FI-59-91 (Final) Debt Instructions With Original Issue Discount; Contingent Payments; Anti-Abuse Rule

Federal Register / VoI. 61, No. 116 / Friday. June 14, 1996 / Rules and Regulations
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(21 U.S.C. 360b(c)(Z)@J(iii)).
his
appruval does not qualify formarketing
exclusivity because reports of new
Food and Drug Administration
clfnjlcaI or field invesdgations (other
than bloequlvalmce or residue studies)
21 CFR Part 558
and. in the case of food producing!
animals. human foad s&ty s t u d k
New Animal Drugs For Use In Animal
(other than bloequivalence or
Feeds; Yirginiamycin
studies)essential to the approval and
AI;ENcY: Food and Drug Administration, conducted or spomred by the
applicant were not required.
HHS.

D E P A R ~ E OF
N ~HEALTH AND
HUMAN SERVICES

ACTION: Final rule.
SUMMARY: The Food and Drug

Administratdon FDA)Is amending the
anlmal drug regulations to reflect
approval of a supplemental new animal
drug application (NADA) filed by PDzcr
Inc. The supplement provides for use of

a 30% virglniamycln forrnulatlon of a
Type A medicated artlcle to be used for
the manufacture of Type C medicated
feeds for cattle fed I n coMinement for
slaughter.
EFFECTIVE D A E : June 14. 1996.
FOR FUR-

I ~ ~ F O R ~
CONTACT:
~ A T ~

Russell G. Arnold, Center for Veterinary
Medicine &FV- I 42), Food arhd Drug
Administraffon. 7500 Standish Pl..
Rockvflle, MD 20855,301-594-1674.
SUPPLUENTARY INFORMATION: Pfizer hc.,
235 East 42d St., New York. NY 10017,
filed a supplement to NADA 140-998
which provided for use or a 30%
virginimych Type A medicated article
formulation to be used in a micrw
ingredient production process Tor the
preparation of Type C medicat4 feeds
for cattle fed in confinement for
slaughter. The Type C medicated feed Is
fed at 1I to 16 grams per ton (g/t) for
improved feed emciency. 13.5 to 16 g/
t for reduction of incidence of llver
abscesses, aad 16 to 22.5 g/t for
. increased rate of weight gain. The feed
is not for animals intended for breeding.
The supplement is approved as of May
3,1996, and the regulationr; are
amend4 in 21 CFR 558.635@) to reflect
the appmval.
Approval of this supplement does not
require submirvion of new safety or
effectiveness data. The supplement
provides for use of an additional level
of Type A medicated article to make a
Type Cmedlcated feed fed at previously
appruved levels and for previously
approved conditions of use.
The agency has detwnlined under 2 1
CFR 25.24 (d)(1)(ili) that this action is of
a type that does not individually or
cumulatively have ~ signifjcant effect on
the human environmenL Therefore.
neither an envitonrne~ltalassessment
nor an environmental impact statement
is required.

Under section 5 12 (c)(2) p)(iii) of the
Federal Food, Drug,and Cosmetic Act

30I33

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that treat a debt Ihstrurnent and a
related hedge as an integrated
traasaction In addition. thf s document
contains amendments to the original
Issue discount regulations, and f i ~
the anti-abuse rule relatine to hose

regulatiom. The final regu\atiorus in this
d-mt
p r d e needed pidance lo
holders and issuers of contineent
payment debt instruments.
W4TES: Except as noted below. the
regulations
are effec!ive August 13,
List of Subjects in 21 CFR Part 558
1996. The amendments to Q 1 .I2754
Adma1 drugs. Animal feeds.
are effective June14, 1896, except for
Therefore, under the Federal Food.
P ~ = w - P ~(a1 (6).(bI(21, m d (c)(l).
Drug, and Cosmetic Act and under
which are effective August 13,1996.
authority delegated to the Cornmlssionr The removal of 5 1.483-2TIs aective
of Food and Drugs and redelegated to
June 14. 1996. The removal of 1.1275the Center for Veterinary Mediche, 21
2T is effective August 13, 1996.
CFR part 558 is amended as foltaws:
For dates of apphcability of these
regulations. see Effective Dates under
PART 558-NEW ANIMAL DRUGS FOR SUPPEMENTARY INFORMATION.
USE IM ANIMAL FEEDS
FOR NKTtlER INFMIkUnON CONTACC
C~nccrnlngthe regulations (other than
I. The authority cltatlon for 2 1 CFR
9 1.1275-6),W f l W E.Blanchard. (202)
part 558 conthues to read as follows:
622-3950. or Jefftey W. Maddrey, (202)
AuthorIry: Secs. 5 12.701 of the Federal
622-3940: Or
5 1.1275-6,
Food,Drug and CosmeIk Act (21 U.S.C.
Michael S.Novcy, (202) 622-3900 (not
360b. 371).
toll-Free numhers).

5 558.635 (Amended]
2. Section 558.635 Vi'glniamydn Is

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SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act
amended in paragraph (b) (I) by
The collections of information
removing "to 000069" and by adding in
its place "used as in paragraph (0 of this contdned in thew final regulations have
been reviewed and approved by the
section; and 30 percent activity (136.2
grams per pound) Tor the manufacture of Office of Management and Budget in
Type C medicated feed for cattle used as accordance with the Paperwork
Reduction Act (44 U.S.C. 3507)under
in paragraph [t7{3);to 000069".
control number 1545-1450. Responses
Dated: June 7. 1996.
to these coiiections of information are
Andrew I. Beaulieau,
required to determine a taxpayer's
Deputy Director, OAlce ofNewAnimal Drug
interest income or deductions on a
Eualuatlm. Center for V e t e r i n qMedicine.
contingent payment debt instrument.
FR Doc. 96- 15202 Filed 6-13-96; 8:45 am]
An agency may not conduct or
BlLLlPlG CODE 41-14
sponsor. and a &son Is not requird to
respond to, a collection of haformatlion
uniess the colleaton of information
DEPARTMENTOFTHETREASURY
Internal Revenue Service
26 CFR Parts 1 and 602

Debt Instruments With Original Issue
Discount; Contingent Payments; AntiAbuse Rule
AGENCY: Internal Revenue

Treasury.
Acnotd: Final regulations.

Servlce (iRS),

displays a valid control number.
The estimated annual burden per
respondent/rmordkeeper varies from .3
houn to .5hours, depending on
individual circumstances, with an
estimated average of .47 hours.
Comrnenb concerning the accuracy af
this burden estimate and suggestiom for
reducing this burden should be sent to
the Internal Revenue Service, Attn: RS
Reports Clearance Officer, T:FP,
Washington, DC 20224, and to the
Omce of Management and Budgel, Attn:
Desk Officer for the Department af the
Treasury, OMce of Information and

Regulatory Affairs. Washington, DC
This document contains final 20503.
Books or records relating to the
regulations relating to the tax treatment
ofdebt instruments that provide for one collections of information must be
retained as long as their contents may
or more conllngent payments. T h i s
document also contains Anal regulations become material in the administration
SUMMARY:

b

30134

.

Federal Register / Vol. 61, No. 116 / Friday, June 14, 1996 / Rules and Regulations

of any h t e r n a l revenue law. Generally,
tax returns and tax return information
are confidential,as required by 26
U.S.C. 6103.

Explanation of Provisions
Debt
Sec'on
Instruments
1'1275-4 Con*ent

A.
Bond Method
. . Noncontineent
"
Under the noncontingent bond
in the proposed regulauam, a
Section 127S(d) of the Internal
taxpayer computes interest accruals on
Revenue Code (Code) g r a b the
I contingent payment debt instrument
Secretaty the authority to presaibe
as ofthe
setmg a payment
reguhtidns under the original issue
discount (OID) pmvkians of the Code
date and
theDI'
to
(sections 163 (e) and 12 7 1 rhFough 12751, the payment
The payment
of 'I1 lhed payments
including regulations relating to debt
instruments that provide for contingent On the deb' instrument and a projected
amount for each 'Ontingent payment
paymenU'On Februuy 2' 1994r
For market-baed contingencies (i.c..
f m l OID regulations in tbe
c"ntiJ'gende'
for which ~ d c q"Qtes
e
are
FederalRe@ster (59 4798)' However' readily available), the projected amount
Ihe
DI' regulatloM did
is the f a m r d price of the contingency.
rules for contingent payment debt
For other contingencies, the issuer Fust
imtruments.
determines a reasonable yield for the
debt Instrument and then sets projeEted
On December 16, 1994, the IRS
amounts equal to the relative
published a notice of proposed
paymen&on the contingencies so that
rubmaldng In the Federal R@@ster(59
the payment schdule produces the
FR 62884) relattng to the tax treaunent
ofdebt insmments that provide for one reasonable yield. These rules were
designed to produce a yield similar to
or more contingent payments. The
the yield the issuer would obtain on a
notice also contained proposed
fmed rate debt instrumentamendments to the regulations under
Commentators suggesled that the
sections 483 (relating to unstated
interest),1001 (relatLng to the amount
regu1ati0ns
be
they
lor
the same basic
realized on a sale, exchange, at other
disposition of prope~fy),1 2 72 (rebuq
to the accrual of OID), 1274 (relating to
suggestedthat forward
debt instruments issued for nonpubUcly price quotes
be variable
or
traded property)*and
lc)
manipulable and that taxpayers will set
to OID information reporting
omre appropriate payment schedules If
requirements), and to 5 1 275-5
they first determine yield and then set
(relating to variable rate debt
the payment schedule to f i t the field.
inst~ments)).
In addjtion. the notice
The final regulatlom adopt these
contained proposed regulations relatiflg suggestions and generally conform the
to the integration of a contingent
treatment of debt instruments that
payment or variable rate debt
provide for either market-based or nonmarket-bawd contingent payments.
instrument with a related hedge. The
Thus, for any cantingent payment debt
notice withdrew the proposed
instrument subject to the noncontingent
regulations relating to contingent
bond method, a taxpayer first
payment debt instruments that were
determines the y d on the instrument
previously published in the Federal
Register on April 8, 1986 (5 1 FR 120871. and then sets the Payment schedule to
fit the yield. The yield is determined by
and February 28, 1991 (56 FR 8308).
the yield at which the issuer would
On March 16,1995,the IRS held a
issue a fixed rate debt instrument with
public hearing on the proposed
terms and conditions similar to the
regulations. In addition, the 1RS
contingent payment debt instrument
r*eiveda numberof
comments (the comparable yield). Relevant terms
on the proposed regulations The
and conditions include the level o i
proposed regdatlons, with certain
subordination, term, timing of
changes to respond to comments, are
payments+and general market
adopted as h a 1 regulations. In addition conditions. For example, if a hedge i s
available such that the issuer or holder
certain clarifying and conforming
amendments are made to the OlD
could integrate the debt instrument and
the hedge into a synthetic Rxed-rate
regulations that were published in the
debt instrument under the rules of
Federal Register on February 2, 1994.
5 1 .I 275-6. the comparable yield is the
he comments and significant changes
yield that the synthetic h e d - r a t e debt
are discussed below.
instrumentwouldhave.Ifa§11275-6
hedge (or the substantial equivalent) is
---

Batkgrwnd

*

not available. but similar Cmd rate debt
instrumentr of the issuer trade at a price
that reflects a spread above a benchmark
rate, the comparable yield is the sum of
the value of the benchmaik rate on the
issue date and the spread. In all cases,
the yield must be a reasonab1e
yield
the issuer and may not bc IePs than the

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determined, the payments&edule k set
to produce thecomparab]egeld,
final regulations retain
general
approach of the propastd regulations in
determining the payment schedule.
Thus. for market-bawd payments, the
projcctsd mynew I. fornard PrlCe
of
hepayment. F~~non-market-basd
paymanu,
pro,prc
prymcnl
or
pymmt as of
th,ksue date.
Commentators were concerned that a
taxpayer could overstate the yield on a
contingent payment debt b m m e n t
and, herefore, claim eyems iflterest
deductions during the term of the
imtrument. They were particularly
concerned about a long-tdebt
i m h m a t that has non-m&et-based
payments because the taxpayer's
determlnatlob would be hard to verify
and
excess interest dedductlons
would not be recaptured for a long time.
The flnal regulations address this
concern by providing that the
comparable yield for a debt instrument
is presumed to be the Am i f the
instrument provides for a non-markekbased payment and is part of an issue
that is marketed or sold h substantla)
part to tax-exempt investors 01other
investors for whom the treatment of the
debt instrument is not q e c t e d to have
a substantial effect on their U.S. tax
LiabiUty. A taxpayer may wercothis
presumption only with clear and
conmdng evidence that the
comparable yield for the debt
instrument should be a specific yield
that b higher than the M R . Appraisals
and other valuations of mnpubljcly
traded property cannot be used to
overcome the presumption, nor can
references to general market rates. An
issuer may, for example, overcome the
presumption by showing that recently
issued similar debt instruments ofthe
Issuer trade at a price that reflects a
specific yield.
One commentator suggested that the
use of the term projecled payment
schedule caused securities law
problems k c a u s e the Issuer could be
seen as making representations to the
holder about the expect~dpaylnents.
The comparable yield and projected
payment schedule determined under
theseregulationsarelortaxpu~poses
only and are not a s u r a n c e s by the

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