Revenue Procedure 2001-21 provides an election that can be used in the case of certain debt exchanges occurring on or after March 13, 2001, to facilitate the consolidation of some or all of the debt instruments from two or more outstanding debt issues.443
438
Treas. Reg. § 1.988-2(b)(11)(i). 439
See Treas. Reg. § 1.1275-4. 440
T.D. 9157, 2004-2 C.B. 545 (Aug. 27, 2004). See Section IV.H for a discussion of the contingent payment debt provisions.
441
Treas. Reg. § 1.988-6(a)(1). The nonfunctional currency CPDI rules do not apply to (i) an instrument if any payment made under such instrument is determined by reference to a hyperinflationary currency, or (ii) an obligation that is tax-exempt under section 103. Treas. Reg. § 1.988-6(a)(2)(i), (f)(1).
442
Treas. Reg. § 1.988-6(b)(3). 443
The election applies to the substitution of new debt for old debt if (1) either (a) debt instruments from a single new issue are substituted for debt instruments from two or more old issues, or (b) debt
This election allows taxpayers to treat a debt substitution as a realization event, even though the exchange does not result in a significant modification, in order to permit the fungibility of debt issues. The election is designed to solve the problem created under Treasury regulation section 1.1275-2(j) by the creation of a
different amount of OID in the new issue pursuant to the requisite OID redeterminations in certain debt exchanges, which may preclude the fungibility of old and new debt issues after an exchange.444
Revenue Procedure 99-18, as extended by Revenue Procedure 2000-29, generally provided the same election for debt substitutions occurring after March 1, 1999 but before March 13, 2001.445 However, Revenue Procedure 2001-21 expands the scope of the debt instruments qualifying for the election in three
significant ways. Under Revenue Procedure 99-18, the election applied only to debt instruments from a single new issue that were
instruments issued in a qualified reopening (as defined in Treasury regulation section 1.1275-2) are substituted for debt instruments from one or more outstanding issues of debt; (2) the substitution does not result in a significant modification of the old debt and, therefore, is not a realization event; (3) the new debt and the old debt are publicly traded; (4) the old debt was issued at par, with premium, or with only a de minimis amount of OID; (5) the new debt is issued at par or with only a de minimis amount of OID or premium; (6) neither the new nor the old debt is a contingent payment debt instrument, a tax-exempt obligation, or a convertible debt instrument; (7) all payments on the old and new debt are denominated in or determined by reference to U.S. dollars, and the U.S. dollar is the functional currency of the issuer of the new debt; and (8) the issuer and one or more holders of the old debt each make the election. Rev. Proc. 2001-21, 2001-1 C.B. 742.
444
See New York State Bar Association, Tax Section, Report on
Definition of “Traded on an Established Market” Within the Meaning of Section 1273, 2004 TNT 159-7 (Aug. 17, 2004)
(questioning whether Revenue Procedure 2001-21 provides relief where tax fungibility would be most beneficial, i.e., where additional bonds are issued under the same indenture, but at a discount
exceeding a de minimis amount). 445
Rev. Proc. 99-18, 1999-1 C.B. 736; Rev. Proc. 2000-29, 2000-2 C.B. 113.
substituted for debt instruments from two or more old issues.446 The election now applies also to debt instruments issued in a qualified reopening (as defined in Treasury regulation
section 1.1275-2) that are substituted for debt instruments from one or more outstanding issues of debt.447 Also, the election now applies even if the old debt was issued with more than a de minimis amount of premium.448 Finally, the requirement that the
substitution not result in a significant modification of the old debt may now be satisfied either as of (1) the substitution date, or (2) the date that is two days before the date on which the
substitution offer commences, provided such date is no more than 30 business days before the date on which the substitution offer ends.449
If the election is made, the issuer and the holders can treat a substitution of debt instruments as a realization event for federal income tax purposes.450 However, instead of recognizing a gain or loss, an electing holder will take into account any gain or loss on the date of the substitution as income or deduction over the term of the new debt instruments.451 Immediately after the substitution, the holder’s basis and holding period with respect to the new debt is the same as the holder’s adjusted basis and holding period with respect to the old debt.452 If the stated redemption price at maturity of the new debt exceeds the holder’s basis in the new debt, the holder treats the difference as market discount on the new debt and treats the new debt as a market discount bond.453 If the holder’s basis in the new debt is greater than the stated redemption price at maturity of the new debt, the holder treats the difference as bond premium on the new debt.454 The issuer must generally take any 446 Rev. Proc. 99-18, 1999-1 C.B. 736. 447 Rev. Proc. 2001-21, 2001-1 C.B. 742. 448 Rev. Proc. 2001-21, 2001-1 C.B. 742. 449 Rev. Proc. 2001-21, 2001-1 C.B. 742. 450 Rev. Proc. 2001-21, 2001-1 C.B. 742. 451 Rev. Proc. 2001-21, 2001-1 C.B. 742. 452 Rev. Proc. 2001-21, 2001-1 C.B. 742. 453 Rev. Proc. 2001-21, 2001-1 C.B. 742. 454 Rev. Proc. 2001-21, 2001-1 C.B. 742.
difference between the adjusted issue prices of the old debt and the new debt into account over the term (or, in the case of a qualified reopening, the remaining term) of the new debt as increased OID, reduced OID, or bond premium.455