Td 9637

Part I. Rulings and Decisions Under the Internal Revenue Code
of 1986
Section 150.—Definitions
and Special Rules
T.D. 9637
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Parts 1 and 48
Modification of Treasury
Regulations Pursuant to
Section 939A of the DoddFrank Wall Street Reform and
Consumer Protection Act
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations and removal
of temporary regulations.
SUMMARY: This document contains final regulations that remove any reference
to, or requirement of reliance on, “credit
ratings” in regulations under the Internal
Revenue Code (Code) and provides substitute standards of credit-worthiness
where appropriate. This action is required
by the Dodd-Frank Wall Street Reform
and Consumer Protection Act. These regulations affect persons subject to various
provisions of the Code.
DATES: Effective Date: These regulations are effective on September 6, 2013.
Applicability Dates: For dates of applicability, see §§1.150 –1(a)(4), 1.171–1 (f),
1.197–2(b)(7), 1.249 –1(f)(3), 1.475(a)–
4(d)(4), 1.860G–2(g)(3), 1.1001–3(d), (e),
and (g), and 48.4101–1(l)(5).
FOR FURTHER INFORMATION
CONTACT: Arturo Estrada, (202) 6223900 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
Section 939A(a) of the Dodd-Frank
Wall Street Reform and Consumer Protection Act, Public Law 111–203 (124 Stat.
1376 (2010)) (the “Dodd-Frank Act”), requires each Federal agency to review its

2013– 44 I.R.B.

regulations that require the use of an assessment of credit-worthiness of a security or money market instrument, and to
review any references or requirements in
its regulations regarding credit ratings.
Section 939A(b) directs each agency to
modify any regulation identified in the
review required under section 939A(a) by
removing any reference to, or requirement
of reliance on, credit ratings and substituting a standard of credit-worthiness that
the agency deems appropriate. Numerous
provisions under the Internal Revenue
Code (Code) are affected.
These regulations amend the Income
Tax Regulations (26 CFR part 1) under
sections 150, 171, 197, 249, 475, 860G,
and 1001 of the Code (the existing regulations). These sections were added to the
Code during different years to serve different purposes. These regulations also
amend the Manufacturers and Retailers
Excise Tax Regulations (26 CFR part 48)
under section 4101, which provides registration requirements related to Federal
fuel taxes.
On July 6, 2011, temporary regulations
(TD 9533) under sections 150, 171, 197,
249, 475, 860G, and 1001 of the Code
were published in the Federal Register
(76 FR 39278) that modify or eliminate
the reference to credit ratings in the relevant regulations. Additional temporary
regulations (26 CFR part 48) under section 4101 were published as part of TD
9533. A notice of proposed rulemaking
(REG–118809 –11) cross-referencing the
temporary regulations was published in
the Federal Register the same day (76 FR
39341). No written comments responding
to the notice of proposed rulemaking were
received. No public hearing was requested
or held. The regulations are adopted as
proposed without substantive changes.
Explanation of Provisions
These regulations remove references to
“credit ratings” and “credit agencies” or
functionally similar terms in the existing
regulations. Some changes involve simple
word deletions or substitutions. Others reflect the revision of one or more sentences
to remove the credit rating references.

427

Where appropriate, substitute standards of
credit-worthiness replace the prior references to credit ratings, credit agencies, or
functionally similar terms. Language revisions serve solely to remove the references prohibited by section 939A of the
Dodd-Frank Act and no additional
changes to the existing regulations are intended.
Special Analyses
It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order
12866, as supplemented by Executive Order 13563. Therefore, a regulatory assessment is not required. It also has been
determined that section 553(b) of the Administrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regulations. Because the regulations do not impose a collection of information on small
entities, the Regulatory Flexibility Act (5
U.S.C. chapter 6) does not apply. Pursuant
to section 7805(f) of the Code, these regulations have been submitted to the Chief
Counsel for Advocacy of the Small Business Administration for comment on its
impact on small business. No comments
were received.
Drafting Information
These regulations were drafted by personnel in the Office of Associate Chief
Counsel (Financial Institutions and Products), the Office of Associate Chief Counsel (Income Tax and Accounting), the Office of the Associate Chief Counsel
(International) and the Office of the Associate Chief Counsel (Passthroughs and
Special Industries). However, other personnel from the IRS and the Treasury
Department participated in the development of the regulations.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and 48
are amended as follows:

October 28, 2013

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 1.150 –1 is amended as
follows:
1. Paragraph heading (a)(2) is revised.
2. Paragraph (a)(4) is revised.
3. In paragraph (b), the definition of
Issuance costs is revised.
The revisions read as follows:
§1.150 –1 Definitions.
(a) * * *
(2) Effective/applicability date * * *
*****
(4) Additional exception to the general
applicability date. Section 1.150 –1(b), Issuance costs, applies on and after July 6,
2011.
(b) * * *
Issuance costs means costs to the extent incurred in connection with, and allocable to, the issuance of an issue within
the meaning of section 147(g). For example, issuance costs include the following
costs but only to the extent incurred in
connection with, and allocable to, the borrowing: underwriters’ spread; counsel
fees; financial advisory fees; fees paid to
an organization to evaluate the credit
quality of an issue; trustee fees; paying
agent fees; bond registrar, certification,
and authentication fees; accounting fees;
printing costs for bonds and offering documents; public approval process costs; engineering and feasibility study costs; guarantee fees, other than for qualified
guarantees (as defined in §1.148 – 4(f));
and similar costs.
*****
§1.150 –1T [Removed]
Par. 3. Section 1.150 –1T is removed.
Par. 4. Section 1.171–1(f) Example 2 is
revised to read as follows:
§1.171–1 Bond premium.
*****
(f) * * *
Example 2. Convertible bond—(i) Facts. On January 1, A purchases for $1,100 B corporation’s bond
maturing in three years from the purchase date, with
a stated principal amount of $1,000, payable at maturity. The bond provides for unconditional pay-

October 28, 2013

ments of interest of $30 on January 1 and July 1 of
each year. In addition, the bond is convertible into 15
shares of B corporation stock at the option of the
holder. On the purchase date, B corporation’s nonconvertible, publicly-traded, three-year debt of comparable credit quality trades at a price that reflects a
yield of 6.75 percent, compounded semiannually.
(ii) Determination of basis. A’s basis for determining loss on the sale or exchange of the bond is
$1,100. As of the purchase date, discounting the
remaining payments on the bond at the yield at
which B’s similar nonconvertible bonds trade (6.75
percent, compounded semiannually) results in a
present value of $980. Thus, the value of the conversion option is $120. Under paragraph
(e)(1)(iii)(A) of this section, A’s basis is $980
($1,100 –$120) for purposes of this section and
§§1.171–2 through 1.171–5. The sum of all amounts
payable on the bond other than qualified stated interest is $1,000. Because A’s basis (as determined
under paragraph (e)(1)(iii)(A) of this section) does
not exceed $1,000, A does not acquire the bond at a
premium.

(iii) Applicability date. Notwithstanding §1.171–5(a)(1), this Example 2 applies to bonds acquired on or after July 6,
2011.
§1.171–1T [Removed]
Par. 5. Section 1.171–1T is removed.
Par. 6. Section 1.197–2 is amended by
revising paragraph (b)(7) to read as follows:
§1.197–2 Amortization of goodwill and
certain other intangibles.
*****
(b) * * *
(7) Supplier-based intangibles—(i) In
general. Section 197 intangibles include
any supplier-based intangible. A supplierbased intangible is the value resulting
from the future acquisition, pursuant to
contractual or other relationships with
suppliers in the ordinary course of business, of goods or services that will be sold
or used by the taxpayer. Thus, the amount
paid or incurred for supplier-based intangibles includes, for example, any portion
of the purchase price of an acquired trade
or business attributable to the existence of
a favorable relationship with persons providing distribution services (such as favorable shelf or display space at a retail
outlet), or the existence of favorable supply contracts. The amount paid or incurred
for supplier-based intangibles does not include any amount required to be paid for
the goods or services themselves pursuant
to the terms of the agreement or other

428

relationship. In addition, see the exceptions in paragraph 2(c) of this section,
including the exception in paragraph
2(c)(6) of this section for certain rights to
receive tangible property or services from
another person.
(ii) Applicability date. This section applies to supplier-based intangibles acquired after July 6, 2011.
*****
§1.197–2T [Removed]
Par. 7. Section 1.197–2T is removed.
Par. 8. Section 1.249 –1 is amended by
revising paragraphs (e)(2)(ii) and (f)(3) to
read as follows:
§1.249 –1 Limitation on deduction of
bond premium on repurchase.
*****
(e) * * *
(2) * * *
(ii) In determining the amount under
paragraph (e)(2)(i) of this section, appropriate consideration shall be given to all
factors affecting the selling price or yields
of comparable nonconvertible obligations.
Such factors include general changes in
prevailing yields of comparable obligations between the dates the convertible
obligation was issued and repurchased
and the amount (if any) by which the
selling price of the nonconvertible obligation was affected by reason of any change
in the issuing corporation’s credit quality
or the credit quality of the obligation during such period (determined on the basis
of widely published financial information
or on the basis of other relevant facts and
circumstances which reflect the relative
credit quality of the corporation or the
comparable obligation).
*****
(f) * * *
(3) Portion of repurchase premium attributable to cost of borrowing. Paragraph
(e)(2)(ii) of this section applies to any
repurchase of a convertible obligation occurring on or after July 6, 2011.
*****
§1.249 –1T [Removed]
Par. 9. Section 1.249 –1T is removed.
Par. 10. Section 1.475(a)– 4 is amended
by revising paragraph (d)(4) Example 1,

2013– 44 I.R.B.

Example 2, and Example 3 to read as
follows:
§1.475(a)– 4 Valuation safe harbor.
*****
(d) * * *
(4) * * *
Example 1. (i) X, a calendar year taxpayer, is a
dealer in securities within the meaning of section
475(c)(1). X generally maintains a balanced portfolio of interest rate swaps and other interest rate
derivatives, capturing bid-ask spreads and keeping
its market exposure within desired limits (using, if
necessary, additional derivatives for this purpose). X
uses a mark-to-market method on a statement that it
is required to file with the United States Securities
and Exchange Commission and that satisfies paragraph (d)(2) of this section with respect to both the
contracts with customers and the additional derivatives. When determining the amount of any gain or
loss realized on a sale, exchange, or termination of a
position, X makes a proper adjustment for amounts
taken into account respecting payments or receipts.
X and all of its counterparties on the derivatives have
the same general credit quality as each other.
(ii) Under X’s valuation method, as of each valuation date, X determines a mid-market probability
distribution of future cash flows under the derivatives and computes the present values of these cash
flows. In computing these present values, X uses an
industry standard yield curve that is appropriate for
obligations by persons with this same general credit
quality. In addition, based on information that includes its own knowledge about the counterparties,
X adjusts some of these present values either upward
or downward to reflect X’s reasonable judgment
about the extent to which the true credit status of
each counterparty’s obligation, taking credit enhancements into account, differs from the general
credit quality used in the yield curve to present value
the derivatives.
(iii) X’s methodology does not violate the requirement in paragraph (d)(3)(iii) of this section that
the same cost or risk not be taken into account,
directly or indirectly, more than once.
(iv) Applicability date. This Example 1 applies to
valuations of securities on or after July 6, 2011.
Example 2. (i) The facts are the same as in
Example 1, except that X uses a better credit quality
in determining the yield curve to discount the payments to be received under the derivatives. Based on
information that includes its own knowledge about
the counterparties, X adjusts these present values to
reflect X’s reasonable judgment about the extent to
which the true credit status of each counterparty’s
obligation, taking credit enhancements into account,
differs from this better credit quality obligation.
(ii) X’s methodology does not violate the requirement in paragraph (d)(3)(iii) of this section that
the same cost or risk not be taken into account,
directly or indirectly, more than once.
(iii) Applicability date. This Example 2 applies to
valuations of securities on or after July 6, 2011.
Example 3. (i) The facts are the same as in
Example 1, except that, after computing present values using the discount rates that are appropriate for

2013– 44 I.R.B.

obligors with the same general credit quality, and
based on information that includes X’s own knowledge about the counterparties, X adjusts some of
these present values either upward or downward to
reflect X’s reasonable judgment about the extent to
which the true credit status of each counterparty’s
obligation, taking credit enhancements into account,
differs from a better credit quality.
(ii) X’s methodology violates the requirement in
paragraph (d)(3)(iii) of this section that the same cost
or risk not be taken into account, directly or indirectly, more than once. By using the same general
credit quality discount rate, X’s method takes into
account the difference between risk-free obligations
and obligations with that lower credit quality. By
adjusting values for the difference between a higher
credit quality and that lower credit quality, X takes
into account risks that it had already accounted for
through the discount rates that it used. The same
result would occur if X judged some of its counterparties’ obligations to be of a higher credit quality
but X failed to adjust the values of those obligations
to reflect the difference between a higher credit quality and the lower credit quality.
(iii) Applicability date. This Example 3 applies to
valuations of securities on or after July 6, 2011.
*****

§1.475(a)– 4T [Removed]
Par. 11. Section 1.475(a)– 4T is removed.
Par. 12. Section 1.860G–2 is amended
by revising paragraphs (g)(3)(ii)(B),
(g)(3)(ii)(C) and (g)(3)(ii)(D) to read as
follows:
§1.860G–2 Other rules.
*****
(g) * * *
(3) * * *
(ii) * * *
(B) Presumption that a reserve is reasonably required. The amount of a reserve
fund is presumed to be reasonable (and an
excessive reserve is presumed to have
been promptly and appropriately reduced)
if it does not exceed the amount required
by a third party insurer or guarantor, who
does not own directly or indirectly (within
the meaning of section 267(c)) an interest
in the REMIC (as defined in §1.860D–
1(b)(1)), as a condition of providing credit
enhancement.
(C) Presumption may be rebutted. The
presumption in paragraph (g)(3)(ii)(B) of
this section may be rebutted if the
amounts required by the third party insurer are not commercially reasonable
considering the factors described in paragraph (g)(3)(ii)(A) of this section.

429

(D) Applicability date. Paragraphs
(g)(3)(ii)(B) and (g)(3)(ii)(C) of this section apply on and after July 6, 2011.
*****
§1.860G–2T [Removed]
Par. 13. Section 1.860G–2T is removed.
Par. 14. Section 1.1001–3 is amended
as follows:
1. Paragraph (d) Example 9 is revised.
2. Paragraph (e)(4)(iv)(B) is revised.
3. Paragraph (e)(5)(ii)(B)(2) is revised.
4. Paragraph (g) Examples 1, 5 and 8
are revised.
The revisions read as follows:
§1.1001–3 Modifications of debt
instruments.
*****
(d) * * *
Example 9. Holder’s option to increase interest
rate. (i) A corporation issues an 8-year note to a bank
in exchange for cash. Under the terms of the note,
the bank has the option to increase the rate of interest
by a specified amount if certain covenants in the note
are breached. The bank’s right to increase the interest rate is a unilateral option as described in paragraph (c)(3) of this section.
(ii) A covenant in the note is breached. The bank
exercises its option to increase the rate of interest.
The increase in the rate of interest occurs by operation of the terms of the note and does not result in a
deferral or a reduction in the scheduled payments or
any other alteration described in paragraph (c)(2) of
this section. Thus, the change in interest rate is not a
modification.
(iii) Applicability date. This Example 9 applies to
modifications occurring on or after July 6, 2011.

*****
(e) * * *
(4) * * *
(iv) * * *
(B) Nonrecourse debt instruments (1)
A modification that releases, substitutes,
adds or otherwise alters a substantial
amount of the collateral for, a guarantee
on, or other form of credit enhancement
for a nonrecourse debt instrument is a
significant modification. A substitution of
collateral is not a significant modification,
however, if the collateral is fungible or
otherwise of a type where the particular
units pledged are unimportant (for example, government securities or financial instruments of a particular type and credit
quality). In addition, the substitution of a
similar commercially available credit enhancement contract is not a significant

October 28, 2013

modification, and an improvement to the
property securing a nonrecourse debt instrument does not result in a significant
modification.
(2) Applicability date. Paragraph (e)(4)
(iv)(B)(1) of this section applies to modifications occurring on or after July 6, 2011.
*****
(5) * * *
(ii) * * *
(B) * * *
(2) Original collateral (i) A modification
that changes a recourse debt instrument to a
nonrecourse debt instrument is not a significant modification if the instrument continues to be secured only by the original collateral and the modification does not result
in a change in payment expectations. For
this purpose, if the original collateral is fungible or otherwise of a type where the particular units pledged are unimportant (for
example, government securities or financial
instruments of a particular type and credit
quality), replacement of some or all units of
the original collateral with other units of the
same or similar type and aggregate value is
not considered a change in the original collateral.
(ii) Applicability date. Paragraph
(e)(5)(ii)(B)(2)(i) of this section applies to
modifications occurring on or after July 6,
2011.
*****
(g) * * *
Example 1. Modification of call right. (i) Under
the terms of a 30-year, fixed-rate bond, the issuer can
call the bond for 102 percent of par at the end of ten
years or for 101 percent of par at the end of 20 years.
At the end of the eighth year, the holder of the bond
pays the issuer to waive the issuer’s right to call the
bond at the end of the tenth year. On the date of the
modification, the issuer’s credit quality is approximately the same as when the bond was issued, but
market rates of interest have declined from that date.
(ii) The holder’s payment to the issuer changes
the yield on the bond. Whether the change in yield is
a significant modification depends on whether the
yield on the modified bond varies from the yield on
the original bond by more than the change in yield as
described in paragraph (e)(2)(ii) of this section.
(iii) If the change in yield is not a significant modification, the elimination of the issuer’s call right must
also be tested for significance. Because the specific
rules of paragraphs (e)(2) through (e)(6) of this section
do not address this modification, the significance of the
modification must be determined under the general rule
of paragraph (e)(1) of this section.
(iv) Applicability date. This Example 1 applies to
modifications occurring on or after July 6, 2011.
*****
Example 5. Assumption of mortgage with increase in interest rate. (i) A recourse debt instrument

October 28, 2013

with a 9 percent annual yield is secured by an office
building. Under the terms of the instrument, a purchaser of the building may assume the debt and be
substituted for the original obligor if the purchaser is
equally or more creditworthy than the original obligor and if the interest rate on the instrument is
increased by one-half percent (50 basis points). The
building is sold, the purchaser assumes the debt, and
the interest rate increases by 50 basis points.
(ii) If the purchaser’s acquisition of the building
does not satisfy the requirements of paragraph
(e)(4)(i)(B) or paragraph (e)(4)(i)(C) of this section,
the substitution of the purchaser as the obligor is a
significant modification under paragraph (e)(4)(i)(A)
of this section.
(iii) If the purchaser acquires substantially all of
the assets of the original obligor, the assumption of
the debt instrument will not result in a significant
modification if there is not a change in payment
expectations and the assumption does not result in a
significant alteration.
(iv) The change in the interest rate, if tested
under the rules of paragraph (e)(2) of this section,
would result in a significant modification. The
change in interest rate that results from the transaction is a significant alteration. Thus, the transaction
does not meet the requirements of paragraph
(e)(4)(i)(C) of this section and is a significant modification under paragraph (e)(4)(i)(A) of this section.
(v) Applicability date. This Example 5 applies to
modifications occurring on or after July 6, 2011.
*****
Example 8. Substitution of credit enhancement
contract. (i) Under the terms of a recourse debt
instrument, the issuer’s obligations are secured by a
letter of credit from a specified bank. The debt instrument does not contain any provision allowing a
substitution of a letter of credit from a different bank.
The specified bank, however, encounters financial
difficulty. The issuer and holder agree that the issuer
will substitute a letter of credit from another bank.
(ii) Under paragraph (e)(4)(iv)(A) of this section,
the substitution of a different credit enhancement contract is not a significant modification of a recourse debt
instrument unless the substitution results in a change in
payment expectations. While the substitution of a new
letter of credit by a different bank does not itself result
in a change in payment expectations, such a substitution may result in a change in payment expectations
under certain circumstances (for example, if the obligor’s capacity to meet payment obligations is dependent on the letter of credit and the substitution substantially enhances that capacity from primarily speculative
to adequate).
(iii) Applicability date. This Example 8 applies to
modifications occurring on or after July 6, 2011.
*****

§1.1001–3T [Removed]
Par. 15. Section 1.1001–3T is removed.
PART 48 —MANUFACTURERS AND
RETAILERS EXCISE TAXES
Par. 16. The authority citation for part
48 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *

430

Par. 17. Section 48.4101–1 is amended
as follows:
1. Paragraph (f)(4)(ii)(B) is revised.
2. Paragraph (l)(5) is revised.
The revisions read as follows:
§48.4101–1 Taxable fuel; registration.
*****
(f) * * *
(4) * * *
(ii) * * *
(B) Basis for determination. The determination under §48.4101–1(f)(4)(ii) must
be based on all information relevant to the
applicant’s financial status.
*****
(l) * * *
(5) Applicability date. Paragraph (f)(4)(ii)
(B) of this section applies on and after July
6, 2011.
§48.4101–1T [Removed]
Par. 18. Section 48.4101–1T is removed.

Beth Tucker,
Deputy Commissioner for
Operations Support.

Approved August 14, 2013.

Mark J. Mazur,
Assistant Secretary
of the Treasury (Tax Policy).
(Filed by the Office of the Federal Register on September 5,
2013, 8:45 a.m., and published in the issue of the Federal
Register for September 6, 2013, 78 F.R. 54758)

Section 6402.—Authority
to Make Credits or Refunds
Special administrative procedures for
making adjustments or claiming refunds
of overpayments of FICA taxes and income tax withholding resulting from
United States v. Windsor and Rev. Rul.
2013–17, are set forth in Notice 2013– 61.
See page 432.

2013– 44 I.R.B.