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Abstract: 

On August 30, 2004, the IRS issued final regulations under Reg. 1.988-6 (the “Final Regulations”) that govern the tax treatment of contingent foreign currency debt instruments.1 More specifically, the Final Regulations address the tax treatment of: 1. Debt instruments that provide for payments that are denominated in or determined by reference to the performance of a single foreign currency and that also include one or more non-currency contingencies (e.g., a Euro denominated note that provides for additional interest upon maturity that is dependent upon the performance of the S&P 500); 2. Debt instruments that provide for payments that are denominated in or determined by reference to the performance of at least two currencies (“Multicurrency Notes”) and that do not include any non-currency contingencies (e.g., a note that has a U.S. dollar principal amount and interest payments that are denominated in Euro); and 3. Multicurrency Notes that also include one or more non-currency contingencies (collectively, “Foreign Currency Contingent Notes”). While they primarily provide technical rules that address the tax treatment of the debt instruments described above, the Final Regulations also include a broad anti-abuse rule that could affect non-contingent foreign currency debt instruments that would not otherwise be subject to the Final Regulations. Furthermore, as discussed below, the rules in the Final Regulations regarding Multicurrency Notes provide for certain planning opportunities that could enable taxpayers to defer the inclusion of original issue discount (“OID”) with respect to certain types of Multicurrency Notes. The discussion below is divided into four parts. Part I addresses the application of the Final Regulations to Foreign Currency Contingent Notes that are issued for money or publicly traded property and have one or more non-currency contingencies and that are not Multicurrency Notes. Part II addresses the application of the Final Regulations to Multicurrency Notes that are issued for money or publicly traded property and that may or may not also have non-currency contingencies. Part III contains a discussion of the anti-abuse rule that is included in the Final Regulations, including the possible application of the antiabuse rule to non-contingent foreign currency debt instruments and related hedging transactions. Finally, Part IV addresses certain unresolved issues under the Final Regulations that will hopefully be addressed in future guidance.

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Affiliations:  1: Sullivan & Cromwell LLP.