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1990-1 C.B. 31 (Copy w/ Cite)

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1990-1 C.B. 31; T.D. 8300;
1990 IRB LEXIS 2187, *
DEPARTMENT OF THE TREASURY
Treasury Decision 8300
1990-1 C.B. 31; T.D. 8300; 1990 IRB LEXIS 2187
January 1990
[*1]
SUBJECT MATTER: Section 163.-Interest
APPLICABLE SECTIONS:
26 CFR 1.163-5: Denial of interest deduction on certain obligations issued after December 31, 1982,
unless issued in registered form. Internal Revenue Service 26 CFR Parts 1, 35a, 46, and 602
TEXT:
Registration Requirements with Respect to Certain Debt Obligations; Application of Repeal of 30
Percent Withholding by the Tax Reform Act of 1984
AGENCY:
Internal Revenue Service, Treasury.
ACTION:
Final and temporary regulations.
SUMMARY:
This document contains final Income Tax Regulations relating to the definition of the term
"registration required obligations" with respect to obligations issued to certain foreign persons and
relating to the imposition of sanctions on issuers of registration required obligations in bearer form.

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This document also contains temporary regulations relating to the repeal of 30 percent withholding
on certain types of interest by the Tax Reform Act of 1984. These regulations provide the public with
guidance necessary to comply with the Tax Equity and Fiscal Responsibility Act of 1982 and the Tax
Reform Act of 1984 and affect persons issuing debt obligations to foreign persons.
EFFECTIVE DATE:
These regulations are effective May 10, 1990. The text of the [*2] regulations states the dates of
applicability of the rules contained therein to various transactions and taxpayers.
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in these final regulations has been reviewed and approved by
the Office of Management and Budget in accordance with the requirements of the Paperwork
Reduction Act (44 U.S.C. § 3504 (h)) under control number 1545-1132. The annual burden per
respondent or record keeper is estimated to be 10 minutes.
These estimates are an approximation of the average time expected to be necessary for a collection
of information. They are based on information as is available to the Internal Revenue Service.
Individual respondents or recordkeepers may require greater or less time, depending on their
particular circumstances.
Comments concerning the accuracy of this burden estimate and suggestions for reducing this
burden should be directed to the Internal Revenue Service, Attention: IRS Reports Clearance
Officer, T:FP, Washington, DC 20224, and to the Office of Management and Budget, Paperwork
Reduction Project (1545-1132), Washington, DC 20503.
Background
On August 24, 1989, the FEDERAL REGISTER published [*3] proposed amendments (54 FR
35200) [INTL-0536-89, 1989-2 C.B. 833] to the Income Tax Regulations (26 CFR Part 1 and 46)
under sections 163 (f), 871, 881, 1441, 1442 and 4701 of the Internal Revenue Code of 1986.
Section 1.163-5 (c) of the regulations incorporated by reference certain requirements based on the
interpretation of the Securities Act of 1933 by the Securities and Exchange Commission (SEC). The
SEC proposed to revise its interpretation of that Act. The proposed amendments were in response to
that action. Written comments responding to this notice were received. No public hearing was
requested and no public hearing was held. After consideration of all comments regarding the
proposed amendments, those amendments are adopted by this Treasury Decision with revisions in
response to those comments. The comments and revisions are discussed below.
Explanation of Provisions
The proposed regulations under § 1.163-5 (c) (2) (i) provided rules relating to whether an obligation
would be considered to be issued under arrangements reasonably designed to insure that the
obligation will be sold (or resold in connection with its original issuance) only to a person who is not
a United States [*4] person. Obligations that satisfied the "arrangements reasonably designed"
test under § 1.163-5 (c) (2) (i) (A) or (B) were required, after the effective date, to satisfy new §
1.163-5 (c) (2) (i) (D).
Proposed § 1.163-5 (c) (2) (i) (D) listed seven requirements. In brief they were:

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(1) Neither the issuer nor any distributor makes a directed selling effort with respect to the
obligation;

(2) Neither the issuer nor any distributor offers the obligation within the United States or its
possessions or to a United States person;

(3) The issuer does not, and each distributor covenants that it will not, sell the obligation
within the United States or its possessions or to a U.S. person during the restricted period;

(4) Neither the issuer nor any distributor delivers the obligation within the United States or its
possessions during the restricted period;
(5) All offering materials and documents used in connection with the original issuance of the
obligation include a statement that the obligation may not be offered or sold within the
United States or its possessions or to a United States person;
(6) If the issuer or any distributor sells the obligation during the restricted period to a
distributor, a dealer, [*5] or any other person who receives a selling concession, fee or
other remuneration in respect to the security sold, the seller sends a confirmation to such
person stating that such person is subject to the restrictions regarding offer, sale, and
delivery of the obligation during the restricted period; and

(7) No later than the 10th day after the last day of the restricted period, a certificate is
provided to the issuer or a distributor of the obligation stating that the owner of the
obligation on the last day of the restricted period is not a United States person.

The term "distributor" was defined to mean any affiliate of the issuer, the lead underwriter, any
person participating in the original issuance of the obligation pursuant to a contractual arrangement,
and any person acting on behalf of the issuer or any of the foregoing.
The term "restricted period" was defined as the forty day period beginning on the later of the closing
of the offering or the first date on which the obligation is offered to persons other than a distributor.
Section 1.163-5 (c) (2) (i) (D) was proposed to be applicable to obligations originally issued after
the date 30 days after final regulations are published [*6] in the FEDERAL REGISTER.
Commentors have suggested a number of difficulties with the proposed regulations under § 1.163-5
(c)-(2) (i) (D). Principally, those difficulties arise from the possibility that an obligation may fail the
requirements of § 1.163-5 (c) (2) (i) (D) for reasons that may be beyond the control of the issuer,
and from the possibility that all the obligations in an issue may fail such requirements if only a few
obligations have failed an issue wide requirement. Other comments concerned the lack of an
incentive for post-restricted period certifications when delivery of the obligation is not required, and
the possibility that the date of applicability of the regulations may not allow sufficient time for
amendment of the documentation associated with an issue.
In response to these comments, and in view of the SEC's requirements under Regulation S, these
final regulations have deleted the requirements of the proposed regulations relating to directed
selling efforts, offering materials and confirmations. The provisions regarding offers and sales have
been amended to limit somewhat the issuer's liability for acts of distributors. The certification

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procedure has been amended [*7] so that delivery of an obligation in definitive form triggers
certification, and a more delayed effective date of the regulations has been provided.
These final regulations are separate and independent from the rules and interpretations that the
SEC chooses to adopt in its administration of the securities laws. The SEC's interpretations will be
considered by the Service where appropriate; however, the Service must ultimately base its
interpretations on the tax policies underlying section 163 (f) (2) (B).
These final regulations contain three requirements: (1) restrictions on offers and sales, (2)
restrictions on delivery, and (3) certification.
With respect to offers and sales, the issuer and distributor must not offer or sell the obligation
during the restricted period to a person within the United States or its possessions or to a United
States person. (The obligation may, however, be sold to a U.S. person in certain circumstances if
the person is a financial institution or acquires and holds through a financial institution.) The
distributor of the obligation will be deemed to satisfy this requirement if it covenants that it will not
offer or sell the obligation during the restricted [*8] period to a person who is within the United
States or its possessions or to a United States person, and it has in effect, in connection with the
offer and sale of the obligation during the restricted period, procedures reasonably designed to
insure that its employees or other agents who are directly engaged in selling the obligation are
aware that the obligation can not be offered or sold during the restricted period to a person who is
within the United States or its possessions or to a United States person.
With respect to delivery of obligations sold during the restricted period, neither the issuer nor any
distributor may deliver the obligation in definitive form within the United States or its possessions.
Certification is required on the earlier of the date of the first payment of interest on the obligation or
the date of delivery by the issuer of the obligation in definitive form. The certification may be signed
or sent either by the owner of the obligation or by a financial institution or clearing organization
through which the owner holds the obligation.
The final regulations alter the exception from certification contained in the proposed regulations for
"targeted offshore offerings". [*9] The changes are in response to comments concerning offers
and sales, under the exception, of obligations within or without the targeted foreign country. The
IRS will continue to review the use of the exception and may make further changes, if warranted;
such changes would be effective on a prospective basis.
The definition of distributor has been amended in these final regulations. A distributor is a person
that offers or sells the obligation during the restricted period pursuant to a written contract with the
issuer, any person that offers or sells the obligation during the restricted period pursuant to a
written contract with a person previously described, and certain affiliates of the issuer or another
distributor that offer and sell the obligation during the restricted period.
The [*10] preamble to the proposed regulations solicited comments on several issues, including
whether registered obligations convertible into bearer form should be treated as registered rather
than bearer obligations at the time of issuance. Because of general tax compliance concerns, it has
been decided to continue current law, which treats such convertible obligations as being in bearer
form at the time of issuance.
These final regulations will apply to obligations originally issued after September 7, 1990. The issuer
of an obligation may choose to apply either the rules of § 1.163-5 (c) (2) (i) (A) or § 1.163-5 (c) (2)
(i) (B), or the rules of these final regulations, to an obligation that is originally issued after May 10,
1990, and on or before September 7, 1990.
This document also publishes temporary regulations revising paragraphs (a), (c) and (e) of §
35a.9999-5 and adding new paragraph (e) to § 1.163-5T. These temporary regulations amend A-5
of paragraph (a) to provide an exception from the certification requirement for certain short term
commercial paper. Under this provision a certificate will not be required under § 1.163-5 (c)-(2) (i)
(D) (3) by virtue of A-5 if the obligation is [*11] an original issue discount obligation with a

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maturity of 183 days or less from the date of issuance.
A-18 of paragraph (c) of § 35a.9999-5 provides that an obligation that would otherwise be in
registered form but for the fact that it is convertible into bearer form is considered to be in bearer
form. Under A-1 of § 35a.9999-5 (a), this provision applies to obligations issued after July 18, 1984.
The provision in A-18 is amended in order to better coordinate that provision with § 1.163-5 (c)-(2)
(vi).
A-21 of paragraph (e) of § 35a.9999-5 provides that interest paid to the holder of a pass-through
certificate described in § 1.163-5T (d) may qualify as portfolio interest. It provides further that, for
purposes of sections 871 (h) and 881 (c), interest is considered to be paid on or with respect to the
pass-through certificate and not with respect to any obligations held by the fund or trust to which
the pass-through certificate relates. This rule was intended to apply with respect to payment from
the trustee of the pass-through trust to the certificate holder, but not with respect to payments
made to the trustee of the pass-through trust. Thus, the rule applies when the trustee of the
[*12] pass-through trust is a United States person who collects and pays out interest to the
certificate holder, but does not apply when the payment is made to a trustee that is a foreign
person. A-21 is amended to clarify this point. A-21 is also amended to clarify its application to
REMICs. Section 1.163-5T is also amended to add paragraph (e) concerning REMICs.
Special Analyses
It has been determined that these rules are not major rules as defined in Executive Order 12291.
Therefore, a Regulatory Impact Analysis is not required. It has also been determined that section
553 (b) of the Administrative Procedure Act (5 U.S.C. Chapter 5) and the Regulatory Flexibility Act
(5 U.S.C. Chapter 6) do not apply to these regulations, and, therefore, a final Regulatory Flexibility
Analysis is not required. Pursuant to section 7805 (f) of the Internal Revenue Code, the notice of
proposed rulemaking for the regulation was submitted to the Administrator of the Small Business
Administration for comment on their impact on small business.

Adoption of amendments to the regulations
Accordingly, 26 CFR Parts 1, 35a, 46 and 602 are amended as follows:

PART 1-INCOME TAX REGULATIONS
Paragraph 1. The authority [*13] for part 1 continues to read in part:

Authority: 26 U.S.C. 7805.

;

Par. 2. Section 1.163-5 (c) is amended as follows:

1. Paragraph (c) (2) (i) introductory text is amended by revising the first, fourth
and fifth sentences and by adding a new sentence between the fourth and fifth
sentences as set forth below.

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2. Paragraph (c) (2) (i) (A) is amended by adding the sentence set forth below
after the last sentence thereof.

3. Paragraph (c) (2) (i) (B) introductory text is revised as set forth below.
4. Paragraph (c) (2) (i) (D) is added as set forth below.
5. Paragraph (c) (3) is amended by redesignating the existing text as paragraph
(c) (3) (i) and adding a heading at the beginning of newly designated paragraph
(c) (3) (i), and by adding a new paragraph (c) (3) (ii) as set forth below.

§ 1.163-5 Denial of interest deduction on certain 2 obligations issued after
December. 31, 1982, unless issued in registered form

(c) Obligations issued to foreign persons after September 21, 1984(2) Rules for the application of this paragraph-(i) Arrangements reasonably designed to
ensure sale to non-United States persons. An obligation will be considered to satisfy
paragraph (c) (1) (i) of this section [*14] if the conditions of paragraph (c) (2) (i) (A),
(B), (C), or (D) of this section are met in connection with the original issuance of the
obligation. ;
Obligations that meet the conditions of paragraph (c) (2) (i) (A),
(B), (C) or (D) of this section may be issued in a single public offering. The preceding
sentence does not apply to certificates of deposit issued under the conditions of
paragraph (c) (2) (i) (C) of this section by a United States person or by a controlled
foreign corporation within the meaning of section 957 (a) that is engaged in the active
conduct of a banking business within the meaning of section 954 (c) (3) (B) as in effect
prior to the Tax Reform Act of 1986, and the regulations thereunder. A temporary global
security need not satisfy the conditions of paragraph (c) (2) (i) (A), (B) or (C) of this
section, but must satisfy the applicable requirements of paragraph (c) (2) (i) (D) of this
section.
(A)
Except as provided in paragraph (c) (3) of this section, this paragraph (c)
(2) (i) (A) applies only to obligations issued on or before September 7, 1990.
(B) The obligation is registered under the Securities Act of 1933, is exempt from
registration by reason [*15] of section 3 or section 4 of such Act, or does not qualify
as a security under the Securities Act of 1933; all of the conditions set forth in
paragraph (c) (2) (i) (B) (1), (2), (3), (4), and (5) of this section are met with respect to
such obligation; and, except as provided in paragraph (c) (3) of this section, the
obligation is issued on or before September 7, 1990.

(D) The obligation is issued after September 7, 1990, and all of the conditions set forth
in this paragraph (c) (2) (i) (D) are met with respect to such obligation.
(1) Offers and sales-(i) Issuer. The issuer does not offer or sell the obligation during the
restricted period to a person who is within the United States or its possessions or to a

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United States person.
(ii) Distributors. (A) The distributor of the obligation does not offer or sell the obligation
during the restricted period to a person who is within the United States or its
possessions or to a United States person.
(B) The distributor of the obligation will be deemed to satisfy the requirements of
paragraph (c) (2) (i)-(D) (1) (ii) (A) of this section if the distributor of the obligation
covenants that it will not offer or sell the obligation during the [*16] restricted period
to a person who is within the United States or its possessions or to a United States
person; and the distributor of the obligation has in effect, in connection with the offer
and sale of the obligation during the restricted period, procedures reasonably designed
to ensure that its employees or agents who are directly engaged in selling the obligation
are aware that the obligation cannot be offered or sold during the restricted period to a
person who is within the United States or its possessions or is a United States person.
(iii) Certain rules. For purposes of paragraph (c) (2) (i) (D) (1) (i) and (ii) of this
section:

(A) An offer or sale will be considered to be made to a person who is within the
United States or its possessions if the offeror or seller of the obligation has an
address within the United States or its possessions for the offeror or buyer of
the obligation with respect to the offer or sale.

(B) An offer or sale of an obligation will not be treated as made to a person within
the United States or its possessions or to a United States person if the person
to whom the offer or sale is made is: An exempt distributor, as defined in
paragraph (c) (2) (i) (D) [*17] (5) of this section; An international
organization as defined in section 7701 (a) (18) and the regulations
thereunder, or a foreign central bank as defined in section 895 and the
regulations thereunder; or The foreign branch of a United States financial
institution as described in paragraph (c) (2) (i) (D) (6) (i) of this section.

Paragraph (c) (2) (i) (D) (1) (iii) (B) regarding an exempt distributor will only apply to
an offer to the United States office of an exempt distributor, and paragraph (c) (2) (i)
(D) (1) (iii).
(B) regarding an international organization or foreign central bank will only apply to an
offer to an international organization or foreign central bank, if such offer is made
directly and specifically to the United States office, organization or bank.
(C) A sale of an obligation will not be treated as made to a person within the United
States or its possessions or to a United States person if the person to whom the sale is
made is a person described in paragraph (c) (2) (i) (D) (6) (ii) of this section.
(2) Delivery. In connection with the sale of the obligation during the restricted period,
neither the issuer nor any distributor delivers the obligation in definitive [*18] form
within the United States or its possessions.
(3) Certification-(i) In general. On the earlier of the date of the first actual payment of
interest by the issuer on the obligation or the date of delivery by the issuer of the
obligation in definitive form, a certificate is provided to the issuer of the obligation
stating that on such date:

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(A) The obligation is owned by a person that is not a United States person;
(B) The obligation is owned by a United States person described in paragraph (c)
(2) (i) (D) ((6) of this section; or

(C)The obligation is owned by a financial institution for purposes of resale during
the restricted period, and such financial institution certifies in addition that it
has not acquired the obligation for purposes of resale directly or indirectly to a
United States person or to a person within the United States or its possessions.
A certificate described in paragraph (c) (2) (i) (D) (3) (i) (A) or (B) of this
section may not be given with respect to an obligation that is owned by a
financial institution for purposes of resale during the restricted period. For
purposes of paragraph (c) (2) (i)-(D) (2) and (3) of this section, a temporary
global security (as defined [*19] in § 1.163-5 (c) (1) (ii) (B)) is not
considered to be an obligation in definitive form. If the issuer does not make
the obligation available for delivery in definitive form within a reasonable period
of time after the end of the restricted period, then the obligation shall be
treated as not satisfying the requirements of this paragraph (c) (2) (i)-(D) (3).
The certificate must be signed (or sent, as provided in paragraph (c) (2) (i) (D)
(3) (ii) of this section) either by the owner of the obligation or by a financial
institution or clearing organization through which the owner holds the
obligation, directly or indirectly. For purposes of this paragraph (c) (2) (i) (D)
(3), the term "financial institution" means a financial institution described in §
1.165-12 (c) (i) (v). When a certificate is provided by a clearing organization,
the certificate must be based on statements provided to it by its member
organizations. The requirement of this paragraph (c) (1) (D) (3) shall be
deemed not to be satisfied with respect to an obligation if the issuer knows or
has reason to know that the certificate with respect to such obligation is false.
The certificate must be retained by the issuer (and [*20] statements by
member organizations must be retained by the clearing organization in the
case of certificates based on such statements) for a period of four calendar
years following the year in which the certificate is received.

(ii) Electronic certification. The certificate required by paragraph (c) (2) (i) (D) (3) (i) of
this section (including a statement provided to a clearing organization by a member
organization) may be provided electronically, but only if the person receiving such
electronic certificate maintains adequate records, for the retention period described in
paragraph (c) (2) (i) (D) (3) (i) of this section, establishing that such certificate was
received in respect of the subject obligation, and only if there is a written agreement
entered into prior to the time of certification (including the written membership rules of
a clearing organization) to which the sender and recipient are subject, providing that the
electronic certificate shall have the effect of a signed certificate described in paragraph
(c) (2) (i) (D) (3) (i) of this section.
(iii) Exception for certain obligations. This paragraph (c) (2) (i) (D) (3) shall not apply,
and no certificate shall be required, [*21] in the case of an obligation that is sold
during the restricted period and that satisfies all of the following requirements:

(A) The interest and principal with respect to the obligation are denominated only
in the currency of a single foreign country.

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(B) The interest and principal with respect to the obligation are payable only within
that foreign country (according to rules similar to those set forth in § 1.163-5
(c) (2) (v)).

(C)The obligation is offered and sold in accordance with practices and
documentation customary in that foreign country.

(D)The distributor covenants to use reasonable efforts to sell the obligation within
that foreign country.

(E) The obligation is not listed, or the subject of an application for listing, on an
exchange located outside that foreign country.

(F) The Commissioner has designated that foreign country as a foreign country in
which certification under paragraph (c) (2) (i) (D) (3) (i) of this section is not
permissible.

(G)The issuance of the obligation is subject to guidelines or restrictions imposed
by governmental, banking or securities authorities in that foreign country.

(H)More than 80 percent by value of the obligations included in the offering of
which [*22] the obligation is a part are offered and sold to non-distributors
by distributors maintaining an office located in that foreign country. Foreign
currency denominated obligations that are convertible into U.S. dollar
denominated obligations or that by their terms are linked to the U.S. dollar in a
way which effectively converts the obligations to U. S. dollar denominated
obligations do not satisfy the requirements of this paragraph (c) (2) (i) (D) (3)
(iii). A foreign currency denominated obligation will not be treated as linked, by
its terms, to the U.S. dollar solely because the obligation is the subject of a
swap transaction.

(4) Distributor. For purposes of this paragraph (c) (2) (i) (D), the term "distributor"
means:

(i) a person that offers or sells the obligation during the restricted period pursuant
to a written contract with the issuer;

(ii) any person that offers or sells the obligation during the restricted period
pursuant to a written contract with a person described in paragraph (c) (2) (i)
(D) (4) (i); and

(iii) any affiliate that acquires the obligation from another member of its affiliated
group for the purpose of offering or selling the obligation during the restricted
period, [*23] but only if the transferor member of the group is the issuer or

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a person described in paragraph (c) (2) (i) (D) (4) (i) or (ii) of this section.
The terms "affiliate" and "affiliated group" have the same meanings as in
section 1504 (a) of the Code, but without regard to the exceptions contained
in section 1504 (b) and substituting "50 percent" for "80 percent" each time it
appears. For purposes of this paragraph (c) (2) (i) (D) (4), a written contract
does not include a confirmation or other notice of the transaction.

(5) Exempt distributor. For purposes of this paragraph (c) (2) (i) (D), the term "exempt
distributor" means a distributor that covenants in its contract with the issuer or with a
distributor described in paragraph (c) (2) (i) (D) (4) (i) that it is buying the obligation
for the purpose of resale in connection with the original issuance of the obligation, and
that if it retains the obligation for its own account, it will only do so in accordance with
the requirements of paragraph (c) (2) (i) (D) (6) of this section. In the latter case, the
covenant will constitute the certificate required under paragraph (c) (2) (i) (D) (6). The
provisions of paragraph (c) (2) (i) (D) (7) [*24] governing the restricted period for
unsold allotments or subscriptions shall apply to any obligation retained for investment
by an exempt distributor.
(6) Certain United States persons. A person is described in this paragraph (c) (2) (i) (D)
(6) if the requirements of this paragraph are satisfied and the person is:

(i) the foreign branch of a United States financial institution purchasing for its own
account or for resale, or

(ii) a United States person who acquired the obligation through the foreign branch
of a United States financial institution and who, for purposes of the
certification required in paragraph (c) (2) (i) (D) (3) of this section, holds the
obligation through such financial institution on the date of certification.
For purposes of paragraph (c) (2) (i)-(D) (6) (ii) of this section, a United States person
will be considered to acquire and hold an obligation through the foreign branch of a
United States financial institution if the United States person has an account with the
United States office of a financial institution, and the transaction is executed by a foreign
office of that financial institution, or by the foreign office of another financial institution
acting on [*25] behalf of that financial institution. This paragraph (c) (2) (i) (D) (6)
will apply, however, only if the United States financial institution (or the United States
office of a foreign financial institution) holding the obligation provides a certificate to the
issuer or distributor selling the obligation within a reasonable time stating that it agrees
to comply with the requirements of section 165 (j) (3) (A), (B), or (C) and the
regulations thereunder. For purposes of this paragraph (c) (2) (i) (D) (6), the term
"financial institution" means a financial institution as defined in § 1.165-12 (c) (1) (v).
As an alternative to the certification required above, a financial institution may provide a
blanket certificate to the issuer or distributor selling the obligation stating that the
financial institution will comply with the requirements of section 165 (j) (3) (A), (B) or
(C) and the regulations thereunder. A blanket certificate must be received by the issuer
or the distributor in the year of the issuance of the obligation or in either of the
preceding two calendar years, and must be retained by the issuer or distributor for at
least four years after the end of the last calendar year [*26] to which it relates.
(7) Restricted period. For purposes of this paragraph (c) (2) (i) (D), the restricted period
with respect to an obligation begins on the earlier of the closing date (or the date on
which the issuer receives the loan proceeds, if there is no closing with respect to the
obligation), or the first date on which the obligation is offered to persons other than a

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distributor. The restricted period with respect to an obligation ends on the expiration of
the forty day period beginning on the closing date (or the date on which the issuer
receives the loan proceeds, if there is no closing with respect to the obligation).
Notwithstanding the preceding sentence, any offer or sale of the obligation by the issuer
or a distributor shall be deemed to be during the restricted period if the issuer or
distributor holds the obligation as part of an unsold allotment or subscription.
(8) Clearing organization. For purposes of this paragraph (c) (2) (i) (D), a "clearing
organization" is an entity which is in the business of holding obligations for member
organizations and transferring obligations among such members by credit or debit to the
account of a member without the necessity of physical [*27] delivery of the
obligation.

(3) Effective date-(i) In general.

(ii) Special rules. If an obligation is originally issued after September 7, 1990, pursuant
to the exercise of a warrant or the conversion of a convertible obligation, which warrant
or obligation (including conversion privilege) was issued on or before May 10, 1990,
then the issuer may choose to apply either the rules of § 1.163-5 (c)-(2) (i) (A) or §
1.163-5 (c)-(2) (i) (B), or the rules of § 1.163-5 (c) (2) (i) (D). The issuer of an
obligation may choose to apply either the rules of § 1.163-5 (c)-(2) (i) (A) or (B), or the
rules of §I.163-5 (c) (2) (i) (D), to an obligation that is originally issued after May 10,
1990, and on or before September 7, 1990. However, any issuer choosing to apply the
rules of § 1.163-5 (c)-(2) (i) (A) must apply the definition of United States person used
for such purposes on December 31, 1989, and must obtain any certificates that would
have been required under applicable law on December 31, 1989.
Par. 3. Paragraph (e) of § 1.163-5T is added immediately after paragraph (d) of §
1.163-5T. Paragraph (e) reads as follows:

§ 1.163-5T Denial of interest deduction on certain obligations issued
after December 31, 1982, unless issued in registered form
(temporary).
[*28]
(e) Regular interests in REMICS. (1) A regular interest in a REMIC, as
defined in sections 860D and 860G and the regulations thereunder, is
considered to be a "registration-required obligation" under section 163 (f)
(2) (A) and § 1.163-5 (c) if the regular interest is described in section 163
(f) (2) (A) and § 1.163-5 (c), without regard to whether any obligation held
by the REMIC to which the regular interest relates is described in section 163
(f) (2) (A) and § 1.163-5 (c). A regular interest in a REMIC is considered to
be described in section 163 (f) (2) (B) and § 1.163-5 (c), if the regular
interest is described in section 163 (f) (2) (B) and § 1.163-5 (c), without
regard to whether any obligation held by the REMIC to which the regular
interest relates is described in section 163 (f) (2) (B) and § 1.163-5 (c).
(2) An obligation held by a REMIC is considered to be described in section
163 (f) (2) (A) or (B) if such obligation is described in section 163 (f) (2) (A)
or (B), respectively, without regard to whether the regular interests in the
REMIC are so considered.

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(3) For purposes of section 4701, a regular interest is considered to be
issued solely by the recipient of the proceeds [*29] from the issuance of
the regular interest (hereinafter the "sponsor"). The sponsor is therefore
liable for any excise tax under section 4701 that may be imposed with
reference to the principal amount of the regular interest.
(4) In order to implement the purpose of section 163, § 1.163-5 (c), and
this section, the Commissioner may characterize a regular interest in a
REMIC and any obligation held by such REMIC in accordance with the
substance of the arrangement they represent and may impose the penalties
provided under sections 163 (f) (1) and 4701 in the appropriate amounts
and on the appropriate persons. This provision may be applied, for example,
where a corporation issues an obligation that is purportedly in registered
form and that will qualify as a "qualified mortgage" within the meaning of
section 860G (a) (3) in the hands of a REMIC, contributes the obligation to a
REMIC as its only asset, and arranges for the sale to investors of regular
interests in the REMIC in bearer form that do not meet the requirements of
section 163 (f) (2) (B). If this provision is applied, the obligation held by the
REMIC will not be considered to be issued in registered form or to meet the
requirements [*30] of section 163 (f)-(2) (B). The corporation will not be
allowed a deduction for the payment of interest on the obligation held by the
REMIC, and the excise tax under section 4701, calculated with reference to
the principal amount of the obligation held by the REMIC, will be imposed on
the corporation and may be collected from the corporation and its agents.

Par. 4. The authority for part 35a continues to read in part as follows:

Authority: 26 U.S.C. 7805.

;

Par. 5. Section 35a.9999-5 is amended by adding a parenthetical in A-5 (ii) of paragraph
(a) immediately before A-5 (iii); by adding a parenthetical in A-5 (iii) of paragraph (a)
immediately before A-5 (iv); by removing the first sentence of A-13 of paragraph (b),
and adding a new sentence in its place; by adding new subdivision (i) (G) to A-14 of
paragraph (b); by removing the sentence immediately before the last sentence of A-18
of paragraph (c), and adding two new sentences in its place; in paragraph (e), by
redesignating the text of existing A-21 as subdivision (i) and adding a sentence
immediately following the second sentence in newly designated subdivision (i), and
adding new subdivision (ii). The added sentences read as [*31] follows:

§ 35a.9999-5 Questions and answers relating to repeal of 30 percent
withholding by section 127 of the Tax Reform Act of 1984 and to the
application of information reporting and backup withholding in light
of such repeal.

(a) Rules concerning obligations in bearer form.

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A-5. ?;
(ii)
(determined by reference to the spot rate on the
date of issuance, in the case of an obligation not denominated in United
States dollars); (iii)
(However, an original issue discount obligation
with a maturity of 183 days or less from the date of issuance is not required
to satisfy the certification requirement of § 1.163-5 (c) (2) (i) (D) (3).)

(b) Rules concerning obligations in registered form.

A-13. An obligation is considered to be targeted to foreign markets for
purposes of A-12 if it is sold (or resold in connection with its original
issuance) only to foreign persons (or to foreign branches of United States
financial institutions described in section 871 (h) (4) (B)) in accordance with
procedures similar to those prescribed in § 1.163-5 (c) (2) (i) (A), (B) or
(D).

A-14.

;

(i)
(G) The certificate described in this subdivision may be provided
electronically [*32] under the terms and conditions of § 1.163-5 (c) (2) (i)
(D) (3) (ii).

(c) Convertibility of obligations.
A-18. ;
An obligation issued after July 18, 1984, and on or before
September 21, 1984, that would otherwise be in registered form but for the
fact that it is convertible into bearer form, shall be considered to be in
bearer form for purposes of A-1 if it satisfies the applicable requirements of
the relevant temporary or proposed regulations under section 163 (f) (2)
(B), as described in § 1.163-5 (c) (2) (vi). An obligation issued after
September 21, 1984, that would otherwise be in registered form but for the
fact that it is convertible into bearer form shall be considered to be in bearer
form. ;
?
(e) Application of repeal of 30 percent withholding to pass-through
certificates.

A-21. (i)
The rule of this A-21 applies only to payments made to the
holder of the pass-through certificate from the trustee of the pass-through
trust and does not apply to payments made to the trustee of the passthrough trust.
(ii) Interest paid to a holder of a regular or residual interest in a REMIC will
qualify as portfolio interest under section 871 (h) (2) or section 881 (c) (2)

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[*33] for purposes of the exemption from 30 percent withholding if the
interest paid to the holder satisfies the conditions described in A-1 or A-8 of
this section. For purposes of A-1 or A-8 of this section and sections 871 (h)
and 881 (c), interest paid to the holder of a regular interest in a REMIC is
considered to be paid on or with respect to the regular interest in the REMIC
and not on or with respect to any mortgage obligations held by the REMIC.
The foregoing rule, however, applies only to payments made to the holder of
the regular interest from the REMIC and does not apply to payments made
to the REMIC. For purposes of A-1 or A-8 of this section and sections 871 (h)
and 881 (c), interest paid to the holder of a residual interest in a REMIC is
considered to be paid on or with respect to the obligations held by the
REMIC, and not on or with respect to the residual interest. For purposes of
A-1 and A-8 of this section and section 127 of the Tax Reform Act of 1984, a
residual interest in a REMIC will be considered as issued after July 18, 1984,
only to the extent that the obligations held by the REMIC are issued after
July 13, 1984, but a regular interest in a REMIC will be considered [*34]
as issued after July 18, 1984, if the regular interest was issued after July 18,
1984, without regard to the date on which the mortgage obligations held by
the REMIC were issued.

Par. 6. The authority for Part 46 continues to read in part as follows:

Authority: 26 U.S.C. 7805.

;

Par. 7. Section 46.4701-1 is amended by revising paragraph (b) (5) to read as follows:

§ 46.4701-1 Tax on issuer of registration-required obligation not in
registered form.

(b) Definitions-

(5) Issuer. Except as provided in § 1.163-5T (d) (relating to passthrough
certificates) and § 1.163-5T (e) (relating to REMICs), the "issuer" is the
person whose interest deduction would be disallowed solely by reason of
section 163 (f) (1).

PART 602-OMB CONTROL NUMBERS UNDER THE PAPERWORK
REDUCTION ACT

Par. 8. The authority for Part 602 continues to read in part as follows:

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Authority: 26 U.S.C. 7805. ?;

Par. 9. Section 602.101 (c) is amended by revising the entry for § 1.163-5 in the table
to read as follows: "§ 1.163-5 ? 1545-1132."

Fred T. Goldberg, Jr.,
Commissioner of Internal Revenue.
Approved April 26, 1990.
Kenneth W. Gideon,
Assistant Secretary of the Treasury.
(Filed by the Office of the Federal Register [*35] on May 4, 1990, 5:00 p.m., and published in the
issue of the Federal Register for May 10, 1990, 55 F.R. 19622)

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