PROPOSED AND TEMPORARY REGS ON APPLICATION OF STRADDLE RULES TO DEBT INSTRUMENTS

[Editor's Note: At 78 F.R. 70901, Nov. 27, 2013, the IRS announced the cancellation of the public hearing scheduled for Jan. 15, 2014 on the following proposed regs.]

[Editor's Note: At 79 F.R. 51090-51091, Aug. 27, 2014, the IRS published Treasury Decision 9691 which adopted the following proposed regs, and removed corresponding temporary regs, T.D. 9635, set out below.]

ACTION: Notice of proposed rulemaking by cross-reference to temporary regulations and notice of public hearings.

SUMMARY: This document contains proposed regulations relating to the application of the straddle rules to a debt instrument. The proposed regulations clarify that a taxpayer's obligation under a debt instrument can be a position in personal property that is part of a straddle. The proposed regulations primarily affect taxpayers that issue debt instruments that provide for one or more payments that reference the value of personal property or a position in personal property. This document also provides notice of a public hearing on these proposed regulations.

DATES: Written or electronic comments must be received by November 4, 2013. Requests to speak and outlines of topics to be discussed at the public hearing scheduled for January 15, 2014, must be received by November 4, 2013.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-111753-12), room 5203, Internal Revenue Service, PO 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-111753-12), Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, NW., Washington, DC, or sent electronically via the Federal eRulemaking Portal at www.regulations.gov (IRS REG-111753-12).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, Mary Brewer, (202) 622-4695; concerning submissions of comments, the hearing and/or to be placed on the building access list to attend the hearing, Oluwafunmilayo Taylor, (202) 622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

BACKGROUND AND EXPLANATION OF PROVISIONS

Temporary regulations in the Rules and Regulations section of this issue of the Federal Register amend the Income Tax Regulations (26 CFR part 1) relating to section 1092(d). The temporary regulations provide that if a taxpayer is the obligor under a debt instrument one or more payments on which are linked to the value of personal property or a position with respect to personal property, then the taxpayer's obligation under the debt instrument is a position with respect to personal property and may be part of a straddle. The temporary regulations apply to straddles established on or after January 17, 2001. The text of the temporary regulations also serves as the text of these proposed regulations and is identical to the text of regulations originally proposed under REG-105801-00.

Special Analyses

It has been determined that this notice of proposed rulemaking 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 also has 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 regulation does 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 Internal Revenue Code, this notice of proposed rulemaking has been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Comments and 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 the preamble under the "Addresses" heading. The Treasury Department and the IRS welcome comments on this proposed regulation. All comments that are submitted by the public will be available at for public inspection and copying at www.regulations.gov. upon request.

A public hearing has been scheduled for January 15, 2014, beginning at 10 a.m. in the IRS Auditorium, Internal Revenue Service Building, 1111 Constitution Avenue, NW., Washington, DC. Due to building security procedures, visitors must enter at the Constitution Avenue entrance. In addition, all visitors must present photo identification to enter the building. Because of access restrictions, visitors will not be admitted beyond the immediate entrance area more than 30 minutes before the hearing starts. For information about having your name placed on the building access list to attend the hearing, see the "FOR FURTHER INFORMATION CONTACT" section of this preamble.

The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who wish to present oral comments at the hearing must submit written or electronic comments and an outline of the topics to be discussed and the time to be devoted to each topic ( a signed original and eight (8) copies by November 4, 2013. A period of 10 minutes will be allotted to each person for making comments. An agenda showing the scheduling of the speakers will be prepared after the deadline for receiving outlines has passed. Copies of the agenda will be available free of charge at the hearing.

Drafting Information

The principal author of these regulations is Mary Brewer, 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.

Proposed Amendments to the Regulations

Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1 -- INCOME TAXES

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

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

Section 1.1092(d)-1 also issued under 26 U.S.C. 1092(b)(1). * * *

Par. 2. Section 1.1092(d)-1 is amended by revising paragraphs (d) and (e) to read as follows:

§ 1.1092(d)-1 Definitions and special rules.

* * * * *

(d) [The text of the proposed amendment to § 1.1092(d)-1(d) is the same as the text for § 1.1092(d)-1T(d) published elsewhere in this issue of the Federal Register].

(e) [The text of the proposed amendment to § 1.1092(d)-1(e) is the same as the text for § 1.1092(d)-1T(e) published elsewhere in this issue of the Federal Register].

ACTION: Final and temporary regulations.

SUMMARY: This document contains final and temporary regulations relating to the application of the straddle rules to a debt instrument. The temporary regulations clarify that a taxpayer's obligation under a debt instrument can be a position in personal property that is part of a straddle. The temporary regulations primarily affect taxpayers that issue debt instruments that provide for one or more payments that reference the value of personal property or a position in personal property. The text of these temporary regulations also serves as the text of the proposed regulations (REG-111753-12) set forth in the Proposed Rules section in this issue of the Federal Register.

DATES: Effective Date: These regulations are effective on September 5, 2013.

Applicability Dates: For date of applicability, see § 1.1092(d)-1T(e).

FOR FURTHER INFORMATION CONTACT: Mary Brewer, (202) 622-4695 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

BACKGROUND AND EXPLANATION OF PROVISIONS

1. Summary of Prior Notice of Proposed Rule Making

This document contains amendments to 26 CFR part 1. On January 18, 2001, a notice of proposed rulemaking (REG-105801-00; RIN 1545-AX92) (the 2001 NPRM) was published in the Federal Register (66 FR 4746). The 2001 NPRM addresses the definition of personal property for purposes of section 263(g) of the Internal Revenue Code (Code), the types of expenses subject to capitalization, and the operation of the capitalization rules. Another portion of the 2001 NPRM (proposed regulation § 1.1092(d)-1(d)) would clarify the circumstances under which an issuer's position under a debt instrument is treated as a position in personal property that is part of a straddle.

No public hearing was requested or held. Written and electronic comments responding to the 2001 NPRM were received, and the only commenter that substantively addressed proposed § 1.1092(d)-1(d) urged its adoption. This Treasury Decision adopts proposed § 1.1092(d)-1(d) (REG-105801-00) in the form proposed. As so adopted, this provision is designated as § 1.1092(d)-1T(d). This Treasury Decision also adopts the 2001 NPRM's proposed amendment to the effective/applicability dates (proposed § 1.1092(d)-1(e)). As so adopted, this effective/applicability date is designated as § 1.1092(d)-1T(e)(2). The amendments are discussed in section 2 of this preamble. The remainder of the 2001 NPRM remains proposed.

2. Overview of the Temporary Regulations

The temporary regulations provide guidance under section 1092 regarding when an issuer's obligation under a debt instrument may be a position in actively traded personal property and, therefore, may be part of a straddle.

Section 1092(d)(7) provides that if a debt instrument is denominated in a nonfunctional currency, the obligor's position under the debt obligation is a position in the nonfunctional currency. Some maintain that section 1092(d)(7) evidences an intent by Congress to limit the circumstances in which an obligor's interest in a debt instrument may be a position in a straddle, and that such treatment is proper only with respect to debt obligations denominated in nonfunctional currency. The IRS and the Treasury Department do not believe that section 1092(d)(7) describes the only circumstance in which an obligor's interest in a debt instrument may be treated as part of a straddle. The statute and the legislative history do not contain any indication that Congress intended to limit section 1092 in this manner; rather, the legislative history characterizes section 1092(d)(7) as a clarification of prior law:

Dates of Applicability of the Regulations

The temporary regulations adopt the effective/applicability date set forth in the 2001 NPRM by providing that § 1.1092(d)-1T(d) applies to straddles established on or after January 17, 2001 (the date on which the 2001 NPRM was filed with the Federal Register). No inference is intended with respect to straddles established prior to January 17, 2001. In appropriate cases, the IRS may take the position under section 1092(d)(2) that, even in the absence of a regulation, an obligation under a debt instrument was part of a straddle prior to the effective date of § 1.1092(d)-1T(d) if the debt instrument functioned economically as an interest in actively traded personal property.

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 also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations. For the applicability of the Regulatory Flexibility Act (5 U.S.C. chapter 6) refer to the Special Analyses section of the preamble to the cross-reference notice of proposed rulemaking published in the Proposed Rules section in this issue of the Federal Register. Pursuant to section 7805(f) of the Code, this regulation has been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Drafting Information

The principal author of these regulations is Mary Brewer, 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.

Amendments to the Regulations

Accordingly, 26 CFR part 1 is amended as follows:

PART 1 -- INCOME TAXES

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

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

Section 1.1092(d)-1T also issued under 26 U.S.C. 1092(b)(1). * * *

Par. 2. Section 1.1092(d)-1 is amended by redesignating paragraph (d) as newly-designated paragraph (e) and revising newly-designated paragraph (e), and adding new paragraph (d) to read as follows:

§ 1.1092(d)-1 Definitions and special rules.

* * * * *

(d) [Reserved]. For further guidance, see § 1.1092(d)-1T(d).

(e) Effective/applicability dates. (1) Paragraph (b)(1)(vii) of this section applies to positions entered into on or after October 14, 1993. Paragraph (c) of this section applies to positions entered into on or after July 8, 1991.

(2) [Reserved]. For further guidance, see § 1.1092(d)-1T(e)(2).

Par. 3. Section 1.1092(d)-1T is added to read as follows:

§ 1.1092(d)-1T Definitions and special rules (temporary).

(a) through (c) [Reserved]. For further guidance, see § 1.1092(d)-1(a) through (c).

(d) Debt instrument linked to the value of personal property. If a taxpayer is the obligor under a debt instrument one or more payments on which are linked to the value of personal property or a position with respect to personal property, then the taxpayer's obligation under the debt instrument is a position with respect to personal property and may be part of a straddle.

(e) Effective/applicability dates -- (1) [Reserved]. For further guidance, see § 1.1092(d)-1(e)(1).

(2) Notwithstanding paragraph (e)(1) of this section, paragraph (d) of this section applies to straddles established on or after January 17, 2001.

(f) Expiration date. The applicability of this section expires on September 2, 2016.