The issuance of Proposed Regulation was another opportunity to specifically exclude contribution gain from being available to offset non-FASIT losses. The Service has not deemed it necessary to include such a prohibition in its extensive proposed regulations. While the Service has not specifically provided that gains recognized by an owner or holder of a high yield interest on a transfer of assets to a FASIT can be offset by the transferors unrelated losses, they have also not stated that such gain is unavailable to offset non-FASIT losses. It, therefore, appears that according to Congress and the Service’s subsequent interpretation of Congressional intent, the use of contribution gain to offset non-FASIT losses is not in itself impermissible.
B. Broad definition of “traded on an established securities market”
The explanation of the proposed regulation states that the intent behind the special 120 per cent valuation rule of Section 860I(d)(1) for debt instruments no traded on an established securities market is uncertain. According to the explanation, the legislative history indicates that the rule was meant to be a simple and mechanical formula that, by its nature would no produce accurate results in every case. The explanation continues: “at the same time, by applying a fair market value standard to all other assets (including market traded debt), Congress showed a clear preference for using actual fair market value whenever it can be determined with reasonable accuracy”.
Many commentators were concerned that the special valuation rule would in many cases generate tax gains far in excess of economic gain. Seeing this overvaluation as an impediment to the use of FASITs, the Service was urged to narrow the application of the special valuation rules as much as possible. Therefore, the intent of the proposed regulations was to take a broad view of what constitutes an established securities market thereby limiting transfers subject to special valuation.
The proposed regulations provide that “For purposes, if 860I(d)(1)(A), a debt instrument is traded on an established securities market if it is traded on a market described in section the Original Issue Discount (OID) regulations, Section 1.1273-2(f)(2), (3) or (4). Under the cross-reference to the OID regulations, debt is considered traded on an established securities market if (i) it is listed on certain specified securities exchanges or certain interdealer quotation systems, (ii) it is traded on a board of trade or interbank market or (iii) it appears on a quotation medium that provides a reasonable basis to determine the fair market value by disseminating either recent price quotations or actual prices of recent sales transactions.
- Special rules
Other special rules have also been included to broaden the types of instruments that will be treated as being traded on an established securities market
Beneficial ownership interests
A certificate representing beneficial ownership of a debt instrument is deemed to represent to represent beneficial ownership of a debt instrument traded on an established securities market if the certificate is traded on an established securities market; or the certificate represents ownership in a pool of assets composed solely of debt instruments all of which are traded on an established securities market.
A stripped bond or stripped coupon not otherwise traded on an established securities market is considered being traded on an established securities market if the underlying bond is traded on an established securities market and the stripped bond or coupon is valued using a commercially reasonable method based on the market value of the underlying bond.
Contemporaneous purchase and transfer of debt instruments, “spot purchase rule”
The values of a debt instrument not traded on an established securities market is its cost to the owner (or related person) if:
- the bet instruments is purchased from an unrelated person in an arm’s length transaction in which no other property is transferred or services provided;
- the debt instruments is acquired solely for cash;
- the price of the debt instruments is fixed no more than 15 days before the date of purchase; and
- the debt instrument is transferred to the FASIT no more than 15 days after the date of purchase.