MoFo Tax Talk Volume 8, Issue 1

In This Issue:

- IRS Rules Debentures Are Part of Straddle; Interest Non-Deductible

- Stock Abandonment Produces Ordinary Loss

- Tax Consequences of Negative Interest Rates

- Renewed Discussion of a Federal Consumption Tax

- IRS Resumes PTP Rulings

- House and Senate Bills Would Increase Then Decrease Estimated Tax Payments

- MoFo in the News; Awards

- Excerpt from IRS Rules Debentures Are Part of Straddle; Interest Non-Deductible:

In a recent field attorney advice, the IRS held that a taxpayer’s issuance of debentures that were exchangeable for a basket of reference shares owned by the taxpayer and traded on an SEC-regulated exchange created a “straddle” within the meaning of Section 1092(c)(1). As a result, according to the IRS the taxpayer could not deduct interest payments attributable to the debentures because the interest payments are allocable to “personal property which is part of a straddle” within the meaning of Section 263(g)(1).

According to the facts of FAA 20151201F, the taxpayer issued exchangeable debentures with quarterly coupon payments at a fixed annual rate. At maturity, subject to the holder’s exchange right, the holder would receive a cash payment equal to the adjusted principal amount of the debenture plus accrued and unpaid interest and other distributions. The holder could exchange the debenture at any time for either a fixed amount of reference shares or their cash equivalent amount. The taxpayer, in turn, could determine whether the holder would receive reference shares or their cash equivalent amount. The taxpayer could redeem the debenture for either an amount of cash equal to the adjusted principal amount of the debenture or the value of the reference shares.