Par. 3. Section 1.163-5 is amended by revising the section heading and adding paragraphs (a), (b), and (c)(3)(iii) to read as follows:
(a) Denial of deduction —(1) In general. No deduction shall be allowed a taxpayer under section 163 for interest paid or accrued on a registration-required obligation (as defined in section 163(f) and paragraph (a)(2) of this section) unless such obligation is issued in registered form (as defined in paragraph (b) of this section). An obligation that is not in registered form under paragraph (b) of this section is an obligation in bearer form.
(2) Registration-required obligation —(i) In general. The term registration-required obligation means any obligation (including a pass-through certificate or participation interest described in paragraph (a)(3) of this section and a regular interest in a REMIC described in paragraph (a)(4) of this section) other than—
(A) An obligation issued by a natural person;
(B) An obligation not of a type offered to the public (as described in paragraph (a)(2)(ii) of this section); or
(C) An obligation that has a maturity at the date of issue of not more than 1 year.
(ii) Obligation not of a type offered to the public. For purposes of section 163(f)(2)(A)(ii) and paragraph (a)(2)(i)(B) of this section, an obligation is not of a type offered to the public unless the obligation is traded on an established market as determined under § 1.1273-2(f) without regard to § 1.1273-2(f)(6).
(3) Pass-through certificates and participation interests —(i) Pass-through certificate —(A) In general. A pass-through certificate is considered to be a registration-required obligation if the pass-through certificate is described in paragraph (a)(2)(i) of this section without regard to whether any obligation held by the entity to which the pass-through certificate relates is described in paragraph (a)(2)(i) of this section.
(B) Definition of pass-through certificate. For purposes of paragraph (a) of this section, a pass-through certificate is an instrument evidencing an interest in a grantor trust under Subpart E of Part I of Subchapter J of the Code, or a similar fund, that principally holds debt instruments. For purposes of this paragraph (a)(3)(i)(B), a similar fund includes an entity that, under §§ 301.7701-1 through 301.7701-3 of this chapter, is disregarded as an entity separate from its owner or classified as a partnership for federal tax purposes, without regard to whether the fund has the power to vary the assets in the fund or the sequence of payments made to holders. In addition, for purposes of this paragraph (a)(3)(i)(B), a similar fund does not include a business entity that is classified as a corporation under § 301.7701-2 of this chapter.
(ii) Participation interest. A participation interest that evidences ownership of some or all of one or more obligations and that is treated as conveying ownership of a specified portion of the obligation or obligations (and not ownership of an entity treated as created under § 301.7701-1(a)(2) of this chapter) is considered to be a registration-required obligation if the participation interest is described in paragraph (a)(2)(i) of this section without regard to whether any obligation to which the participation interest relates is described in paragraph (a)(2)(i) of this section.
(iii) Treatment of obligation held by a trust or fund. An obligation held by a trust or a fund in which ownership interests are represented by pass-through certificates is considered to be in registered form or to be a registration-required obligation if the obligation held by the trust or fund is in registered form (as defined in paragraph (b) of this section) or is a registration-required obligation described in paragraph (a)(2)(i) of this section, without regard to whether the pass-through certificates are so considered.
(iv) Examples. The application of paragraph (a)(3) of this section may be illustrated by the following examples:
Example 1.
Fund, a partnership under the laws of the state in which it is organized, acquires a pool of student loans. The student loans are issued by natural persons and, therefore, are not registration-required obligations as described in paragraph (a)(2)(i) of this section. Fund contributes the student loans to Trust, a business trust under the laws of the state in which Trust is organized. Trust has the power to vary the investments in Trust, and is not treated as a trust of which the grantor is the owner under Subpart E of Part I of Subchapter J of the Code. Trust issues certificates evidencing an interest in Trust. The certificates issued by Trust are offered to the public. The certificates issued by Trust are pass-through certificates (as described in paragraph (a)(3)(i)(B) of this section) and are described in paragraph (a)(2)(i) of this section, and thus, are registration-required obligations described in paragraph (a)(2)(i) of this section, even though the student loans held by Trust are not registration-required obligations.
Example 2.
Partnership U purchases a building from Partnership V. Partnership U makes a cash down payment and issues a note secured by a mortgage in the building to Partnership V for the remaining purchase price of the building. The note is not a registration-required obligation described in paragraph (a)(2)(i) of this section because it is not an obligation of a type offered to the public. Partnership V offers participations in the underlying note to the public. Under the terms of the participation, each participant will own an interest in the note that will entitle the participant to a specified portion of the interest and principal generated by the note. The participation is a participation interest described in paragraph (a)(3)(ii) of this section and is described in paragraph (a)(2)(i) of this section, and, thus, is a registration-required obligation described in paragraph (a)(2)(i) of this section, even though the underlying note is not a registration-required obligation.
(4) REMICs —(i) Regular interest in a REMIC. 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 if the regular interest is described in paragraph (a)(2)(i) of this section, without regard to whether one or more of the obligations held by the REMIC to which the regular interest relates is described in paragraph (a)(2)(i) of this section.
(ii) Treatment of obligation held by a REMIC. An obligation described in paragraph (a)(2)(i) of this section and held by a REMIC is treated as a registration-required obligation regardless of whether the regular interests in the REMIC are so treated.
(5) Applicability date —(i) In general. Except as otherwise provided in paragraphs (a)(5)(ii) and (iii) of this section, paragraph (a) of this section applies to obligations issued after March 18, 2012. For obligations issued on or before March 18, 2012, see § 5f.163-1 of this chapter.
(ii) Obligations not of a type offered to the public. Paragraph (a)(2)(ii) of this section applies to obligations issued after the date of publication of a Treasury decision adopting these rules as final regulations in the Federal Register .
(iii) Pass-through certificates, participation interests, and regular interests in REMICs. Paragraph (a) of this section applies to pass-through certificates, participation interests, and regular interests in REMICs issued after the date of publication of a Treasury decision adopting these rules as final regulations in the Federal Register . For pass-through certificates or regular interests in REMICs issued on or before the date of publication of a Treasury decision adopting these rules as final regulations in the Federal Register , see § 1.163-5T.
(b) Registered form —(1) General rule. Except as provided in paragraph (b)(4) of this section, an obligation is in registered form if a transfer of the right to receive both principal and any stated interest on the obligation may be effected only—
(i) By surrender of the old obligation and either the reissuance of the old obligation to the new holder or the issuance of a new obligation to the new holder;
(ii) Through a book entry system (as described in paragraph (b)(2) of this section) maintained by the issuer of the obligation (or its agent) or by a clearing organization (as defined in paragraph (b)(3) of this section); or
(iii) Through both of the methods described in paragraphs (b)(1)(i) and (ii) of this section.
(2) Book entry system —(i) In general. An obligation will be considered transferable through a book entry system, including a dematerialized book entry system, if ownership of the obligation or an interest in the obligation is required to be recorded in an electronic or physical register maintained by the issuer of the obligation (or its agent) or by a clearing organization (as defined in paragraph (b)(3) of this section).
(ii) Book entry system maintained by clearing organization that effectively immobilizes a bearer form obligation. An obligation represented by one or more physical certificates in bearer form will be considered to be in registered form if the physical certificates are effectively immobilized. A physical certificate is effectively immobilized only if—
(A) The physical certificate is issued to and held by a clearing organization (as defined in paragraph (b)(3) of this section) for the benefit of purchasers of interests in the obligation under arrangements that prohibit the transfer of the physical certificate except to a successor clearing organization subject to terms that effectively immobilize the physical certificate, as provided in paragraph (b)(2)(ii) of this section, in the hands of the successor clearing organization; and
(B) Ownership of the obligation or an interest in the obligation is transferable only through a book entry system (as described in paragraph (b)(2)(i) of this section) maintained by the clearing organization (as defined in paragraph (b)(3) of this section).
(3) Definition of clearing organization. For purposes of paragraph (b) of this section, clearing organization means an entity that is in the business of holding obligations for or reflecting the ownership interests of member organizations and transferring obligations among such member organizations by credit or debit to the account of a member organization without the necessity of physical delivery of the obligation.
(4) Temporal limitations on registered form —(i) In general. Except as provided in paragraphs (b)(4)(ii) and (iii) of this section, an obligation is not considered to be in registered form as of a particular time if the obligation may be transferred at that time or at a time or times on or before the maturity of the obligation by any means not described in paragraph (b)(1) of this section.
(ii) Events that permit issuance of physical certificates in bearer form —(A) In general. An obligation transferrable through a dematerialized book entry system is not in bearer form pursuant to paragraph (b)(4)(i) of this section solely because a holder of the obligation (or an interest therein) has a right to obtain a physical certificate in bearer form upon the occurrence of one or both of the following events—
( 1 ) A termination of business without a successor by the clearing organization that maintains the book entry system; or
( 2 ) The issuance of physical securities at the issuer's request upon a change in tax law that would be adverse to the issuer but for the issuance of physical securities in bearer form.
(B) Treatment upon issuance of physical certificate in bearer form. Upon the occurrence of one or both of the events described in paragraph (b)(4)(ii)(A) of this section, any obligation with respect to which a holder, or a group of holders acting collectively, may obtain a physical certificate in bearer form will no longer be in registered form, regardless of whether a physical certificate in bearer form has actually been issued.
(iii) Obligations in registered form until maturity. An obligation that as of a particular time is not considered to be in registered form because the obligation may be transferred at a time or times before the maturity of the obligation by a means not described in paragraph (b)(1) of this section and that during the period beginning at a later time and ending at maturity may be transferred only by a means described in paragraph (b)(1) of this section is considered to be in registered form during the period beginning at that later time.
(5) Examples. The application of paragraph (b) of this section may be illustrated by the following examples:
Example 1.
X issues an obligation that is a registration-required obligation as described in paragraph (a)(2)(i) of this section. At issuance, X issues the obligation in the purchaser's name evidencing the purchaser's ownership of the principal and interest under the obligation. The purchaser may transfer the obligation only by surrendering the obligation to X and by X issuing a new instrument to the new holder. X's obligation is issued in registered form under paragraph (b)(1) of this section.
Example 2.
Corporation A issues US$500 million of debt (the Note) evidenced by a physical certificate that is registered in the name of ABC, a clearing organization (as defined in paragraph (b)(3) of this section). Under the terms of the Note, Corporation A must maintain an electronic register identifying the owners of interests in the Note, and a transfer of the right to receive either principal or any stated interest on such ownership interests may be effected only through a change to the electronic register. Pursuant to an agreement with Corporation A, ABC takes custody of the physical certificate evidencing the Note and receives all principal and interest on the Note from Corporation A. Independently of its agreement with Corporation A, ABC maintains electronic records of its members' ownership interests in the Note and distributes principal and interest to members' accounts in accordance with those interests. ABC's members, in turn, maintain electronic records of their customers' ownership interests in the Note and similarly distribute principal and interest to their customers' accounts. Corporation A's electronic register identifies ABC as the sole owner of the Note. Corporation A does not record transfers of ownership interests in the Note to or among ABC's members, and ABC does not record transfers of ownership interests in the Note to or among its members' customers. Corporation A's electronic register is a book entry system as described in paragraph (b)(2)(i) of this section, and the Note is in registered form under paragraph (b)(1) of this section.
Example 3.
The facts are the same as in Example 2 of paragraph (b)(5) of this section, except that, instead of maintaining an electronic register, Corporation A issues a global bearer certificate (Certificate) to ABC pursuant to an agreement that prohibits the transfer of Certificate except to a successor clearing organization subject to terms that effectively immobilize Certificate, as provided in paragraph (b)(2)(ii) of this section, in the hands of the successor clearing organization. Further, holders of interests in Certificate may only obtain physical bearer certificates upon cessation of ABC's operations without a successor or, at Corporation A's request, upon a change in tax law that would be adverse to Corporation A but for the issuance of physical bearer certificates. Because ownership of interests in Certificate may be transferred only through a dematerialized book entry system maintained by ABC, and because the circumstances under which definitive bearer certificates may be issued to holders of interests in Certificate are limited to the circumstances described in paragraph (b)(4)(ii)(A) of this section, Certificate is an immobilized bearer form obligation described in paragraph (b)(2)(ii) of this section and is accordingly in registered form under paragraph (b)(2)(ii) of this section.
Example 4.
The facts are the same as in Example 3 of paragraph (b)(5) of this section, except that purchasers of interests in Certificate have the right to obtain definitive bearer certificates upon request at any time until maturity of Certificate. Because the circumstances under which definitive bearer obligations may be issued to holders of interests in Certificate are not limited to the circumstances described in paragraph (b)(4)(ii)(A) of this section, Certificate is not considered to be issued in registered form under paragraph (b)(4)(i) of this section.
Example 5.
Bank makes a loan to borrower secured by real property (Loan). Participations in Loan are traded on an established market. The participations are participation interests described in paragraph (a)(3)(ii) of this section and are accordingly registration-required obligations described in paragraph (a)(2)(i) of this section. Bank remains the registered owner of Loan and maintains an electronic book entry system that identifies participants. Participation interests may be transferred only by surrender of the old participation interest and reissuance of the participation interest in the name of the new participant, or by transfer of the participation interest from the name of the old participant to the name of the new participant in the book entry system of Bank. Bank's book entry system is described in paragraph (b)(2)(i) of this section, and, accordingly, under paragraph (b)(1)(iii) of this section, the participation interests are in registered form.
(6) Applicability date. Paragraph (b) of this section applies to obligations issued after March 18, 2012. Taxpayers may apply the rules in section 3 of Notice 2012-20, 2012-13 IRB 574, for obligations issued prior to the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register . For obligations issued on or before March 18, 2012, see § 5f.103-1 of this chapter.
(c) * * *
(3) * * *
(iii) Applicability to obligations issued after March 18, 2012. For purposes of section 163(f), paragraph (c) of this section does not apply to obligations issued after March 18, 2012. However, for purposes of determining whether an obligation is described in section 4701(b)(1)(B) or whether the exception in section 6049 from information reporting of interest or original discount with respect to obligations that have an original term of 183 days or less applies, paragraph (c) of this section continues to apply to obligations issued after March 18, 2012. See §§ 1.4701-1(b)(3) and 1.6049-5(b)(10).