Rp 2001-21

bility or exemption issue while considering the request, that issue will remain outside the scope of the VCAP submission
because it was not voluntarily brought
forward by the organization.
.05 Verification. As part of the processing of the VCAP submission, the
Service reserves the right to verify that
corrections have been made to the eligible
organization’s tax, withholding, and
reporting procedures on payments to alien
individuals. Verification of such corrections does not constitute an examination
of the books and records of the organization. If the Service determines that the
eligible organization has not implemented
or does not plan to implement the proper
corrections and procedures, the case may
be considered for examination. The
Service does not contemplate opening
examinations on VCAP submissions but
reserves the right to do so. If the Service
decides to examine the eligible organization, the examination will be commenced
and completed as soon as possible, with
the intention in most cases that the scope
of the examination will be limited to tax
and withholding obligations on payments
to alien individuals and related issues.
.06 Acknowledgment letter.
If the
Service is satisfied at the conclusion of its
review that the organization has instituted
policies and procedures which ensure that
the correct amounts of taxes on payments
to alien individuals are withheld, paid,
and reported to the Service on the proper
forms and in a timely manner, then the
Service will issue to the eligible organization an acknowledgment letter indicating
that based upon its review, the eligible
organization is at that time in substantial
compliance with the tax, withholding, and
reporting obligations governing payments
to alien individuals. Once the organization has received an acknowledgment letter at the completion of the VCAP
process, and provided that the organization in fact complies with the agreed upon
withholding, payment and reporting procedures, the information submitted by the
organization to the Service under VCAP
will not be used as the basis to initiate an
examination of the organization.
.07 Failure to reach resolution. If resolution cannot be reached because sufficient information is not timely provided to
the Service or because agreement cannot
be reached on correction or administrative

February 26, 2001

procedures, the Service may consider the
case for examination.
.08 Applicability of §§ 6103 and 6110.
The information received or generated by
the Service under VCAP is subject to the
confidentiality requirements of § 6103 of
the Code. The acknowledgment letter is
not a written determination letter within
the meaning of § 6110 of the Code.
.09 Conferences. If the Service initially determines that it cannot issue an
acknowledgment letter because the parties
cannot agree upon some correction or
administrative issue, the organization or
the organization’s representative may be
granted a conference with the Service, at
the Service’s discretion and upon request
by the organization or the organization’s
representative. The conference can be
held either in person or by telephone. If a
conference is offered, the organization or
its representative will be contacted by the
Service representative.
SEC. 6. EFFECTIVE DATE AND
SUNSET DATE
VCAP is effective on February 26,
2001. It will be available for submissions
made on or before February 28, 2002.

The estimated annual frequency of
responses is on occasion.
Books or records relating to a 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.
SEC. 8. DRAFTING INFORMATION
The principal authors of this revenue
procedure are Lowell G. Hancock of the
Office of Pre-Filing Services, and
Virginia Richardson of the Tax
Exempt/Government Entities Division.
For more information concerning VCAP,
contact Mr. Hancock at (202) 874-1800 or
(330) 375-5421 (not toll-free numbers),
Ms. Richardson at (202) 283-8938 (not a
toll-free number), or Neil Shepherd of the
Office of the Associate Chief Counsel
(Tax Exempt and Government Entities) at
(202) 622-6040 (not a toll-free number).

26 CFR 601.601: Rules and regulations.
(Also Part I, §§ 1001; 1.1001–3, 1.1275–2.)

Rev. Proc. 2001–21

SEC. 7. PAPERWORK REDUCTION
ACT

SECTION 1. PURPOSE

The collections of information contained
in this revenue procedure have been
reviewed and approved by the Office of
Management and Budget in accordance with
the Paperwork Reduction Act (44 U.S.C. §
3507) under control number 1545–1735.
An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless the collection of information displays a valid
control number.
The collections of information contained in this revenue procedure are in
section 4.02 and section 4.03(2). This
information will enable the Service to
determine whether an organization qualifies for VCAP. The likely respondents are
public and other not-for-profit colleges
and universities and certain other charitable organizations.
The estimated total annual reporting
burden is 346,500 hours.
The estimated average annual burden
per respondent is 700 hours. The estimated number of respondents is 495.

This revenue procedure provides an
election that will facilitate the substitution of newly issued debt instruments
for outstanding debt instruments.
Under the election, taxpayers can treat
a substitution of debt instruments, in
certain circumstances, as a realization
event for federal income tax purposes
even though it does not result in a significant modification under § 1.1001–3
of the Income Tax Regulations (and,
therefore, is not otherwise an exchange
for purposes of § 1.1001–1(a)). Under
section 4 of this revenue procedure,
taxpayers do not recognize any realized
gain or loss on the date of the substitution. Instead, the gain or loss generally
is taken into account as income or
deductions over the term of the new
debt instruments.
This revenue procedure modifies and
supersedes Rev. Proc. 99–18, 1999–1
C.B. 736, which, as modified by Rev.
Proc. 2000–29, 2000–28 I.R.B. 113,
applies to substitutions that occur on or

742

2001–9 I.R.B.

after March 1, 1999. The significant
changes to Rev. Proc. 99–18 are as follows:
.01 The newly issued debt may be debt
issued in a qualified reopening;
.02 The outstanding debt may have
been issued with premium; and
.03 The determination of whether a
substitution does or does not result in a
significant modification may be made on
the substitution date or, in most cases, on
the date that is two business days before
the date on which the substitution offer
commences.
SECTION 2. BACKGROUND
.01 Under § 1.1001–1(a), if gain or loss
is realized from the exchange of property
for other property differing materially
either in kind or in extent, it is treated as
income or as loss sustained.
.02 Section 1.1001–3 provides rules to
determine whether a modification of the
terms of a debt instrument results in an
exchange of the original debt instrument
for a modified instrument that differs
materially either in kind or in extent.
Under § 1.1001–3(b), a modification of a
debt instrument results in an exchange for
purposes of § 1.1001–1(a) if, and only if,
the modification is significant.
.03 Section 1.1001–3 applies to any
modification of a debt instrument, regardless of the form of the modification
(including an exchange of a new instrument for an existing instrument). Under
§ 1.1001–3(c), a modification means any
alteration, including any deletion or addition, in whole or in part, of a legal right or
obligation of the issuer or a holder of a
debt instrument, whether the alteration is
evidenced by an express agreement (oral
or written), conduct of the parties, or otherwise.
.04 In general, a modification of a debt
instrument is a significant modification
under § 1.1001–3 only if, based on all the
facts and circumstances, the legal rights or
obligations that are altered and the degree
to which they are altered are economically significant. Section 1.1001–3(e) provides rules to determine whether certain
modifications, such as a change in the
yield or in the timing of payments, constitute significant modifications.
.05 If the terms of a debt instrument are
modified to defer one or more payments
and the modification does not result in an

2001–9 I.R.B.

exchange under § 1.1001–3, § 1.1275–2(j)
provides rules to account for the modified
debt instrument. Under § 1.1275–2(j),
solely for purposes of §§ 1272 and 1273 of
the Internal Revenue Code, the debt instrument is treated as retired and then reissued
on the date of the modification for an
amount equal to the instrument’s adjusted
issue price on that date. As a result, the debt
instrument is retested for original issue discount based on the instrument’s adjusted
issue price and the remaining payments, as
modified, to be made on the instrument. If
the debt instrument has original issue discount as a result of the modification, both
the issuer and the holder account for the
original issue discount over the remaining
term of the instrument. See §§ 163(e) and
1272.
.06 An issuer may want to refinance and
consolidate outstanding debt instruments
in a way that increases the liquidity of the
issuer’s debt by concentrating more of the
issuer’s outstanding debt in a smaller number of issues. In general, if the terms of the
newly issued debt are not materially different from the terms of the outstanding
debt, substituting the newly issued debt for
the outstanding debt does not result in a
significant modification of the outstanding
debt under § 1.1001–3. Therefore, the
substitution of the newly issued debt for
the outstanding debt in the refinancing and
consolidation is not a realization event for
federal income tax purposes. Under
§ 1.1275–2(j), however, some or all of the
newly issued debt may have original issue
discount in varying amounts, depending
upon the terms of the outstanding debt for
which the newly issued debt was substituted. As a result, the newly issued debt may
not be fungible.
SECTION 3. SCOPE
This revenue procedure applies to the
substitution of new debt for old debt if all
of the following conditions are satisfied:
.01 Either—
(1) Debt instruments from a single
new issue (“new debt”) are substituted for
debt instruments from two or more outstanding issues of debt (“old debt”) (It is
not necessary, however, for any single
holder of the old debt to have held debt
instruments from more than one of the
outstanding issues.); or
(2) Debt instruments issued in a
qualified reopening (as defined in

743

§ 1.1275–2) (“new debt”) are substituted
for debt instruments from one or more
outstanding issues of debt (“old debt”).
.02 The substitution does not result in a
significant modification of the old debt
under § 1.1001–3 and, therefore, is not a
realization event under § 1.1001–1. This
determination may be made either on–
(1) the substitution date, or
(2) the date that is two business days
before the date on which the substitution
offer commences, provided that date is no
more than 30 business days before the
date on which the substitution offer ends.
.03 The new debt and the old debt are
publicly traded (within the meaning of
§ 1.1273–2(f)). If the new debt is issued
in a qualified reopening of an outstanding
issue of debt, that outstanding issue was
also publicly traded.
.04 The old debt was issued at par, at a
premium, or with less than a de minimis
amount of original issue discount (within
the meaning of § 1.1273–1(d)).
.05 The new debt is issued at par or
with less than a de minimis amount of
original issue discount or premium. For
purposes of this condition, the issue price
of the new debt is determined under
§ 1.1273–2 (rather than under § 1.1275–2
(j)), and the de minimis amount for premium is determined using the principles of §
1.1273–1(d).
.06 Neither the new debt nor the old
debt is—
(1) a contingent payment debt instrument (within the meaning of § 1.1275–4),
(2) a tax-exempt obligation (as
defined in § 1275(a)(3)), or
(3) a convertible debt instrument
(within the meaning of § 1.1272–1(e)).
.07 All payments on the old debt and
the new debt are denominated in, or determined solely by reference to, U.S. dollars,
and the functional currency of the business unit issuing the new debt is the U.S.
dollar.
.08 The issuer and one or more holders
of the old debt make the election provided
in section 4.01 of this revenue procedure.
SECTION 4. APPLICATION
.01 Election.
(1) Manner of making the election.
The issuer and the holders make the election under this revenue procedure by
agreeing in writing to treat the substitution for federal income tax purposes in the

February 26, 2001

manner described in section 4.02 through
section 4.04 of this revenue procedure and
to comply with all other provisions of this
revenue procedure. The written agreement must be entered into no later than
the last day of the month in which the substitution occurs.
For example, the written agreement to
make the election may be evidenced by a
statement in the offering documents for
the substitution that—
(a) The issuer, by distributing the
documents, elects under this revenue procedure to treat the substitution as a realization event for federal income tax purposes;
(b) Any holder of old debt that tenders its old debt for new debt as part of the
substitution thereby makes the election
under this revenue procedure; and
(c) The issuer and the holders who
have tendered their old debt for the new
debt (“electing holders”) will comply with
the provisions of this revenue procedure.
(2) Statement attached to return. If
an election is made under section 4.01(1)
of this revenue procedure, and if the issuer
must file a federal income tax return for
the taxable year in which the substitution
occurs, the issuer must attach a signed
statement to its timely filed (including
extensions) federal income tax return for
the taxable year in which the substitution
occurs. On the statement, the issuer
must—
(a) identify the old debt for which
new debt was substituted,
(b) identify the new debt that was
substituted for the old debt,
(c) indicate the issue price of the
new debt (or, if the new debt is issued in a
qualified reopening, the adjusted issue
price of the new debt immediately after
the substitution), and
(d) indicate that the election was
made under this revenue procedure.
.02 Treatment of substitution. If an
election is made under this revenue procedure, the issuer and the electing holders
must report the substitution for federal
income tax purposes as a repurchase of
the old debt in exchange for the new debt
in the taxable year in which the substitution occurs. The issuer, however, must
account for this deemed exchange under
the rules described in section 4.03 of this
revenue procedure, and each electing

February 26, 2001

holder must account for this deemed
exchange under the rules described in section 4.04 of this revenue procedure.
.03 Issuer’s treatment.
(1) In general. Except as provided in
section 4.03(2) of this revenue procedure,
the issuer must take into account over the
term of the new debt any difference
between the adjusted issue prices of the
old debt at the time of the substitution and
the issue price of the new debt (as determined under § 1.1273–2). If the aggregate issue price of the new debt that is
transferred to electing holders as a substitute for the old debt is greater than the
aggregate adjusted issue prices of the old
debt for which it is substituted, the issuer
treats the difference as a reduction in the
aggregate issue price of the new debt. As
a result, the difference is taken into
account by the issuer over the term of the
new debt as increased original issue discount or as reduced bond issuance premium (within the meaning of § 1.163–13).
If the aggregate issue price of the new
debt that is transferred to electing holders
as a substitute for the old debt is less than
the aggregate adjusted issue prices of the
old debt for which it is substituted, the
issuer treats the difference as an increase
in the aggregate issue price of the new
debt. As a result, the difference is taken
into account by the issuer over the term of
the new debt as reduced original issue discount or increased bond issuance premium.
(2) Qualified reopening. If the new
debt is issued in a qualified reopening, the
issuer applies the rules in section 4.03(1)
of this revenue procedure by using the
remaining term of the new debt instead of
the term of the new debt and by using the
adjusted issue price of the new debt
immediately after the substitution instead
of the issue price of the new debt.
.04 Electing holder’s treatment.
(1) In general. Notwithstanding any
provision of subtitle A of the Internal
Revenue Code (including §§ 356(a) and
1276(a)), an electing holder does not recognize any gain or loss as a result of the
deemed exchange. Instead, the holder’s
basis (immediately after the substitution)
in the new debt is the same as the holder’s
adjusted basis (determined as of the date
of the substitution) in the debt instruments
for which the new debt was substituted.

744

In addition, the holder’s holding period
for the new debt includes the holder’s
holding period for the old debt.
(2) Market discount.
(a) In general. If the stated
redemption price at maturity of the new
debt (as determined under § 1.1273–1(b))
is greater than the holder’s basis (immediately after the substitution) in the new
debt, the holder treats the difference as
market discount on the new debt and the
new debt as a market discount bond
(unless the amount of the discount is de
minimis within the meaning of
§ 1278(a)(2)(C)). See §§ 1276 and 1278
for the treatment of market discount. (The
issue date of the old debt rather than the
issue date of the new debt is used to determine whether the new debt is a short-term
obligation for purposes of § 1278(a)(1)
(B)(i).) See section 4.04(2)(b) below for
the treatment of any accrued market discount on the old debt.
(b) Accrued market discount. The
rules in this section 4.04(2)(b) apply if, as
of the date of the substitution, there is any
accrued market discount on the old debt
that has not been taken into account by the
holder as ordinary income. If, under section 4.04(2)(a) above, there is no market
discount on the new debt or the amount of
any market discount on the new debt is de
minimis, the amount of accrued market
discount on the new debt is zero, and the
accrued market discount on the old debt is
ignored. If, under section 4.04(2)(a)
above, the amount of market discount on
the new debt is more than de minimis, the
lesser of this market discount and the
accrued market discount on the old debt is
treated by the holder, as of the date of the
substitution, as accrued market discount
on the new debt. (Solely for purposes of
determining the accruals of any additional
market discount on the new debt, the
holder’s basis is increased by the amount
of the accrued market discount on the old
debt that is treated as accrued market discount on the new debt.)
(3) Bond premium. If the holder’s
basis in the new debt (immediately after
the substitution) is greater than the stated
redemption price at maturity of the new
debt (as determined under § 1.1273–1(b)),
the holder treats the difference as bond
premium on the new debt. See §§ 1.
171–1 through 1.171–5 for the treatment

2001–9 I.R.B.

of bond premium.
SECTION 5. EFFECT ON OTHER
DOCUMENTS
Rev. Proc. 99–18, as modified by Rev.
Proc. 2000–28, is modified and superseded.
SECTION 6. EFFECTIVE DATE
This revenue procedure applies to substitutions that occur on or after March 13,
2001. For substitutions that occur before
March 13, 2001, Rev. Proc. 99–18, as currently in effect, continues to apply.
SECTION 7. PAPERWORK
REDUCTION ACT
The collections of information contained in this revenue procedure have
been reviewed and approved by the Office
of Management and Budget (OMB) in
26 CFR 601.202: Closing agreements.

accordance with the Paperwork Reduction
Act (44 U.S.C. 3507) under control number 1545–1647.
An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless the collection of information displays a valid
OMB control number.
The collections of information in this
revenue procedure are in section 4.01.
This information is required to determine
whether an election has been made under
this revenue procedure. The collections
of information are required to obtain a
benefit. The likely respondents are business or other for-profit institutions.
The estimated total annual reporting
and/or recordkeeping burden is 75 hours.
The estimated annual burden per
respondent/recordkeeper varies from 1/2
hour to 1 hour, depending on individual
circumstances, with an estimated average

of 3/4 hour. The estimated number of
respondents is 100.
The estimated annual frequency of
responses is on occasion.
Books or records relating to a 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.
CONTACT PERSON
For further information regarding this
revenue procedure, contact William E.
Blanchard of the Office of the Associate
Chief Counsel (Financial Institutions and
Products) at (202) 622–3950 (not a tollfree call).

(Also Part I, sections 446, 482, 7121; 1.446-1, 301.7121-1)

Rev. Proc. 2001–22
SECTION 1. PURPOSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 746
SECTION 2. BACKGROUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 746
SECTION 3. SCOPE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 747
.01 Eligible taxpayers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 747
.02 Eligible taxable years. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 747
.03 Eligible issues generally. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 747
(1) Factual issues and well established law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 747
(2) Eligible taxable year(s) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 747
.04 Nonexclusive list of eligible domestic issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 747
.05 Exclusive list of international issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 747
.06 Excluded issues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 747
.07 Methods of accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 748
.08 Definition of taxpayer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 748
SECTION 4. REQUESTING AN LMSB PRE-FILING AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 748
.01 General information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 748
.02 Specific descriptions of issues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 748
.03 Perjury statement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 748
.04 Agreement regarding examination or inspection of records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 748
.05 Signature. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 749
.06 Where to submit request. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 749
SECTION 5. SELECTING TAXPAYERS FOR LMSB PFA PROGRAM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 749
.01 Jurisdiction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 749
.02 Criteria for selection. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 749
.03 Notification. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 749
.04 Requests not accepted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 749
SECTION 6. PROCESSING A REQUEST FOR AN LMSB PFA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 749
.01 Planning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 749
.02 Drafting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 749

2001–9 I.R.B.

745

February 26, 2001