form by 
maintaining a book entry system. Sections 163(f) and 149(a) require 
that certain obligations be in registered form and expressly permit 
issuers to satisfy that requirement through a book entry system. 
Accordingly, the proposed regulations permit issuers to satisfy the 
registration requirement through a book entry system and detail certain 
arrangements that qualify as book entry systems. The collection of 
information in proposed Sec.  1.163-5(b) is an increase in the total 
annual burden under control number 1545-0945. The respondents are 
businesses and other for-profit organizations, non-profit 
organizations, and state, local and tribal governments.
    Estimated total annual recordkeeping burden: 95,105 hours.
    Estimated average annual burden hours per respondent: 0.5 hours.
    Estimated number of respondents: 190,210.
    Estimated annual frequency of responses: 190,210.
    Comments on the collection of information should be sent to the 
Office of Management and Budget, Attn: Desk Officer for the Department 
of the Treasury, Office of Information and Regulatory Affairs, 
Washington, DC 20503, with copies to the Internal Revenue Service, 
Attn: IRS Reports Clearance Officer, SE:CAR:MP:T:T:SP, Washington, DC 
20224. Comments on the collection of information should be received by 
November 20, 2017.
    Comments are specifically requested concerning:
    Whether the proposed collection of information is necessary for the 
proper performance of the Internal Revenue Service, including whether 
the information will have practical utility;
    The accuracy of the estimated burden associated with the proposed 
collection of information;
    How the quality, utility, and clarity of the information to be 
collected may be enhanced;
    How the burden of complying with the proposed collection of 
information may be minimized, including through the application of 
automated collection techniques or other forms of information 
technology; and
    Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of service to provide information.
    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 
tax return information are confidential, as required by section 26 
U.S.C. 6103.

Background

    This document contains proposed amendments to 26 CFR parts 1, 5f, 
and 46 under sections 103, 149, 163, 165, 860D, 871, 881, 1287, 4701, 
6045, and 6049 of the Internal Revenue Code (Code).

1. In General

    The classification of an obligation as in bearer or registered form 
has significant tax implications because a number of Code provisions 
impose sanctions on issuers and holders of registration-required 
obligations that are not issued in registered form. An obligation not 
issued in registered form is a bearer form obligation. Most of the Code 
provisions that pertain to registration-required obligations were 
enacted as part of the Tax Equity and Fiscal Responsibility Act of 1982 
(TEFRA), Public Law 97-248, 96 Stat. 324, Sec.  310. Among these 
provisions, section 163(f) denies an issuer an interest deduction for 
interest on a registration-required obligation that is not in 
registered form. Section 4701 imposes an excise tax on the issuer of a 
registration-required obligation that is not in registered form. The 
excise tax is equal to 1 percent of the principal amount of the 
obligation multiplied by the number of calendar years (or portions 
thereof) between the issue date of the obligation and the date of 
maturity. Section 149(a) provides that interest on a registration-
required bond is not exempt from tax under section 103(a) unless the 
bond is in registered form. In addition, section 871(h) and section 
881(c) exempt from federal income tax portfolio interest from sources 
within the U.S. received by a nonresident alien or foreign corporation 
(portfolio interest exception) only if the obligation with respect to 
which the interest was paid is in registered form. Similar restrictions 
are found in sections 165(j) (generally denying the holder a deduction 
for a loss sustained on a registration-required obligation not in 
registered form), 312(m) (generally providing that the issuer's 
earnings and profits cannot be decreased by interest paid on a 
registration-required obligation not in registered form), and 1287 
(generally treating the holder's gain on sale of a registration-
required obligation not in registered form as ordinary income).
    Historically, the Code provisions referenced in the preceding 
paragraph generally did not apply to obligations that complied with the 
foreign-targeting rules of prior section 163(f)(2)(B) and Sec.  1.163-
5(c) (foreign-targeted bearer obligations). Under the foreign-targeting 
rules, an issuer could issue foreign-targeted bearer obligations 
without penalty provided the obligations were issued under arrangements 
reasonably designed to ensure that the obligations

[[Page 43722]]

were sold only to non-U.S. persons. The portfolio interest exception 
also applied to interest paid on foreign-targeted bearer obligations 
issued under such reasonably designed arrangements.
    The Hiring Incentives to Restore Employment Act (the HIRE Act), 
Public Law 111-147, 124 Stat. 71, section 502, repealed section 
163(f)(2)(B) and generally eliminated the special treatment of foreign-
targeted bearer obligations. Foreign-targeted bearer obligations issued 
after March 18, 2012, are subject to the sanctions on bearer form 
obligations under sections 149(a), 163(f), 165(j), 312(m), and 1287. 
The HIRE Act also revoked the portfolio interest exception for foreign-
targeted bearer obligations, thus requiring that obligations issued 
after March 18, 2012, be in registered form to qualify for that 
exception. The HIRE Act did not, however, repeal the foreign-targeted 
bearer obligation exception to the excise tax under section 4701. See 
section 4701(b)(1)(B)(i).

2. Registration-Required Obligations

A. In General
    Under section 163(f)(2)(A), as amended by the HIRE Act, the term 
registration-required obligation means any obligation other than an 
obligation that: (1) Is issued by a natural person; (2) is not of a 
type offered to the public; or (3) has a maturity at issue of not more 
than 1 year. For purposes of sections 165(j), 312(m), and 1287, 
registration-required obligation has the same meaning as when used in 
section 163(f). See also section 149(a) (providing a similar definition 
except for the exclusion for instruments issued by a natural person). 
For purposes of section 4701, that term also has the same meaning as 
when used in section 163(f), except that tax-exempt bonds and foreign-
targeted bearer obligations are excluded.
    Section 5f.163-1(b)(2) provides that the determination as to 
whether an obligation is of a type offered to the public is based on 
whether similar obligations are in fact publicly offered or traded. On 
January 21, 1993, the Department of the Treasury (Treasury) and the IRS 
published in the Federal Register (58 FR 5316) a notice of proposed 
rulemaking (INTL-0115-90) containing proposed regulations that 
elaborated upon the meaning of ``of a type offered to the public'' for 
purposes of section 163(f)(2)(A) (the 1993 proposed regulations). See 
Prop. Treas. Reg. Sec.  5f.163-1(b)(2). The preamble to the 1993 
proposed regulations cited the report of the Senate Finance Committee 
on TEFRA for the conclusion that an obligation that represents a 
``readily negotiable substitute for cash'' should be a registration-
required obligation. 58 FR 5316 (citing S. Rep. No. 97-494, at 242 
(1982)). Treasury and the IRS reasoned in the preamble to the 1993 
proposed regulations that, because the standards for determining if an 
obligation is ``readily tradable in an established securities market'' 
under section 453(f)(4)(B) and Sec.  15a.453-1(e)(4) address an 
analogous concern with negotiability, similar standards should apply 
for determining whether an obligation is ``of a type offered to the 
public'' under section 163(f)(2)(A).
B. Pass-Through Certificates
    Section 1.163-5T provides rules to address whether pass-through 
certificates are registration-required obligations. In their most 
common form, pass-through certificates are issued by an investment 
entity (typically a trust) that holds a pool of obligations, such as 
mortgage loans. Each pass-through certificate represents an interest in 
the investment entity.
    To accommodate these securitization transactions, Sec.  1.163-
5T(d)(1) generally provides that a pass-through certificate evidencing 
an interest in a pool of mortgage loans that is treated as a trust of 
which the grantor is the owner is considered to be a registration-
required obligation if, standing alone, the pass-through certificate 
meets the definition of a registration-required obligation. Section 
1.163-5T(d)(1) also applies to ``similar evidence of interest in a 
similar pooled fund or pooled trust treated as a grantor trust,'' 
although commenters have noted the ambiguity of the reference. 
Similarly, Sec.  1.871-14(d)(1) provides that interest received on a 
pass-through certificate qualifies for the portfolio interest exception 
if, standing alone, the pass-through certificate is in registered form.
    Commenters have asked that Treasury and the IRS describe the types 
of arrangements that qualify as pass-through certificates. 
Specifically, commenters have requested that Treasury and the IRS amend 
the definition of a pass-through certificate to clarify that the issuer 
of a pass-through certificate may be either a grantor trust or another 
type of entity, such as a partnership or a disregarded entity, so long 
as the obligations in the pool are held through an arrangement that 
meets the requirements to be in registered form. Commenters have also 
requested that Treasury and the IRS amend Sec.  1.871-14(d)(1) so that 
the definition of pass-through certificate for purposes of the 
portfolio interest exception is identical to the definition of pass-
through certificate under Sec.  1.163-5T(d)(1).

3. Definition of Registered Form

A. In General
    For purposes of determining whether an obligation is in registered 
form under section 163(f),\1\ the principles of section 149(a)(3) 
apply. See section 163(f)(3). Section 149(a)(3)(A) provides that a bond 
is treated as being in registered form if the right to the principal 
of, and stated interest on, the bond may be transferred only through a 
book entry consistent with regulations prescribed by the Secretary. 
Section 149(a)(3)(B) authorizes the Secretary to prescribe regulations 
to carry out the requirement that a bond be issued in registered form 
when there is one or more nominee. For purposes of section 149(a), the 
conditions for an obligation to be considered in registered form are 
described in Sec.  5f.103-1(c).\2\ The regulations under both section 
163(f) and section 871(h), specifically Sec. Sec.  5f.163-1(a) and 
1.871-14(c), refer to Sec.  5f.103-1(c) for a definition of registered 
form. Obligations that do not meet the conditions described in Sec.  
5f.103-1(c) are treated as issued in bearer form.
---------------------------------------------------------------------------

    \1\ For purposes of sections 165(j), 312(m), 871(h)(7), 
881(c)(7), 1287, and 4701, the term registered form has the same 
meaning as when used in section 163(f).
    \2\ Section 5f.103-1 was originally published under section 
103(j) of the Internal Revenue Code of 1954, which was enacted as 
part of TEFRA and provided that obligations must be in registered 
form to be tax-exempt. Section 103(j) was recodified as section 
149(a) by section 1301 of the Tax Reform Act of 1986, Public Law 99-
514, 100 Stat. 2085.
---------------------------------------------------------------------------

    Generally, under Sec.  5f.103-1(c), an obligation is in registered 
form if: (1) The obligation is registered as to both principal and any 
stated interest with the issuer (or its agent) and any transfer of the 
obligation may be effected only by surrender of the old obligation and 
reissuance to the new holder; (2) the right to principal and stated 
interest with respect to the obligation may be transferred only through 
a book entry system maintained by the issuer or its agent; or (3) the 
obligation is registered as to both principal and stated interest with 
the issuer or its agent and may be transferred both by surrender and 
reissuance and through a book entry system. An obligation is considered 
transferable through a book entry system if ownership of an interest in 
the obligation is required to be reflected in a book entry, whether or 
not physical securities are issued. An obligation that would otherwise 
be considered to be in registered form is not considered to be in 
registered form if the obligation may

[[Page 43723]]

be converted at any time in the future into an obligation that is not 
in registered form. See Sec.  5f.103-1(e).
B. Dematerialized Book Entry Systems
    Since the publication of Sec.  5f.103-1, market practices have 
changed with respect to how interests in obligations are recorded and 
transferred. For example, many obligations trade in fully 
dematerialized form. An obligation that is fully dematerialized is not 
represented by a physical (paper) certificate, and a clearing 
organization that is the registered holder of the obligation operates 
an electronic book entry system that identifies the clearing 
organization's member or members holding the obligation (or interests 
in the obligation). The clearing organization facilitates and records 
transfers of the obligation (or interests in the obligation) among the 
clearing organization's members. The members (typically, banks or 
broker-dealers), in turn, record their clients' ownership of the 
obligation (or interests in the obligation) in their book entry 
systems. Alternatively, an obligation may be represented by a physical 
global certificate that is nominally in bearer form but that is 
immobilized in a clearing organization, which handles the obligation 
thereafter exactly as it does an obligation that was fully 
dematerialized when issued. Commenters have requested additional 
guidance on how the registered form rules in Sec.  5f.103-1 apply to 
these arrangements.
    Treasury and the IRS provided guidance on how to apply the 
registered form rules to certain of these arrangements in Notice 2006-
99, 2006-2 CB 907. Notice 2006-99 addresses an arrangement in which no 
physical certificates are issued and under which ownership interests in 
bonds are required to be represented only by book entries in a 
dematerialized book entry system maintained by a clearing organization. 
Notice 2006-99 provides that an obligation issued under such an 
arrangement is treated as in registered form notwithstanding the 
ability of holders to obtain physical certificates in bearer form upon 
the termination of the business of the clearing organization without a 
successor.
    The HIRE Act also addressed dematerialized book entry systems. For 
obligations issued after March 18, 2012, section 163(f)(3), as amended 
by the HIRE Act, provides that, for purposes of section 163(f), a 
dematerialized book entry system or other book entry system specified 
by the Secretary will be treated as a book entry system described in 
section 149(a)(3). The Joint Committee on Taxation's technical 
explanation of the HIRE Act further explained that an obligation ``that 
is formally in bearer form is treated, for the purposes of section 
163(f), as held in a book entry system as long as the debt obligation 
may be transferred only through a dematerialized book entry system or 
other book entry system specified by the Secretary.'' J. Comm. on 
Tax'n, Technical Explanation of the Revenue Provisions Contained in 
Senate Amendment 3310, the ``Hiring Incentives to Restore Employment 
Act,'' Under Consideration by the Senate (JCX-4-10), Feb. 23, 2010, at 
53.
C. Notice 2012-20
    Commenters expressed concern that the explicit reference to a 
``dematerialized book entry system'' in section 163(f)(3), as amended 
by the HIRE Act, would create uncertainty about obligations issued in a 
manner not specifically described in Notice 2006-99. In particular, 
commenters requested guidance to address the treatment of obligations 
represented by a physical global certificate that is nominally in 
bearer form, but that is immobilized in a clearing system. In addition, 
commenters requested guidance regarding whether an obligation will be 
considered to be in registered form if holders may obtain physical 
certificates in bearer form under circumstances not described in Notice 
2006-99.
    In response to these comments, Treasury and the IRS published 
Notice 2012-20, 2012-13 IRB 574, on March 26, 2012. Notice 2012-20 
provides additional guidance on the definition of registered form and 
further states that Treasury and the IRS intend to publish regulations 
consistent with the guidance described in the notice. Under Notice 
2012-20, an obligation is considered to be in registered form if it is 
issued either through a dematerialized book entry system in which 
beneficial interests are transferable only through a book entry system 
maintained by a clearing organization (or by an agent of the clearing 
organization) or through a clearing system in which the obligation is 
effectively immobilized. Notice 2012-20 provides that an obligation is 
considered to be effectively immobilized if: (1) The obligation is 
represented by one or more global securities in physical form that are 
issued to and held by a clearing organization (or by a custodian or 
depository acting as an agent of the clearing organization) for the 
benefit of purchasers of interests in the obligation under arrangements 
that prohibit the transfer of the global securities except to a 
successor clearing organization subject to the same terms; and (2) 
beneficial interests in the underlying obligation are transferable only 
through a book entry system maintained by the clearing organization (or 
an agent of the clearing organization). Notice 2012-20 further states 
that an interest in an obligation is considered to be transferable only 
through a book entry system if the interest would be considered 
transferable through a book entry system under Sec.  5f.103-1(c)(2), 
except that holders may obtain physical certificates in bearer form in 
certain limited circumstances stated in the notice. Finally, Notice 
2012-20 states that, for purposes of determining when an obligation is 
a registration-required obligation under section 4701, rules identical 
to the foreign-targeting rules under section 163(f)(2)(B), prior to its 
amendment by the HIRE Act, and Sec.  1.163-5(c) will apply to 
obligations issued after March 18, 2012.

Explanation of Provisions

1. In General

    Consistent with Notice 2012-20, these proposed regulations amend 
the definition of registered form to take into account current market 
practices and changes made by the HIRE Act, including the repeal of the 
foreign-targeting rules in section 163(f)(2)(B). In addition, these 
proposed regulations amend the definition of a registration-required 
obligation in two ways. First, the proposed regulations specify the 
types of obligations that are treated as ``of a type offered to the 
public'' and withdraw the 1993 proposed regulations. Second, the 
proposed regulations take into account comments requesting 
clarification on the types of arrangements that qualify as pass-through 
certificates.
    Though the definitions of the terms registered form and 
registration-required obligation are generally consistent across the 
various provisions in which they are used, the rules are set forth in a 
number of existing regulations, including several promulgated under 
section 163(f). To the extent possible, these proposed regulations 
simplify the definitions of registered form and registration-required 
obligation by centralizing the rules in Sec.  1.163-5. Thus, the 
applicable rules have been relocated from Sec. Sec.  5f.103-1 
(definition of registered form), 1.163-5T (pass-through certificates 
and regular interests in REMICs), and 5f.163-1 (definition of 
registration-required obligation) to paragraphs (a) and (b) of proposed 
Sec.  1.163-5. Appropriate cross-references to Sec.  1.163-5 are 
proposed to be added to regulations that rely on one or both

[[Page 43724]]

definitions, including Sec. Sec.  1.149(a)-1, 1.165-12, 1.860D-
1(b)(5)(i)(A), 1.871-14, 1.1287-1, and 46.4701-1.

2. Registration-Required Obligations

A. Obligation of a Type Offered to the Public
    Consistent with the 1993 proposed regulations, Treasury and the IRS 
continue to believe that it is appropriate to determine whether an 
obligation is of a type offered to the public by reference to whether 
the obligation is ``traded on an established market.'' Although a 
number of Code and regulation sections refer to and define that phrase 
(for example, sections 453, 1092, 1273, and 7704, as well as the 
regulations promulgated under those Code sections), Treasury and the 
IRS have concluded that the definition provided in Sec.  1.1273-2(f) is 
most appropriate for purposes of defining a registration-required 
obligation. Thus, the proposed regulations generally treat an 
obligation as of a type offered to the public if the obligation is 
traded on an established market as determined under Sec.  1.1273-2(f). 
For this purpose, however, the proposed regulations do not take into 
account the exception for small debt issues in Sec.  1.1273-2(f)(6).
B. Pass-Through Certificates and Participation Interests
    Commenters indicated that an entity that issues pass-through 
certificates may hold a pool of debt instruments that is either fixed 
or that changes over time. For example, the issuing entity may have the 
right to acquire additional assets after formation, or the right to 
dispose of assets at any time. In those situations, the entity 
generally will not be classified as a grantor trust for federal tax 
purposes, but that does not preclude it from issuing pass-through 
certificates. To address these situations, the proposed regulations 
amend the definition of a pass-through certificate to provide that a 
pass-through certificate may be issued by a grantor trust or a similar 
fund, and specify that a similar fund includes entities that are 
partnerships or disregarded for federal tax purposes and funds that 
have the power to vary the assets they hold or the sequence of payments 
to holders. A similar fund, however, does not include a business entity 
classified as a corporation.
    In addition, Treasury and the IRS have concluded that an 
arrangement that satisfies the definition of a registration-required 
obligation and the registered form rules should be treated the same as 
a pass-through certificate even if the arrangement is with respect to 
only one underlying obligation or if the arrangement is treated as co-
ownership of one or more obligations (rather than, for purposes of 
TEFRA or otherwise, ownership of an entity that holds the underlying 
obligations). The proposed regulations eliminate the requirement that 
the fund hold a pool of loans and replace it with a requirement that 
the fund primarily hold debt instruments. Thus, a fund can hold one or 
more debt instruments, so long as the fund primarily holds debt 
instruments.
    In addition, the proposed regulations treat an interest that 
evidences co-ownership of one or more obligations (including a 
participation interest) as a registration-required obligation if, 
standing alone, the interest satisfies the definition of a 
registration-required obligation. The proposed regulations also propose 
to amend Sec.  1.871-14(d)(1) to include a cross-reference to the rules 
for pass-through certificates and participation interests in proposed 
Sec.  1.163-5(a)(3)(i) and (ii) such that similar rules apply for 
purposes of the portfolio interest exception.

3. Definition of Registered Form

    The proposed regulations amend the definition of registered form in 
a number of ways. First, the proposed regulations provide that an 
obligation is considered to be in registered form if it is transferable 
through a book entry system, including a dematerialized book entry 
system, maintained by the issuer of the obligation, an agent of the 
issuer, or a clearing organization. A clearing organization includes an 
entity that holds obligations for its members or maintains a system 
that reflects the ownership interests of members and transfers of 
obligations among members' accounts without the necessity of physical 
delivery of the obligation.
    Second, the proposed regulations provide that an obligation 
represented by a physical certificate in bearer form will be considered 
to be in registered form if the physical certificate is effectively 
immobilized. To be effectively immobilized, the physical certificate 
evidencing an obligation must be issued to and held by a clearing 
organization for the benefit of purchasers of interests in the 
obligation under arrangements that prohibit the transfer of the 
physical certificate except to a successor clearing organization and 
permit transfers of ownership interests in the underlying obligation 
only through a book entry system maintained by the clearing 
organization (or a successor clearing organization). As suggested in 
comments, the proposed regulations change the requirement in Notice 
2012-20 that a successor clearing organization hold the physical 
certificate subject to the same terms as the predecessor; Treasury and 
the IRS concluded that it is sufficient if the successor clearing 
organization has rules that effectively immobilize the physical 
certificate.
    Third, the proposed regulations permit holders of obligations (or 
interests in obligations) to have a right to obtain physical 
certificates evidencing the obligation (or interests in the obligation) 
in bearer form without causing the obligation to be treated as not in 
registered form in two circumstances: (1) A termination of the clearing 
organization's business without a successor; or (2) the issuance of 
physical securities at the issuer's request upon a change in tax law 
that would be adverse to the issuer but for the issuance of physical 
securities in bearer form. This exception from bearer form treatment is 
consistent with the guidance provided in Notice 2012-20, except that 
the proposed regulations do not permit a holder to have a right to 
obtain a physical bearer certificate if there is an issuer event of 
default (default exception). Treasury and the IRS understand that in 
certain situations holders may be required to obtain physical 
certificates to pursue claims against the issuer, but in such instances 
it would be appropriate to expect those physical certificates to be 
issued in registered form. Taxpayers may rely on the default exception 
in Notice 2012-20 for obligations issued prior to publication of a 
Treasury decision adopting these rules as final regulations in the 
Federal Register.
    After the occurrence of one of the two events described in the 
first sentence of the preceding paragraph, an obligation will no longer 
be in registered form if a holder, or a group of holders acting 
collectively, has a right to obtain a physical certificate in bearer 
form, regardless of whether any option to obtain a physical certificate 
in bearer form has actually been exercised.

4. Section 881

    Commenters requested that examples 10 and 19 set forth in Sec.  
1.881-3(e) be removed or revised to take into account the repeal of the 
foreign-targeted bearer obligation exception. Consistent with these 
comments, the proposed regulations propose to remove those examples.

5. Section 4701

    Commenters requested clarification on whether the foreign-targeting 
rules under Sec.  1.163-5(c) would apply to obligations issued after 
March 18, 2012, for purposes of section 4701. Consistent

[[Page 43725]]

with Notice 2012-20, proposed Sec.  46.4701-1 provides that, for 
purposes of determining whether an obligation is a foreign-targeted 
bearer obligation, the rules of Sec.  1.163-5(c) apply.

6. Applicability Dates

    Notice 2012-20 stated that regulations incorporating the guidance 
described in that notice will be effective for obligations issued after 
March 18, 2012. Accordingly, the proposed regulations will generally 
apply to obligations issued after March 18, 2012. However, taxpayers 
may apply the rules in section 3 of Notice 2012-20, including the 
default exception, for obligations issued prior to publication of a 
Treasury decision adopting these rules as final regulations in the 
Federal Register. The rules related to pass-through certificates, 
participation interests, and regular interests in REMICs and the rules 
related to obligations not of a type offered to the public are not 
described in Notice 2012-20 and, therefore, will apply only to 
obligations issued after the publication of a Treasury decision 
adopting these rules as final regulations in the Federal Register, 
except as otherwise provided in the next sentence. The existing 
regulations under Sec.  5f.103-1 will continue to apply to tax-exempt 
bonds issued prior to the date 90 days after publication of a Treasury 
decision adopting these rules as final regulations in the Federal 
Register.

Special Analyses

    Certain IRS regulations, including these, are exempt from the 
requirements of Executive Order 12866, as supplemented and reaffirmed 
by Executive Order 13563. Therefore, a regulatory impact assessment is 
not required. It is hereby certified that these regulations will not 
have a significant economic impact on a substantial number of small 
entities. Sections 163(f) and 149(a) require that certain obligations 
be in registered form which is satisfied if the obligations are 
transferable only through a book entry system. The existing regulations 
under these sections therefore permit issuers to satisfy the 
registration requirement through a book entry system and describe the 
arrangements that are necessary for a system to qualify as a book entry 
system. Certain systems that are now common, however, may not qualify 
as book entry systems under the existing regulations. Because the 
proposed regulations merely clarify that these systems are book entry 
systems, the proposed regulations would not impose a significant 
economic impact. Accordingly, a regulatory flexibility analysis is not 
required. Pursuant to section 7805(f) of the Code, this notice of 
proposed rulemaking will be submitted to the Chief Counsel for Advocacy 
of the Small Business Administration for comment on its impact on small 
entities.

Comments and Requests for Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any comments that are submitted timely 
to the IRS as prescribed in this preamble under the ADDRESSES heading. 
Treasury and the IRS request comments on all aspects of the proposed 
rules. All comments will be available at www.regulations.gov or upon 
request. A public hearing will be scheduled if requested in writing by 
any person that timely submits written comments. If a public hearing is 
scheduled, notice of the date, time, and place for the hearing will be 
published in the Federal Register.

Drafting Information

    The principal authors of these regulations are Spence Hanemann and 
Diana Imholtz, Office of Associate Chief Counsel (Financial 
Institutions and Products), IRS. However, other personnel from Treasury 
and the IRS participated in their development.

Availability of IRS Documents

    The IRS notices cited in this preamble are published in the 
Internal Revenue Bulletin (or Cumulative Bulletin) and are available 
from the Superintendent of Documents, U.S. Government Publishing 
Office, Washington, DC 20402, or by visiting the IRS Web site at 
www.irs.gov.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 5f

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 46

    Excise taxes, Insurance, Reporting and recordkeeping requirements.

Partial Withdrawal of Notice of Proposed Rulemaking

    Accordingly, under the authority of 26 U.S.C. 7805, 5f.163-1(b)(2) 
of the notice of proposed rulemaking (INTL-0115-90, subsequently 
converted to REG-208245-90) that was published in the Federal Register 
(58 FR 5316) on January 21, 1993, is withdrawn.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR parts 1, 5f, and 46 are proposed to be amended 
as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 is amended by adding 
entries in numerical order to read in part as follows:

    Authority:  26 U.S.C. 7805 * * *
    Section 1.149(a)-1 also issued under 26 U.S.C. 149(a)(3).
* * * * *
    Section 1.163-5 also issued under 26 U.S.C. 163(f)(3).
* * * * *
0
Par. 2. Section 1.149(a)-1 is added to read as follows:


Sec.  1.149(a)-1  Obligations required to be in registered form.

    (a) General rule. Interest on a registration-required bond shall 
not be exempt from tax notwithstanding section 103(a) or any other 
provision of law, exclusive of any treaty obligation of the United 
States, unless the bond is issued in registered form (as defined in 
Sec.  1.163-5(b)). For this purpose, registration-required bond has the 
same meaning as registration-required obligation in Sec.  1.163-
5(a)(2).
    (b) Applicability date. This section applies to bonds issued on or 
after the date 90 days after the publication of the Treasury decision 
adopting these rules as final regulations in the Federal Register. For 
bonds issued before the date 90 days after the publication of the 
Treasury decision adopting these rules as final regulations in the 
Federal Register, see Sec.  5f.103-1 of this chapter.
0
Par. 3. Section 1.163-5 is amended by revising the section heading and 
adding paragraphs (a), (b), and (c)(3)(iii) to read as follows:


Sec.  1.163-5  Denial of interest deduction on certain obligations 
unless issued in registered form.

    (a) Denial of deduction--(1) In general. No deduction shall be 
allowed a taxpayer under section 163 for interest paid or accrued on a 
registration-required obligation (as defined in section 163(f) and 
paragraph (a)(2) of this section) unless such obligation is issued in 
registered form (as defined in paragraph (b) of this section). An 
obligation that is not in registered form under paragraph (b) of this 
section is an obligation in bearer form.
    (2) Registration-required obligation--(i) In general. The term 
registration-required obligation means any obligation (including a 
pass-through

[[Page 43726]]

certificate or participation interest described in paragraph (a)(3) of 
this section and a regular interest in a REMIC described in paragraph 
(a)(4) of this section) other than--
    (A) An obligation issued by a natural person;
    (B) An obligation not of a type offered to the public (as described 
in paragraph (a)(2)(ii) of this section); or
    (C) An obligation that has a maturity at the date of issue of not 
more than 1 year.
    (ii) Obligation not of a type offered to the public. For purposes 
of section 163(f)(2)(A)(ii) and paragraph (a)(2)(i)(B) of this section, 
an obligation is not of a type offered to the public unless the 
obligation is traded on an established market as determined under Sec.  
1.1273-2(f) without regard to Sec.  1.1273-2(f)(6).
    (3) Pass-through certificates and participation interests--(i) 
Pass-through certificate--(A) In general. A pass-through certificate is 
considered to be a registration-required obligation if the pass-through 
certificate is described in paragraph (a)(2)(i) of this section without 
regard to whether any obligation held by the entity to which the pass-
through certificate relates is described in paragraph (a)(2)(i) of this 
section.
    (B) Definition of pass-through certificate. For purposes of 
paragraph (a) of this section, a pass-through certificate is an 
instrument evidencing an interest in a grantor trust under Subpart E of 
Part I of Subchapter J of the Code, or a similar fund, that principally 
holds debt instruments. For purposes of this paragraph (a)(3)(i)(B), a 
similar fund includes an entity that, under Sec. Sec.  301.7701-1 
through 301.7701-3 of this chapter, is disregarded as an entity 
separate from its owner or classified as a partnership for federal tax 
purposes, without regard to whether the fund has the power to vary the 
assets in the fund or the sequence of payments made to holders. In 
addition, for purposes of this paragraph (a)(3)(i)(B), a similar fund 
does not include a business entity that is classified as a corporation 
under Sec.  301.7701-2 of this chapter.
    (ii) Participation interest. A participation interest that 
evidences ownership of some or all of one or more obligations and that 
is treated as conveying ownership of a specified portion of the 
obligation or obligations (and not ownership of an entity treated as 
created under Sec.  301.7701-1(a)(2) of this chapter) is considered to 
be a registration-required obligation if the participation interest is 
described in paragraph (a)(2)(i) of this section without regard to 
whether any obligation to which the participation interest relates is 
described in paragraph (a)(2)(i) of this section.
    (iii) Treatment of obligation held by a trust or fund. An 
obligation held by a trust or a fund in which ownership interests are 
represented by pass-through certificates is considered to be in 
registered form or to be a registration-required obligation if the 
obligation held by the trust or fund is in registered form (as defined 
in paragraph (b) of this section) or is a registration-required 
obligation described in paragraph (a)(2)(i) of this section, without 
regard to whether the pass-through certificates are so considered.
    (iv) Examples. The application of paragraph (a)(3) of this section 
may be illustrated by the following examples:

    Example 1. Fund, a partnership under the laws of the state in 
which it is organized, acquires a pool of student loans. The student 
loans are issued by natural persons and, therefore, are not 
registration-required obligations as described in paragraph 
(a)(2)(i) of this section. Fund contributes the student loans to 
Trust, a business trust under the laws of the state in which Trust 
is organized. Trust has the power to vary the investments in Trust, 
and is not treated as a trust of which the grantor is the owner 
under Subpart E of Part I of Subchapter J of the Code. Trust issues 
certificates evidencing an interest in Trust. The certificates 
issued by Trust are offered to the public. The certificates issued 
by Trust are pass-through certificates (as described in paragraph 
(a)(3)(i)(B) of this section) and are described in paragraph 
(a)(2)(i) of this section, and thus, are registration-required 
obligations described in paragraph (a)(2)(i) of this section, even 
though the student loans held by Trust are not registration-required 
obligations.
    Example 2. Partnership U purchases a building from Partnership 
V. Partnership U makes a cash down payment and issues a note secured 
by a mortgage in the building to Partnership V for the remaining 
purchase price of the building. The note is not a registration-
required obligation described in paragraph (a)(2)(i) of this section 
because it is not an obligation of a type offered to the public. 
Partnership V offers participations in the underlying note to the 
public. Under the terms of the participation, each participant will 
own an interest in the note that will entitle the participant to a 
specified portion of the interest and principal generated by the 
note. The participation is a participation interest described in 
paragraph (a)(3)(ii) of this section and is described in paragraph 
(a)(2)(i) of this section, and, thus, is a registration-required 
obligation described in paragraph (a)(2)(i) of this section, even 
though the underlying note is not a registration-required 
obligation.

    (4) REMICs--(i) Regular interest in a REMIC. A regular interest in 
a REMIC, as defined in sections 860D and 860G and the regulations 
thereunder, is considered to be a registration-required obligation if 
the regular interest is described in paragraph (a)(2)(i) of this 
section, without regard to whether one or more of the obligations held 
by the REMIC to which the regular interest relates is described in 
paragraph (a)(2)(i) of this section.
    (ii) Treatment of obligation held by a REMIC. An obligation 
described in paragraph (a)(2)(i) of this section and held by a REMIC is 
treated as a registration-required obligation regardless of whether the 
regular interests in the REMIC are so treated.
    (5) Applicability date--(i) In general. Except as otherwise 
provided in paragraphs (a)(5)(ii) and (iii) of this section, paragraph 
(a) of this section applies to obligations issued after March 18, 2012. 
For obligations issued on or before March 18, 2012, see Sec.  5f.163-1 
of this chapter.
    (ii) Obligations not of a type offered to the public. Paragraph 
(a)(2)(ii) of this section applies to obligations issued after the date 
of publication of a Treasury decision adopting these rules as final 
regulations in the Federal Register.
    (iii) Pass-through certificates, participation interests, and 
regular interests in REMICs. Paragraph (a) of this section applies to 
pass-through certificates, participation interests, and regular 
interests in REMICs issued after the date of publication of a Treasury 
decision adopting these rules as final regulations in the Federal 
Register. For pass-through certificates or regular interests in REMICs 
issued on or before the date of publication of a Treasury decision 
adopting these rules as final regulations in the Federal Register, see 
Sec.  1.163-5T.
    (b) Registered form--(1) General rule. Except as provided in 
paragraph (b)(4) of this section, an obligation is in registered form 
if a transfer of the right to receive both principal and any stated 
interest on the obligation may be effected only--
    (i) By surrender of the old obligation and either the reissuance of 
the old obligation to the new holder or the issuance of a new 
obligation to the new holder;
    (ii) Through a book entry system (as described in paragraph (b)(2) 
of this section) maintained by the issuer of the obligation (or its 
agent) or by a clearing organization (as defined in paragraph (b)(3) of 
this section); or
    (iii) Through both of the methods described in paragraphs (b)(1)(i) 
and (ii) of this section.
    (2) Book entry system--(i) In general. An obligation will be 
considered transferable through a book entry system, including a 
dematerialized book entry system, if ownership of the obligation or an 
interest in the

[[Page 43727]]

obligation is required to be recorded in an electronic or physical 
register maintained by the issuer of the obligation (or its agent) or 
by a clearing organization (as defined in paragraph (b)(3) of this 
section).
    (ii) Book entry system maintained by clearing organization that 
effectively immobilizes a bearer form obligation. An obligation 
represented by one or more physical certificates in bearer form will be 
considered to be in registered form if the physical certificates are 
effectively immobilized. A physical certificate is effectively 
immobilized only if--
    (A) The physical certificate is issued to and held by a clearing 
organization (as defined in paragraph (b)(3) of this section) for the 
benefit of purchasers of interests in the obligation under arrangements 
that prohibit the transfer of the physical certificate except to a 
successor clearing organization subject to terms that effectively 
immobilize the physical certificate, as provided in paragraph 
(b)(2)(ii) of this section, in the hands of the successor clearing 
organization; and
    (B) Ownership of the obligation or an interest in the obligation is 
transferable only through a book entry system (as described in 
paragraph (b)(2)(i) of this section) maintained by the clearing 
organization (as defined in paragraph (b)(3) of this section).
    (3) Definition of clearing organization. For purposes of paragraph 
(b) of this section, clearing organization means an entity that is in 
the business of holding obligations for or reflecting the ownership 
interests of member organizations and transferring obligations among 
such member organizations by credit or debit to the account of a member 
organization without the necessity of physical delivery of the 
obligation.
    (4) Temporal limitations on registered form--(i) In general. Except 
as provided in paragraphs (b)(4)(ii) and (iii) of this section, an 
obligation is not considered to be in registered form as of a 
particular time if the obligation may be transferred at that time or at 
a time or times on or before the maturity of the obligation by any 
means not described in paragraph (b)(1) of this section.
    (ii) Events that permit issuance of physical certificates in bearer 
form--(A) In general. An obligation transferrable through a 
dematerialized book entry system is not in bearer form pursuant to 
paragraph (b)(4)(i) of this section solely because a holder of the 
obligation (or an interest therein) has a right to obtain a physical 
certificate in bearer form upon the occurrence of one or both of the 
following events--
    (1) A termination of business without a successor by the clearing 
organization that maintains the book entry system; or
    (2) The issuance of physical securities at the issuer's request 
upon a change in tax law that would be adverse to the issuer but for 
the issuance of physical securities in bearer form.
    (B) Treatment upon issuance of physical certificate in bearer form. 
Upon the occurrence of one or both of the events described in paragraph 
(b)(4)(ii)(A) of this section, any obligation with respect to which a 
holder, or a group of holders acting collectively, may obtain a 
physical certificate in bearer form will no longer be in registered 
form, regardless of whether a physical certificate in bearer form has 
actually been issued.
    (iii) Obligations in registered form until maturity. An obligation 
that as of a particular time is not considered to be in registered form 
because the obligation may be transferred at a time or times before the 
maturity of the obligation by a means not described in paragraph (b)(1) 
of this section and that during the period beginning at a later time 
and ending at maturity may be transferred only by a means described in 
paragraph (b)(1) of this section is considered to be in registered form 
during the period beginning at that later time.
    (5) Examples. The application of paragraph (b) of this section may 
be illustrated by the following examples:

    Example 1. X issues an obligation that is a registration-
required obligation as described in paragraph (a)(2)(i) of this 
section. At issuance, X issues the obligation in the purchaser's 
name evidencing the purchaser's ownership of the principal and 
interest under the obligation. The purchaser may transfer the 
obligation only by surrendering the obligation to X and by X issuing 
a new instrument to the new holder. X's obligation is issued in 
registered form under paragraph (b)(1) of this section.
    Example 2. Corporation A issues US$500 million of debt (the 
Note) evidenced by a physical certificate that is registered in the 
name of ABC, a clearing organization (as defined in paragraph (b)(3) 
of this section). Under the terms of the Note, Corporation A must 
maintain an electronic register identifying the owners of interests 
in the Note, and a transfer of the right to receive either principal 
or any stated interest on such ownership interests may be effected 
only through a change to the electronic register. Pursuant to an 
agreement with Corporation A, ABC takes custody of the physical 
certificate evidencing the Note and receives all principal and 
interest on the Note from Corporation A. Independently of its 
agreement with Corporation A, ABC maintains electronic records of 
its members' ownership interests in the Note and distributes 
principal and interest to members' accounts in accordance with those 
interests. ABC's members, in turn, maintain electronic records of 
their customers' ownership interests in the Note and similarly 
distribute principal and interest to their customers' accounts. 
Corporation A's electronic register identifies ABC as the sole owner 
of the Note. Corporation A does not record transfers of ownership 
interests in the Note to or among ABC's members, and ABC does not 
record transfers of ownership interests in the Note to or among its 
members' customers. Corporation A's electronic register is a book 
entry system as described in paragraph (b)(2)(i) of this section, 
and the Note is in registered form under paragraph (b)(1) of this 
section.
    Example 3. The facts are the same as in Example 2 of paragraph 
(b)(5) of this section, except that, instead of maintaining an 
electronic register, Corporation A issues a global bearer 
certificate (Certificate) to ABC pursuant to an agreement that 
prohibits the transfer of Certificate except to a successor clearing 
organization subject to terms that effectively immobilize 
Certificate, as provided in paragraph (b)(2)(ii) of this section, in 
the hands of the successor clearing organization. Further, holders 
of interests in Certificate may only obtain physical bearer 
certificates upon cessation of ABC's operations without a successor 
or, at Corporation A's request, upon a change in tax law that would 
be adverse to Corporation A but for the issuance of physical bearer 
certificates. Because ownership of interests in Certificate may be 
transferred only through a dematerialized book entry system 
maintained by ABC, and because the circumstances under which 
definitive bearer certificates may be issued to holders of interests 
in Certificate are limited to the circumstances described in 
paragraph (b)(4)(ii)(A) of this section, Certificate is an 
immobilized bearer form obligation described in paragraph (b)(2)(ii) 
of this section and is accordingly in registered form under 
paragraph (b)(2)(ii) of this section.
    Example 4. The facts are the same as in Example 3 of paragraph 
(b)(5) of this section, except that purchasers of interests in 
Certificate have the right to obtain definitive bearer certificates 
upon request at any time until maturity of Certificate. Because the 
circumstances under which definitive bearer obligations may be 
issued to holders of interests in Certificate are not limited to the 
circumstances described in paragraph (b)(4)(ii)(A) of this section, 
Certificate is not considered to be issued in registered form under 
paragraph (b)(4)(i) of this section.
    Example 5. Bank makes a loan to borrower secured by real 
property (Loan). Participations in Loan are traded on an established 
market. The participations are participation interests described in 
paragraph (a)(3)(ii) of this section and are accordingly 
registration-required obligations described in paragraph (a)(2)(i) 
of this section. Bank remains the registered owner of Loan and 
maintains an electronic book entry system that identifies 
participants. Participation interests may be transferred only by 
surrender of the old participation interest and reissuance of the 
participation interest in the name of the new participant, or by 
transfer of the participation interest from the name of the old 
participant to the name of

[[Page 43728]]

the new participant in the book entry system of Bank. Bank's book 
entry system is described in paragraph (b)(2)(i) of this section, 
and, accordingly, under paragraph (b)(1)(iii) of this section, the 
participation interests are in registered form.

    (6) Applicability date. Paragraph (b) of this section applies to 
obligations issued after March 18, 2012. Taxpayers may apply the rules 
in section 3 of Notice 2012-20, 2012-13 IRB 574, for obligations issued 
prior to the date of publication of the Treasury decision adopting 
these rules as final regulations in the Federal Register. For 
obligations issued on or before March 18, 2012, see Sec.  5f.103-1 of 
this chapter.
    (c) * * *
    (3) * * *
    (iii) Applicability to obligations issued after March 18, 2012. For 
purposes of section 163(f), paragraph (c) of this section does not 
apply to obligations issued after March 18, 2012. However, for purposes 
of determining whether an obligation is described in section 
4701(b)(1)(B) or whether the exception in section 6049 from information 
reporting of interest or original discount with respect to obligations 
that have an original term of 183 days or less applies, paragraph (c) 
of this section continues to apply to obligations issued after March 
18, 2012. See Sec. Sec.  1.4701-1(b)(3) and 1.6049-5(b)(10).
0
Par. 4. Section 1.163-5T is amended by adding paragraph (f) to read as 
follows:


Sec.  1.163-5T  Denial of interest deduction on certain obligations 
issued after December 31, 1982, unless issued in registered form 
(temporary).

* * * * *
    (f) Applicability date. This section applies to obligations to 
which Sec.  5f.163-1 of this chapter applies. See Sec.  5f.163-1(d) of 
this chapter.
0
Par. 5. Section 1.165-12 is amended by:
0
1. Revising paragraph (a).
0
2. Redesignating paragraphs (b)(1) and (2) as (b)(2) and (3), 
respectively.
0
3. Adding a new paragraph (b)(1).
0
4. Revising the paragraph heading and first sentence of newly 
redesignated paragraph (b)(2).
0
5. Redesignating paragraph (d) as paragraph (d)(1).
0
6. Revising the paragraph heading and the first sentence of newly 
redesignated paragraph (d)(1).
0
7. Adding a new paragraph heading for paragraph (d).
0
8. Adding paragraph (d)(2).
    The revisions and additions read as follows:


Sec.  1.165-12  Denial of deduction for losses on registration-required 
obligations not in registered form.

    (a) In general. Except as provided in paragraph (c) of this 
section, nothing in section 165(a) and the regulations thereunder, or 
in any other provision of law, shall be construed to provide a 
deduction for any loss sustained on any registration-required 
obligation held after December 31, 1982, unless the obligation is in 
registered form or the issuance of the obligation was subject to tax 
under section 4701. The term registration-required obligation has the 
meaning given to that term in section 163(f)(2) and Sec.  1.163-
5(a)(2)(i). For purposes of this section, the term holder means the 
person that would be denied a loss deduction under section 165(j)(1) or 
denied capital gain treatment under section 1287(a). For purposes of 
this section, the term United States means the United States and its 
possessions within the meaning of Sec.  1.163-5(c)(2)(iv).
    (b) Registered form--(1) Obligations issued after March 18, 2012. 
With respect to obligations issued after March 18, 2012, the term 
registered form has the meaning given that term in Sec.  1.163-5(b).
    (2) Obligations issued after September 21, 1984 and on or before 
March 18, 2012. With respect to any obligation originally issued after 
September 21, 1984, and on or before March 18, 2012, the term 
registered form has the meaning given that term in Sec.  5f.103-1 of 
this chapter. * * *
* * * * *
    (d) Applicability date--(1) In general. Except as provided in 
paragraph (d)(2) of this section, these regulations apply generally to 
obligations issued after January 20, 1987. * * *
    (2) Obligations issued after March 18, 2012. Paragraph (a) of this 
section applies to obligations issued after March 18, 2012. For the 
rules that apply to obligations issued on or before March 18, 2012, see 
Sec.  1.165-12 as contained in 26 CFR part 1, revised as of the date of 
the most recent annual revision.


Sec.  1.860D-1   [Amended]

0
Par. 6. Section 1.860D-1(b)(5)(i)(A) is amended by removing the 
language ``Sec.  5f.103-1(c)'' and adding in its place the language 
``Sec.  1.163-5(b).''
0
Par. 7. Section 1.871-14 is amended by:
0
1. Revising the heading for paragraph (c).
0
2. Revising paragraph (c)(1)(i).
0
3. Revising the heading for paragraph (d).
0
4. Revising paragraphs (d)(1) and (2).
0
5. Adding paragraphs (j)(4) and (5).
    The revisions and additions read as follows:


Sec.  1.871-14  Rules relating to repeal of tax on interest of 
nonresident alien individuals and foreign corporations received from 
certain portfolio debt investments.

* * * * *
    (c) Obligations in registered form--(1) In general--(i) Registered 
form. For purposes of this section, the rules of Sec.  1.163-5(b) apply 
to determine when an obligation is in registered form.
* * * * *
    (d) Application of repeal of 30-percent withholding to pass-through 
certificates or participation interests--(1) In general--(i) Pass-
through certificates. Interest received on a pass-through certificate 
(as defined in Sec.  1.163-5(a)(3)(i)(B)) qualifies as portfolio 
interest under section 871(h)(2) or 881(c)(2) if the interest satisfies 
the conditions described in paragraph (c)(1)(ii) of this section or the 
conditions described in paragraph (e) of this section, without regard 
to whether any obligation held by the grantor trust, or similar fund, 
to which the pass-through certificate relates is described in paragraph 
(c)(1)(ii) or (e) of this section. For purposes of this paragraph 
(d)(1)(i), a similar fund includes an entity that, under Sec. Sec.  
301.7701-1 through 301.7701-3 of this chapter, is disregarded as an 
entity separate from its owner or classified as a partnership for 
federal tax purposes, without regard to the fund has the power to vary 
the assets in the fund or the sequence of payments made to holders. In 
addition, for purposes of this paragraph (d)(1)(i), a similar fund does 
not include a business entity that is classified as a corporation under 
Sec.  301.7701-2 of this chapter.
    (ii) Participation interests. Interest received on a participation 
interest described in Sec.  1.163-5(a)(3)(ii) qualifies as portfolio 
interest under section 871(h)(2) or 881(c)(2) if the interest satisfies 
the conditions described in paragraph (c)(1)(ii) of this section or the 
conditions described in paragraph (e) of this section, without regard 
to whether the obligation to which the participation interest relates 
is described in paragraph (c)(1)(ii) or (e) of this section.
    (2) Interest in REMICs. Interest received on a regular or residual 
interest in a REMIC, as defined in sections 860D and 860G and the 
regulations thereunder, qualifies as portfolio interest under section 
871(h)(2) or 881(c)(2) if the interest satisfies the conditions 
described in paragraph (c)(1)(ii) of this section or the conditions 
described in paragraph (e) of this section. For purposes of paragraphs 
(c)(1)(ii) and (e) of this section, interest

[[Page 43729]]

on a regular interest in a REMIC is not considered interest on any 
mortgage obligations held by the REMIC. The rule in the preceding 
sentence, however, applies only to payments made to the holder of the 
regular interest in the REMIC from the REMIC and does not apply to 
payments made to the REMIC. For purposes of paragraphs (c)(1)(ii) and 
(e) of this section, interest on a residual interest in a REMIC is 
considered to be interest on or with respect to the obligations held by 
the REMIC, and not on or with respect to the residual interest.
* * * * *
    (j) * * *
    (4) Registered form. Paragraph (c)(1)(i) of this section applies to 
obligations issued after March 18, 2012. For the rules that apply to 
obligations issued on or before March 18, 2012, see Sec.  1.871-14 as 
contained in 26 CFR part 1, revised as of the date of the most recent 
annual revision.
    (5) Pass-through certificates, participation interests, and 
interests in REMICs. Paragraph (d) of this section applies to pass-
through certificates, participation interests, or interests in REMICs 
issued after the date of publication of a Treasury decision adopting 
these rules as final regulations in the Federal Register.


Sec.  1.881-3   [Amended]

0
Par. 8. Section 1.881-3(e) is amended by:
0
1. Removing Examples 10 and 19.
0
2. Redesignating Examples 11 through 18 as Examples 10 through 17 and 
Examples 20 through 26 as Examples 18 through 24.
0
Par. 9. Section 1.1287-1 is amended by:
0
1. Revising paragraph (a).
0
2. Redesignating paragraphs (b)(1) and (2) as (b)(2) and (3), 
respectively.
0
3. Adding a new paragraph (b)(1).
0
4. Revising the paragraph heading and first sentence of newly 
redesignated paragraph (b)(2).
0
5. Redesignating paragraph (d) as paragraph (d)(1).
0
6. Revising the paragraph heading and the first sentence of newly 
redesignated paragraph (d)(1).
0
7. Adding a new paragraph heading for paragraph (d).
0
8. Adding paragraph (d)(2).
    The revisions and additions read as follows:


Sec.  1.1287-1  Denial of capital gains treatment for gains on 
registration-required obligations not in registered form.

    (a) In general. Except as provided in paragraph (c) of this 
section, any gain on the sale or other disposition of a registration-
required obligation held after December 31, 1982, that is not in 
registered form shall be treated as ordinary income unless the issuance 
of the obligation was subject to tax under section 4701. The term 
registration-required obligation has the meaning given to that term in 
section 163(f)(2) and Sec.  1.163-5(a)(2)(i). The term holder means the 
person that would be denied a loss deduction under section 165(j)(1) or 
denied capital gain treatment under section 1287(a).
    (b) Registered form--(1) Obligations issued after March 18, 2012. 
With respect to obligations issued after March 18, 2012, the term 
registered form has the meaning given that term in Sec.  1.163-5(b).
    (2) Obligations issued after September 21, 1984 and on or before 
March 18, 2012. With respect to any obligation originally issued after 
September 21, 1984, and on or before March 18, 2012, the term 
registered form has the meaning given that term in Sec.  5f.103-1 of 
this chapter. * * *
* * * * *
    (d) Applicability date--(1) In general. Except as provided in 
paragraph (d)(2) of this section, these regulations apply generally to 
obligations issued after January 20, 1987. * * *
    (2) Obligations issued after March 18, 2012. Paragraph (a) of this 
section applies to obligations issued after March 18, 2012.


Sec.  1.6045-1   [Amended]

0
Par. 10. Section 1.6045-1(n)(2)(ii)(J) is amended by removing the 
language ``Sec.  1.1471-1(b)(18)'' and adding in its place the language 
``Sec.  1.1471-1(b)(21)''.


Sec.  1.6049-5   [Amended]

0
Par. 11. Section 1.6049-5 is amended by:
0
1. Removing ``Sec.  5f.103-1(c)),'' and adding in its place ``Sec.  
1.163-5(b));'' in paragraph (a)(1)(i).
0
2. Removing the language ``Sec.  5f.163-1'' and adding in its place the 
language ``Sec.  1.163-5(a)(2)'' in paragraph (a)(1)(ii).

PART 5f--TEMPORARY INCOME TAX REGULATIONS UNDER THE TAX EQUITY AND 
FISCAL RESPONSIBILITY ACT OF 1982

0
Par. 12. The authority citation for part 5f continues to read in part 
as follows:

    Authority:  26 U.S.C. 7805 * * *

0
Par. 13. Section 5f.103-1(d) is amended by revising the paragraph 
heading and adding two sentences at the end of the paragraph to read as 
follows:


Sec.  5f.103-1  Obligations issued after December 31, 1982, required to 
be in registered form.

* * * * *
    (d) Applicability date. * * * For the purpose of determining 
whether bonds satisfy the requirements of section 149(a), this section 
applies to bonds issued prior to the date 90 days after the publication 
of the Treasury decision adopting these rules as final regulations in 
the Federal Register, and Sec.  1.149(a)-1 of this chapter applies to 
bonds issued on or after the date 90 days after the publication of the 
Treasury decision adopting these rules as final regulations in the 
Federal Register. For all other purposes, see Sec.  1.163-5(a)(2) and 
(b) of this chapter for obligations issued after March 18, 2012.
* * * * *
0
Par. 14. Section 5f.163-1(d) is amended by revising the paragraph 
heading and adding a sentence at the end of the paragraph to read as 
follows:


Sec.  5f.163-1  Denial of interest deduction on certain obligations 
issued after December 31, 1982, unless issued in registered form.

* * * * *
    (d) Applicability date. * * * For obligations issued after March 
18, 2012, see Sec.  1.163-5 of this chapter.
* * * * *

PART 46--EXCISE TAX ON POLICIES ISSUED BY FOREIGN INSURERS AND 
OBLIGATIONS NOT IN REGISTERED FORM

0
Par. 15. The authority citation for part 46 continues to read as 
follows:

    Authority:  26 U.S.C. 7805.

0
Par. 16. Section 46.4701-1 is amended by:
0
1. Revising paragraphs (b)(3), (4), and (5).
0
2. Redesignating paragraph (e) as paragraph (e)(1).
0
3. Revising the paragraph heading of newly redesignated paragraph 
(e)(1).
0
4. Adding a new paragraph heading for paragraph (e).
0
5. Adding paragraph (e)(2).
    The revisions and additions read as follows:


Sec.  46.4701-1  Tax on issuer of registration-required obligation not 
in registered form.

* * * * *
    (b) * * *
    (3) Registration-required obligation. The term registration-
required obligation has the same meaning as in section 163(f) and Sec.  
1.163-5(a)(2)(i) of this chapter, except that the term does not include 
an obligation described in section 4701(b)(1)(B) or any obligation that 
is required to be registered under

[[Page 43730]]

section 149(a), such as bonds that are tax-exempt under section 103. 
For purposes of determining whether an obligation is described in 
section 4701(b)(1)(B), the rules of Sec.  1.163-5(c) of this chapter 
apply.
    (4) Registered form. The term registered form has the same meaning 
as in Sec.  1.163-5(b) of this chapter.
    (5) Issuer--(i) In general. Except as provided in paragraph 
(b)(5)(ii) of this section, the term issuer is the person whose 
interest deduction would be disallowed solely by reason of section 
163(f)(1).
    (ii) Sponsor treated as issuer. A pass-through certificate (as 
defined in Sec.  1.163-5(a)(3)(i)(B) of this chapter), a participation 
interest described in Sec.  1.163-5(a)(3)(ii) of this chapter, or a 
regular interest in a REMIC, as defined in sections 860D and 860G and 
the regulations thereunder, is considered to be issued solely by the 
recipient of the proceeds from the issuance of the certificate or 
interest (the sponsor). The sponsor is therefore liable for any excise 
tax under section 4701 that may be imposed with reference to the 
principal amount of the pass-through certificate, participation 
interest, or regular interest.
* * * * *
    (e) Applicability date--(1) In general. * * *
    (2) Exception. Notwithstanding paragraph (e)(1) of this section, 
paragraphs (b)(3), (4), and (5) of this section apply to obligations 
issued after March 18, 2012. For the rules that apply to obligations 
issued on or before March 18, 2012, see Sec.  46.4701-1 as contained in 
26 CFR part 46, revised as of the date of the most recent annual 
revision.

Kirsten Wielobob,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2017-19753 Filed 9-15-17; 4:15 pm]
 BILLING CODE 4830-01-P