* See Institute Memorandum to Accounting/Treasurer Members No. 45-94 and Tax Members No. 52-94, dated
December 23, 1994.
March 16, 1995
TO: TAX COMMITTEE No. 15-95
RE: INSTITUTE COMMENTS ON CONTINGENT DEBT REGULATIONS
______________________________________________________________________________
As we previously informed you, in December the Internal Revenue Service published
proposed regulations governing the tax treatment of debt instruments with one or more
contingent payments.* These regulations provide rules for determining the tax treatment of
many structured notes, as well as rules for integrating contingent or variable rate debt with
related hedges.
The attached Institute comment letter addresses two RIC-specific concerns presented by
the proposed regulations. First, the letter analyzes various difficulties that the proposed
regulations would create under the section 4982 minimum distribution requirements for taxable
bonds with contingent interest; the letter urges that RICs take the income and loss on
contingent debt instruments into account for section 4982 purposes using an October 31 year-
end, similar to the treatment of foreign currency gains and losses. Second, the letter considers
the treatment of tax-exempt obligations with contingent interest and urges that income and loss
on such instruments be treated consistently as capital.
We will keep you informed of further developments.
Peter J. Cinquegrani
Assistant Counsel - Tax
Attachment