Daily Tax Update - May 3, 2010

THE DAILY TAX UPDATE WILL BE PUBLISHED ON A PERIODIC BASIS UNTIL CONGRESS RETURNS FROM ITS MEMORIAL DAY RECESS ON JUNE 7TH

TREASURY AND IRS ISSUE PROPOSED REGULATIONS CLARIFYING EFFECT OF ISSUER’S FINANCIAL CONDITION ON DEBT INSTRUMENT MODIFICATION: Today, Treasury and the IRS issued proposed regulations clarifying the extent to which the deterioration of an issuer’s financial condition is taken into account to determine whether a modified debt instrument will be recharacterized as an instrument or property right that is not debt. The proposed regulations would apply to alterations of the terms of a debt instrument on or after the date the regulations are finalized, although taxpayers may rely on the proposed rules before that date.

• Treas. Reg. § 1.1001-3 generally provides that a change in the nature of an instrument from debt to property that is not debt is treated as a significant modification thus resulting in a sale or exchange. The current regulations provide that a decline in the creditworthiness of the issuer is not taken into account for purposes of “paragraph (e)(5)(i),” which defines when such a change in the nature of the obligation is a significant modification.
• To address taxpayer concerns that a decline in the creditworthiness of the issuer may be taken into account for other purposes under Treas. Reg. § 1.1001-3, the proposed regulations clarify the circumstances in which the issuer’s credit should be considered in determining the nature of the instrument resulting from an alteration or modification of a debt instrument.
• The proposed regulations state generally that the determination of whether an instrument resulting from an alteration or modification of a debt instrument will be recharacterized as an instrument or property right that is not debt for federal income tax purposes must take into account all of the factors relevant to such a determination.
• The proposed regulations further provide that, in making this determination for all purposes of Treas. Reg. § 1.1001-3, any deterioration in the financial condition of the obligor between the issue date of the debt instrument and the date of the alteration or modification (as it relates to the obligor’s ability to repay the debt instrument) is not taken into account. However, this rule does not apply if there is a substitution of a new obligor or the addition or deletion of a co-obligor.
• Thus, for example, any decrease in the FMV of a debt instrument between the issue date of the debt instrument and the date of the alteration or modification is not taken into account to the extent that the decrease in FMV is attributable to the deterioration in the financial condition of the obligor and not to a modification of the terms of the instrument.
• For additional information, contact Mark J. Silverman - msilverman@steptoe.com or Lisa M. Zarlenga - lzarlenga@steptoe.com.

MISCELLANEOUS GUIDANCE RELEASED:
Announcement 2010-41 announces a change in procedures for individual payees to follow to obtain validation of social security numbers (“SSNs”) from the Social Security Administration (“SSA”) to prevent or stop backup withholding under section 3406 of the Internal Revenue Code following receipt of a second “B notice” from a payor.

INTERNAL REVENUE SERVICE - CIRCULAR 230 DISCLOSURE:
As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

STEPTOE & JOHNSON LLP - TAX PRACTICE
Steptoe & Johnson LLP has one of the largest and most diverse law firm tax practices in the country. The practice covers the entire spectrum of federal taxation, including representation of businesses before the Congress, Treasury and the national office of the IRS; transactional planning for domestic and multinational corporations; complex audit and controversy work for corporations and other business interests contesting IRS adjustments; litigation before the Tax Court, Court of Federal Claims, district courts, courts of appeals and the Supreme Court. The firm's tax practice also encompasses all aspects of employee benefits (ERISA), executive compensation, tax-exempt organizations and charitable giving. Steptoe has an extensive state and local tax practice, representing an array of business clients on complex sales and use tax, corporate income tax and property tax matters, both advising those clients and handling audits, administrative appeals, and litigation for them. Read more information on Steptoe's tax practice.

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