[Federal Register Volume 79, Number 10 (Wednesday, January 15, 2014)]
[Rules and Regulations]
[Pages 2589-2591]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-00613]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9653]
RIN 1545-BL28
Bond Premium Carryforward
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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SUMMARY: This document contains final regulations that provide guidance
on the tax treatment of a debt instrument with a bond premium
carryforward in the holder's final accrual period. The regulations in
this document provide guidance to holders of Treasury securities and
other debt instruments acquired at a premium.
DATES: Effective Date: These regulations are effective on January 15,
2014.
Applicability Date: For the date of applicability, see Sec. 1.171-
2(a)(4)(i)(C)(2).
FOR FURTHER INFORMATION CONTACT: William E. Blanchard, (202) 317-3900
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
On January 4, 2013, the IRS and the Treasury Department published
temporary regulations (TD 9609) in the Federal Register (78 FR 666)
relating to the federal income tax treatment of a debt instrument with
a bond premium carryforward in the holder's final accrual period,
including a Treasury bill acquired at a premium. See Sec. 1.171-2T. On
the same day, the IRS and the Treasury Department published a notice of
proposed rulemaking (REG-140437-12) cross-referencing the temporary
regulations in the Federal Register (78 FR 687). No comments were
received on the notice of proposed rulemaking. No public hearing was
requested or held.
The proposed regulations are adopted without substantive change by
this
[[Page 2590]]
Treasury decision, and the corresponding temporary regulations are
removed.
Explanation of Provisions
Prior to the issuance of the temporary regulations, the IRS and the
Treasury Department had received questions about an electing holder's
treatment of a taxable zero coupon debt instrument, including a
Treasury bill, acquired at a premium and with a negative yield. In this
situation, as explained in more detail below, under the bond premium
regulations in effect prior to the issuance of the temporary
regulations (the prior regulations), a holder that had elected to
amortize bond premium under section 171 generally would have had a
capital loss upon the sale, retirement, or other disposition of the
debt instrument rather than an ordinary deduction under section
171(a)(1) for all or a portion of the bond premium. The acquisition of
a zero coupon debt instrument at a premium and with a negative yield
was not contemplated when the prior regulations were revised in 1997
(TD 8746).
Under section 171(c) and Sec. 1.171-4, a holder can elect to
amortize bond premium on taxable debt instruments. A holder acquires a
debt instrument at a premium if the holder's basis in the debt
instrument immediately after its acquisition by the holder exceeds the
sum of all amounts payable on the debt instrument after the acquisition
date other than payments of qualified stated interest (as defined in
Sec. 1.1273-1(c)). The general effect of an election to amortize bond
premium on a debt instrument that is a capital asset is to treat the
bond premium as an offset to ordinary income rather than as a capital
loss.
Under section 171(e) and Sec. 1.171-2, an electing holder
amortizes bond premium by offsetting the qualified stated interest
allocable to an accrual period with the bond premium allocable to the
period. As a result, the holder only includes the net amount of
interest in income for the period. If the bond premium allocable to an
accrual period exceeds the qualified stated interest allocable to the
accrual period, the holder treats the excess as a bond premium
deduction under section 171(a)(1) for the accrual period. However, the
amount treated as a bond premium deduction is limited to the amount by
which the holder's total interest inclusions on the debt instrument in
prior accrual periods exceed the total amount treated by the holder as
a bond premium deduction on the debt instrument in prior accrual
periods. If the bond premium allocable to an accrual period exceeds the
sum of the qualified stated interest allocable to the accrual period
and the amount treated as a deduction under section 171(a)(1), the
excess is carried forward to the next accrual period and is treated as
bond premium allocable to that period. See Sec. 1.171-2(a)(4). Under
Sec. 1.1016-5(b), a holder's basis in a taxable debt instrument is
reduced by the amount of bond premium used to offset qualified stated
interest on the debt instrument and the amount of bond premium allowed
as a deduction under section 171(a)(1).
There is no stated interest payable, and therefore no qualified
stated interest, on a zero coupon debt instrument, including a Treasury
bill. As a result, under Sec. 1.171-2, if a zero coupon debt
instrument is acquired at a premium (that is, acquired for an amount
greater than its stated principal amount), the bond premium allocable
to an accrual period is carried forward to the next accrual period and
to each succeeding accrual period. As a result, upon the sale,
retirement, or other disposition of the debt instrument, there
generally will be a bond premium carryforward in the holder's final
accrual period. In this situation, because there is no qualified stated
interest to offset the bond premium carryforward and the holder's basis
in the debt instrument has not been reduced, under the prior
regulations the holder would have had a capital loss in an amount at
least equal to the bond premium carryforward.
To address the treatment of a bond premium carryforward in the
situation described in the prior paragraph, the temporary regulations
added a specific rule for the treatment of a bond premium carryforward
determined as of the end of the holder's final accrual period for any
taxable debt instrument for which the holder had elected to amortize
bond premium. These final regulations adopt the rule in the temporary
and proposed regulations. Thus, in the situation described in the prior
paragraph, under these final regulations an electing holder deducts all
or a portion of the bond premium under section 171(a)(1) when the
instrument is sold, retired, or otherwise disposed of rather than
recognizing a capital loss.
As noted above, no comments were received on the temporary
regulations. The final regulations in this document are substantively
the same as the temporary regulations.
Applicability Date
Section 1.171-2(a)(4)(i)(C)(1) applies to a debt instrument (bond)
acquired on or after January 4, 2013 (the effective/applicability date
of the temporary regulations). A taxpayer, however, may rely on this
section for a debt instrument (bond) acquired before that date.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in Executive Order 12866, 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, and because the regulations do not
impose a collection of information on small entities, the Regulatory
Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to
section 7805(f) of the Code, the proposed regulations preceding these
final regulations were submitted to the Chief Counsel for Advocacy of
the Small Business Administration for comment on their impact on small
business. No comments were received.
Drafting Information
The principal author of these regulations is William E. Blanchard,
Office of Associate Chief Counsel (Financial Institutions and
Products). However, other personnel from the IRS and the Treasury
Department participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 is amended by removing
the entry for '1.171-2T to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
0
Par. 2. Section 1.171-2 is amended by adding new paragraph (a)(4)(i)(C)
to read as follows:
Sec. 1.171-2 Amortization of bond premium.
(a) * * *
(4) * * *
(i) * * *
(C) Carryforward in holder's final accrual period--(1) Bond premium
deduction. If there is a bond premium carryforward determined under
paragraph (a)(4)(i)(B) of this section as
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of the end of the holder's accrual period in which the bond is sold,
retired, or otherwise disposed of, the holder treats the amount of the
carryforward as a bond premium deduction under section 171(a)(1) for
the holder's taxable year in which the sale, retirement, or other
disposition occurs. For purposes of Sec. 1.1016-5(b), the holder's
basis in the bond is reduced by the amount of bond premium allowed as a
deduction under this paragraph (a)(4)(i)(C)(1).
(2) Effective/applicability date. Notwithstanding Sec. 1.171-
5(a)(1), paragraph (a)(4)(i)(C)(1) of this section applies to a bond
acquired on or after January 4, 2013. A taxpayer, however, may rely on
paragraph (a)(4)(i)(C)(1) of this section for a bond acquired before
that date.
* * * * *
Sec. 1.171-2T [Removed]
0
Par. 3. Section 1.171-2T is removed.
0
Par. 4. Section 1.171-3 is amended by revising the fifth sentence in
paragraph (b) to read as follows:
Sec. 1.171-3 Special rules for certain bonds.
* * * * *
(b) * * * However, the rules in Sec. 1.171-2(a)(4)(i)(C) apply to
any remaining deflation adjustment attributable to bond premium as of
the end of the holder's accrual period in which the bond is sold,
retired, or otherwise disposed of. * * *
* * * * *
John Dalrymple,
Deputy Commissioner for Services and Enforcement.
Approved: January 7, 2014.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2014-00613 Filed 1-14-14; 8:45 am]
BILLING CODE 4830-01-P