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Abstract: 

Are distressed debt investors required to treat their speculative investment gains as ordinary interest income under the market discount rules, while continuing to treat their investment losses as capital losses? Or can they rely on the common law “doubtful collectibility doctrine” to stop accruing market discount as interest income, notwithstanding an IRS memorandum that seems to reject this approach? The recent economic downturn underscores the need for clear, consistent rules that do not artificially deflate investor demand. This article examines the current state of the law, and considers whether House Ways and Means Committee Chairman Dave Camp’s proposal to reform the market discount rules (which parallels one of President Obama’s revenue proposals) would be a step in the right direction.

Keywords: market discount; original issue discount; OID; distressed debt; doubtful collectability; constant yield; Dave Camp; tax reform

Affiliations:  1: Cadwalader, Wickersham & Taft LLP; 2: Cadwalader, Wickersham & Taft LLP; 3: Cadwalader, Wickersham & Taft LLP; 4: Cadwalader, Wickersham & Taft LLP.