Treasury Issues Proposed Regulations Expanding the Definition of Publicly Traded Property
By Andrew M. Short & Matthew G. Brigham
On January 6, 2011, the Treasury Department and the Internal Revenue Service (the IRS) issued proposed regulations (the Proposed Regulations) amending the current rules for classifying property as publicly traded for purposes of determining the issue price of a debt instrument. The issue price of a debt instrument has important income tax consequences. For example, the difference between the issue price and the stated redemption price at maturity, commonly known as the face value of the debt, measures whether there is any original issue discount (OID) on the instrument. Additionally, a debt-for-debt exchange involving publicly traded property (including a significant modification of existing debt) may result in a reduced issue price for the new debt, which generally would produce cancellation of indebtedness income for the issuer, a loss for 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.