TD 9157 (Aug. 2004)

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Federal Register / Vol. 69, No. 167 / Monday, August 30, 2004 / Rules and Regulations

(2) Indications for use. For the
treatment and control of infectious
bacterial enteritis (white scours)
associated with E. coli in pigs under 4
weeks of age.
(3) Limitations. Do not administer to
pigs over 15 lb of body weight or over
4 weeks of age. Do not administer
within 21 days of slaughter.
Dated: August 17, 2004.
Stephen F. Sundlof,
Director, Center for Veterinary Medicine.
[FR Doc. 04–19655 Filed 8–27–04; 8:45 am]
BILLING CODE 4160–01–S

DEPARTMENT OF HEALTH AND
HUMAN SERVICES
Food and Drug Administration
21 CFR Part 558
New Animal Drugs For Use in Animal
Feeds; Decoquinate
AGENCY:

Food and Drug Administration,

HHS.
ACTION:

Final rule.

SUMMARY: The Food and Drug
Administration (FDA) is amending the
animal drug regulations to reflect
approval of a supplemental new animal
drug application (NADA) filed by
Alpharma Inc. The supplemental NADA
provides for the use of single-ingredient
decoquinate and monensin Type A
medicated articles to make two-way
Type B and Type C medicated feeds for
cattle at a broader range of
concentrations.
DATES: This rule is effective August 30,
2004.
FOR FURTHER INFORMATION CONTACT:
Janis R. Messenheimer, Center for
Veterinary Medicine (HFV–135), Food
and Drug Administration, 7500 Standish
Pl., Rockville, MD 20855, 301–827–
7578, e-mail:
[email protected].

Alpharma
Inc., One Executive Drive, P.O. Box
1399, Fort Lee, NJ 07024, filed a
supplement to NADA 141–148 for use of
DECCOX (decoquinate) and RUMENSIN
(monensin sodium) Type A medicated
articles to make two-way Type B and
Type C medicated feeds for cattle at the
broader range of concentrations. The
supplemental application is approved as
of July 30, 2004, and the regulations are
amended in 21 CFR 558.195 to reflect
the approval. The basis of approval is
discussed in the freedom of information
summary.
In accordance with the freedom of
information provisions of 21 CFR part

SUPPLEMENTARY INFORMATION:

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20 and 21 CFR 514.11(e)(2)(ii), a
summary of safety and effectiveness
data and information submitted to
support approval of this application
may be seen in the Division of Dockets
Management (HFA–305), Food and Drug
Administration, 5630 Fishers Lane, rm.
1061, Rockville, MD 20852, between 9
a.m. and 4 p.m., Monday through
Friday.
The agency has determined under 21
CFR 25.33(a)(1) that this action is of a
type that does not individually or
cumulatively have a significant effect on
the human environment. Therefore,
neither an environmental assessment
nor environmental impact statement is
required.
This rule does not meet the definition
of ‘‘rule’’ in 5 U.S.C. 804(3)(A) because
it is a rule of ‘‘particular applicability.’’
Therefore, it is not subject to the
congressional review requirements in 5
U.S.C. 801–808.

DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
[TD 9157]
RIN 1545–AW33

Guidance Regarding the Treatment of
Certain Contingent Payment Debt
Instruments With One or More
Payments That Are Denominated in, or
Determined by Reference to, a
Nonfunctional Currency
Internal Revenue Service (IRS),
Treasury.
ACTION: Final regulation.
AGENCY:

SUMMARY: This document contains final
regulations regarding the treatment of
contingent payment debt instruments
for which one or more payments are
denominated in, or determined by
reference to, a currency other than the
taxpayer’s functional currency. These
regulations are necessary because
List of Subjects in 21 CFR Part 558
current regulations do not provide
Animal drugs, Animal feeds.
guidance concerning the tax treatment
of such instruments. The regulations
■ Therefore, under the Federal Food,
affect issuers and holders of such
Drug, and Cosmetic Act and under the
instruments.
authority delegated to the Commissioner
of Food and Drugs and redelegated to the DATES: Effective Date: These regulations
are effective August 30, 2004.
Center for Veterinary Medicine, 21 CFR
Applicability date: These regulations
part 558 is amended as follows:
apply to debt instruments issued on or
PART 558—NEW ANIMAL DRUGS FOR after October 29, 2004.
FOR FURTHER INFORMATION CONTACT:
USE IN ANIMAL FEEDS
Milton Cahn, (202) 622–3860 (not a toll
free number).
■ 1. The authority citation for 21 CFR
SUPPLEMENTARY INFORMATION:
part 558 continues to read as follows:

Paperwork Reduction Act
The collections of information
§ 558.195 [Amended]
contained in these final regulations have
been reviewed and approved by the
■ 2. Section 558.195 Decoquinate is
Office of Management and Budget in
amended in paragraph (e)(2)(iv) in the
table in the ‘‘Decoquinate in grams/ton’’ accordance with the Paperwork
column by removing ‘‘13.6 to 27.2’’ and Reduction Act (44 U.S.C. 3507) under
by adding in its place ‘‘12.9 to 90.8’’; and control number 1545–1831. Responses
to these collections of information are
in the ‘‘Limitations’’ column after the
mandatory.
fourth sentence by adding ‘‘Do not feed
An agency may not conduct or
to lactating dairy cattle.’’
sponsor, and a person is not required to
Dated: August 18, 2004.
respond to, a collection of information
Steven D. Vaughn,
unless the collection of information
displays a valid control number
Director, Office of New Animal Drug
assigned by the Office of Management
Evaluation, Center for Veterinary Medicine.
and Budget.
[FR Doc. 04–19696 Filed 8–27–04; 8:45 am]
The estimated annual burden per
BILLING CODE 4160–01–S
[respondent/recordkeeper] varies from
48 minutes to 1 hour 12 minutes,
depending on individual circumstances,
with an estimated average of 1 hour.
Comments concerning the accuracy of
this burden estimate and suggestions for
reducing this burden should be sent to
the Internal Revenue Service, Attn: IRS

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Federal Register / Vol. 69, No. 167 / Monday, August 30, 2004 / Rules and Regulations
Reports Clearance Officer,
SE:W:CAR:MP:T:T:SP Washington, DC
20224, and to the Office of Management
and Budget, Attn: Desk Officer for the
Department of the Treasury, Office of
Information and Regulatory Affairs,
Washington, DC 20503.
Books or records relating to this
collection of information must be
retained as long as their contents may
become material in the administration
of any internal revenue law. Generally,
tax returns and tax return information
are confidential, as required by 26
U.S.C. 6103.
Background
This document contains amendments
to 26 CFR part 1. On August 29, 2003,
a notice of proposed rulemaking (REG–
106486–98) relating to the taxation of
nonfunctional currency denominated
contingent payment debt instruments
was published in the Federal Register
(68 FR 51944). No public hearing was
requested or held. One written comment
responding to the notice of proposed
rulemaking was received. After
consideration of this comment, the
proposed regulations are adopted as
amended by this Treasury decision. The
revisions are discussed below.
Summary of Comments
Treasury and the IRS received one
comment letter in response to the notice
of proposed rulemaking. The issues
raised in that comment letter are
addressed below.
1. Exceptions Described in § 1.1275–
4(a)(2)
The comment letter notes that in
describing instruments subject to
§ 1.988–6 by reference to § 1.1275–
4(b)(1), it was unclear whether the
exceptions set forth in § 1.1275–4(a)(2)
applied to instruments described in
§ 1.988–6(a)(1).
It was intended to be implicit from
the reference to § 1.1275–4(b)(1) that
debt instruments excluded from the
application of § 1.1275–4 by reason of
§ 1.1275–4(a)(2) (other than by reason of
being subject to section 988) are
similarly excluded from § 1.988–6.
Nevertheless, the final regulations have
been revised to make explicit that
§ 1.988–6 applies only to debt
instruments to which § 1.1275–4 would
otherwise apply (not taking into account
the exclusion for debt instruments that
are subject to section 988).
2. Multicurrency Debt Instruments With
Related Hedges
The comment letter expresses concern
that it may be possible to structure
arrangements to avoid the original issue

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discount (OID) rules using a
multicurrency debt instrument that has
a nonfunctional currency as the
predominant currency and partial
hedges of that instrument. That is, it
may be possible to closely replicate the
economic attributes of a dollar
denominated instrument with OID
through a combination of a
multicurrency instrument without OID
and a partial hedge of that instrument.
The comment letter suggests that
§ 1.988–5(a) would not apply in such a
case, because the hedge would not be a
complete hedge of all payments.
Treasury and the IRS believe that an
anti-abuse rule is appropriate to prevent
the potential abuse described above.
Accordingly, an anti-abuse rule
applicable to debt instruments subject to
section 988 is included in § 1.988–
2(b)(18). This anti-abuse rule is
patterned after the anti-abuse rule
contained in § 1.1275–2(g) and permits
the Commissioner to apply or depart
from the applicable regulations as
necessary or appropriate to achieve a
reasonable result. No inference is
intended as to how the Commissioner
may apply the anti-abuse rule contained
in § 1.1275–2(g) to nonfunctional
currency denominated debt
instruments.
In addition, Treasury and the IRS
believe that § 1.988–2(f) may be applied
in the situation described. Furthermore,
Treasury and the IRS note that under
§ 1.988–5(a)(8)(iii) the Commissioner
can integrate a foreign currency
denominated debt instrument with a
partial hedge of that instrument.
3. Multicurrency Debt Instrument—
Determination of Predominant Currency
The comment letter proposes the use
of a special anti-abuse rule in the case
where the net present value of all
payments in, or determined with respect
to, the predominant currency of a
multicurrency instrument does not
exceed 50 percent of the present value
of all payments. The letter requests that,
in such a case, the comparable yield be
determined on a synthetic basis by
reference to the weighted average of the
comparable yields in each component
currency rather than by reference to the
predominant currency. There are two
stated rationales for this request. First,
the holder could avoid accrual of OID if
a multicurrency contingent payment
debt instrument’s predominant currency
is a currency with a low interest rate
and the other currencies in which
payments are denominated or with
respect to which payments are
determined are highly inflationary
currencies (but not hyperinflationary
currencies). Second, if the predominant

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52817

low interest rate currency in such an
instrument is the U.S. dollar and the
issuer is foreign, a holder’s gain upon
disposition of the instrument would be
characterized as foreign source interest
income rather than as U.S. source
foreign currency gain.
Treasury and the IRS agree that the
letter has identified an issue to be
addressed. However, Treasury and the
IRS believe the proposed solution of
creating a synthetic yield (and
presumably a synthetic currency to
measure currency gain or loss) is overly
complex and would be difficult to
administer. Instead, Treasury and the
IRS have added a special rule that
applies if there is no single currency for
which the net present value in
functional currency of all payments
denominated in, or determined by
reference to, that currency is greater
than 50 percent of the total value of all
payments. In such a case, if the discount
rate attributable to the currency that
would otherwise be the predominant
currency differs by 10 percentage points
or more from the discount rate
attributable to any other currency in
which payments are denominated or
with respect to which payments are
determined, the Commissioner can
determine the predominant currency
under any reasonable method.
4. Integrated Debt Instruments
The comment letter requests
clarification that § 1.988–6 does not
apply to transactions that are composed
of a nonfunctional currency contingent
payment debt instrument (or a
multicurrency debt instrument) and a
qualified hedge and that are subject to
the integration rules of § 1.988–5.
Treasury and the IRS believe that the
proposed regulations are clear on this
point, because § 1.988–5(a)(5)(i)
provides that a taxpayer may treat a debt
instrument and a hedge as an integrated
economic transaction only if, among
other things, all the contingent features
of an instrument are fully hedged such
that the synthetic debt instrument
resulting from integration is not a
contingent payment instrument.
Accordingly, no change has been made
in the final regulations regarding this
issue.
5. Alternative Payment Schedule and
Fixed Yield Rules
Section 1.1275–4(a)(2)(iii) provides
that the contingent payment debt
instrument rules in § 1.1275–4 do not
apply to a debt instrument subject to
§ 1.1272–1(c) (a debt instrument that
provides for certain alternative payment
schedules) or § 1.1272–1(d) (a debt
instrument that provides for a fixed

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yield). The comment letter requests that
the final regulations clarify that, for
purposes of applying §§ 1.1272–1(c) and
1.1272–1(d) to a nonfunctional currency
denominated debt instrument, the yield
of the instrument be determined in the
instrument’s denomination currency,
rather than in the taxpayer’s functional
currency. Treasury and the IRS believe
that it is clear under § 1.988–
2(b)(2)(ii)(A) (determinations regarding
OID in a nonfunctional currency
denominated debt instrument are made
in the currency of the debt instrument)
that these provisions are applied by
using the debt instrument’s
denomination currency. Accordingly,
no change has been made in the final
regulations regarding this issue.
6. Predominant Currency of a
Multicurrency Debt Instrument Is the
Same as the Taxpayer’s Functional
Currency
The comment letter requests that the
final regulations clarify that if the
predominant currency of a
multicurrency debt instrument is the
taxpayer’s functional currency, then
section 988 does not apply to that
instrument. Treasury and the IRS
believe that § 1.988–6(d)(4) of the
proposed regulations is clear on this
point. Accordingly, no further
clarification is made in the final
regulations.
7. Other Regulatory Provisions
The comment letter requests that the
final regulations clarify that debt
instruments subject to § 1.988–6 be
treated for purposes of other regulations
as if they were subject to § 1.1275–4.
Section 1.988–6 provides that the rules
of § 1.1275–4 apply to debt instruments
subject to § 1.988–6, except as otherwise
provided in § 1.988–6. Accordingly, a
reference to a debt instrument subject to
§ 1.1275–4 will also refer to a debt
instrument subject to § 1.988–6, unless
otherwise provided in § 1.988–6.
Treasury and the IRS therefore believe
that no further clarification is necessary.
8. Netting Currency Gain or Loss With
Other Gain or Loss Upon a Disposition
of the Instrument
In response to a request in the
preamble to the proposed regulations for
comments regarding netting, the
comment letter proposes that foreign
currency gain or loss be netted with
other gain or loss on the disposition of
a debt instrument. Treasury and the IRS
are concerned about this type of netting
in the context of foreign currency
contingent payment debt instruments.
Depending on the particular terms of
such an instrument, a change in value

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due to a contingency may be recognized
for tax purposes in a year prior to the
recognition of foreign currency gain or
loss upon disposition of the instrument
or may be recognized concurrently with
the recognition of foreign currency gain
or loss upon disposition. Treasury and
the IRS therefore have concluded that
netting is not appropriate in the context
of foreign currency contingent payment
debt instruments.
9. Tax Exempt Foreign Currency
Contingent Payment Debt Instruments
In response to a request in the
preamble to the proposed regulations for
comments regarding tax exempt foreign
currency contingent payment debt
instruments, the comment letter
requests certain modifications to
§ 1.1275–4(d)(3) to take into account the
policy considerations underlying
§ 1.988–3(c). Treasury and the IRS
appreciate these comments but believe
the matter deserves more careful study
before any regulations specifically
addressing tax exempt foreign currency
contingent payment debt instruments
can be issued.
10. Multicurrency Debt Instruments
With No Non-Currency Contingencies
In response to the request for
comments contained in the preamble to
the proposed regulations, the comment
letter requests that all gain or loss on a
sale of a multicurrency debt instrument
that has no non-currency contingencies
be characterized wholly as foreign
currency gain or loss. Treasury and the
IRS are concerned that such treatment
would differ inappropriately from the
treatment of gain or loss in respect of a
contingent payment debt instrument
that has currency contingencies and
non-currency contingencies.
Accordingly, no change has been made
in the final regulations regarding this
issue.
Effect on Other Documents
The following publications are
obsolete with regard to debt instruments
issued on or after October 29, 2004:
Announcement 99–76, 1999–2 C.B. 223.
Special Analyses
It has been determined that this final
regulation is not a significant regulatory
action as defined in Executive Order
12866. Therefore, a regulatory
assessment is not required. It is hereby
certified that these regulations will not
have a significant economic impact on
a substantial number of small entities.
This certification is based upon the fact
that few, if any, small entities issue or
hold foreign currency denominated
contingent payment debt instruments.

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Generally, it is expected that the only
domestic holders of these instruments
will likely be financial institutions,
investment banking firms, investment
funds, and other sophisticated investors,
due to the foreign currency risk and
other contingencies inherent in these
instruments. Therefore, a Regulatory
Flexibility Analysis under the
Regulatory Flexibility Act (5 U.S.C.
chapter 6) is not required. Pursuant to
26 U.S.C. 7805(f), the notice of proposed
rulemaking preceding these final
regulations was submitted to the Chief
Counsel for Advocacy of the Small
Business Administration for comment
on its impact on small business.
Drafting Information
The principal author of these
regulations is Milton Cahn of the Office
of the Associate Chief Counsel
(International). However, other
personnel from the IRS and Treasury
Department participated in their
development.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.
26 CFR Part 602
Reporting and recordkeeping
requirements.
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and 602
are amended as follows:

■

PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read, in part, as
follows:

■

Authority: 26 U.S.C. 7805 * * *
■ Par. 2. Section 1.988–0 is amended as
follows:
■ 1. The introductory text is revised.
■ 2. Entries are added for §§ 1.988–
2(b)(18), 1.988–2(h) and 1.988–6.
The revision and additions read as
follows:

§ 1.988–0 Taxation of gain or loss from a
section 988 transaction; Table of Contents.

This section lists captioned
paragraphs contained in §§ 1.988–1
through 1.988–6.
*
*
*
*
*
§ 1.988–2 Recognition and Computation of
Exchange Gain or Loss

*

*

*

*

*

(b) * * *
(18) Interaction of section 988 and
§ 1.1275–2(g).

*

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*

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*

Federal Register / Vol. 69, No. 167 / Monday, August 30, 2004 / Rules and Regulations
(h) Timing of income and deductions from
notional principal contracts.

*

*

*

*

*

§ 1.988–6 Nonfunctional Currency
Contingent Payment Debt Instruments
(a) In general.
(1) Scope.
(2) Exception for hyperinflationary
currencies.
(b) Instruments described in paragraph
(a)(1)(i) of this section.
(1) In general.
(2) Application of noncontingent bond
method.
(3) Treatment and translation of amounts
determined under noncontingent bond
method.
(4) Determination of gain or loss not
attributable to foreign currency.
(5) Determination of foreign currency gain
or loss.
(6) Source of gain or loss.
(7) Basis different from adjusted issue
price.
(8) Fixed but deferred contingent
payments.
(c) Examples.
(d) Multicurrency debt instruments.
(1) In general.
(2) Determination of denomination
currency.
(3) Issuer/holder consistency.
(4) Treatment of payments in currencies
other than the denomination currency.
(e) Instruments issued for nonpublicly
traded property.
(1) Applicability.
(2) Separation into components.
(3) Treatment of components consisting of
one or more noncontingent payments in the
same currency.
(4) Treatment of components consisting of
contingent payments.
(5) Basis different from adjusted issue
price.
(6) Treatment of holder on sale, exchange,
or retirement.
(f) Rules for nonfunctional currency tax
exempt obligations described in § 1.1275–
4(d).
(g) Effective date.

Par. 3. Section 1.988–2 is amended by:
1. Adding the text of paragraph
(b)(2)(i)(B)(1).
■ 2. Revising paragraph (b)(2)(i)(B)(2).
■ 3. Adding the text of paragraph (b)(18).
The additions and revision read as
follows:
■
■

§ 1.988–2 Recognition and computation of
exchange gain or loss.

*

*
*
*
*
(b) * * *
(2) * * *
(i) * * *
(B) * * * (1) Operative rules. See
§ 1.988–6 for rules applicable to
contingent payment debt instruments
for which one or more payments are
denominated in, or determined by
reference to, a nonfunctional currency.
(2) Certain instruments are not
contingent payment debt instruments.

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For purposes of sections 163(e) and
1271 through 1275 and the regulations
thereunder, a debt instrument does not
provide for contingent payments merely
because the instrument is denominated
in, or all payments of which are
determined with reference to, a single
nonfunctional currency. See § 1.988–6
for the treatment of nonfunctional
currency contingent payment debt
instruments.
*
*
*
*
*
(18) Interaction of section 988 and
§ 1.1275–2(g)—(i) In general. If a
principal purpose of structuring a debt
instrument subject to section 988 and
any related hedges is to achieve a result
that is unreasonable in light of the
purposes of section 163(e), section 988,
sections 1271 through 1275, or any
related section of the Internal Revenue
Code, the Commissioner can apply or
depart from the regulations under the
applicable sections as necessary or
appropriate to achieve a reasonable
result. For example, if this paragraph
(b)(18) applies to a multicurrency debt
instrument and a hedge or hedges, the
Commissioner can wholly or partially
integrate transactions or treat portions of
the debt instrument as separate
instruments where appropriate. See also
§ 1.1275–2(g).
(ii) Unreasonable result. Whether a
result is unreasonable is determined
based on all the facts and
circumstances. In making this
determination, a significant fact is
whether the treatment of the debt
instrument is expected to have a
substantial effect on the issuer’s or a
holder’s U.S. tax liability. Another
significant fact is whether the result is
obtainable without the application of
§ 1.988–6 and any related provisions
(e.g., if the debt instrument and the
contingency were entered into
separately). A result will not be
considered unreasonable, however, in
the absence of an expected substantial
effect on the present value of a
taxpayer’s tax liability.
(iii) Effective date. This paragraph
(b)(18) shall apply to debt instruments
issued on or after October 29, 2004.
*
*
*
*
*
■ Par. 4. Section 1.988–6 is added to
read as follows:
§ 1.988–6 Nonfunctional currency
contingent payment debt instruments.

(a) In general—(1) Scope. This section
determines the accrual of interest and
the amount, timing, source, and
character of any gain or loss on
nonfunctional currency contingent
payment debt instruments described in
this paragraph (a)(1) and to which

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§ 1.1275–4(a) would otherwise apply if
the debt instrument were denominated
in the taxpayer’s functional currency.
Except as provided by the rules in this
section, the rules in § 1.1275–4 (relating
to contingent payment debt
instruments) apply to the following
instruments—
(i) A debt instrument described in
§ 1.1275–4(b)(1) for which all payments
of principal and interest are
denominated in, or determined by
reference to, a single nonfunctional
currency and which has one or more
non-currency related contingencies;
(ii) A debt instrument described in
§ 1.1275–4(b)(1) for which payments of
principal or interest are denominated in,
or determined by reference to, more
than one currency and which has no
non-currency related contingencies;
(iii) A debt instrument described in
§ 1.1275–4(b)(1) for which payments of
principal or interest are denominated in,
or determined by reference to, more
than one currency and which has one or
more non-currency related
contingencies; and
(iv) A debt instrument otherwise
described in paragraph (a)(1)(i), (ii) or
(iii) of this section, except that the debt
instrument is described in § 1.1275–
4(c)(1) rather than § 1.1275–4(b)(1) (e.g.,
the instrument is issued for nonpublicly traded property).
(2) Exception for hyperinflationary
currencies—(i) In general. Except as
provided in paragraph (a)(2)(ii) of this
section, this section shall not apply to
an instrument described in paragraph
(a)(1) of this section if any payment
made under such instrument is
determined by reference to a
hyperinflationary currency, as defined
in § 1.985–1(b)(2)(ii)(D). In such case,
the amount, timing, source and
character of interest, principal, foreign
currency gain or loss, and gain or loss
relating to a non-currency contingency
shall be determined under the method
that reflects the instrument’s economic
substance.
(ii) Discretion as to method. If a
taxpayer does not account for an
instrument described in paragraph
(a)(2)(i) of this section in a manner that
reflects the instrument’s economic
substance, the Commissioner may apply
the rules of this section to such an
instrument or apply the principles of
§ 1.988–2(b)(15), reasonably taking into
account the contingent feature or
features of the instrument.
(b) Instruments described in
paragraph (a)(1)(i) of this section—(1) In
general. Paragraph (b)(2) of this section
provides rules for applying the
noncontingent bond method (as set forth
in § 1.1275–4(b)) in the nonfunctional

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currency in which a debt instrument
described in paragraph (a)(1)(i) of this
section is denominated, or by reference
to which its payments are determined
(the denomination currency). Paragraph
(b)(3) of this section describes how
amounts determined in paragraph (b)(2)
of this section shall be translated from
the denomination currency of the
instrument into the taxpayer’s
functional currency. Paragraph (b)(4) of
this section describes how gain or loss
(other than foreign currency gain or
loss) shall be determined and
characterized with respect to the
instrument. Paragraph (b)(5) of this
section describes how foreign currency
gain or loss shall be determined with
respect to accrued interest and principal
on the instrument. Paragraph (b)(6) of
this section provides rules for
determining the source and character of
any gain or loss with respect to the
instrument. Paragraph (b)(7) of this
section provides rules for subsequent
holders of an instrument who purchase
the instrument for an amount other than
the adjusted issue price of the
instrument. Paragraph (c) of this section
provides examples of the application of
paragraph (b) of this section. See
paragraph (d) of this section for the
determination of the denomination
currency of an instrument described in
paragraph (a)(1)(ii) or (iii) of this
section. See paragraph (e) of this section
for the treatment of an instrument
described in paragraph (a)(1)(iv) of this
section.
(2) Application of noncontingent bond
method—(i) Accrued interest. Interest
accruals on an instrument described in
paragraph (a)(1)(i) of this section are
initially determined in the
denomination currency of the
instrument by applying the
noncontingent bond method, set forth in
§ 1.1275–4(b), to the instrument in its
denomination currency. Accordingly,
the comparable yield, projected
payment schedule, and comparable
fixed rate debt instrument, described in
§ 1.1275–4(b)(4), are determined in the
denomination currency. For purposes of
applying the noncontingent bond
method to instruments described in this
paragraph, the applicable Federal rate
described in § 1.1275–4(b)(4)(i) shall be
the rate described in § 1.1274–4(d) with
respect to the denomination currency.
(ii) Net positive and negative
adjustments. Positive and negative
adjustments, and net positive and net
negative adjustments, with respect to an
instrument described in paragraph
(a)(1)(i) of this section are determined
by applying the rules of § 1.1275–4(b)(6)
(and § 1.1275–4(b)(9)(i) and (ii), if
applicable) in the denomination

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currency. Accordingly, a net positive
adjustment is treated as additional
interest (in the denomination currency)
on the instrument. A net negative
adjustment first reduces interest that
otherwise would be accrued by the
taxpayer during the current tax year in
the denomination currency. If a net
negative adjustment exceeds the interest
that would otherwise be accrued by the
taxpayer during the current tax year in
the denomination currency, the excess
is treated as ordinary loss (if the
taxpayer is a holder of the instrument)
or ordinary income (if the taxpayer is
the issuer of the instrument). The
amount treated as ordinary loss by a
holder with respect to a net negative
adjustment is limited, however, to the
amount by which the holder’s total
interest inclusions on the debt
instrument (determined in the
denomination currency) exceed the total
amount of the holder’s net negative
adjustments treated as ordinary loss on
the debt instrument in prior taxable
years (determined in the denomination
currency). Similarly, the amount treated
as ordinary income by an issuer with
respect to a net negative adjustment is
limited to the amount by which the
issuer’s total interest deductions on the
debt instrument (determined in the
denomination currency) exceed the total
amount of the issuer’s net negative
adjustments treated as ordinary income
on the debt instrument in prior taxable
years (determined in the denomination
currency). To the extent a net negative
adjustment exceeds the current year’s
interest accrual and the amount treated
as ordinary loss to a holder (or ordinary
income to the issuer), the excess is
treated as a negative adjustment
carryforward, within the meaning of
§ 1.1275–4(b)(6)(iii)(C), in the
denomination currency.
(iii) Adjusted issue price. The
adjusted issue price of an instrument
described in paragraph (a)(1)(i) of this
section is determined by applying the
rules of § 1.1275–4(b)(7) in the
denomination currency. Accordingly,
the adjusted issue price is equal to the
debt instrument’s issue price in the
denomination currency, increased by
the interest previously accrued on the
debt instrument (determined without
regard to any net positive or net
negative adjustments on the instrument)
and decreased by the amount of any
noncontingent payment and the
projected amount of any contingent
payment previously made on the
instrument. All adjustments to the
adjusted issue price are calculated in
the denomination currency.
(iv) Adjusted basis. The adjusted basis
of an instrument described in paragraph

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(a)(1)(i) of this section is determined by
applying the rules of § 1.1275–4(b)(7) in
the taxpayer’s functional currency. In
accordance with those rules, a holder’s
basis in the debt instrument is increased
by the interest previously accrued on
the debt instrument (translated into
functional currency), without regard to
any net positive or net negative
adjustments on the instrument (except
as provided in paragraph (b)(7) or (8) of
this section, if applicable), and
decreased by the amount of any
noncontingent payment and the
projected amount of any contingent
payment previously made on the
instrument to the holder (translated into
functional currency). See paragraph
(b)(3)(iii) of this section for translation
rules.
(v) Amount realized. The amount
realized by a holder and the repurchase
price paid by the issuer on the
scheduled or unscheduled retirement of
a debt instrument described in
paragraph (a)(1)(i) of this section are
determined by applying the rules of
§ 1.1275–4(b)(7) in the denomination
currency. For example, with regard to a
scheduled retirement at maturity, the
holder is treated as receiving the
projected amount of any contingent
payment due at maturity, reduced by
the amount of any negative adjustment
carryforward. For purposes of
translating the amount realized by the
holder into functional currency, the
rules of paragraph (b)(3)(iv) of this
section shall apply.
(3) Treatment and translation of
amounts determined under
noncontingent bond method—(i)
Accrued interest. The amount of
accrued interest, determined under
paragraph (b)(2)(i) of this section, is
translated into the taxpayer’s functional
currency at the average exchange rate, as
described in § 1.988–2(b)(2)(iii)(A), or,
at the taxpayer’s election, at the
appropriate spot rate, as described in
§ 1.988–2(b)(2)(iii)(B).
(ii) Net positive and negative
adjustments—(A) Net positive
adjustments. A net positive adjustment,
as referenced in paragraph (b)(2)(ii) of
this section, is translated into the
taxpayer’s functional currency at the
spot rate on the last day of the taxable
year in which the adjustment is taken
into account under § 1.1275–4(b)(6), or,
if earlier, the date the instrument is
disposed of or otherwise terminated.
(B) Net negative adjustments. A net
negative adjustment is treated and,
where necessary, is translated from the
denomination currency into the
taxpayer’s functional currency under
the following rules:

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Federal Register / Vol. 69, No. 167 / Monday, August 30, 2004 / Rules and Regulations
(1) The amount of a net negative
adjustment determined in the
denomination currency that reduces the
current year’s interest in that currency
shall first reduce the current year’s
accrued but unpaid interest, and then
shall reduce the current year’s interest
which was accrued and paid. No
translation is required.
(2) The amount of a net negative
adjustment treated as ordinary income
or loss under § 1.1275–4(b)(6)(iii)(B)
first is attributable to accrued but
unpaid interest accrued in prior taxable
years. For this purpose, the net negative
adjustment shall be treated as
attributable to any unpaid interest
accrued in the immediately preceding
taxable year, and thereafter to unpaid
interest accrued in each preceding
taxable year. The amount of the net
negative adjustment applied to accrued
but unpaid interest is translated into
functional currency at the same rate
used, in each of the respective prior
taxable years, to translate the accrued
interest.
(3) Any amount of the net negative
adjustment remaining after the
application of paragraphs (b)(3)(ii)(B)(1)
and (2) of this section is attributable to
interest accrued and paid in prior
taxable years. The amount of the net
negative adjustment applied to such
amounts is translated into functional
currency at the spot rate on the date the
debt instrument was issued or, if later,
acquired.
(4) Any amount of the net negative
adjustment remaining after application
of paragraphs (b)(3)(ii)(B)(1), (2) and (3)
of this section is a negative adjustment
carryforward, within the meaning of
§ 1.1275–4(b)(6)(iii)(C). A negative
adjustment carryforward is carried
forward in the denomination currency
and is applied to reduce interest
accruals in subsequent years. In the year
in which the instrument is sold,
exchanged or retired, any negative
adjustment carryforward not applied to
interest reduces the holder’s amount
realized on the instrument (in the
denomination currency). An issuer of a
debt instrument described in paragraph
(a)(1)(i) of this section who takes into
income a negative adjustment
carryforward (that is not applied to
interest) in the year the instrument is
retired, as described in § 1.1275–
4(b)(6)(iii)(C), translates such income
into functional currency at the spot rate
on the date the instrument was issued.
(iii) Adjusted basis—(A) In general.
Except as otherwise provided in this
paragraph and paragraph (b)(7) or (8) of
this section, a holder determines and
maintains adjusted basis by translating
the denomination currency amounts

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determined under § 1.1275–4(b)(7)(iii)
into functional currency as follows:
(1) The holder’s initial basis in the
instrument is determined by translating
the amount paid by the holder to
acquire the instrument (in the
denomination currency) into functional
currency at the spot rate on the date the
instrument was issued or, if later,
acquired.
(2) An increase in basis attributable to
interest accrued on the instrument is
translated at the rate applicable to such
interest under paragraph (b)(3)(i) of this
section.
(3) Any noncontingent payment and
the projected amount of any contingent
payments determined in the
denomination currency that decrease
the holder’s basis in the instrument
under § 1.1275–4(b)(7)(iii) are translated
as follows:
(i) The payment first is attributable to
the most recently accrued interest to
which prior amounts have not already
been attributed. The payment is
translated into functional currency at
the rate at which the interest was
accrued.
(ii) Any amount remaining after the
application of paragraph
(b)(3)(iii)(A)(3)(i) of this section is
attributable to principal. Such amounts
are translated into functional currency
at the spot rate on the date the
instrument was issued or, if later,
acquired.
(B) Exception for interest reduced by
a negative adjustment carryforward.
Solely for purposes of this § 1.988–6,
any amounts of accrued interest income
that are reduced as a result of a negative
adjustment carryforward shall be treated
as principal and translated at the spot
rate on the date the instrument was
issued or, if later, acquired.
(iv) Amount realized—(A) Instrument
held to maturity—(1) In general. With
respect to an instrument held to
maturity, a holder translates the amount
realized by separating such amount in
the denomination currency into the
component parts of interest and
principal that make up adjusted basis
prior to translation under paragraph
(b)(3)(iii) of this section, and translating
each of those component parts of the
amount realized at the same rate used to
translate the respective component parts
of basis under paragraph (b)(3)(iii) of
this section. The amount realized first
shall be translated by reference to the
component parts of basis consisting of
accrued interest during the taxpayer’s
holding period as determined under
paragraph (b)(3)(iii) of this section and
ordering such amounts on a last in first
out basis. Any remaining portion of the
amount realized shall be translated by

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52821

reference to the rate used to translate the
component of basis consisting of
principal as determined under
paragraph (b)(3)(iii) of this section.
(2) Subsequent purchases at discount
and fixed but deferred contingent
payments. For purposes of this
paragraph (b)(3)(iv) of this section, any
amount which is required to be added
to adjusted basis under paragraph (b)(7)
or (8) of this section shall be treated as
additional interest which was accrued
on the date the amount was added to
adjusted basis. To the extent included in
amount realized, such amounts shall be
translated into functional currency at
the same rates at which they were
translated for purposes of determining
adjusted basis. See paragraphs (b)(7)(iv)
and (b)(8) of this section for rules
governing the rates at which the
amounts are translated for purposes of
determining adjusted basis.
(B) Sale, exchange, or unscheduled
retirement—(1) Holder. In the case of a
sale, exchange, or unscheduled
retirement, application of the rule stated
in paragraph (b)(3)(iv)(A) of this section
shall be as follows. The holder’s amount
realized first shall be translated by
reference to the principal component of
basis as determined under paragraph
(b)(3)(iii) of this section, and then to the
component of basis consisting of
accrued interest as determined under
paragraph (b)(3)(iii) of this section and
ordering such amounts on a first in first
out basis. Any gain recognized by the
holder (i.e., any excess of the sale price
over the holder’s basis, both expressed
in the denomination currency) is
translated into functional currency at
the spot rate on the payment date.
(2) Issuer. In the case of an
unscheduled retirement of the debt
instrument, any excess of the adjusted
issue price of the debt instrument over
the amount paid by the issuer
(expressed in denomination currency)
shall first be attributable to accrued
unpaid interest, to the extent the
accrued unpaid interest had not been
previously offset by a negative
adjustment, on a last-in-first-out basis,
and then to principal. The accrued
unpaid interest shall be translated into
functional currency at the rate at which
the interest was accrued. The principal
shall be translated at the spot rate on the
date the debt instrument was issued.
(C) Effect of negative adjustment
carryforward with respect to the issuer.
Any amount of negative adjustment
carryforward treated as ordinary income
under § 1.1275–4(b)(6)(iii)(C) shall be
translated at the exchange rate on the
day the debt instrument was issued.
(4) Determination of gain or loss not
attributable to foreign currency. A

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Federal Register / Vol. 69, No. 167 / Monday, August 30, 2004 / Rules and Regulations

holder of a debt instrument described in
paragraph (a)(1)(i) of this section shall
recognize gain or loss upon sale,
exchange, or retirement of the
instrument equal to the difference
between the amount realized with
respect to the instrument, translated
into functional currency as described in
paragraph (b)(3)(iv) of this section, and
the adjusted basis in the instrument,
determined and maintained in
functional currency as described in
paragraph (b)(3)(iii) of this section. The
amount of any gain or loss so
determined is characterized as provided
in § 1.1275–4(b)(8), and sourced as
provided in paragraph (b)(6) of this
section.
(5) Determination of foreign currency
gain or loss—(i) In general. Other than
in a taxable disposition of the debt
instrument, foreign currency gain or loss
is recognized with respect to a debt
instrument described in paragraph
(a)(1)(i) of this section only when
payments are made or received. No
foreign currency gain or loss is
recognized with respect to a net positive
or negative adjustment, as determined
under paragraph (b)(2)(ii) of this section
(except with respect to a positive
adjustment described in paragraph (b)(8)
of this section). As described in this
paragraph (b)(5), foreign currency gain
or loss is determined in accordance with
the rules of § 1.988–2(b).
(ii) Foreign currency gain or loss
attributable to accrued interest. The
amount of foreign currency gain or loss
recognized with respect to payments of
interest previously accrued on the
instrument is determined by translating
the amount of interest paid or received
into functional currency at the spot rate
on the date of payment and subtracting
from such amount the amount
determined by translating the interest
paid or received into functional
currency at the rate at which such
interest was accrued under the rules of
paragraph (b)(3)(i) of this section. For
purposes of this paragraph, the amount
of any payment that is treated as
accrued interest shall be reduced by the
amount of any net negative adjustment
treated as ordinary loss (to the holder)
or ordinary income (to the issuer), as
provided in paragraph (b)(2)(ii) of this
section. For purposes of determining
whether the payment consists of interest
or principal, see the payment ordering
rules in paragraph (b)(5)(iv) of this
section.
(iii) Principal. The amount of foreign
currency gain or loss recognized with
respect to payment or receipt of
principal is determined by translating
the amount paid or received into
functional currency at the spot rate on

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the date of payment or receipt and
subtracting from such amount the
amount determined by translating the
principal into functional currency at the
spot rate on the date the instrument was
issued or, in case of the holder, if later,
acquired. For purposes of determining
whether the payment consists of interest
or principal, see the payment ordering
rules in paragraph (b)(5)(iv) of this
section.
(iv) Payment ordering rules—(A) In
general. Except as provided in
paragraph (b)(5)(iv)(B) of this section,
payments with respect to an instrument
described in paragraph (a)(1)(i) of this
section shall be treated as follows:
(1) A payment shall first be
attributable to any net positive
adjustment on the instrument that has
not previously been taken into account.
(2) Any amount remaining after
applying paragraph (b)(5)(iv)(A)(1) of
this section shall be attributable to
accrued but unpaid interest, remaining
after reduction by any net negative
adjustment, and shall be attributable to
the most recent accrual period to the
extent prior amounts have not already
been attributed to such period.
(3) Any amount remaining after
applying paragraphs (b)(5)(iv)(A)(1) and
(2) of this section shall be attributable to
principal. Any interest paid in the
current year that is reduced by a net
negative adjustment shall be considered
a payment of principal for purposes of
determining foreign currency gain or
loss.
(B) Special rule for sale or exchange
or unscheduled retirement. Payments
made or received upon a sale or
exchange or unscheduled retirement
shall first be applied against the
principal of the debt instrument (or in
the case of a subsequent purchaser, the
purchase price of the instrument in
denomination currency) and then
against accrued unpaid interest (in the
case of a holder, accrued while the
holder held the instrument).
(C) Subsequent purchaser that has a
positive adjustment allocated to a daily
portion of interest. A positive
adjustment that is allocated to a daily
portion of interest pursuant to
paragraph (b)(7)(iv) of this section shall
be treated as interest for purposes of
applying the payment ordering rule of
this paragraph (b)(5)(iv).
(6) Source of gain or loss. The source
of foreign currency gain or loss
recognized with respect to an
instrument described in paragraph
(a)(1)(i) of this section shall be
determined pursuant to § 1.988–4.
Consistent with the rules of § 1.1275–
4(b)(8), all gain (other than foreign
currency gain) on an instrument

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described in paragraph (a)(1)(i) of this
section is treated as interest income for
all purposes. The source of an ordinary
loss (other than foreign currency loss)
with respect to an instrument described
in paragraph (a)(1)(i) of this section
shall be determined pursuant to
§ 1.1275–4(b)(9)(iv). The source of a
capital loss with respect to an
instrument described in paragraph
(a)(1)(i) of this section shall be
determined pursuant to § 1.865–1(b)(2).
(7) Basis different from adjusted issue
price—(i) In general. The rules of
§ 1.1275–4(b)(9)(i), except as set forth in
this paragraph (b)(7), shall apply to an
instrument described in paragraph
(a)(1)(i) of this section purchased by a
subsequent holder for more or less than
the instrument’s adjusted issue price.
(ii) Determination of basis. If an
instrument described in paragraph
(a)(1)(i) of this section is purchased by
a subsequent holder, the subsequent
holder’s initial basis in the instrument
shall equal the amount paid by the
holder to acquire the instrument,
translated into functional currency at
the spot rate on the date of acquisition.
(iii) Purchase price greater than
adjusted issue price. If the purchase
price of the instrument (determined in
the denomination currency) exceeds the
adjusted issue price of the instrument,
the holder shall, consistent with the
rules of § 1.1275–4(b)(9)(i)(B),
reasonably allocate such excess to the
daily portions of interest accrued on the
instrument or to a projected payment on
the instrument. To the extent
attributable to interest, the excess shall
be reasonably allocated over the
remaining term of the instrument to the
daily portions of interest accrued and
shall be a negative adjustment on the
dates the daily portions accrue. On the
date of such adjustment, the holder’s
adjusted basis in the instrument is
reduced by the amount treated as a
negative adjustment under this
paragraph (b)(7)(iii), translated into
functional currency at the rate used to
translate the interest which is offset by
the negative adjustment. To the extent
related to a projected payment, such
excess shall be treated as a negative
adjustment on the date the payment is
made. On the date of such adjustment,
the holder’s adjusted basis in the
instrument is reduced by the amount
treated as a negative adjustment under
this paragraph (b)(7)(iii), translated into
functional currency at the spot rate on
the date the instrument was acquired.
(iv) Purchase price less than adjusted
issue price. If the purchase price of the
instrument (determined in the
denomination currency) is less than the
adjusted issue price of the instrument,

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Federal Register / Vol. 69, No. 167 / Monday, August 30, 2004 / Rules and Regulations
the holder shall, consistent with the
rules of § 1.1275–4(b)(9)(i)(C),
reasonably allocate the difference to the
daily portions of interest accrued on the
instrument or to a projected payment on
the instrument. To the extent
attributable to interest, the difference
shall be reasonably allocated over the
remaining term of the instrument to the
daily portions of interest accrued and
shall be a positive adjustment on the
dates the daily portions accrue. On the
date of such adjustment, the holder’s
adjusted basis in the instrument is
increased by the amount treated as a
positive adjustment under this
paragraph (b)(7)(iv), translated into
functional currency at the rate used to
translate the interest to which it relates.
For purposes of determining adjusted
basis under paragraph (b)(3)(iii) of this
section, such increase in adjusted basis
shall be treated as an additional accrual
of interest during the period to which
the positive adjustment relates. To the
extent related to a projected payment,
such difference shall be treated as a
positive adjustment on the date the
payment is made. On the date of such
adjustment, the holder’s adjusted basis
in the instrument is increased by the
amount treated as a positive adjustment
under this paragraph (b)(7)(iv),
translated into functional currency at
the spot rate on the date the adjustment
is taken into account. For purposes of
determining the amount realized on the
instrument in functional currency under
paragraph (b)(3)(iv) of this section,
amounts attributable to the excess of the
adjusted issue price of the instrument
over the purchase price of the
instrument shall be translated into
functional currency at the same rate at
which the corresponding adjustments
are taken into account under this
paragraph (b)(7)(iv) for purposes of
determining the adjusted basis of the
instrument.
(8) Fixed but deferred contingent
payments. In the case of an instrument
with a contingent payment that becomes
fixed as to amount before the payment
is due, the rules of § 1.1275–4(b)(9)(ii)
shall be applied in the denomination
currency of the instrument. For this
purpose, foreign currency gain or loss
shall be recognized on the date payment
is made or received with respect to the
instrument under the principles of
paragraph (b)(5) of this section. Any
increase or decrease in basis required
under § 1.1275–4(b)(9)(ii)(D) shall be
taken into account at the same exchange
rate as the corresponding net positive or
negative adjustment is taken into
account.
(c) Examples. The provisions of
paragraph (b) of this section may be

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illustrated by the following examples. In
each example, assume that the
instrument described is a debt
instrument for federal income tax
purposes. No inference is intended,
however, as to whether the instrument
is a debt instrument for federal income
tax purposes. The examples are as
follows:
Example 1. Treatment of net positive
adjustment —(i) Facts. On December 31,
2004, Z, a calendar year U.S. resident
taxpayer whose functional currency is the
U.S. dollar, purchases from a foreign
corporation, at original issue, a zero-coupon
debt instrument with a non-currency
contingency for £1000. All payments of
principal and interest with respect to the
instrument are denominated in, or
determined by reference to, a single
nonfunctional currency (the British pound).
The debt instrument would be subject to
§ 1.1275–4(b) if it were denominated in
dollars. The debt instrument’s comparable
yield, determined in British pounds under
paragraph (b)(2)(i) of this section and
§ 1.1275–4(b), is 10 percent, compounded
annually, and the projected payment
schedule, as constructed under the rules of
§ 1.1275–4(b), provides for a single payment
of £1210 on December 31, 2006 (consisting of
a noncontingent payment of £975 and a
projected payment of £235). The debt
instrument is a capital asset in the hands of
Z. Z does not elect to use the spot-rate
convention described in § 1.988–
2(b)(2)(iii)(B). The payment actually made on
December 31, 2006, is £1300. The relevant
pound/dollar spot rates over the term of the
instrument are as follows:
Spot rate
(pounds to dollars)

Date
Dec. 31, 2004 ...........
Dec. 31, 2005 ...........
Dec. 31, 2006 ...........

Accrual period
2005 ..........................
2006 ..........................

£1.00 = $1.00
£1.00 = $1.10
£1.00 = $1.20
Average rate
(pounds to dollars)
£1.00 = $1.05
£1.00 = $1.15

(ii) Treatment in 2005—(A) Determination
of accrued interest. Under paragraph (b)(2)(i)
of this section, and based on the comparable
yield, Z accrues £100 of interest on the debt
instrument for 2005 (issue price of £1000 ×
10 percent). Under paragraph (b)(3)(i) of this
section, Z translates the £100 at the average
exchange rate for the accrual period ($1.05 x
£100 = $105). Accordingly, Z has interest
income in 2005 of $105.
(B) Adjusted issue price and basis. Under
paragraphs (b)(2)(iii) and (iv) of this section,
the adjusted issue price of the debt
instrument determined in pounds and Z’s
adjusted basis in dollars in the debt
instrument are increased by the interest
accrued in 2005. Thus, on January 1, 2006,
the adjusted issue price of the debt
instrument is £1100. For purposes of
determining Z’s dollar basis in the debt

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52823

instrument, the $1000 basis ($1.00 × £1000
original cost basis) is increased by the £100
of accrued interest, translated at the rate at
which interest was accrued for 2005. See
paragraph (b)(3)(iii) of this section.
Accordingly, Z’s adjusted basis in the debt
instrument as of January 1, 2006, is $1105.
(iii) Treatment in 2006—(A) Determination
of accrued interest. Under paragraph (b)(2)(i)
of this section, and based on the comparable
yield, Z accrues £110 of interest on the debt
instrument for 2006 (adjusted issue price of
£1100 × 10 percent). Under paragraph
(b)(3)(i) of this section, Z translates the £110
at the average exchange rate for the accrual
period ($1.15 × £110 = $126.50).
Accordingly, Z has interest income in 2006
of $126.50.
(B) Effect of net positive adjustment. The
payment actually made on December 31,
2006, is £1300, rather than the projected
£1210. Under paragraph (b)(2)(ii) of this
section, Z has a net positive adjustment of
£90 on December 31, 2006, attributable to the
difference between the amount of the actual
payment and the amount of the projected
payment. Under paragraph (b)(3)(ii)(A) of this
section, the £90 net positive adjustment is
treated as additional interest income and is
translated into dollars at the spot rate on the
last day of the year ($1.20 × £90 = $108).
Accordingly, Z has a net positive adjustment
of $108 resulting in a total interest inclusion
for 2006 of $234.50 ($126.50 + $108 =
$234.50).
(C) Adjusted issue price and basis. Based
on the projected payment schedule, the
adjusted issue price of the debt instrument
immediately before the payment at maturity
is £1210 (£1100 plus £110 of accrued interest
for 2006). Z’s adjusted basis in dollars, based
only on the noncontingent payment and the
projected amount of the contingent payment
to be received, is $1231.50 ($1105 plus
$126.50 of accrued interest for 2006).
(D) Amount realized. Even though Z
receives £1300 at maturity, for purposes of
determining the amount realized, Z is treated
under paragraph (b)(2)(v) of this section as
receiving the projected amount of the
contingent payment on December 31, 2006.
Therefore, Z is treated as receiving £1210 on
December 31, 2006. Under paragraph
(b)(3)(iv) of this section, Z translates its
amount realized into dollars and computes
its gain or loss on the instrument (other than
foreign currency gain or loss) by breaking the
amount realized into its component parts.
Accordingly, £100 of the £1210 (representing
the interest accrued in 2005) is translated at
the rate at which it was accrued (£1 = $1.05),
resulting in an amount realized of $105; £110
of the £1210 (representing the interest
accrued in 2006) is translated into dollars at
the rate at which it was accrued (£1 = $1.15),
resulting in an amount realized of $126.50;
and £1000 of the £1210 (representing a return
of principal) is translated into dollars at the
spot rate on the date the instrument was
purchased (£1 = $1), resulting in an amount
realized of $1000. Z’s total amount realized
is $1231.50, the same as its basis, and Z
recognizes no gain or loss (before
consideration of foreign currency gain or
loss) on retirement of the instrument.
(E) Foreign currency gain or loss. Under
paragraph (b)(5) of this section Z recognizes

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foreign currency gain under section 988 on
the instrument with respect to the
consideration actually received at maturity
(except for the net positive adjustment),
£1210. The amount of recognized foreign
currency gain is determined based on the
difference between the spot rate on the date
the instrument matures and the rates at
which the principal and interest were taken
into account. With respect to the portion of
the payment attributable to interest accrued
in 2005, the foreign currency gain is $15
[£100 × ($1.20¥$1.05)]. With respect to
interest accrued in 2006, the foreign currency
gain equals $5.50 [£110 × ($1.20¥$1.15)].
With respect to principal, the foreign
currency gain is $200 [£1000 ×
($1.20¥$1.00)]. Thus, Z recognizes a total
foreign currency gain on December 31, 2006,
of $220.50.
(F) Source. Z has interest income of $105
in 2005, interest income of $234.50 in 2006
(attributable to £110 of accrued interest and
the £90 net positive adjustment), and a
foreign currency gain of $220.50 in 2006.
Under paragraph (b)(6) of this section and
section 862(a)(1), the interest income is
sourced by reference to the residence of the
payor and is therefore from sources without
the United States. Under paragraph (b)(6) of
this section and § 1.988–4, Z’s foreign
currency gain of $220.50 is sourced by
reference to Z’s residence and is therefore
from sources within the United States.
Example 2. Treatment of net negative
adjustment—
(i) Facts. Assume the same facts as in
Example 1, except that Z receives £975 at
maturity instead of £1300.
(ii) Treatment in 2005. The treatment of the
debt instrument in 2005 is the same as in
Example 1. Thus, Z has interest income in
2005 of $105. On January 1, 2006, the
adjusted issue price of the debt instrument is
£1100, and Z’s adjusted basis in the
instrument is $1105.
(iii) Treatment in 2006—(A) Determination
of accrued interest. Under paragraph (b)(2)(i)
of this section and based on the comparable
yield, Z’s accrued interest for 2006 is £110
(adjusted issue price of £1100 × 10 percent).
Under paragraph (b)(3)(i) of this section, the
£110 of accrued interest is translated at the
average exchange rate for the accrual period
($1.15 × £110 = $126.50).
(B) Effect of net negative adjustment. The
payment actually made on December 31,
2006, is £975, rather than the projected
£1210. Under paragraph (b)(2)(ii) of this
section, Z has a net negative adjustment of
£235 on December 31, 2006, attributable to
the difference between the amount of the
actual payment and the amount of the
projected payment. Z’s accrued interest
income of £110 in 2006 is reduced to zero by
the net negative adjustment. Under paragraph
(b)(3)(ii)(B)(1) of this section the net negative
adjustment which reduces the current year’s
interest is not translated into functional
currency. Under paragraph (b)(2)(ii) of this
section, Z treats the remaining £125 net
negative adjustment as an ordinary loss to the
extent of the £100 previously accrued interest
in 2005. This £100 ordinary loss is
attributable to interest accrued but not paid
in the preceding year. Therefore, under

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paragraph (b)(3)(ii)(B)(2) of this section, Z
translates the loss into dollars at the average
rate for such year (£1 = $1.05). Accordingly,
Z has an ordinary loss of $105 in 2006. The
remaining £25 of net negative adjustment is
a negative adjustment carryforward under
paragraph (b)(2)(ii) of this section.
(C) Adjusted issue price and basis. Based
on the projected payment schedule, the
adjusted issue price of the debt instrument
immediately before the payment at maturity
is £1210 (£1100 plus £110 of accrued interest
for 2006). Z’s adjusted basis in dollars, based
only on the noncontingent payments and the
projected amount of the contingent payments
to be received, is $1231.50 ($1105 plus
$126.50 of accrued interest for 2006).
(D) Amount realized. Even though Z
receives £975 at maturity, for purposes of
determining the amount realized, Z is treated
under paragraph (b)(2)(v) of this section as
receiving the projected amount of the
contingent payment on December 31, 2006,
reduced by the amount of Z’s negative
adjustment carryforward of £25. Therefore, Z
is treated as receiving £1185 (£1210¥£25) on
December 31, 2006. Under paragraph
(b)(3)(iv) of this section, Z translates its
amount realized into dollars and computes
its gain or loss on the instrument (other than
foreign currency gain or loss) by breaking the
amount realized into its component parts.
Accordingly, £100 of the £1185 (representing
the interest accrued in 2005) is translated at
the rate at which it was accrued (£1 = $1.05),
resulting in an amount realized of $105; £110
of the £1185 (representing the interest
accrued in 2006) is translated into dollars at
the rate at which it was accrued (£1 = $1.15),
resulting in an amount realized of $126.50;
and £975 of the £1185 (representing a return
of principal) is translated into dollars at the
spot rate on the date the instrument was
purchased (£1 = $1), resulting in an amount
realized of $975. Z’s amount realized is
$1206.50 ($105 + $126.50 + $975 =
$1206.50), and Z recognizes a capital loss
(before consideration of foreign currency gain
or loss) of $25 on retirement of the
instrument ($1206.50¥$1231.50 = ¥$25).
(E) Foreign currency gain or loss. Z
recognizes foreign currency gain with respect
to the consideration actually received at
maturity, £975. Under paragraph (b)(5)(ii) of
this section, no foreign currency gain or loss
is recognized with respect to unpaid accrued
interest reduced to zero by the net negative
adjustment resulting in 2006. In addition, no
foreign currency gain or loss is recognized
with respect to unpaid accrued interest from
2005, also reduced to zero by the ordinary
loss. Accordingly, Z recognizes foreign
currency gain with respect to principal only.
Thus, Z recognizes a total foreign currency
gain on December 31, 2006, of $195 [£975 ×
($1.20¥$1.00)].
(F) Source. In 2006, Z has an ordinary loss
of $105, a capital loss of $25, and a foreign
currency gain of $195. Under paragraph (b)(6)
of this section and § 1.1275–4(b)(9)(iv), the
$105 ordinary loss generally reduces Z’s
foreign source passive income under section
904(d) and the regulations thereunder. Under
paragraph (b)(6) of this section and § 1.865–
1(b)(2), the $25 capital loss is sourced by
reference to how interest income on the

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instrument would have been sourced.
Therefore, the $25 capital loss generally
reduces Z’s foreign source passive income
under section 904(d) and the regulations
thereunder. Under paragraph (b)(6) of this
section and § 1.988–4, Z’s foreign currency
gain of $195 is sourced by reference to Z’s
residence and is therefore from sources
within the United States.
Example 3. Negative adjustment and
periodic interest payments—(i) Facts. On
December 31, 2004, Z, a calendar year U.S.
resident taxpayer whose functional currency
is the U.S. dollar, purchases from a foreign
corporation, at original issue, a two-year debt
instrument with a non-currency contingency
for £1000. All payments of principal and
interest with respect to the instrument are
denominated in, or determined by reference
to, a single nonfunctional currency (the
British pound). The debt instrument would
be subject to § 1.1275–4(b) if it were
denominated in dollars. The debt
instrument’s comparable yield, determined
in British pounds under §§ 1.988–2(b)(2) and
1.1275–4(b), is 10 percent, compounded
semiannually. The debt instrument provides
for semiannual interest payments of £30
payable each June 30, and December 31, and
a contingent payment at maturity on
December 31, 2006, which is projected to
equal £1086.20 (consisting of a
noncontingent payment of £980 and a
projected payment of £106.20) in addition to
the interest payable at maturity. The debt
instrument is a capital asset in the hands of
Z. Z does not elect to use the spot-rate
convention described in § 1.988–
2(b)(2)(iii)(B). The payment actually made on
December 31, 2006, is £981.00. The relevant
pound/dollar spot rates over the term of the
instrument are as follows:
Spot rate
(pounds to dollars)

Date
Dec. 31, 2004
June 30, 2005
Dec. 31, 2005
June 30, 2006
Dec. 31, 2006

...........
...........
...........
...........
...........

Accrual period
Jan.–June 2005 ........
July–Dec. 2005 .........
Jan.–June 2006 ........
July–Dec. 2006 .........

£1.00
£1.00
£1.00
£1.00
£1.00

=
=
=
=
=

$1.00
$1.20
$1.40
$1.60
$1.80

Average rate
(pounds to dollars)
£1.00
£1.00
£1.00
£1.00

=
=
=
=

$1.10
$1.30
$1.50
$1.70

(ii) Treatment in 2005—(A) Determination
of accrued interest. Under paragraph (b)(2)(i)
of this section, and based on the comparable
yield, Z accrues £50 of interest on the debt
instrument for the January–June accrual
period (issue price of £1000 × 10 percent/2).
Under paragraph (b)(3)(i) of this section, Z
translates the £50 at the average exchange
rate for the accrual period ($1.10 × £50 =
$55.00). Similarly, Z accrues £51 of interest
in the July–December accrual period [(£1000
+ £50¥£30) × 10 percent/2], which is
translated at the average exchange rate for the
accrual period ($1.30 × £51 = $66.30).
Accordingly, Z accrues $121.30 of interest
income in 2005.

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(B) Adjusted issue price and basis—(1)
January–June accrual period. Under
paragraphs (b)(2)(iii) and (iv) of this section,
the adjusted issue price of the debt
instrument determined in pounds and Z’s
adjusted basis in dollars in the debt
instrument are increased by the interest
accrued, and decreased by the interest
payment made, in the January–June accrual
period. Thus, on July 1, 2005, the adjusted
issue price of the debt instrument is £1020
(£1000 + £50 ¥ £30 = £1020). For purposes
of determining Z’s dollar basis in the debt
instrument, the $1000 basis is increased by
the £50 of accrued interest, translated, under
paragraph (b)(3)(iii) of this section, at the rate
at which interest was accrued for the
January–June accrual period ($1.10 × £50 =
$55). The resulting amount is reduced by the
£30 payment of interest made during the
accrual period, translated, under paragraph
(b)(3)(iii) of this section and § 1.988–2(b)(7),
at the rate applicable to accrued interest
($1.10 × £30 = $33). Accordingly, Z’s
adjusted basis as of July 1, 2005, is $1022
($1000 + $55 ¥ $33).
(2) July–December accrual period. Under
paragraphs (b)(2)(iii) and (iv) of this section,
the adjusted issue price of the debt
instrument determined in pounds and Z’s
adjusted basis in dollars in the debt
instrument are increased by the interest
accrued, and decreased by the interest
payment made, in the July–December accrual
period. Thus, on January 1, 2006, the
adjusted issue price of the instrument is
£1041 (£1020 + £51 ¥ £30 = £1041). For
purposes of determining Z’s dollar basis in
the debt instrument, the $1022 basis is
increased by the £51 of accrued interest,
translated, under paragraph (b)(3)(iii) of this
section, at the rate at which interest was
accrued for the July–December accrual period
($1.30 × £51 = $66.30). The resulting amount
is reduced by the £30 payment of interest
made during the accrual period, translated,
under paragraph (b)(3)(iii) of this section and
§ 1.988–2(b)(7), at the rate applicable to
accrued interest ($1.30 × £30 = $39).
Accordingly, Z’s adjusted basis as of January
1, 2006, is $1049.30 ($1022 + $66.30 ¥ $39).
(C) Foreign currency gain or loss. Z will
recognize foreign currency gain on the
receipt of each £30 payment of interest
actually received during 2005. The amount of
foreign currency gain in each case is
determined, under paragraph (b)(5)(ii) of this
section, by reference to the difference
between the spot rate on the date the £30
payment was made and the average exchange
rate for the accrual period during which the
interest accrued. Accordingly, Z recognizes
$3 of foreign currency gain on the January–
June interest payment [£30 × ($1.20 ¥
$1.10)], and $3 of foreign currency gain on
the July–December interest payment [£30 ×
($1.40 ¥ $1.30)]. Z recognizes in 2005 a total
of $6 of foreign currency gain.
(D) Source. Z has interest income of
$121.30 and a foreign currency gain of $6.
Under paragraph (b)(6) of this section and
section 862(a)(1), the interest income is
sourced by reference to the residence of the
payor and is therefore from sources without
the United States. Under paragraph (b)(6) of
this section and § 1.988–4, Z’s foreign

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currency gain of $6 is sourced by reference
to Z’s residence and is therefore from sources
within the United States.
(iii) Treatment in 2006—(A) Determination
of accrued interest. Under paragraph (b)(2)(i)
of this section, and based on the comparable
yield, Z’s accrued interest for the January–
June accrual period is £52.05 (adjusted issue
price of £1041 × 10 percent/2). Under
paragraph (b)(3)(i) of this section, Z translates
the £52.05 at the average exchange rate for
the accrual period ($1.50 × £52.05 = $78.08).
Similarly, Z accrues £53.15 of interest in the
July–December accrual period [(£1041 +
£52.05¥£30) × 10 percent/2], which is
translated at the average exchange rate for the
accrual period ($1.70 × £53.15 = $90.35).
Accordingly, Z accrues £105.20, or $168.43,
of interest income in 2006.
(B) Effect of net negative adjustment. The
payment actually made on December 31,
2006, is £981.00, rather than the projected
£1086.20. Under paragraph (b)(2)(ii)(B) of
this section, Z has a net negative adjustment
of £105.20 on December 31, 2006,
attributable to the difference between the
amount of the actual payment and the
amount of the projected payment. Z’s
accrued interest income of £105.20 in 2006
is reduced to zero by the net negative
adjustment. Elimination of the 2006 accrued
interest fully utilizes the net negative
adjustment.
(C) Adjusted issue price and basis—(1)
January–June accrual period. Under
paragraphs (b)(2)(iii) and (iv) of this section,
the adjusted issue price of the debt
instrument determined in pounds and Z’s
adjusted basis in dollars in the debt
instrument are increased by the interest
accrued, and decreased by the interest
payment made, in the January–June accrual
period. Thus, on July 1, 2006, the adjusted
issue price of the debt instrument is £1063.05
(£1041 + £52.05 ¥ £30 = £1063.05). For
purposes of determining Z’s dollar basis in
the debt instrument, the $1049.30 adjusted
basis is increased by the £52.05 of accrued
interest, translated, under paragraph
(b)(3)(iii) of this section, at the rate at which
interest was accrued for the January–June
accrual period ($1.50 × £52.05 = $78.08). The
resulting amount is reduced by the £30
payment of interest made during the accrual
period, translated, under paragraph (b)(3)(iii)
of this section and § 1.988–2(b)(7), at the rate
applicable to accrued interest ($1.50 × £30 =
$45). Accordingly, Z’s adjusted basis as of
July 1, 2006, is $1082.38 ($1049.30 + $78.08
¥ $45).
(2) July–December accrual period. Under
paragraphs (b)(2)(iii) and (iv) of this section,
the adjusted issue price of the debt
instrument determined in pounds and Z’s
adjusted basis in dollars in the debt
instrument are increased by the interest
accrued, and decreased by the interest
payment made, in the July–December accrual
period. Thus, immediately before maturity on
December 31, 2006, the adjusted issue price
of the instrument is £1086.20 (£1063.05 +
£53.15 ¥ £30 = £1086.20). For purposes of
determining Z’s dollar basis in the debt
instrument, the $1082.38 adjusted basis is
increased by the £53.15 of accrued interest,
translated, under paragraph (b)(3)(iii) of this

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52825

section, at the rate at which interest was
accrued for the July-December accrual period
($1.70 × £53.15 = $90.36). The resulting
amount is reduced by the £30 payment of
interest made during the accrual period,
translated, under paragraph (b)(3)(iii) of this
section and § 1.988–2(b)(7), at the rate
applicable to accrued interest ($1.70 × £30 =
$51). Accordingly, Z’s adjusted basis on
December 31, 2006, immediately prior to
maturity is $1121.74 ($1082.38 + $90.36 ¥
$51).
(D) Amount realized. Even though Z
receives £981.00 at maturity, for purposes of
determining the amount realized, Z is treated
under paragraph (b)(2)(v) of this section as
receiving the projected amount of the
contingent payment on December 31, 2006.
Therefore, Z is treated as receiving £1086.20
on December 31, 2006. Under paragraph
(b)(3)(iv) of this section, Z translates its
amount realized into dollars and computes
its gain or loss on the instrument (other than
foreign currency gain or loss) by breaking the
amount realized into its component parts.
Accordingly, £20 of the £1086.20
(representing the interest accrued in the
January–June 2005 accrual period, less £30
interest paid) is translated into dollars at the
rate at which it was accrued (£1 = $1.10),
resulting in an amount realized of $22; £21
of the £1086.20 (representing the interest
accrued in the July–December 2005 accrual
period, less £30 interest paid) is translated
into dollars at the rate at which it was
accrued (£1 = $1.30), resulting in an amount
realized of $27.30; £22.05 of the £1086.20
(representing the interest accrued in the
January–June 2006 accrual period, less £30
interest paid) is translated into dollars at the
rate at which it was accrued (£1 = $1.50),
resulting in an amount realized of $33.08;
£23.15 of the £1086.20 (representing the
interest accrued in the July 1–December 31,
2006 accrual period, less the £30 interest
payment) is translated into dollars at the rate
at which it was accrued (£1 = $1.70),
resulting in an amount realized of $39.36;
and £1000 (representing principal) is
translated into dollars at the spot rate on the
date the instrument was purchased (£1 = $1),
resulting in an amount realized of $1000.
Accordingly, Z’s total amount realized is
$1121.74 ($22 + $27.30 + $33.08 + $39.36 +
$1000), the same as its basis, and Z
recognizes no gain or loss (before
consideration of foreign currency gain or
loss) on retirement of the instrument.
(E) Foreign currency gain or loss. Z
recognizes foreign currency gain with respect
to each £30 payment actually received during
2006. These payments, however, are treated
as payments of principal for this purpose
because all 2006 accrued interest is reduced
to zero by the net negative adjustment. See
paragraph (b)(5)(iv)(A)(3) of this section. The
amount of foreign currency gain in each case
is determined, under paragraph (b)(5)(iii) of
this section, by reference to the difference
between the spot rate on the date the £30
payment is made and the spot rate on the
date the debt instrument was issued.
Accordingly, Z recognizes $18 of foreign
currency gain on the January–June 2006
interest payment [£30 × ($1.60 ¥ $1.00)], and
$24 of foreign currency gain on the July–

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December 2006 interest payment [£30 ×
($1.80 ¥ $1.00)]. Z separately recognizes
foreign currency gain with respect to the
consideration actually received at maturity,
£981.00. The amount of such gain is
determined based on the difference between
the spot rate on the date the instrument
matures and the rates at which the principal
and interest were taken into account. With
respect to the portion of the payment
attributable to interest accrued in January–
June 2005 (other than the £30 payments), the
foreign currency gain is $14 [£20 × ($1.80 ¥
$1.10)]. With respect to the portion of the
payment attributable to interest accrued in
July–December 2005 (other than the £30
payments), the foreign currency gain is
$10.50 [£21 × ($1.80 ¥ $1.30)]. With respect
to the portion of the payment attributable to
interest accrued in 2006 (other than the £30
payments), no foreign currency gain or loss
is recognized under paragraph (b)(5)(ii) of
this section because such interest was
reduced to zero by the net negative
adjustment. With respect to the portion of the
payment attributable to principal, the foreign
currency gain is $752 [£940 × ($1.80 ¥
$1.00)]. Thus, Z recognizes a foreign currency
gain of $42 on receipt of the two £30
payments in 2006, and $776.50 ($14 + $10.50
+ $752) on receipt of the payment at
maturity, for a total 2006 foreign currency
gain of $818.50.
(F) Source. Under paragraph (b)(6) of this
section and § 1.988–4, Z’s foreign currency
gain of $818.50 is sourced by reference to Z’s
residence and is therefore from sources
within the United States.
Example 4. Purchase price greater than
adjusted issue price —(i) Facts. On July 1,
2005, Z, a calendar year U.S. resident
taxpayer whose functional currency is the
U.S. dollar, purchases a debt instrument with
a non-currency contingency for £1405. All
payments of principal and interest with
respect to the instrument are denominated in,
or determined by reference to, a single
nonfunctional currency (the British pound).
The debt instrument would be subject to
§ 1.1275–4(b) if it were denominated in
dollars. The debt instrument was originally
issued by a foreign corporation on December
31, 2003, for an issue price of £1000, and
matures on December 31, 2006. The debt
instrument’s comparable yield, determined
in British pounds under §§ 1.988–2(b)(2) and
1.1275–4(b), is 10.25 percent, compounded
semiannually, and the projected payment
schedule for the debt instrument (determined
as of the issue date under the rules of
§ 1.1275-4(b)) provides for a single payment
at maturity of £1349.70 (consisting of a
noncontingent payment of £1000 and a
projected payment of £349.70). At the time of
the purchase, the adjusted issue price of the
debt instrument is £1161.76, assuming
semiannual accrual periods ending on June
30 and December 31 of each year. The
increase in the value of the debt instrument
over its adjusted issue price is due to an
increase in the expected amount of the
contingent payment. The debt instrument is
a capital asset in the hands of Z. Z does not
elect to use the spot-rate convention
described in § 1.988–2(b)(2)(iii)(B). The
payment actually made on December 31,

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2006, is £1400. The relevant pound/dollar
spot rates over the term of the instrument are
as follows:
Spot rate
(pounds to dollars)

Date
July 1, 2005 ..............
Dec. 31, 2006 ...........

Accrual period
July 1–Dec. 31, 2005
Jan. 1–June 30, 2006
July 1–Dec. 31, 2006

£1.00 = $1.00
£1.00 = $2.00
Average rate
(pounds to dollars)
£1.00 = $1.50
£1.00 = $1.50
£1.00 = $1.50

(ii) Initial basis. Under paragraph (b)(7)(ii)
of this section, Z’s initial basis in the debt
instrument is $1405, Z’s purchase price of
£1405, translated into functional currency at
the spot rate on the date the debt instrument
was purchased (£1 = $1).
(iii) Allocation of purchase price
differential. Z purchased the debt instrument
for £1405 when its adjusted issue price was
£1161.76. Under paragraph (b)(7)(iii) of this
section, Z allocates the £243.24 excess of
purchase price over adjusted issue price to
the contingent payment at maturity. This
allocation is reasonable because the excess is
due to an increase in the expected amount of
the contingent payment and not, for example,
to a decrease in prevailing interest rates.
(iv) Treatment in 2005—(A) Determination
of accrued interest. Under paragraph (b)(2)(i)
of this section, and based on the comparable
yield, Z accrues £59.54 of interest on the debt
instrument for the July–December 2005
accrual period (issue price of £1161.76 ×
10.25 percent/2). Under paragraph (b)(3)(i) of
this section, Z translates the £59.54 of
interest at the average exchange rate for the
accrual period ($1.50 × £59.54 = $89.31).
Accordingly, Z has interest income in 2005
of $89.31.
(B) Adjusted issue price and basis. Under
paragraphs (b)(2)(iii) and (iv) of this section,
the adjusted issue price of the debt
instrument determined in pounds and Z’s
adjusted basis in dollars in the debt
instrument are increased by the interest
accrued in July–December 2005. Thus, on
January 1, 2006, the adjusted issue price of
the debt instrument is £1221.30 (£1161.76 +
£59.54). For purposes of determining Z’s
dollar basis in the debt instrument on
January 1, 2006, the $1405 basis is increased
by the £59.54 of accrued interest, translated
at the rate at which interest was accrued for
the July–December 2005 accrual period.
Paragraph (b)(3)(iii) of this section.
Accordingly, Z’s adjusted basis in the
instrument, as of January 1, 2006, is $1494.31
[$1405 + (£59.54 × $1.50)].
(v) Treatment in 2006—(A) Determination
of accrued interest. Under paragraph (b)(2)(i)
of this section, and based on the comparable
yield, Z accrues £62.59 of interest on the debt
instrument for the January–June 2006 accrual
period (issue price of £1221.30 × 10.25
percent/2). Under paragraph (b)(3)(i) of this
section, Z translates the £62.59 of accrued
interest at the average exchange rate for the
accrual period ($1.50 × £62.59 = $93.89).
Similarly, Z accrues £65.80 of interest in the

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July–December 2006 accrual period
[(£1221.30 + £62.59) × 10.25 percent/2],
which is translated at the average exchange
rate for the accrual period ($1.50 × £65.80 =
$98.70). Accordingly, Z accrues £128.39, or
$192.59, of interest income in 2006.
(B) Effect of positive and negative
adjustments—(1) Offset of positive
adjustment. The payment actually made on
December 31, 2006, is £1400, rather than the
projected £1349.70. Under paragraph
(b)(2)(ii) of this section, Z has a positive
adjustment of £50.30 on December 31, 2006,
attributable to the difference between the
amount of the actual payment and the
amount of the projected payment. Under
paragraph (b)(7)(iii) of this section, however,
Z also has a negative adjustment of £243.24,
attributable to the excess of Z’s purchase
price for the debt instrument over its
adjusted issue price. Accordingly, Z will
have a net negative adjustment of £192.94
(£50.30¥£243.24 = £192.94) for 2006.
(2) Offset of accrued interest. Z’s accrued
interest income of £128.39 in 2006 is reduced
to zero by the net negative adjustment. The
net negative adjustment which reduces the
current year’s interest is not translated into
functional currency. Under paragraph
(b)(2)(ii) of this section, Z treats the
remaining £64.55 net negative adjustment as
an ordinary loss to the extent of the £59.54
previously accrued interest in 2005. This
£59.54 ordinary loss is attributable to interest
accrued but not paid in the preceding year.
Therefore, under paragraph (b)(3)(ii)(B)(2) of
this section, Z translates the loss into dollars
at the average rate for such year (£1 = $1.50).
Accordingly, Z has an ordinary loss of $89.31
in 2006. The remaining £5.01 of net negative
adjustment is a negative adjustment
carryforward under paragraph (b)(2)(ii) of
this section.
(C) Adjusted issue price and basis—(1)
January–June accrual period. Under
paragraph (b)(2)(iii) of this section, the
adjusted issue price of the debt instrument
on July 1, 2006, is £1283.89 (£1221.30 +
£62.59 = £1283.89). Under paragraphs
(b)(2)(iv) and (b)(3)(iii) of this section, Z’s
adjusted basis as of July 1, 2006, is $1588.20
($1494.31 + $93.89).
(2) July–December accrual period. Based on
the projected payment schedule, the adjusted
issue price of the debt instrument
immediately before the payment at maturity
is £1349.70 (£1283.89 + £65.80 accrued
interest for July–December). Z’s adjusted
basis in dollars, based only on the
noncontingent payments and the projected
amount of the contingent payments to be
received, is $1686.90 ($1588.20 plus $98.70
of accrued interest for July–December).
(3) Adjustment to basis upon contingent
payment. Under paragraph (b)(7)(iii) of this
section, Z’s adjusted basis in the debt
instrument is reduced at maturity by £243.24,
the excess of Z’s purchase price for the debt
instrument over its adjusted issue price. For
this purpose, the adjustment is translated
into functional currency at the spot rate on
the date the instrument was acquired (£1 =
$1). Accordingly, Z’s adjusted basis in the
debt instrument at maturity is $1443.66
($1686.90¥$243.24).
(D) Amount realized. Even though Z
receives £1400 at maturity, for purposes of

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determining the amount realized, Z is treated
under paragraph (b)(2)(v) of this section as
receiving the projected amount of the
contingent payment on December 31, 2006,
reduced by the amount of Z’s negative
adjustment carryforward of £5.01. Therefore,
Z is treated as receiving £1344.69
(£1349.70¥£5.01) on December 31, 2006.
Under paragraph (b)(3)(iv) of this section, Z
translates its amount realized into dollars
and computes its gain or loss on the
instrument (other than foreign currency gain
or loss) by breaking the amount realized into
its component parts. Accordingly, £59.54 of
the £1344.69 (representing the interest
accrued in 2005) is translated at the rate at
which it was accrued (£1 = $1.50), resulting
in an amount realized of $89.31; £62.59 of
the £1344.69 (representing the interest
accrued in January–June 2006) is translated
into dollars at the rate at which it was
accrued (£1 = $1.50), resulting in an amount
realized of $93.89; £65.80 of the £1344.69
(representing the interest accrued in July–
December 2006) is translated into dollars at
the rate at which it was accrued (£1 = $1.50),
resulting in an amount realized of $98.70;
and £1156.76 of the £1344.69 (representing a
return of principal) is translated into dollars
at the spot rate on the date the instrument
was purchased (£1 = $1), resulting in an
amount realized of $1156.76. Z’s amount
realized is $1438.66 ($89.31 + $93.89 +
$98.70 + $1156.76), and Z recognizes a
capital loss (before consideration of foreign
currency gain or loss) of $5 on retirement of
the instrument ($1438.66 ¥ $1443.66 =
¥$5).
(E) Foreign currency gain or loss. Z
recognizes foreign currency gain under
section 988 on the instrument with respect to
the entire consideration actually received at
maturity, £1400. While foreign currency gain
or loss ordinarily would not have arisen with
respect to £50.30 of the £1400, which was
initially treated as a positive adjustment in
2006, the larger negative adjustment in 2006
reduced this positive adjustment to zero.
Accordingly, foreign currency gain or loss is
recognized with respect to the entire £1400.
Under paragraph (b)(5)(ii) of this section,
however, no foreign currency gain or loss is
recognized with respect to unpaid accrued
interest reduced to zero by the net negative
adjustment resulting in 2006, and no foreign
currency gain or loss is recognized with
respect to unpaid accrued interest from 2005,
also reduced to zero by the ordinary loss.
Therefore, the entire £1400 is treated as a
return of principal for the purpose of
determining foreign currency gain or loss,
and Z recognizes a total foreign currency gain
on December 31, 2001, of $1400 [£1400 ×
($2.00¥$1.00)].
(F) Source. Z has an ordinary loss of
$89.31, a capital loss of $5, and a foreign
currency gain of $1400. Under paragraph
(b)(6) of this section and § 1.1275–4(b)(9)(iv),
the $89.31 ordinary loss generally reduces
Z’s foreign source passive income under
section 904(d) and the regulations
thereunder. Under paragraph (b)(6) of this
section and § 1.865–1(b)(2), the $5 capital
loss is sourced by reference to how interest
income on the instrument would have been
sourced. Therefore, the $5 capital loss

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generally reduces Z’s foreign source passive
income under section 904(d) and the
regulations thereunder. Under paragraph
(b)(6) of this section and § 1.988–4, Z’s
foreign currency gain of $1400 is sourced by
reference to Z’s residence and is therefore
from sources within the United States.
Example 5. Sale of an instrument with a
negative adjustment carryforward— (i) Facts.
On December 31, 2003, Z, a calendar year
U.S. resident taxpayer whose functional
currency is the U.S. dollar, purchases at
original issue a debt instrument with noncurrency contingencies for £1000. All
payments of principal and interest with
respect to the instrument are denominated in,
or determined by reference to, a single
nonfunctional currency (the British pound).
The debt instrument would be subject to
§ 1.1275–4(b) if it were denominated in
dollars. The debt instrument’s comparable
yield, determined in British poundsunder
§§ 1.988–2(b)(2) and 1.1275–4(b), is 10
percent, compounded annually, and the
projected payment schedule for the debt
instrument provides for payments of £310 on
December 31, 2005 (consisting of a
noncontingent payment of £50 and a
projected amount of £260) and £990 on
December 31, 2006 (consisting of a
noncontingent payment of £940 and a
projected amount of £50). The debt
instrument is a capital asset in the hands of
Z. Z does not elect to use the spot-rate
convention described in § 1.988–
2(b)(2)(iii)(B). The payment actually made on
December 31, 2005, is £50. On December 30,
2006, Z sells the debt instrument for £940.
The relevant pound/dollar spot rates over the
term of the instrument are as follows:
Spot rate
(pounds to dollars)

Date
Dec. 31, 2003 ...........
Dec. 31, 2005 ...........
Dec. 30, 2006 ...........

Accrual period
Jan. 1–Dec. 31, 2004
Jan. 1–Dec. 31, 2005
Jan. 1–Dec. 31, 2006

£1.00 = $1.00
£1.00 = $2.00
£1.00 = $2.00
Average rate
(pounds to dollars)
£1.00 = $2.00
£1.00 = $2.00
£1.00 = $2.00

(ii) Treatment in 2004—(A) Determination
of accrued interest. Under paragraph (b)(2)(i)
of this section, and based on the comparable
yield, Z accrues £100 of interest on the debt
instrument for 2004 (issue price of £1000 ×
10 percent). Under paragraph (b)(3)(i) of this
section, Z translates the £100 at the average
exchange rate for the accrual period ($2.00 ×
£100 = $200). Accordingly, Z has interest
income in 2004 of $200.
(B) Adjusted issue price and basis. Under
paragraphs (b)(2)(iii) and (iv) of this section,
the adjusted issue price of the debt
instrument determined in pounds and Z’s
adjusted basis in dollars in the debt
instrument are increased by the interest
accrued in 2004. Thus, on January 1, 2005,
the adjusted issue price of the debt
instrument is £1100. For purposes of
determining Z’s dollar basis in the debt
instrument, the $1000 basis ($1.00 × £1000

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52827

original cost basis) is increased by the £100
of accrued interest, translated at the rate at
which interest was accrued for 2004. See
paragraph (b)(3)(iii) of this section.
Accordingly, Z’s adjusted basis in the debt
instrument as of January 1, 2005, is $1200
($1000 + $200).
(iii) Treatment in 2005—(A) Determination
of accrued interest. Under paragraph (b)(2)(i)
of this section, and based on the comparable
yield, Z’s accrued interest for 2005 is £110
(adjusted issue price of £1100 × 10 percent).
Under paragraph (b)(3)(i) of this section, the
£110 of accrued interest is translated at the
average exchange rate for the accrual period
($2.00 × £110 = $220).
(B) Effect of net negative adjustment. The
payment actually made on December 31,
2005, is £50, rather than the projected £310.
Under paragraph (b)(2)(ii) of this section, Z
has a net negative adjustment of £260 on
December 31, 2005, attributable to the
difference between the amount of the actual
payment and the amount of the projected
payment. Z’s accrued interest income of £110
in 2005 is reduced to zero by the net negative
adjustment. Under paragraph (b)(3)(ii)(B)(1)
of this section, the net negative adjustment
which reduces the current year’s interest is
not translated into functional currency.
Under paragraph (b)(2)(ii) of this section, Z
treats the remaining £150 net negative
adjustment as an ordinary loss to the extent
of the £100 previously accrued interest in
2004. This £100 ordinary loss is attributable
to interest accrued but not paid in the
preceding year. Therefore, under paragraph
(b)(3)(ii)(B)(2) of this section, Z translates the
loss into dollars at the average rate for such
year (£1 = $2.00). Accordingly, Z has an
ordinary loss of $200 in 2005. The remaining
£50 of net negative adjustment is a negative
adjustment carryforward under paragraph
(b)(2)(ii) of this section.
(C) Adjusted issue price and basis. Based
on the projected payment schedule, the
adjusted issue price of the debt instrument
on January 1, 2006 is £900, i.e., the adjusted
issue price of the debt instrument on January
1, 2005 (£1100), increased by the interest
accrued in 2005 (£110), and decreased by the
projected amount of the December 31, 2005,
payment (£310). See paragraph (b)(2)(iii) of
this section. Z’s adjusted basis on January 1,
2006 is Z’s adjusted basis on January 1, 2005
($1200), increased by the functional currency
amount of interest accrued in 2005 ($220),
and decreased by the amount of the
payments made in 2005, based solely on the
projected payment schedule, (£310). The
amount of the projected payment is first
attributable to the interest accrued in 2005
(£110), and then to the interest accrued in
2004 (£100), and the remaining amount to
principal (£100). The interest component of
the projected payment is translated into
functional currency at the rates at which it
was accrued, and the principal component of
the projected payment is translated into
functional currency at the spot rate on the
date the instrument was issued. See
paragraph (b)(3)(iii) of this section.
Accordingly, Z’s adjusted basis in the debt
instrument, following the increase of
adjusted basis for interest accrued in 2005
($1200 + $220 = $1420), is decreased by $520

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($220 + $200 + $100 = $520). Z’s adjusted
basis on January 1, 2006 is therefore, $900.
(D) Foreign currency gain or loss. Z will
recognize foreign currency gain on the
receipt of the £50 payment actually received
on December 31, 2005. Based on paragraph
(b)(5)(iv) of this section, the £50 payment is
attributable to principal since the accrued
unpaid interest was completely eliminated
by the net negative adjustment. The amount
of foreign currency gain is determined, under
paragraph (b)(5)(iii) of this section, by
reference to the difference between the spot
rate on the date the £50 payment was made
and the spot rate on the date the debt
instrument was issued. Accordingly, Z
recognizes $50 of foreign currency gain on
the £50 payment. [($2.00—$1.00) × £50
=$50]. Under paragraph (b)(6) of this section
and § 1.988–4, Z’s foreign currency gain of
$50 is sourced by reference to Z’s residence
and is therefore from sources within the
United States.
(iv) Treatment in 2006—(A) Determination
of accrued interest. Under paragraph (b)(2)(i)
of this section, and based on the comparable
yield, Z accrues £90 of interest on the debt
instrument for 2006 (adjusted issue price of
£900 × 10 percent). Under paragraph (b)(3)(i)
of this section, Z translates the £90 at the
average exchange rate for the accrual period
($2.00 × £90 = $180). Accordingly, prior to
taking into account the 2005 negative
adjustment carryforward, Z has interest
income in 2006 of $180.
(B) Effect of net negative adjustment. The
£50 negative adjustment carryforward from
2005 is a negative adjustment for 2006. Since
there are no other positive or negative
adjustments, there is a £50 negative
adjustment in 2006 which reduces Z’s
accrued interest income by £50. Accordingly,
after giving effect to the £50 negative
adjustment carryforward, Z will accrue $80
of interest income. [(£90¥£50) × $2.00 = $80]
(C) Adjusted issue price. Under paragraph
(b)(2)(iii) of this section, the adjusted issue
price of the debt instrument determined in
pounds is increased by the interest accrued
in 2006 (prior to taking into account the
negative adjustment carryforward). Thus, on
December 30, 2006, the adjusted issue price
of the debt instrument is £990.
(D) Adjusted basis. For purposes of
determining Z’s dollar basis in the debt
instrument, Z’s $900 adjusted basis on
January 1, 2006, is increased by the accrued
interest, translated at the rate at which
interest was accrued for 2006. See paragraph
(b)(3)(iii)(A) of this section. Note, however,
that under paragraph (b)(3)(iii)(B) of this
section the amount of accrued interest which
is reduced as a result of the negative
adjustment carryforward, i.e., £50, is treated
for purposes of this section as principal, and
is translated at the spot rate on the date the
instrument was issued, i.e., £1.00 =$1.00.
Accordingly, Z’s adjusted basis in the debt
instrument as of December 30, 2006, is $1030
($900 + $50 + $80).
(E) Amount realized. Z’s amount realized
in denomination currency is £940, i.e., the
amount of pounds Z received on the sale of
the debt instrument. Under paragraph
(b)(3)(iv)(B)(1) of this section, Z’s amount
realized is first translated by reference to the

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principal component of basis (including the
amount which is treated as principal under
paragraph (b)(3)(iii)(B) of this section) and
then the remaining amount realized, if any,
is translated by reference to the accrued
unpaid interest component of adjusted basis.
Thus, £900 of Z’s amount realized is
translated by reference to the principal
component of adjusted basis. The remaining
£40 of Z’s amount realized is treated as
principal under paragraph (b)(3)(iii)(B) of this
section, and is also translated by reference to
the principal component of adjusted basis.
Accordingly, Z’s amount realized in
functional currency is $940. (No part of Z’s
amount realized is attributable to the interest
accrued on the debt instrument.) Z realizes
a loss of $90 on the sale of the debt
instrument ($1030 basis¥$940 amount
realized). Under paragraph (b)(4) of this
section and § 1.1275–4(b)(8), $80 of the loss
is characterized as ordinary loss, and the
remaining $10 of loss is characterized as
capital loss. Under §§ 1.988–6(b)(6) and
1.1275–4(b)(9)(iv) the $80 ordinary loss is
treated as a deduction that is definitely
related to the interest income accrued on the
debt instrument. Similarly, under §§ 1.988–
6(b)(6) and 1.865–1(b)(2) the $10 capital loss
is also allocated to the interest income from
the debt instrument.
(F) Foreign currency gain or loss. Z
recognizes foreign currency gain with respect
to the £940 he received on the sale of the
debt instrument. Under paragraph (b)(5)(iv)
of this section, the £940 Z received is
attributable to principal (and the amount
which is treated as principal under paragraph
(b)(3)(iii)(B) of this section). Thus, Z
recognizes foreign currency gain on
December 31, 2006, of $940. [($2.00¥$1.00)
× £940]. Under paragraph (b)(6) of this
section and § 1.988–4, Z’s foreign currency
gain of $940 is sourced by reference to Z’s
residence and is therefore from sources
within the United States.

(d) Multicurrency debt instruments—
(1) In general. Except as provided in this
paragraph (d), a multicurrency debt
instrument described in paragraph
(a)(1)(ii) or (iii) of this section shall be
treated as an instrument described in
paragraph (a)(1)(i) of this section and
shall be accounted for under the rules
of paragraph (b) of this section. Because
payments on an instrument described in
paragraph (a)(1)(ii) or (iii) of this section
are denominated in, or determined by
reference to, more than one currency,
the issuer and holder or holders of the
instrument are required to determine
the denomination currency of the
instrument under paragraph (d)(2) of
this section before applying the rules of
paragraph (b) of this section.
(2) Determination of denomination
currency—(i) In general. The
denomination currency of an instrument
described in paragraph (a)(1)(ii) or (iii)
of this section shall be the predominant
currency of the instrument. Except as
otherwise provided in paragraph
(d)(2)(ii) of this section, the

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predominant currency of the instrument
shall be the currency with the greatest
value determined by comparing the
functional currency value of the
noncontingent and projected payments
denominated in, or determined by
reference to, each currency on the issue
date, discounted to present value (in
each relevant currency), and translated
(if necessary) into functional currency at
the spot rate on the issue date. For this
purpose, the applicable discount rate
may be determined using any method,
consistently applied, that reasonably
reflects the instrument’s economic
substance. If a taxpayer does not
determine a discount rate using such a
method, the Commissioner may choose
a method for determining the discount
rate that does reflect the instrument’s
economic substance. The predominant
currency is determined as of the issue
date and does not change based on
subsequent events (e.g., changes in
value of one or more currencies).
(ii) Difference in discount rate of
greater than 10 percentage points. This
§ 1.988–6(d)(2)(ii) applies if no currency
has a value determined under paragraph
(d)(2)(i) of this section that is greater
than 50% of the total value of all
payments. In such a case, if the
difference between the discount rate in
the denomination currency otherwise
determined under (d)(2)(i) of this
section and the discount rate
determined under paragraph (d)(2)(i) of
this section with respect to any other
currency in which payments are made
(or determined by reference to) pursuant
to the instrument is greater than 10
percentage points, then the
Commissioner may determine the
predominant currency under any
reasonable method.
(3) Issuer/holder consistency. The
issuer determines the denomination
currency under the rules of paragraph
(d)(2) of this section and provides this
information to the holders of the
instrument in a manner consistent with
the issuer disclosure rules of § 1.1275–
2(e). If the issuer does not determine the
denomination currency of the
instrument, or if the issuer’s
determination is unreasonable, the
holder of the instrument must
determine the denomination currency
under the rules of paragraph (d)(2) of
this section. A holder that determines
the denomination currency itself must
explicitly disclose this fact on a
statement attached to the holder’s
timely filed federal income tax return
for the taxable year that includes the
acquisition date of the instrument.
(4) Treatment of payments in
currencies other than the denomination
currency. For purposes of applying the

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Federal Register / Vol. 69, No. 167 / Monday, August 30, 2004 / Rules and Regulations
rules of paragraph (b) of this section to
debt instruments described in paragraph
(a)(1)(ii) or (iii) of this section, payments
not denominated in (or determined by
reference to) the denomination currency
shall be treated as non-currency-related
contingent payments. Accordingly, if
the denomination currency of the
instrument is determined to be the
taxpayer’s functional currency, the
instrument shall be accounted for under
§ 1.1275–4(b) rather than under this
section.
(e) Instruments issued for nonpublicly
traded property—(1) Applicability. This
paragraph (e) applies to debt
instruments issued for nonpublicly
traded property that would be described
in paragraph (a)(1)(i), (ii), or (iii) of this
section, but for the fact that such
instruments are described in § 1.1275–
4(c)(1) rather than § 1.1275–4(b)(1). For
example, this paragraph (e) generally
applies to a contingent payment debt
instrument denominated in a
nonfunctional currency that is issued
for non-publicly traded property.
Generally the rules of § 1.1275–4(c)
apply except as set forth by the rules of
this paragraph (e).
(2) Separation into components. An
instrument described in this paragraph
(e) is not accounted for using the
noncontingent bond method of
§ 1.1275–4(b) and paragraph (b) of this
section. Rather, the instrument is
separated into its component payments.
Each noncontingent payment or group
of noncontingent payments which is
denominated in a single currency shall
be considered a single component
treated as a separate debt instrument
denominated in the currency of the
payment or group of payments. Each
contingent payment shall be treated
separately as provided in paragraph
(e)(4) of this section.
(3) Treatment of components
consisting of one or more noncontingent
payments in the same currency. The
issue price of each component treated as
a separate debt instrument which
consists of one or more noncontingent
payments is the sum of the present
values of the noncontingent payments
contained in the separate instrument.
The present value of any noncontingent
payment shall be determined under
§ 1.1274–2(c)(2), and the test rate shall
be determined under § 1.1274–4 with
respect to the currency in which each
separate instrument is considered
denominated. No interest payments on
the separate debt instrument are
qualified stated interest payments
(within the meaning of § 1.1273–1(c))
and the de minimis rules of section
1273(a)(3) and § 1.1273–1(d) do not
apply to the separate debt instrument.

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Interest income or expense is translated,
and exchange gain or loss is recognized
on the separate debt instrument as
provided in § 1.988–2(b)(2), if the
instrument is denominated in a
nonfunctional currency.
(4) Treatment of components
consisting of contingent payments —(i)
General rule. A component consisting of
a contingent payment shall generally be
treated in the manner provided in
§ 1.1275–4(c)(4). However, except as
provided in paragraph (e)(4)(ii) of this
section, the test rate shall be determined
by reference to the U.S. dollar unless the
dollar does not reasonably reflect the
economic substance of the contingent
component. In such case, the test rate
shall be determined by reference to the
currency which most reasonably reflects
the economic substance of the
contingent component. Any amount
received in nonfunctional currency from
a component consisting of a contingent
payment shall be translated into
functional currency at the spot rate on
the date of receipt. Except in the case
when the payment becomes fixed more
than six months before the payment is
due, no foreign currency gain or loss
shall be recognized on a contingent
payment component.
(ii) Certain delayed contingent
payments—(A) Separate debt
instrument relating to the fixed
component. The rules of § 1.1275–
4(c)(4)(iii) shall apply to a contingent
component the payment of which
becomes fixed more than 6 months
before the payment is due. For this
purpose, the denomination currency of
the separate debt instrument relating to
the fixed payment shall be the currency
in which payment is to be made and the
test rate for such separate debt
instrument shall be determined in the
currency of that instrument. If the
separate debt instrument relating to the
fixed payment is denominated in
nonfunctional currency, the rules of
§ 1.988–2(b)(2) shall apply to that
instrument for the period beginning on
the date the payment is fixed and
ending on the payment date.
(B) Contingent component. With
respect to the contingent component,
the issue price considered to have been
paid by the issuer to the holder under
§ 1.1275–4(c)(4)(iii)(A) shall be
translated, if necessary, into the
functional currency of the issuer or
holder at the spot rate on the date the
payment becomes fixed.
(5) Basis different from adjusted issue
price. The rules of § 1.1275–4(c)(5) shall
apply to an instrument subject to this
paragraph (e).
(6) Treatment of a holder on sale,
exchange, or retirement. The rules of

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§ 1.1275–4(c)(6) shall apply to an
instrument subject to this paragraph (e).
(f) Rules for nonfunctional currency
tax exempt obligations described in
§ 1.1275–4(d)—(1) In general. Except as
provided in paragraph (f)(2) of this
section, section 1.988–6 shall not apply
to a debt instrument the interest on
which is excluded from gross income
under section 103(a).
(2) Operative rules. [RESERVED].
(g) Effective date. This section shall
apply to debt instruments issued on or
after October 29, 2004.
■ Par. 5. In § 1.1275–2, paragraph (g)(1)
is amended by adding a sentence at the
end of the paragraph to read as follows:

§ 1.1275–2 Special rules relating to debt
instruments.

*

*
*
*
*
(g) * * * (1) * * * See also § 1.988–
2(b)(18) for debt instruments with
payments denominated in (or
determined by reference to) a currency
other than the taxpayer’s functional
currency.
*
*
*
*
*
■ Par. 6. In § 1.1275–4, paragraph
(a)(2)(iv) is revised to read as follows:

§ 1.1275–4 Contingent payment debt
instruments.

(a) * * *
(2) * * *
(iv) A debt instrument subject to
section 988 (except as provided in
§ 1.988–6);
*
*
*
*
*
PART 602—OMB CONTROL NUMBERS
UNDER THE PAPERWORK
REDUCTION ACT
■ Par. 7. The authority citation for part
602 continues to read as follows:

Authority: 26 U.S.C. 7805.
■ Par. 8. Section 602.101(b) adding an
entry to the table in numerical order to
read as follows:

§ 602.101

*

OMB Control numbers.

*
*
(b) * * *

*

*

CFR part or section where
identified and described

Current OMB
control No.

*
*
*
*
*
1.988–6 ...................................
1545–1831
*
*
*
*
*

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52830

Federal Register / Vol. 69, No. 167 / Monday, August 30, 2004 / Rules and Regulations

Nancy J. Jardini,
Acting Deputy Commissioner of Services and
Enforcement.
Approved: July 16, 2004.
Gregory F. Jenner,
Acting Assistant Secretary of the Treasury.
[FR Doc. 04–19642 Filed 8–27–04; 8:45 am]
BILLING CODE 4830–01–P

DEPARTMENT OF HOMELAND
SECURITY
Coast Guard
33 CFR Part 150
[USCG–1998–3884]
RIN 1625–AA20 (formerly RIN 2115–AF63)

Deepwater Ports
Coast Guard, DHS.
ACTION: Correcting amendments.
AGENCY:

SUMMARY: This document corrects the
temporary interim rule with request for
comments (FR Doc. 03–32204)
published in the Federal Register of
January 6, 2004 (69 FR 724). The
temporary interim rule contained
provisions relating to deepwater ports
that may remain in effect until October
2006.
DATES: Effective on August 30, 2004.

If
you have questions on this correction,
call Lieutenant Commander Kevin Tone,
Vessel and Facility Operating Standards
Division (G–MSO–2), Coast Guard,
telephone 202–267–0226.
SUPPLEMENTARY INFORMATION:

Need for Correction

Background

Harbors, Marine safety, Navigation
(water), Occupational safety and health,
Oil pollution, Reporting and
recordkeeping requirements.

FOR FURTHER INFORMATION CONTACT:

The temporary interim rule that is the
subject of this correction updated Coast
Guard regulations governing the license
process, the design, construction, and
equipment, and the operation of
deepwater ports, which are used for the
transportation, storage, and further
handling of oil or natural gas. The
temporary interim rule inadvertently
omitted provisions describing the
location of the safety zone for the
Louisiana Offshore Oil Port (LOOP), as
well as areas to be avoided and the
anchorage area within the safety zone.
Those provisions were first promulgated
in 1980 and last updated in 1994; prior
to the temporary interim rule they
appeared in Annex A to Appendix A,
part 150 of the Code of Federal
Regulations. The Coast Guard intended
no substantive change in the LOOP
safety zone requirements, but for
stylistic consistency and to clarify their
regulatory nature we did intend to set
them out in a regulatory section rather
than in an annex.

As published, the temporary interim
rule omits text. This omission may
prove to be misleading and needs to be
corrected.
List of Subjects in 33 CFR Part 150

Accordingly, 33 CFR part 150 is
corrected by making the following
correcting amendment:

■

PART 150—DEEPWATER PORTS:
OPERATIONS
1. The authority citation for part 150
continues to read as follows:

■

Authority: 33 U.S.C. 1231, 1321(j)(1)(C),
(j)(5), (j)(6), (m)(2); 33 U.S.C. 1509(a); E.O.
12777, sec. 2; E.O. 13286, sec. 34, 68 FR
10619; Department of Homeland Security
Delegation No. 0170.1(70), (73), (75), (80).
■

2. Add § 150.940 to read as follows:

§ 150.940 Safety zones for specific
deepwater ports.

(a) Louisiana Offshore Oil Port
(LOOP):
(1) The location of the safety zone for
LOOP is as described in Table
150.940(A):

TABLE 150.940(A).—SAFETY ZONE FOR LOOP, GULF OF MEXICO
Latitude N

Longitude W

(i) Starting at:
28°55′23″ ..............................................................................................................................................................................
(ii) A rhumb line to:
28°53′50″ ..............................................................................................................................................................................
(iii) Then an arc with a 4,465 meter (4,883 yard) radius centered at the port’s pumping platform complex:
28°53′06″ ..............................................................................................................................................................................
(iv) To a point:
28°51′07″ ..............................................................................................................................................................................
(v) Then a rhumb line to:
28°50′09″ ..............................................................................................................................................................................
(vi) Then a rhumb line to:
28°49′05″ ..............................................................................................................................................................................
(vii) Then a rhumb line to:
28°48′36″ ..............................................................................................................................................................................
(viii) Then a rhumb line to:
28°52′04″ ..............................................................................................................................................................................
(ix) Then a rhumb line to:
28°53′10″ ..............................................................................................................................................................................
(x) Then a rhumb line to:
28°54′52″ ..............................................................................................................................................................................
(xi) Then a rhumb line to:
28°54′52″ ..............................................................................................................................................................................
(xii) Then an arc with a 4,465 meter (4,883 yard) radius centered again at the port’s pumping platform complex;
(xiii) To the point of starting:
28°55′23″ ..............................................................................................................................................................................

(2) The areas to be avoided within the
safety zone are:

VerDate jul<14>2003

13:25 Aug 27, 2004

Jkt 203001

(i) The area encompassed within a
circle having a 600 meter radius around

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90°00′37″
90°04′07″
90°01′30″
90°03′06″
90°02′24″
89°55′54″
89°55′00″
89°52′42″
89°53′42″
89°57′00″
89°59′36″
90°00′37″

the port’s pumping platform complex
and centered at:

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