§1274 — Determination of issue price in the case of certain debt instruments issued for property
20 citing cases
Statute Text — 26 U.S.C. §1274
In the case of any debt instrument to which this section applies, for purposes of this subpart, the issue price shall be—
where there is adequate stated interest, the stated principal amount, or
in any other case, the imputed principal amount.
For purposes of this section—
Except as provided in paragraph (3), the imputed principal amount of any debt instrument shall be equal to the sum of the present values of all payments due under such debt instrument.
For purposes of paragraph (1), the present value of a payment shall be determined in the manner provided by regulations prescribed by the Secretary—
as of the date of the sale or exchange, and
by using a discount rate equal to the applicable Federal rate, compounded semiannually.
In the case of any potentially abusive situation, the imputed principal amount of any debt instrument received in exchange for property shall be the fair market value of such property adjusted to take into account other consideration involved in the transaction.
For purposes of subparagraph (A), the term “potentially abusive situation” means—
a tax shelter (as defined in section 6662(d)(2)(C)(ii)), and
any other situation which, by reason of—
recent sales transactions,
nonrecourse financing,
financing with a term in excess of the economic life of the property, or
other circumstances,
is of a type which the Secretary specifies by regulations as having potential for tax avoidance.
Except as otherwise provided in this subsection, this section shall apply to any debt instrument given in consideration for the sale or exchange of property if—
the stated redemption price at maturity for such debt instrument exceeds—
where there is adequate stated interest, the stated principal amount, or
in any other case, the imputed principal amount of such debt instrument determined under subsection (b), and
some or all of the payments due under such debt instrument are due more than 6 months after the date of such sale or exchange.
For purposes of this section, there is adequate stated interest with respect to any debt instrument if the stated principal amount for such debt instrument is less than or equal to the imputed principal amount of such debt instrument determined under subsection (b).
This section shall not apply to—
Any debt instrument arising from the sale or exchange of a farm (within the meaning of section 6420(c)(2))—
by an individual, estate, or testamentary trust,
by a corporation which as of the date of the sale or exchange is a small business corporation (as defined in section 1244(c)(3)), or
by a partnership which as of the date of the sale or exchange meets requirements similar to those of section 1244(c)(3).
Clause (i) shall apply only if it can be determined at the time of the sale or exchange that the sales price cannot exceed $1,000,000. For purposes of the preceding sentence, all sales and exchanges which are part of the same transaction (or a series of related transactions) shall be treated as 1 sale or exchange.
Any debt instrument arising from the sale or exchange by an individual of his principal residence (within the meaning of section 121).
Any debt instrument arising from the sale or exchange of property if the sum of the following amounts does not exceed $250,000:
the aggregate amount of the payments due under such debt instrument and all other debt instruments received as consideration for the sale or exchange, and
the aggregate amount of any other consideration to be received for the sale or exchange.
For purposes of clause (i), any consideration (other than a debt instrument) shall be taken into account at its fair market value.
For purposes of this subparagraph, all sales and exchanges which are part of the same transaction (or a series of related transactions) shall be treated as 1 sale or exchange.
Any debt instrument to which section 1273(b)(3) applies.
In the case of any transfer described in section 1235(a) (relating to sale or exchange of patents), any amount contingent on the productivity, use, or disposition of the property transferred.
Any debt instrument to the extent section 483(e) (relating to certain land transfers between related persons) applies to such instrument.
If any person—
in connection with the sale or exchange of property, assumes any debt instrument, or
acquires any property subject to any debt instrument,
in determining whether this section or section 483 applies to such debt instrument, such assumption (or such acquisition) shall not be taken into account unless the terms and conditions of such debt instrument are modified (or the nature of the transaction is changed) in connection with the assumption (or acquisition).
For purposes of this section—
| In the case of a debt instrument with a term of: | The applicable Federal rate is: |
|---|---|
| Not over 3 years | The Federal short-term rate. |
| Over 3 years but not over 9 years | The Federal mid-term rate. |
| Over 9 years | The Federal long-term rate. |
During each calendar month, the Secretary shall determine the Federal short-term rate, mid-term rate, and long-term rate which shall apply during the following calendar month.
For purposes of this paragraph—
The Federal short-term rate shall be the rate determined by the Secretary based on the average market yield (during any 1-month period selected by the Secretary and ending in the calendar month in which the determination is made) on outstanding marketable obligations of the United States with remaining periods to maturity of 3 years or less.
The Federal mid-term and long-term rate shall be determined in accordance with the principles of clause (i).
The Secretary may by regulations permit a rate to be used with respect to any debt instrument which is lower than the applicable Federal rate if the taxpayer establishes to the satisfaction of the Secretary that such lower rate is based on the same principles as the applicable Federal rate and is appropriate for the term of such instrument.
In the case of any sale or exchange, the applicable Federal rate shall be the lowest 3-month rate.
For purposes of subparagraph (A), the term “lowest 3-month rate” means the lowest of the applicable Federal rates in effect for any month in the 3-calendar-month period ending with the 1st calendar month in which there is a binding contract in writing for such sale or exchange.
In determining the term of a debt instrument for purposes of this subsection, under regulations prescribed by the Secretary, there shall be taken into account options to renew or extend.
In the case of any debt instrument to which this subsection applies, the discount rate used under subsection (b)(2)(B) or section 483(b) shall be 110 percent of the applicable Federal rate, compounded semiannually.
Section 1274A shall not apply to any debt instrument to which this subsection applies.
This subsection shall apply to any debt instrument given in consideration for the sale or exchange of any property if, pursuant to a plan, the transferor or any related person leases a portion of such property after such sale or exchange.
Treasury Regulations
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Treas. Reg. §1.1274-1Debt instruments to which section 1274 applies
(a) In general. Subject to the exceptions and limitations in paragraph (b) of this section, section 1274 and this section apply to any debt instrument issued in consideration for the sale or exchange of property. For purposes of section 1274, property includes debt instruments and investment units, but does not include money, services, or the right to use property. For the treatment of certain obligations given in exchange for services or the use of property, see sections 404 and 467. For purposes of this paragraph (a), money includes functional currency and, in certain circumstances, nonfunctional currency. See § 1.988-2(b)(2) for circumstances when nonfunctional currency is treated as money rather than as property.
(b) Exceptions—(1) Debt instrument with adequate stated interest and no OID. Section 1274 does not apply to a debt instrument if—
(i) All interest payable on the instrument is qualified stated interest;
(ii) The stated rate of interest is at least equal to the test rate of interest (as defined in § 1.1274-4);
(iii) The debt instrument is not issued in a potentially abusive situation (as defined in § 1.1274-3); and
(iv) No payment from the buyer-borrower to the seller-lender designated as points or interest is made at the time of issuance of the debt instrument.
(2) Exceptions under sections 1274(c)(1)(B), 1274(c)(3), 1274A(c), and 1275(b)(1)—(i) In general. Sections 1274(c)(1)(B), 1274(c)(3), 1274A(c), and 1275(b)(1) describe certain transactions to which section 1274 does not apply. This paragraph (b)(2) provides certain rules to be used in applying those exceptions.
(ii) Special rules for certain exceptions under section 1274(c)(3)—(A) Determination of sales price for certain sales of farms. For purposes of section 1274(c)(3)(A), the determination as to whether the sales price cannot exceed $1,000,000 is made without regard to any other exception to, or limitation on, the applicability of section 1274 (e.g., without regard to the special rules regarding sales of principal residences and land transfers between related persons). In addition, the sales price is determined without regard to section 1274 and without regard to any stated interest. The sales price includes the amount of any liability included in the amount realized from the sale or exchange. See § 1.1001-2.
(B) Sales involving total payments of $250,000 or less. Under section 1274(c)(3)(C), the determination of the amount of payments due under all debt instruments and the amount of other consideration to be received is made as of the date of the sale or exchange or, if earlier, the contract date. If the precise amount due under any debt instrument or the precise amount of any other consideration to be received cannot be determined as of that date, section 1274(c)(3)(C) applies only if it can be determined that the maximum of the aggregate amount of payments due under the debt instruments and other consideration to be received cannot exceed $250,000. For purposes of section 1274(c)(3)(C), if a liability is assumed or property is taken subject to a liability, the aggregate amount of payments due includes the outstanding principal balance or adjusted issue price (in the case of an obligation originally issued at a discount) of the obligation.
(C) Coordination with section 1273 and § 1.1273-2. In accordance with section 1274(c)(3)(D), section 1274 and this section do not apply if the issue price of a debt instrument issued in consideration for the sale or exchange of property is determined under paragraph (a)(1), (b)(1), or (c)(1) of § 1.1273-2.
(3) Other exceptions to section 1274—(i) Holders of certain below-market instruments. Section 1274 does not apply to any holder of a debt instrument that is issued in consideration for the sale or exchange of personal use property (within the meaning of section 1275(b)(3)) in the hands of the issuer and that evidences a below-market loan described in section 7872(c)(1).
(ii) Transactions involving certain demand loans. Section 1274 does not apply to any debt instrument that evidences a demand loan that is a below-market loan described in section 7872(c)(1).
(iii) Certain transfers subject to section 1041. Section 1274 does not apply to any debt instrument issued in consideration for a transfer of property subject to section 1041 (relating to transfers of property between spouses or incident to divorce).
(c) Examples. The following examples illustrate the rules of this section.
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Treas. Reg. §1.1274-1(a)In general.
In general. Subject to the exceptions and limitations in paragraph (b) of this section, section 1274 and this section apply to any debt instrument issued in consideration for the sale or exchange of property. For purposes of section 1274, property includes debt instruments and investment units, but does not include money, services, or the right to use property. For the treatment of certain obligations given in exchange for services or the use of property, see sections 404 and 467. For purposes of this paragraph (a), money includes functional currency and, in certain circumstances, nonfunctional currency. See § 1.988-2(b)(2) for circumstances when nonfunctional currency is treated as money rather than as property.
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Treas. Reg. §1.1274-1(b)Exceptions—(1) Debt instrument with adequate stated interest and no OID.
Exceptions—(1) Debt instrument with adequate stated interest and no OID. Section 1274 does not apply to a debt instrument if—
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Treas. Reg. §1.1274-1(c)Examples.
Examples. The following examples illustrate the rules of this section.
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Treas. Reg. §1.1274-1(i)§1.1274-1(i)
All interest payable on the instrument is qualified stated interest;
(ii) The stated rate of interest is at least equal to the test rate of interest (as defined in § 1.1274-4);
(iii) The debt instrument is not issued in a potentially abusive situation (as defined in § 1.1274-3); and
(iv) No payment from the buyer-borrower to the seller-lender designated as points or interest is made at the time of issuance of the debt instrument.
(2) Exceptions under sections 1274(c)(1)(B), 1274(c)(3), 1274A(c), and 1275(b)(1)—(i) In general. Sections 1274(c)(1)(B), 1274(c)(3), 1274A(c), and 1275(b)(1) describe certain transactions to which section 1274 does not apply. This paragraph (b)(2) provides certain rules to be used in applying those exceptions.
(ii) Special rules for certain exceptions under section 1274(c)(3)—(A) Determination of sales price for certain sales of farms. For purposes of section 1274(c)(3)(A), the determination as to whether the sales price cannot exceed $1,000,000 is made without regard to any other exception to, or limitation on, the applicability of section 1274 (e.g., without regard to the special rules regarding sales of principal residences and land transfers between related persons). In addition, the sales price is determined without regard to section 1274 and without regard to any stated interest. The sales price includes the amount of any liability included in the amount realized from the sale or exchange. See § 1.1001-2.
(B) Sales involving total payments of $250,000 or less. Under section 1274(c)(3)(C), the determination of the amount of payments due under all debt instruments and the amount of other consideration to be received is made as of the date of the sale or exchange or, if earlier, the contract date. If the precise amount due under any debt instrument or the precise amount of any other consideration to be received cannot be determined as of that date, section 1274(c)(3)(C) applies only if it can be determined that the maximum of the aggregate amount of payments due under the debt instruments and other consideration to be received cannot exceed $250,000. For purposes of section 1274(c)(3)(C), if a liability is assumed or property is taken subject to a liability, the aggregate amount of payments due includes the outstanding principal balance or adjusted issue price (in the case of an obligation originally issued at a discount) of the obligation.
(C) Coordination with section 1273 and § 1.1273-2. In accordance with section 1274(c)(3)(D), section 1274 and this section do not apply if the issue price of a debt instrument issued in consideration for the sale or exchange of property is determined under paragraph (a)(1), (b)(1), or (c)(1) of § 1.1273-2.
(3) Other exceptions to section 1274—(i) Holders of certain below-market instruments. Section 1274 does not apply to any holder of a debt instrument that is issued in consideration for the sale or exchange of personal use property (within the meaning of section 1275(b)(3)) in the hands of the issuer and that evidences a below-market loan described in section 7872(c)(1).
(ii) Transactions involving certain demand loans. Section 1274 does not apply to any debt instrument that evidences a demand loan that is a below-market loan described in section 7872(c)(1).
(iii) Certain transfers subject to section 1041. Section 1274 does not apply to any debt instrument issued in consideration for a transfer of property subject to section 1041 (relating to transfers of property between spouses or incident to divorce).
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Treas. Reg. §1.1274-2Issue price of debt instruments to which section 1274 applies
(a) In general. If section 1274 applies to a debt instrument, section 1274 and this section determine the issue price of the debt instrument. For rules relating to the determination of the amount and timing of OID to be included in income, see section 1272 and the regulations thereunder.
(b) Issue price—(1) Debt instruments that provide for adequate stated interest; stated principal amount. The issue price of a debt instrument that provides for adequate stated interest is the stated principal amount of the debt instrument. For purposes of section 1274, the stated principal amount of a debt instrument is the aggregate amount of all payments due under the debt instrument, excluding any amount of stated interest. Under § 1.1273-2(g)(2)(ii), however, the stated principal amount of a debt instrument is reduced by any payment from the buyer- borrower to the seller-lender that is designated as interest or points. See Example 2 of § 1.1273-2(g)(5).
(2) Debt instruments that do not provide for adequate stated interest; imputed principal amount. The issue price of a debt instrument that does not provide for adequate stated interest is the imputed principal amount of the debt instrument.
(3) Debt instruments issued in a potentially abusive situation; fair market value. Notwithstanding paragraphs (b)(1) and (b)(2) of this section, in the case of a debt instrument issued in a potentially abusive situation (as defined in § 1.1274-3), the issue price of the debt instrument is the fair market value of the property received in exchange for the debt instrument, reduced by the fair market value of any consideration other than the debt instrument issued in consideration for the sale or exchange.
(c) Determination of whether a debt instrument provides for adequate stated interest—(1) In general. A debt instrument provides for adequate stated interest if its stated principal amount is less than or equal to its imputed principal amount. Imputed principal amount means the sum of the present values, as of the issue date, of all payments, including payments of stated interest, due under the debt instrument (determined by using a discount rate equal to the test rate of interest as determined under § 1.1274-4). If a debt instrument has a single fixed rate of interest that is paid or compounded at least annually, and that rate is equal to or greater than the test rate, the debt instrument has adequate stated interest.
(2) Determination of present value. The present value of a payment is determined by discounting the payment from the date it becomes due to the date of the sale or exchange at the test rate of interest. To determine present value, a compounding period must be selected, and the test rate must be based on the same compounding period.
(d) Treatment of certain options. This paragraph (d) provides rules for determining the issue price of a debt instrument to which section 1274 applies (other than a debt instrument issued in a potentially abusive situation) that is subject to one or more options described in both paragraphs (c)(1) and (c)(5) of § 1.1272-1. Under this paragraph (d), an issuer will be deemed to exercise or not exercise an option or combination of options in a manner that minimizes the instrument's imputed principal amount, and a holder will be deemed to exercise or not exercise an option or combination of options in a manner that maximizes the instrument's imputed principal amount. If both the issuer and the holder have options, the rules of this paragraph (d) are applied to the options in the order that they may be exercised. Thus, the deemed exercise of one option may eliminate other options that are later in time. See § 1.1272-1(c)(5) to determine the debt instrument's yield and maturity for purposes of determining the accrual of OID with respect to the instrument.
(e) Mandatory sinking funds. In determining the issue price of a debt instrument to which section 1274 applies (other than a debt instrument issued in a potentially abusive situation) and that is subject to a mandatory sinking fund provision described in § 1.1272-1(c)(3), the mandatory sinking fund provision is ignored.
(f) Treatment of variable rate debt instruments—(1) Stated interest at a qualified floating rate—(i) In general. For purposes of paragraph (c) of this section, the imputed principal amount of a variable rate debt instrument (within the meaning of § 1.1275-5(a)) that provides for stated interest at a qualified floating rate (or rates) is determined by assuming that the instrument provides for a fixed rate of interest for each accrual period to which a qualified floating rate applies. For purposes of the preceding sentence, the assumed fixed rate in each accrual period is the greater of—
(A) The value of the applicable qualified floating rate as of the first date on which there is a binding written contract that substantially sets forth the terms under which the sale or exchange is ultimately consummated; or
(B) The value of the applicable qualified floating rate as of the date on which the sale or exchange occurs.
(ii) Interest rate restrictions. Notwithstanding paragraph (f)(1)(i) of this section, if, as a result of interest rate restrictions (such as an interest rate cap), the expected yield of the debt instrument taking the restrictions into account is significantly less than the expected yield of the debt instrument without regard to the restrictions, the interest payments on the debt instrument (other than any fixed interest payments) are treated as contingent payments. Reasonably symmetric interest rate caps and floors, or reasonably symmetric governors, that are fixed throughout the term of the debt instrument do not result in the debt instrument being subject to this rule.
(2) Stated interest at a single objective rate. For purposes of paragraph (c) of this section, the imputed principal amount of a variable rate debt instrument (within the meaning of § 1.1275-5(a)) that provides for stated interest at a single objective rate is determined by treating the interest payments as contingent payments.
(g) Treatment of contingent payment debt instruments. Notwithstanding paragraph (b) of this section, if a debt instrument subject to section 1274 provides for one or more contingent payments, the issue price of the debt instrument is the lesser of the instrument's noncontingent principal payments and the sum of the present values of the noncontingent payments (as determined under paragraph (c) of this section). However, if the debt instrument is issued in a potentially abusive situation, the issue price of the debt instrument is the fair market value of the noncontingent payments. For additional rules relating to a debt instrument that provides for one or more contingent payments, see § 1.1275-4. This paragraph (g) applies to debt instruments issued on or after August 13, 1996.
(h) Examples. The following examples illustrate the rules of this section. Each example assumes a 30-day month, 360-day year. In addition, each example assumes that the debt instrument is not a qualified debt instrument (as defined in section 1274A(b)) and is not issued in a potentially abusive situation.
(i) [Reserved]
(j) Special rules for tax-exempt obligations—(1) Certain variable rate debt instruments. Notwithstanding paragraph (b) of this section, if a tax-exempt obligation (as defined in section 1275(a)(3)) is a variable rate debt instrument (within the meaning of § 1.1275-5) that pays interest at an objective rate and is subject to section 1274, the issue price of the obligation is the greater of the obligation's fair market value and its stated principal amount.
(2) Contingent payment debt instruments. Notwithstanding paragraphs (b) and (g) of this section, if a tax-exempt obligation (as defined in section 1275(a)(3)) is subject to section 1274 and § 1.1275-4, the issue price of the obligation is the fair market value of the obligation. However, in the case of a tax-exempt obligation that is subject to § 1.1275-4(d)(2) (an obligation that provides for interest-based or revenue-based payments), the issue price of the obligation is the greater of the obligation's fair market value and its stated principal amount.
(3) Effective date. This paragraph (j) applies to debt instruments issued on or after August 13, 1996.
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Treas. Reg. §1.1274-2(a)In general.
In general. If section 1274 applies to a debt instrument, section 1274 and this section determine the issue price of the debt instrument. For rules relating to the determination of the amount and timing of OID to be included in income, see section 1272 and the regulations thereunder.
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Treas. Reg. §1.1274-2(b)Issue price—(1) Debt instruments that provide for adequate stated interest; stated principal amount.
Issue price—(1) Debt instruments that provide for adequate stated interest; stated principal amount. The issue price of a debt instrument that provides for adequate stated interest is the stated principal amount of the debt instrument. For purposes of section 1274, the stated principal amount of a debt instrument is the aggregate amount of all payments due under the debt instrument, excluding any amount of stated interest. Under § 1.1273-2(g)(2)(ii), however, the stated principal amount of a debt instrument is reduced by any payment from the buyer- borrower to the seller-lender that is designated as interest or points. See Example 2 of § 1.1273-2(g)(5).
(2) Debt instruments that do not provide for adequate stated interest; imputed principal amount. The issue price of a debt instrument that does not provide for adequate stated interest is the imputed principal amount of the debt instrument.
(3) Debt instruments issued in a potentially abusive situation; fair market value. Notwithstanding paragraphs (b)(1) and (b)(2) of this section, in the case of a debt instrument issued in a potentially abusive situation (as defined in § 1.1274-3), the issue price of the debt instrument is the fair market value of the property received in exchange for the debt instrument, reduced by the fair market value of any consideration other than the debt instrument issued in consideration for the sale or exchange.
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Treas. Reg. §1.1274-2(c)Determination of whether a debt instrument provides for adequate stated interest—(1) In general.
Determination of whether a debt instrument provides for adequate stated interest—(1) In general. A debt instrument provides for adequate stated interest if its stated principal amount is less than or equal to its imputed principal amount. Imputed principal amount means the sum of the present values, as of the issue date, of all payments, including payments of stated interest, due under the debt instrument (determined by using a discount rate equal to the test rate of interest as determined under § 1.1274-4). If a debt instrument has a single fixed rate of interest that is paid or compounded at least annually, and that rate is equal to or greater than the test rate, the debt instrument has adequate stated interest.
(2) Determination of present value. The present value of a payment is determined by discounting the payment from the date it becomes due to the date of the sale or exchange at the test rate of interest. To determine present value, a compounding period must be selected, and the test rate must be based on the same compounding period.
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Treas. Reg. §1.1274-2(d)Treatment of certain options.
Treatment of certain options. This paragraph (d) provides rules for determining the issue price of a debt instrument to which section 1274 applies (other than a debt instrument issued in a potentially abusive situation) that is subject to one or more options described in both paragraphs (c)(1) and (c)(5) of § 1.1272-1. Under this paragraph (d), an issuer will be deemed to exercise or not exercise an option or combination of options in a manner that minimizes the instrument's imputed principal amount, and a holder will be deemed to exercise or not exercise an option or combination of options in a manner that maximizes the instrument's imputed principal amount. If both the issuer and the holder have options, the rules of this paragraph (d) are applied to the options in the order that they may be exercised. Thus, the deemed exercise of one option may eliminate other options that are later in time. See § 1.1272-1(c)(5) to determine the debt instrument's yield and maturity for purposes of determining the accrual of OID with respect to the instrument.
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Treas. Reg. §1.1274-2(e)Mandatory sinking funds.
Mandatory sinking funds. In determining the issue price of a debt instrument to which section 1274 applies (other than a debt instrument issued in a potentially abusive situation) and that is subject to a mandatory sinking fund provision described in § 1.1272-1(c)(3), the mandatory sinking fund provision is ignored.
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Treas. Reg. §1.1274-2(f)Treatment of variable rate debt instruments—(1) Stated interest at a qualified floating rate—(i) In general.
Treatment of variable rate debt instruments—(1) Stated interest at a qualified floating rate—(i) In general. For purposes of paragraph (c) of this section, the imputed principal amount of a variable rate debt instrument (within the meaning of § 1.1275-5(a)) that provides for stated interest at a qualified floating rate (or rates) is determined by assuming that the instrument provides for a fixed rate of interest for each accrual period to which a qualified floating rate applies. For purposes of the preceding sentence, the assumed fixed rate in each accrual period is the greater of—
(A) The value of the applicable qualified floating rate as of the first date on which there is a binding written contract that substantially sets forth the terms under which the sale or exchange is ultimately consummated; or
(B) The value of the applicable qualified floating rate as of the date on which the sale or exchange occurs.
(ii) Interest rate restrictions. Notwithstanding paragraph (f)(1)(i) of this section, if, as a result of interest rate restrictions (such as an interest rate cap), the expected yield of the debt instrument taking the restrictions into account is significantly less than the expected yield of the debt instrument without regard to the restrictions, the interest payments on the debt instrument (other than any fixed interest payments) are treated as contingent payments. Reasonably symmetric interest rate caps and floors, or reasonably symmetric governors, that are fixed throughout the term of the debt instrument do not result in the debt instrument being subject to this rule.
(2) Stated interest at a single objective rate. For purposes of paragraph (c) of this section, the imputed principal amount of a variable rate debt instrument (within the meaning of § 1.1275-5(a)) that provides for stated interest at a single objective rate is determined by treating the interest payments as contingent payments.
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Treas. Reg. §1.1274-2(g)Treatment of contingent payment debt instruments.
Treatment of contingent payment debt instruments. Notwithstanding paragraph (b) of this section, if a debt instrument subject to section 1274 provides for one or more contingent payments, the issue price of the debt instrument is the lesser of the instrument's noncontingent principal payments and the sum of the present values of the noncontingent payments (as determined under paragraph (c) of this section). However, if the debt instrument is issued in a potentially abusive situation, the issue price of the debt instrument is the fair market value of the noncontingent payments. For additional rules relating to a debt instrument that provides for one or more contingent payments, see § 1.1275-4. This paragraph (g) applies to debt instruments issued on or after August 13, 1996.
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Treas. Reg. §1.1274-2(h)Examples.
Examples. The following examples illustrate the rules of this section. Each example assumes a 30-day month, 360-day year. In addition, each example assumes that the debt instrument is not a qualified debt instrument (as defined in section 1274A(b)) and is not issued in a potentially abusive situation.
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Treas. Reg. §1.1274-2(i)§1.1274-2(i)
[Reserved]
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Treas. Reg. §1.1274-2(j)Special rules for tax-exempt obligations—(1) Certain variable rate debt instruments.
Special rules for tax-exempt obligations—(1) Certain variable rate debt instruments. Notwithstanding paragraph (b) of this section, if a tax-exempt obligation (as defined in section 1275(a)(3)) is a variable rate debt instrument (within the meaning of § 1.1275-5) that pays interest at an objective rate and is subject to section 1274, the issue price of the obligation is the greater of the obligation's fair market value and its stated principal amount.
(2) Contingent payment debt instruments. Notwithstanding paragraphs (b) and (g) of this section, if a tax-exempt obligation (as defined in section 1275(a)(3)) is subject to section 1274 and § 1.1275-4, the issue price of the obligation is the fair market value of the obligation. However, in the case of a tax-exempt obligation that is subject to § 1.1275-4(d)(2) (an obligation that provides for interest-based or revenue-based payments), the issue price of the obligation is the greater of the obligation's fair market value and its stated principal amount.
(3) Effective date. This paragraph (j) applies to debt instruments issued on or after August 13, 1996.
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Treas. Reg. §1.1274-3Potentially abusive situations defined
(a) In general. For purposes of section 1274, a potentially abusive situation means-—
(1) A tax shelter (as defined in section 6662(d)(2)(C)(ii)); or
(2) Any other situation involving—
(i) A recent sales transaction;
(ii) Nonrecourse financing;
(iii) Financing with a term in excess of the useful life of the property; or
(iv) A debt instrument with clearly excessive interest.
(b) Operating rules—(1) Debt instrument exchanged for nonrecourse financing. Nonrecourse financing does not include an exchange of a nonrecourse debt instrument for an outstanding recourse or nonrecourse debt instrument.
(2) Nonrecourse debt with substantial down payment. Nonrecourse financing does not include a sale or exchange of a real property interest financed by a nonrecourse debt instrument if, in addition to the nonrecourse debt instrument, the purchaser makes a down payment in money that equals or exceeds 20 percent of the total stated purchase price of the real property interest. For purposes of the preceding sentence, a real property interest means any interest, other than an interest solely as a creditor, in real property.
(3) Clearly excessive interest. Interest on a debt instrument is clearly excessive if the interest, in light of the terms of the debt instrument and the creditworthiness of the borrower, is clearly greater than the arm's length amount of interest that would have been charged in a cash lending transaction between the same two parties.
(4) Debt-for-debt exchange—(i) Rule. A debt instrument issued in a debt-for-debt exchange, including a deemed exchange under § 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 § 1.1273-2(f), the rules of § 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.
(c) Other situations to be specified by Commissioner. The Commissioner may designate in the Internal Revenue Bulletin situations that, although described in paragraph (a)(2) of this section, will not be treated as potentially abusive because they do not have the effect of significantly misstating basis or amount realized (see § 601.601(d)(2)(ii) of this chapter).
(d) Consistency rule. The issuer's determination that the debt instrument is or is not issued in a potentially abusive situation is binding on all holders of the debt instrument. However, the issuer's determination is not binding on a holder who explicitly discloses a position that is inconsistent with the issuer's determination. Unless otherwise prescribed by the Commissioner, the disclosure must be made on a statement attached to the holder's timely filed Federal income tax return for the taxable year that includes the acquisition date of the debt instrument. See § 1.1275-2(e) for rules relating to the issuer's obligation to disclose certain information to holders.
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Treas. Reg. §1.1274-3(a)In general.
In general. For purposes of section 1274, a potentially abusive situation means-—
(1) A tax shelter (as defined in section 6662(d)(2)(C)(ii)); or
(2) Any other situation involving—
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Treas. Reg. §1.1274-3(b)Operating rules—(1) Debt instrument exchanged for nonrecourse financing.
Operating rules—(1) Debt instrument exchanged for nonrecourse financing. Nonrecourse financing does not include an exchange of a nonrecourse debt instrument for an outstanding recourse or nonrecourse debt instrument.
(2) Nonrecourse debt with substantial down payment. Nonrecourse financing does not include a sale or exchange of a real property interest financed by a nonrecourse debt instrument if, in addition to the nonrecourse debt instrument, the purchaser makes a down payment in money that equals or exceeds 20 percent of the total stated purchase price of the real property interest. For purposes of the preceding sentence, a real property interest means any interest, other than an interest solely as a creditor, in real property.
(3) Clearly excessive interest. Interest on a debt instrument is clearly excessive if the interest, in light of the terms of the debt instrument and the creditworthiness of the borrower, is clearly greater than the arm's length amount of interest that would have been charged in a cash lending transaction between the same two parties.
(4) Debt-for-debt exchange—(i) Rule. A debt instrument issued in a debt-for-debt exchange, including a deemed exchange under § 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 § 1.1273-2(f), the rules of § 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.
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Treas. Reg. §1.1274-3(c)Other situations to be specified by Commissioner.
Other situations to be specified by Commissioner. The Commissioner may designate in the Internal Revenue Bulletin situations that, although described in paragraph (a)(2) of this section, will not be treated as potentially abusive because they do not have the effect of significantly misstating basis or amount realized (see § 601.601(d)(2)(ii) of this chapter).
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Treas. Reg. §1.1274-3(d)Consistency rule.
Consistency rule. The issuer's determination that the debt instrument is or is not issued in a potentially abusive situation is binding on all holders of the debt instrument. However, the issuer's determination is not binding on a holder who explicitly discloses a position that is inconsistent with the issuer's determination. Unless otherwise prescribed by the Commissioner, the disclosure must be made on a statement attached to the holder's timely filed Federal income tax return for the taxable year that includes the acquisition date of the debt instrument. See § 1.1275-2(e) for rules relating to the issuer's obligation to disclose certain information to holders.
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Treas. Reg. §1.1274-3(i)§1.1274-3(i)
A recent sales transaction;
(ii) Nonrecourse financing;
(iii) Financing with a term in excess of the useful life of the property; or
(iv) A debt instrument with clearly excessive interest.
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Treas. Reg. §1.1274-4Test rate
(a) Determination of test rate of interest—(1) In general—(i) Test rate is the 3-month rate. Except as provided in paragraph (a)(2) of this section, the test rate of interest for a debt instrument issued in consideration for the sale or exchange of property is the 3-month rate.
(ii) The 3-month rate. Except as provided in paragraph (a)(1)(iii) of this section, the 3-month rate is the lower of—
(A) The lowest applicable Federal rate (based on the appropriate compounding period) in effect during the 3-month period ending with the first month in which there is a binding written contract that substantially sets forth the terms under which the sale or exchange is ultimately consummated; or
(B) The lowest applicable Federal rate (based on the appropriate compounding period) in effect during the 3-month period ending with the month in which the sale or exchange occurs.
(iii) Special rule if there is no binding written contract. If there is no binding written contract that substantially sets forth the terms under which the sale or exchange is ultimately consummated, the 3-month rate is the lowest applicable Federal rate (based on the appropriate compounding period) in effect during the 3-month period ending with the month in which the sale or exchange occurs.
(2) Test rate for certain debt instruments—(i) Sale-leaseback transactions. Under section 1274(e) (relating to certain sale-leaseback transactions), the test rate is 110 percent of the 3-month rate determined under paragraph (a)(1) of this section. For purposes of section 1274(e)(3), related party means a person related to the transferor within the meaning of section 267(b) or 707(b)(1).
(ii) Qualified debt instrument. Under section 1274A(a), the test rate for a qualified debt instrument is no greater than 9 percent, compounded semiannually, or an equivalent rate based on an appropriate compounding period.
(iii) Alternative test rate for short-term obligations—(A) Requirements. This paragraph (a)(2)(iii)(A) provides an alternative test rate under section 1274(d)(1)(D) for a debt instrument with a maturity of 1 year or less. This alternative test rate applies, however, only if the debt instrument provides for adequate stated interest using the alternative test rate, the issuer provides on the face of the debt instrument that the instrument qualifies as having adequate stated interest under section 1274(d)(1)(D), and the issuer and holder treat or agree to treat the instrument as having adequate stated interest.
(B) Alternative test rate. For purposes of paragraph (a)(2)(iii)(A), the alternative test rate is the market yield on U.S. Treasury bills with the same maturity date as the debt instrument. If the same maturity date is not available, the market yield on U.S. Treasury bills that mature in the same week or month as the debt instrument is used. The alternative test rate is determined as of the date on which there is a binding written contract that substantially sets forth the terms under which the sale or exchange is ultimately consummated or as of the date of the sale or exchange, whichever date results in a lower rate. If there is no binding written contract, however, the alternative test rate is determined as of the date of the sale or exchange.
(b) Applicable Federal rate. Except as otherwise provided in this section, the applicable Federal rate for a debt instrument is based on the term of the instrument (i.e., short-term, mid-term, or long-term). See section 1274(d)(1). The Internal Revenue Service publishes the applicable Federal rates for each month in the Internal Revenue Bulletin (see § 601.601(d)(2)(ii) of this chapter). The applicable Federal rates are based on the yield to maturity of outstanding marketable obligations of the United States of similar maturities during the one month period ending on the 14th day of the month preceding the month for which the rates are applicable.
(c) Special rules to determine the term of a debt instrument for purposes of determining the applicable Federal rate—(1) Installment obligation. If a debt instrument is an installment obligation (as defined in § 1.1273-1(e)(1)), the term of the instrument is the instrument's weighted average maturity (as defined in § 1.1273-1(e)(3)).
(2) Certain variable rate debt instruments—(i) In general. Except as otherwise provided in paragraph (c)(2)(ii) of this section, if a variable rate debt instrument (as defined in § 1.1275-5(a)) provides for stated interest at a qualified floating rate (or rates), the term of the instrument is determined by reference to the longest interval between interest adjustment dates, or, if the variable rate debt instrument provides for a fixed rate, the interval between the issue date and the last day on which the fixed rate applies, if this interval is longer.
(ii) Restrictions on adjustments. If, due to significant restrictions on variations in a qualified floating rate or the use of certain formulae pursuant to § 1.1275-5(b)(2) (e.g., 15 percent of 1-year LIBOR, plus 800 basis points), the rate in substance resembles a fixed rate, the applicable Federal rate is determined by reference to the term of the debt instrument.
(3) Counting of either the issue date or the maturity date. The term of a debt instrument includes either the issue date or the maturity date, but not both dates.
(4) Certain debt instruments that provide for principal payments uncertain as to time. If a debt instrument provides for principal payments that are fixed in total amount but uncertain as to time, the term of the instrument is determined by reference to the latest possible date on which a principal payment can be made or, in the case of an installment obligation, by reference to the longest weighted average maturity under any possible payment schedule.
(d) Foreign currency loans. If all of the payments of a debt instrument are denominated in, or determined by reference to, a currency other than the U.S. dollar, the applicable Federal rate for the debt instrument is a foreign currency rate of interest that is analogous to the applicable Federal rate described in this section. For this purpose, an analogous rate of interest is a rate based on yields (with the appropriate compounding period) of the highest grade of outstanding marketable obligations denominated in such currency (excluding any obligations that benefit from special tax exemptions or preferential tax rates not available to debt instruments generally) with due consideration given to the maturities of the obligations.
(e) Examples. The following examples illustrate the rules of this section.
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Treas. Reg. §1.1274-4(a)Determination of test rate of interest—(1) In general—(i) Test rate is the 3-month rate.
Determination of test rate of interest—(1) In general—(i) Test rate is the 3-month rate. Except as provided in paragraph (a)(2) of this section, the test rate of interest for a debt instrument issued in consideration for the sale or exchange of property is the 3-month rate.
(ii) The 3-month rate. Except as provided in paragraph (a)(1)(iii) of this section, the 3-month rate is the lower of—
(A) The lowest applicable Federal rate (based on the appropriate compounding period) in effect during the 3-month period ending with the first month in which there is a binding written contract that substantially sets forth the terms under which the sale or exchange is ultimately consummated; or
(B) The lowest applicable Federal rate (based on the appropriate compounding period) in effect during the 3-month period ending with the month in which the sale or exchange occurs.
(iii) Special rule if there is no binding written contract. If there is no binding written contract that substantially sets forth the terms under which the sale or exchange is ultimately consummated, the 3-month rate is the lowest applicable Federal rate (based on the appropriate compounding period) in effect during the 3-month period ending with the month in which the sale or exchange occurs.
(2) Test rate for certain debt instruments—(i) Sale-leaseback transactions. Under section 1274(e) (relating to certain sale-leaseback transactions), the test rate is 110 percent of the 3-month rate determined under paragraph (a)(1) of this section. For purposes of section 1274(e)(3), related party means a person related to the transferor within the meaning of section 267(b) or 707(b)(1).
(ii) Qualified debt instrument. Under section 1274A(a), the test rate for a qualified debt instrument is no greater than 9 percent, compounded semiannually, or an equivalent rate based on an appropriate compounding period.
(iii) Alternative test rate for short-term obligations—(A) Requirements. This paragraph (a)(2)(iii)(A) provides an alternative test rate under section 1274(d)(1)(D) for a debt instrument with a maturity of 1 year or less. This alternative test rate applies, however, only if the debt instrument provides for adequate stated interest using the alternative test rate, the issuer provides on the face of the debt instrument that the instrument qualifies as having adequate stated interest under section 1274(d)(1)(D), and the issuer and holder treat or agree to treat the instrument as having adequate stated interest.
(B) Alternative test rate. For purposes of paragraph (a)(2)(iii)(A), the alternative test rate is the market yield on U.S. Treasury bills with the same maturity date as the debt instrument. If the same maturity date is not available, the market yield on U.S. Treasury bills that mature in the same week or month as the debt instrument is used. The alternative test rate is determined as of the date on which there is a binding written contract that substantially sets forth the terms under which the sale or exchange is ultimately consummated or as of the date of the sale or exchange, whichever date results in a lower rate. If there is no binding written contract, however, the alternative test rate is determined as of the date of the sale or exchange.
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Treas. Reg. §1.1274-4(b)Applicable Federal rate.
Applicable Federal rate. Except as otherwise provided in this section, the applicable Federal rate for a debt instrument is based on the term of the instrument (i.e., short-term, mid-term, or long-term). See section 1274(d)(1). The Internal Revenue Service publishes the applicable Federal rates for each month in the Internal Revenue Bulletin (see § 601.601(d)(2)(ii) of this chapter). The applicable Federal rates are based on the yield to maturity of outstanding marketable obligations of the United States of similar maturities during the one month period ending on the 14th day of the month preceding the month for which the rates are applicable.
20 Citing Cases
Section 1274 provides the issue price of the Note because it was given in consideration for the sale of property and the two further conditions set forth in section 1274(c)(1) are met.
1274, 100 Stat. at 2596.¹° Section 932 unifies the tax obligation ofthose individuals--both bonaffde residents and nonresidents ofthe VI--with VI-source income. (The rules are different for corporations. This opinion is not for them.) The legislative history refers to this as a "U.S. tax liability." See S. Rept. No. 99-313, at 482 (1986), 1986
1274, 100 Stat. at 2596.¹° Section 932 unifies the tax obligation ofthose individuals--both bonaffde residents and nonresidents ofthe VI--with VI-source income. (The rules are different for corporations. This opinion is not for them.) The legislative history refers to this as a "U.S. tax liability." See S. Rept. No. 99-313, at 482 (1986), 1986
1274, 100 Stat. at 2596.¹° Section 932 unifies the tax obligation ofthose individuals--both bonaffde residents and nonresidents ofthe VI--with VI-source income. (The rules are different for corporations. This opinion is not for them.) The legislative history refers to this as a "U.S. tax liability." See S. Rept. No. 99-313, at 482 (1986), 1986
1274, 100 Stat. at 2596.¹° Section 932 unifies the tax obligation ofthose individuals--both bonaffde residents and nonresidents ofthe VI--with VI-source income. (The rules are different for corporations. This opinion is not for them.) The legislative history refers to this as a "U.S. tax liability." See S. Rept. No. 99-313, at 482 (1986), 1986
rebut the presumption by carrying his or her burden to show facts and circumstances that "clearly establish "We fully expect the parties to apply during Rule 155 computations the rules ofinstallment sales under sec. 453 and time value ofmoney under sec. 1274 as is the case in the example in the regulations. -57- [*57] that the transfers do not constitute a sale." Id. (emphasis added); see Superior Trading, LLC v. Commissioner, T.C. Memo. 2012-110, 103 T.C.M. (CCH) 1604, 1613 (2012), aff'd, 728
rebut the presumption by carrying his or her burden to show facts and circumstances that "clearly establish "We fully expect the parties to apply during Rule 155 computations the rules ofinstallment sales under sec. 453 and time value ofmoney under sec. 1274 as is the case in the example in the regulations. -57- [*57] that the transfers do not constitute a sale." Id. (emphasis added); see Superior Trading, LLC v. Commissioner, T.C. Memo. 2012-110, 103 T.C.M. (CCH) 1604, 1613 (2012), aff'd, 728
-, 50 - first and second, Glendale mortgages, and we hold that :they rieed impute real estate tax:es, only in the amount conceded.
1274 (d) (1) (C) (i) and (ii). It therefore reflects the Government's cost of borrowing, which is low because Government obligations are low-risk investments. See United States v. Camino Real Landscape Maint. Contractors, Inc., supra at 1506. Using the long-term applicable Federal rate consequently would have been unfair to the Walter Trust. W
-, 50 - first and second, Glendale mortgages, and we hold that :they rieed impute real estate tax:es, only in the amount conceded.
1274 (d) ; Rev. Rul. 2002- 53, 2002--2 C.B. 427. The long-term applicable Federal rate for loans óriginating in September 2002 was 5.23 percent. e Rev., Rul. 2002-53, 2002-2 C.B. at 428. made a premium payment to Solithland on policy- No.4 8889 After 2003, however, petitioner's orporation st opped making its annual contributions to UEBF on- b
- 300 - meaning of section 483, no portion of the sales price would be recharacterized as interest under that section; and (2) if the deferred payment arrangement were a “debt instrument given in consideration for the sale or exchange of property” within the meaning of section 1274, no portion of the sales price would be treated as original issue discount (OID) under that section.
- 300 - meaning of section 483, no portion of the sales price would be recharacterized as interest under that section; and (2) if the deferred payment arrangement were a “debt instrument given in consideration for the sale or exchange of property” within the meaning of section 1274, no portion of the sales price would be treated as original issue discount (OID) under that section.
cts for the sale of property that call for contingent payments involve principal payments that are wholly contingent, it is doubtful that these contracts would be viewed as debt instruments and accordingly would be subject to section 483 rather than section 1274. * * * It seems likely that a contingent fee contract would be treated under a debt analysis as contingent as to both principal and interest; both the principal and interest amounts could be determined only when and if the claim is satis
cts for the sale of property that call for contingent payments involve principal payments that are wholly contingent, it is doubtful that these contracts would be viewed as debt instruments and accordingly would be subject to section 483 rather than section 1274. * * -i! It seems likely that a contingent fee contract would be treated under a debt analysis as contingent as to both principal and interest; both the principal and interest amounts could be determined only when and if the claim is sat
ence of 11 Colgate computed the loss as follows: Cash proceeds $9,406,180 Imputed interest on contingent payments (48,693) Amount realized 9,357,487 Citicorp Note basis plus accrued interest 50,144,161 Basis allocable to LIBOR Notes (5/6) 41,786,801 Section 1274 interest accrued by ACM 525 Adjusted basis allocable to LIBOR Notes 41,787,326 Capital loss 32,429,839 - 49 - steps by which the partnership would borrow to redeem ABN's interest in October 1991 and recognize the remainder of the total $