Reopenings of Treasury Securities; Original Issue Discount

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Part 1 [TD 8840] RIN 1545-AX61

TITLE: Reopenings of Treasury Securities; Original Issue Discount

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary regulations.

SUMMARY: This document contains temporary regulations relating to
the Federal income tax treatment of reopenings of Treasury
securities. The temporary regulations change the definition of a
qualified reopening. The text of the temporary regulations also
serves as the text of the proposed regulations set forth in the
notice of proposed rulemaking on this subject in the Proposed Rules
section of this issue of the Federal Register . The regulations in
this document provide needed guidance to holders of reopened
Treasury securities.

DATES: The regulations are effective November 5, 1999.

FOR FURTHER INFORMATION CONTACT: William E. Blanchard, (202)
622-3950 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

Sections 163(e) and 1271 through 1275 of the Internal Revenue Code
(Code) provide rules for the Federal income tax treatment of
interest and original issue discount (OID). On February 2, 1994,
final regulations relating to these sections of the Code (TD 8517,
1994-1 C.B. 38) were published in the Federal Register (59 FR 4799).
Section 1.1275-2(d)(2) of the regulations provides rules for the
treatment of certain reopenings of Treasury securities.

On January 6, 1997, temporary regulations relating to the Federal
income tax treatment of inflation-indexed debt instruments (TD 8709,
1997-1 C.B. 167) were published in the Federal Register (62 FR 615).
Section 1.1275-7T(g) of those temporary regulations provided rules
for the treatment of certain reopenings of Treasury Inflation-
Indexed Securities. On September 7, 1999, �1.1275-7T was
redesignated as �1.1275-7 (TD 8838, 64 FR 48545).

Explanation of provisions

The Secretary of the Treasury is authorized to issue Treasury
securities, including Treasury Inflation-Indexed Securities, and to
prescribe terms and conditions for their issuance and sale. The
Treasury Department sells securities throughout the year.

In January 1992, the Treasury Department determined that it will be
prepared to provide additional quantities of a security to the
public when an acute, protracted shortage develops. These reopenings
are necessary to preserve the integrity and efficient functioning of
the market in Treasury securities. See Department Of The Treasury,
Securities and Exchange Commission, and Board of Governors of the
Federal Reserve System, Joint Report on the Government Securities
Market (January 1992).

In order to ensure that the original and additional Treasury
securities are fungible, �1.1275-2(d) provides that the additional
Treasury securities issued in a reopening are part of the same issue
as the original Treasury securities if (1) the additional Treasury
securities have the same terms as the original Treasury securities,
(2) the additional Treasury securities are issued not more than 12
months after the original Treasury securities were first issued to
the public, and (3) the additional Treasury securities are issued in
a reopening intended to alleviate an acute, protracted shortage of
the original Treasury securities (a qualified reopening). As a
result, any discount generated upon the issuance of the additional
Treasury securities in the reopening is market discount rather than
OID.

Under �1.1275-7(g), a reopening of Treasury Inflation-Indexed
Securities is a qualified reopening for purposes of �1.1275-2(d)
even though the reopening is not intended to alleviate an acute,
protracted shortage of the original Treasury securities.

For debt management and liquidity concerns, the Treasury Department
has decided that it needs the ability to reopen an issue of Treasury
securities within one year. Therefore, the temporary regulations in
this document (�1.1275-2T) revise the rules for when a reopening is
a qualified reopening by eliminating the acute, protracted shortage
requirement. As a result, the Treasury Department can reopen an
issue of outstanding Treasury securities at any time within 12
months after the issue date of the securities for any reason and the
securities will be fungible for Federal income tax purposes.

The temporary regulations also revise the rules to determine the
issue price and issue date of an issue of Treasury securities
auctioned on or after November 2, 1998, to reflect changes in how
Treasury securities are sold. On November 2, 1998, the Treasury
Department switched from an average price auction to a single price
auction for selling Treasury securities.

In response to comments, the IRS is proposing rules for reopenings
of debt instruments other than Treasury securities. See the Proposed
Rules section of this issue of the Federal Register .

Special Analyses

It has been determined that this Treasury decision is not a
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory assessment is not required. It also has been
determined that section 553(b) of the Administrative Procedure Act
(5 U.S.C. chapter 5) does not apply to these regulations and,
because the regulations do not impose a collection of information on
small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6)
does not apply. Pursuant to section 7805(f) of the Code, these
temporary regulations will be submitted to the Chief Counsel for
Advocacy of the Small Business Administration for comment on their
impact on small business.

Information

The principal author of the regulations is William E. Blanchard,
Office of Assistant Chief Counsel (Financial Institutions and
Products). However, other personnel from the IRS and Treasury
Department participated in their development.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

Paragraph 1. The authority citation for part 1 is amended by adding
an entry in numerical order to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Section 1.1275-2T also issued under 26 U.S.C. 1275(d). * * * Par. 2.
Section 1.1271-0 is amended by:

1. Revising the entry for �1.1275-2(d) in paragraph (b).

2. Adding an entry for �1.1275-2T in numerical order in paragraph
(b).

3. Revising the entry for �1.1275-7(g) in paragraph (b).

The revisions and additions read as follows:

�1.1271-0 Original issue discount; effective date; table of
contents.

* * * * *

(b) * * *

* * * * * �

1.1275-2 Special rules relating to debt instruments.

* * * * *

(d) [Reserved]

* * * * *

�1.1275-2T Special rules relating to debt instruments (temporary).

(a) through (c) [Reserved]

(d) Special rules for Treasury securities.

(1) Issue price and issue date.

(2) Reopenings of Treasury securities.

* * * * *

�1.1275-7 Inflation-indexed debt instruments.

* * * * *

(g) [Reserved]

* * * * *

Par. 3. Section 1.1275-2 is amended by revising paragraph (d) to
read as follows:

�1.1275-2 Special rules relating to debt instruments.

* * * * *

(d) [Reserved] For further guidance, see �1.1275-2T(d).

* * * * *

Par. 4. Section 1.1275-2T is added to read as follows:

�1.1275-2T Special rules relating to debt instruments (temporary).

(a) through (c) [Reserved] For further guidance, see �1.1275-2(a)
through (c).

(d) Special rules for Treasury securities--(1) Issue price and issue
date--(i) In general. The issue price of an issue of Treasury
securities is the price of the securities sold at auction. In
addition, the issue date of the issue is the first settlement date
of a substantial amount of the securities.

(ii) Treasury securities auctioned before November 2, 1998. For an
issue of Treasury securities auctioned before November 2, 1998, the
issue price of the issue is the average price of the securities
sold. In addition, the issue date of the issue is the first
settlement date on which a substantial amount of the securities in
the issue is sold.

(2) Reopenings of Treasury securities--(i) Treatment of additional
Treasury securities. Additional Treasury securities issued in a
qualified reopening are part of the same issue as the original
Treasury securities and have the same issue price and issue date as
the original Treasury securities. This paragraph (d)(2) applies to
qualified reopenings that occur on or after March 25, 1992.

(ii) Definitions--(A) Additional Treasury securities. Additional
Treasury securities are Treasury securities with terms that are in
all respects identical to the terms of the original Treasury
securities. ( B) Original Treasury securities. Original Treasury
securities are securities comprising any issue of outstanding
Treasury securities.

(C) Qualified reopening. A qualified reopening is a reopening that
occurs not more than one year after the original Treasury securities
were first issued to the public.

For reopenings of Treasury securities (other than Treasury
Inflation-Indexed Securities) that occur prior to November 5, 1999,
a qualified reopening is a reopening of Treasury securities that
satisfies the preceding sentence and that was intended to alleviate
an acute, protracted shortage of the original Treasury securities.

�1.1275-7 [Amended ] Par. 5. Section 1.1275-7 is amended by removing
and reserving paragraph (g).

David A. Mader
Acting Deputy Commissioner of Internal Revenue
Approved: October 29, 1999
Jonathan Talisman
Acting Assistant Secretary of the Treasury

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