Bright Lines In Debt Modification Regs Should Be Safe Harbors, Chicago Bar Says.

Susan J. Daley has submitted comments of the Chicago Bar

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February 11, 1993

Commissioner of the Internal Revenue Service

Re: Comments on the Proposed Regulation Section 1.1001-3 Relating to

Dear Commissioner:

On behalf of the Federal Taxation Committee of the Chicago Bar Association (the "CBA"), I am submitting the enclosed comments to the Proposed Regulation relating to modifications of debt instruments that was published in the Federal Register on December 2, 1992. These comments are intended to address the impact of the Proposed Regulation on its general application to debt instruments.

I ask that Steven D. Conlon on behalf of the CBA be scheduled to present oral comments at the public hearing on the Proposed Regulation scheduled for February 17, 1993. If you have any questions regarding these comments, please do not hesitate to contact Lynn E. Cagney (312) 822-2968.

Yours truly,

Susan J. Daley

cc: Harry L. Gutman, Esq., Chief of Staff

* * *

REPORT ON PROPOSED REGULATION

The following comments represent the view of the Federal Taxation Committee of the Chicago Bar Association (the "CBA"). The comments were approved by Division B (Partnerships, Real Estate and Other Tax Sheltered Investments), Division C (Corporation, Tax Accounting and General Income Tax Problems) and the Executive Committee of the Federal Taxation Committee. Primary drafting responsibility for this report was exercised by Mark D. Anderson, Douglas J. Antonio, Lynn E. Cagney and Steven D. Conlon. Substantial comments and suggestions were received from, among others, Susan J. Daley, Jeffrey L. Kwall, Charles R. Levun and Richard M. Lipton. The contact person for this report is Lynn E. Cagney (312) 822-2968.

I. GENERAL COMMENTS

In 1991, the United States Supreme Court decided Cottage Savings Association v. Commissioner, 111 S. Ct. 1503 (1991) (Cottage) holding that an exchange between holders of participation certificates in mortgage pools was a realization event under Section 1001. The Court held that the transactions satisfied the material difference test of Treas. Reg. Section 1.1001-1. The underlying mortgages received were issued by different mortgagors and were secured by different property than the underlying mortgages delivered. In other words, the holders received property in the exchange that embodied legally distinct entitlements.

Various commentators have discussed whether the Court's decision in Cottage is of significance in determining whether a modification of a debt instrument constitutes a realization event. /1/ A realization event with respect to a modified debt instrument is important because it may result in the recognition of cancellation of indebtedness income, original issue discount, the recognition of income under the installment sale rules, a deemed distribution to partners in a partnership, the application of the high yield discount limitations on interest expense deductibility, the loss of tax- exemption with respect to tax-exempt obligations and other material federal income tax consequences. The state of the real estate market, the thrift industry and the economy in general during the past several years has resulted in modifications to the terms of a significant number of debt instruments. Accordingly, the determination of whether and when a realization event may have occurred with respect to such debt instruments is critical.

On December 1, 1992, the U.S. Treasury Department released Proposed Regulation 1.1001-3 (the "Proposed Regulation") addressing whether the direct or indirect modification of a debt instrument results in a realization event (i.e., a "deemed exchange" of the debt instrument prior to the modification for a "new" modified debt instrument). The preamble to the Proposed Regulation (the "Preamble") states that the Proposed Regulation was issued "[i]n response to the issues raised by the Cottage decision, and in an effort to provide certainty." /2/

While the CBA welcomes clarification and guidance from the Internal Revenue Service (the "Service") in this area, the CBA finds the Proposed Regulation, in general, overly restrictive and incapable of providing the flexibility needed to test fairly for material modifications of a wide variety of debt instruments in various circumstances. /3/ Moreover, the Proposed Regulation is unclear in a number of respects, making the potential impact of the Proposed Regulation uncertain.

As indicated above, the Preamble indicates that the Proposed Regulation is in part being issued to respond to the issues raised by Cottage. However, it is the CBA's belief that in many respects the standards set forth in the Proposed Regulation for determining whether a modification of a debt instrument constitutes a realization event are significantly stricter than under existing law (the cases, published revenue rulings and private letter rulings addressing the tax consequences associated with various types of debt modifications). /4/ The CBA believes that there is simply no mandate in Cottage that requires the adoption of the stricter standards for debt modifications between a holder and an issuer contained in the Proposed Regulation.

The Service notes in the Preamble that even if a modification results in a deemed exchange, the issuer and holder may not realize gain or loss depending upon the application of Section 108 (the exceptions to discharge of indebtedness income), Sections 1273 and 1274 (the original issue discount provisions), and other nonrecognition provisions of the Code. Thus, the adoption of the stricter standards set forth in the Proposed Regulation will increase taxpayer and Service compliance costs by increasing the likelihood that the modification of a debt instrument will require the parties and the Service to analyze fully the impact of deemed exchanges under a variety of other provisions of the Internal Revenue Code. In addition to the increased compliance costs associated with the standards contained in the Proposed Regulation, the stricter standards and their potential tax impact may prevent parties from restructuring debt instruments in the most economically appropriate fashion.

The CBA believes that the restructuring of debt instruments should focus primarily on minimizing the extent to which the creditor incurs a loss of principal, return and cash flow while fostering the continued viability of the debtor for general economic and social policy reasons. Taxpayers may be prevented from utilizing appropriate solutions in light of tax consequences triggered if the modifications of such debt instruments constitute realization events. Tax policy should foster rather than hinder economically sound restructurings of debt instruments especially in troubled debt situations. Accordingly, the CBA recommends that portions of the Proposed Regulation be modified in light of these concerns.

II. SUMMARY OF SPECIFIC RECOMMENDATIONS

The CBA recommends that the final regulation:

A. provide a series of safe harbor rules consisting of the

B. delete the general rule that a change in the timing and/or

C. provide that the addition or alteration of credit

D. provide that a change in the nature of the debt from recourse

E. clarify that "contingent payment" and "variable rate payment"

F. expand the exception for unilateral waiver or exercise of a

G. clarify and recognize that (1) a temporary failure by a

H. retain the provision that multiple changes to a debt

I. revise Example 3 of paragraph (g) to be consistent with the

J. should not control the tax treatment of other types of

K. exempt modifications of a debt instrument that has been

L. provide guidance on its application, if any, to that portion

M. apply only to debt instruments issued after (rather than

iii. SPECIFIC COMMENTS

A. Prop. Reg. Section 1.1001-3(e) should be a "safe harbor"

Existing law relating to whether a modification of a debt instrument results in a realization event appears to be highly dependent upon the facts and circumstances present in a given case. /5/ Under the Proposed Regulation, however, the operating rules contained in paragraph (e) thereof for determining whether a modification constitutes a "significant modification" (and, therefore, a realization event), are a series of essentially rigid rules rather than a facts and circumstances based test. The CBA recognizes that, as a matter of tax policy, bright line tests are, in general, more administrable by both taxpayers and the Service than a facts and circumstances test. However, the bright line tests set out in the Proposed Regulation deviate from existing law to such an extent that additional tax policy concerns are created. /6/ These concerns outweigh the benefits derived from the use of the bright line tests. Accordingly, the CBA believes that the operating rules contained in paragraph (e) of the Proposed Regulation should function as a "safe harbor", rather than as a series of new bright line standards.

The CBA recommends that some of the tests set out in Proposed Regulation 1.1001-3(e) be listed as factors to be weighed in light of all other facts. In particular, the CBA recommends the following be used as criteria in a facts and circumstances test rather than a stand alone test: the extension of final maturity, /7/ the addition or alteration of a guarantee or credit enhancement on a nonrecourse instrument, /8/ the substitution of collateral securing a nonrecourse note, /9/ changes in the recourse nature of the debt, /10/ and changes in the types of payments -- fixed rate, variable rate, and contingent. /11/ Further, a safe harbor provision could incorporate Prop. Reg. 1.1001-3(e)(2)(ii) regarding extensions of the final maturity date to the lesser of five years or 50% of the original term of the instrument.

B. Prop. Reg. Section 1.1001-3(e)(2)(i): Delete the material

Proposed Regulation Section 1.1001-3(e)(2)(i) provides in part that "[a] change in the timing and/or amounts of payments is a significant modification if it materially defers payments due under an instrument." This provision appears overly restrictive, deviates from existing case law and rulings, /12/ and is not necessarily a valid indication that the parties economic interests in an obligation have been materially altered. The Service has issued a number of private letter rulings permitting the deferral of payments on a debt instrument provided that the debt instrument's yield and principal amount remain unaffected. /13/ In almost all debt restructurings, deferral of principal and interest payments for some period of time is likely.

Moreover, the "material deferral" standard is not clear. This lack of clarity is likely to result in uncertainty regarding whether or not a modification has triggered a realization event. This, in turn, will result in unnecessary administrative costs for both the Service and taxpayers.

The CBA, however, is aware that a taxpayer seeking to avoid the accrual of interest income under the original issue discount rules could initially enter into a debt instrument that had no original issue discount and later modify the instrument in a way that materially defers the payment of principal or interest. An anti-abuse rule should be adopted so that if a modification achieves a material deferral, a recognition event occurs only if one of the principal purposes of the modification was the avoidance of the accrual of interest income by the creditor. The rule should clearly state that, in the context of a bona fide work out, such a purpose, generally, would not be inferred.

C. Prop. Reg. Section 1.1001-3(e)(3)(iii): Change in a guarantee

Proposed Regulation Section 1.1001-3(e)(3)(iii) provides, in part, that "[t]he addition or material alteration of a guarantee or other form of credit enhancement on a nonrecourse instrument is a significant modification." Under existing law, it is believed that the substitution of a letter of credit guaranteeing a nonrecourse obligation, for example, is not considered to be a realization event. /14/ Thus, the Proposed Regulation in this respect is a departure from existing law. This provision may make sense economically, but is inconsistent with the reality of a market place where as a result of rating agency downgrades of credit enhancers, for example, letters of credit and other forms of credit enhancement securing debt instruments often have fluctuating values. The CBA recommends that the substitution of credit enhancements, whether guaranteeing recourse or nonrecourse obligations, not trigger a realization event. If the Service does not delete this test from the final regulation, the CBA recommends that this provision as it applies to nonrecourse debt be, at most, one of the factors considered in a facts and circumstances test. Further, in the event the test is not deleted in the final regulation, the CBA assumes that the addition or alteration of a guarantee on a recourse debt instrument generally would not be treated as a significant modification under the rule set forth in Prop. Reg. Section 1.1001- 3(e)(3)(iii).

D. Prop. Reg. Section 1.1001-3(e)(4)(iv): Change in the nature

Proposed Regulation Section 1.1001-3(e)(4)(iv) provides that a modification is significant if it changes a recourse debt instrument into a nonrecourse debt instrument (or vice versa). The CBA believes that, fundamentally, a change in the recourse nature of a debt instrument is merely a change in the collateral securing that instrument. Under existing law, the substitution of collateral on nonrecourse debt generally does not constitute a realization event. /15/ Therefore, in this respect, the Proposed Regulation appears to deviate from existing law. Moreover, the CBA understands that, in many real estate transactions, creditors are willing to release their rights of recourse with respect to debt instruments once collateral has reached a sufficient value. Under the Proposed Regulation this release would be considered a significant modification. The CBA questions if it is appropriate to treat such a release as a material modification. Hence, the CBA recommends that the final regulation treat a change in the recourse nature of an instrument as a substitution of collateral which should be regarded as one criterion in a facts and circumstances tests.

E. Prop. Reg. Section 1.1001-3(e)(4)(ii): Determination of

The Proposed Regulation sets out a test for substantial modification based on the characterization of an instrument's payments as fixed rate, variable rate or contingent. In particular, if an instrument changes its type of payment from one type of rate to another there is a deemed exchange. /16/ Recently published proposed regulations 1.1275-4 and 1.1275-5 define contingent payment and variable rate debt instrument respectively for purposes of the original issue discount ("OID") rules. It is logical to assume that Proposed Regulation 1.1001-3(e)(4)(ii) would incorporate these definitions. This has not been clarified, however. Moreover, these OID regulations have not been finalized as of the date of this report. Therefore, the CBA believes that it is necessary for the final regulations under 1.1001-3 to define the terms needed to apply those provisions and should adopt the definitions set out in the proposed OID provisions.

F. Prop. Reg. 1.1001-3(c)(2)(i)(A)(3): The definition of a

Pursuant to Proposed Regulation 1.1001-3(c)(2)(i)(A)(3), a party's exercise of a right under the instrument essentially results in a modification if it requires consideration, unless the amount of consideration is fixed on the issue date. Under the terms as stated, it would appear that a floating rate obligation converted to a fixed rate debt in accordance with the terms of the obligation and upon payment of a reasonable processing fee determined at the time of conversion (but which is not "fixed" on the issue date) would be a modification. This provision should be expanded to permit payment of reasonable fees incurred for the conversion even though the amount of the conversion fee is not fixed on the issue date provided the principal purpose of the payment is not to avoid the substantial modification provisions.

G. Prop. Reg. 1.1001-3(c)(2)(ii): Temporary failure exception

Proposed Regulation 1001-3(c)(2)(ii), which excludes a debtor's temporary failure to perform its obligation from classification as a modification, should be expanded. Parties, especially in troubled debt workout situations, should be afforded a reasonable amount of time to effect the best economic solution. Creditors generally waive their rights to acceleration only for the time needed to accomplish what is in their best financial interest. In many cases, the period of time needed to restructure an instrument and to begin payments may be from 2 to 5 years.

The Proposed Regulation seems to expose all temporary failures by the debtor to perform and waivers by creditor of rights to acceleration (other than "temporary" failures to perform and "temporary" waivers) to the significant modification tests. It is the CBA's belief that all defaults and waivers do not affect the yield of the instrument or reduce the amount of principal due under the instrument and, accordingly, should not be treated uniformly as modifications. Defaults relating to various covenants, for example, frequently are overlooked by lenders and most likely do not affect the yield of the instrument. In order to avoid analysis under the significant modification tests and the possible harsh tax consequences resulting from a deemed exchange, certain lenders may opt to exercise their rights of acceleration in default situations that they would have otherwise disregarded. Accordingly, the CBA recommends that temporary failures to perform and temporary waivers by creditors that do not significantly alter the economic interests of the parties in the instrument not be treated as modifications.

With respect to the timing of the modification, if the economic interests of the parties are significantly altered, the CBA believes that the temporary failure should only be considered a modification when an actual agreement is reached between the debtor and the creditor. While the parties are still actively negotiating, a modification should not be deemed to occur. If the "holding pattern", however, lasts for such a significant length of time that it would be reasonable to conclude that an agreement has informally been reached by the creditor and debtor for an indefinite indulgence, then such agreement should be implied. Otherwise the temporary failure and indulgence would not be considered a modification, even though the economic interests of the parties may be significantly altered.

H. Prop. Reg. Section 1.1001-3(f)(3)(i): Simultaneous changes

Proposed Regulation 1.1001-3(f)(3)(i) provides, in part, that "[m]ultiple changes to a debt instrument, none of which would be a significant modification under paragraph (e) of this [Regulation], do not collectively constitute a significant modification." The CBA commends the Service for the inclusion of this provision. Moreover, the CBA recommends that this rule be retained in final regulations that incorporate a facts and circumstances test. In particular, the CBA recommends that each change to an instrument be tested independently under the safe harbor provision as proposed by the CBA.

I. Prop. Reg. Section 1.1001-3(e)(2)(iii): Partial Prepayments

Proposed Regulation Section 1.1001-3(e)(2)(iii) generally provides that the prepayment of a portion of a debt instrument is not a significant modification ("partial prepayment rule"). However, the partial prepayment rule further provides that if the terms of the remaining portion of the debt instrument are altered in a way that would otherwise be a significant modification under the rules of paragraph (e), a significant modification will be deemed to have occurred. The CBA believes that testing the remaining portion of the debt rather than the entire debt is appropriate.

The CBA, however, is concerned because the partial prepayment rule cross references the other significant modification tests of the Proposed Regulation. In particular, the CBA is concerned about the change in yield rule of paragraph (e)(1)(ii). Example 3 of paragraph (g) which illustrates the change in yield rule does not take into account the remaining portion of the partial prepayment rule. Example 3 involves a debt instrument that provides for a payment at maturity of $100,000 and annual interest payments at the rate of 10%. The agreement by the issuer and the holder to reduce the amount due at maturity to $80,000 while retaining the 10% interest rate is a significant modification, according to Example 3, because the yield of the instrument after the modification, computed using the adjusted issue price of $100,000, was "significantly" altered. The CBA believes that the cancellation of $20,000 of principal should be viewed more appropriately as a deemed prepayment of principal by the debtor. The $80,000 of principal should be viewed as the remaining portion of the debt instrument which should be tested under the rules of paragraph (e). Further, the CBA believes that a taxpayer should not experience automatically both cancellation of indebtedness income and a realization event when the principal on a debt is forgiven. Accordingly, the CBA recommends that Example 3 of paragraph (g) be revised to be consistent with the partial prepayment rule or, in the alternative, that Example 3 be deleted.

J. Comments on the application of the Proposed Regulation to

The Service has invited comments on whether the Proposed Regulation should control the tax treatment of other types of transactions under other specific provisions. Uniformity of the criteria for material modification or deemed exchanges where practical would help toward achieving much needed simplification of the Code. However, simplification should be secondary to accomplishing a Code provision's given purpose. The general purpose of Section 453B, for example, is to require a taxpayer to report any deferred profits when those profits are realized, economically speaking, through a sale or exchange of an installment obligation. /17/ Existing case law and revenue rulings have established that deferral of payments and a 1% increase in interest rates, /18/ a reduction in the principal amount, /19/ a change in the obligor, /20/ and a change in the security for a note /21/ are not material modifications or deemed exchanges for purposes of Section 453B. Subjecting Section 453B modifications to the more stringent standards set out in the Proposed Regulation Section 1.1001-3 would not accomplish the goals of Section 453B. /22/ The CBA believes that the standards set out in the Proposed Regulation are overly restrictive for most provisions of the Code and should not control the tax treatment of other types of transactions.

K. Comments on alterations resulting from a change in a statute

The Service is considering to what extent alterations that occur as a result of a change in a statute or government regulation should not be viewed as modifications, whether or not the possibility of such change was addressed in the original instrument. It is the CBA's understanding that the Service does not classify an alteration to an instrument as a modification when the alteration occurred by operation of the terms of the instrument even if that alteration was triggered by the change in law. In addition, it is the CBA's belief that the Service does not intend a realization event to be triggered if the modification to an instrument arising from the change in law is not a significant modification as determined under the tests of Proposed Regulation 1.1001-3(e). If the debt instrument is altered as a result of a change in the law, however, the CBA recommends that the final regulation allow the parties to modify the instrument without tax consequences in order to put the parties back in the same economic positions that they had held before the instrument was altered by the change in law. The CBA believes, however, that the parties must be able to demonstrate that a direct relationship exists between the change in law and the parties' alteration to the instrument and that the principal purpose of such modification is not the avoidance of tax that would otherwise result from the treatment of such modification as a realization event.

L. Comments on the scope of the Proposed Regulation to other

As proposed, the regulations apply only to alterations of debt instruments by an issuer and a holder. The CBA believes that the Service should provide guidance on the application, if any, of this Regulation to that portion of a notional principal contract that is reclassified for all purposes of the Code under Proposed Regulation Section 1.446 as an "embedded loan".

M. Comments on the effective date of the final regulations

Final regulations will apply only to modifications made on or after the date that is 30 days after the publication of final regulations in the Federal Register. The CBA recommends that the final regulation apply only to debt instruments issued after the final regulation is promulgated. Instruments issued before the proposed effective date which establish the rights of the respective parties have been issued in reliance on the less stringent standards of existing case law and IRS rulings.

For example, a nonrecourse debt instrument issued before the publication of the final regulation may permit the issuer to substitute collateral if the value of the original collateral decreases, subject to the consent of the lender (which may be unreasonably withheld). Under existing law, the substitution of collateral pursuant to this provision would not appear to trigger a realization event. /23/ Based on the proposed effective date, the substitution of collateral pursuant to this provision which occurs after the effective date would trigger a realization event regardless of when the debt instrument was originally issued.

The CBA is concerned that many existing debt instruments may contain provisions that could result in "significant modifications" under the Proposed Regulation. As a matter of fairness, it appears inappropriate that the Proposed Regulation should potentially trigger realization events with respect to existing debt instruments. Therefore, the CBA recommends that the effective date for the final regulation reach only debt instruments issued after that date.

FOOTNOTES

/1/ See, e.g., Richard L. Bacon, S & L Loan Swaps at the Supreme Court: Ripple Effect, 49 Tax Notes 1121 (Dec. 3, 1990); Richard A. Nicholls, Cottage Savings: More S & L Problems, 45 Tax Law. 727 (1992);

/2/ 57 Fed. Reg. 57,034 (1992).

/3/ Although the CBA is suggesting significant changes in the Proposed Regulation, it believes that now that the Proposed Regulation has been issued that it cannot simply be withdrawn. The CBA believes, therefore, that it may be better to address directly the problems raised by the Proposed Regulation. The CBA further believes that the issuance and subsequent withdrawal of the Proposed Regulation could cause a significant disruption in commerce. Further, because of the short comment period provided by the Proposed Regulation, bar associations, including the CBA, have had difficulty responding as timely as possible with the most helpful comments. Furthermore, if the Proposed Regulation is revised substantially (as the CBA suggests), the CBA respectively requests that the Proposed Regulation be reissued in proposed form to allow further comments prior to its finalization.

/4/ See, e.g., Shafer v. United States, 204 F. Supp. 473 (S.D. Ohio 1962), aff'd per curiam, 312 F.2d 747 (6th Cir. 1963), cert denied, 373 U.S. 933 (1963) (10 year extension of maturity date held not to be a realization event); Motor Products Corp. v. Commissioner, 47 B.T.A. 983 (1942), aff'd per curiam, 142 F.2d 449 (6th Cir. 1944) (not a material change when maturity date extended, prepayment allowed, and interest could be paid in part with new bonds); Truman H. Newberry, 4 T.C.M. (CCH) 576 (1945) (no exchange where maturity was extended, interest rate was lowered and collateral added to defaulted note); Mutual Loan & Savings Co. v. Commissioner, 184 F.2d 161 (5th Cir. 1950) (no exchange where maturity date extended, interest rate lowered, sinking fund provision added to default note); West Missouri Power Co. v. Commissioner, 18 T.C. 105 (1952) (extension of maturity date, addition of prepayment privilege, change in revenue source, and addition of provision allowing interest to be paid by issuing new bonds bearing a lower interest rate held not to be a material change); C.M. Hall Lamp Co. v. United States, 97 F. Supp. 481 (D.C. Mich. 1951) (involuntary maturity date and interest change held not to be a material change); Gen. Couns. Mem. 22901 (Sept. 16, 1941) (extension of maturity date held not to be an exchange); Rev. Rul. 73-160, 1973-1 C.B. 365 (extension of maturity date and addition of subordination provision); Priv. Ltr. Rul. 8346104 (Aug. 18, 1983) (change in maturity date and change in collateral held not a material change); Priv. Ltr. Rul. 8504049 (Oct. 30, 1984) (parent assumed joint and several liability, held not a material change).

/5/ Cf., e.g., Priv. Ltr. Rul. 8813035 (Dec. 31, 1987) (change in obligor was not a material change); Priv. Ltr. Rul. 7925065 (March 22, 1979) (change in obligor and collateral held to be a material modification); West Missouri Power Co. v. Commissioner, 18 T.C. 105 (1952) (change in maturity date was not material); Watson v. Commissioner, 8 T.C. 569 (1947) (changes in interest rates and maturity dates held to be a material change).

/6/ The Committee believes that the strict standards may increase compliance costs for both the taxpayer and the Service and may hinder economically sound restructuring of troubled debt. See Text at page 3.

/7/ Prop. Treas. Reg. Sect. 1.1001-3(e)(2)(ii).

/8/ Prop. Treas. Reg. Sect. 1.1001-3(e)(3)(iii).

/9/ Prop. Treas. Reg. Sect. 1.1001-3(e)(3)(iv).

/10/ Prop. Treas. Reg. Sect. 1.1001-3(e)(3)(iv).

/11/ Prop. Treas. Reg. Sect. 1.1001-3(e)(4)(ii).

/12/ See, e.g., Truman H. Newberry, 4 T.C.M. (CCH) 576 (1945); Mutual Loan & Savings Co. v. Commissioner, 184 F2d 161 (5th Cir. 1950); City Bank Farmers Trust Co. v. Hoey, 52 F. Supp. 665 (S.D.N.Y. 1942), aff'd per curiam, 138 F.2d 1023 (2d. Cir. 1943).

/13/ See, e.g., Priv. Ltr. Rul. 9037009 (June 12, 1990); Priv. Ltr. Rul. 9043060 (Aug. 1, 1990); Priv. Ltr. Rul. 8935007 (May 15, 1989); Priv. Ltr. Rul. 8928049 (April 18, 1989); Priv. Ltr. Rul. 8920047 (Feb. 17, 1989); Priv. Ltr. Rul. 8907049 (Nov. 23, 1989); Priv. Ltr. Rul. 8848033 (Sept. 1, 1988); Priv. Ltr. Rul. 8804039 (Nov. 2, 1987); Priv. Ltr. Rul. 8753014 (Oct. 2, 1987); Priv. Ltr. Rul. 8731011 (May 1, 1987); Priv. Ltr. Rul. 8708017 (Nov. 21, 1986); Priv. Ltr. Rul. 8534064 (May 28, 1985).

/14/ Under existing law, the substitution of collateral on nonrecourse debt generally does not constitute a realization event. See, e.g., Rev. Rul. 77-416, 1977-2 C.B. 34, Priv. Ltr. Rul. 8346104 (Aug. 18, 1983).

/15/ See, e.g., West Missouri Power Co. v. Commissioner, 18 T.C. 105 (1952); Priv. Ltr. Rul. 8346104 (Aug. 18, 1983); Priv. Ltr. Rul 8753014 (Oct. 2, 1987); Priv. Ltr. Rul. 8907049 (Nov. 23, 1988).

/16/ Prop. Treas. Reg. 1.1001-3(e)(4)(ii).

/17/ Kutsunai v. Commissioner, 45 T.C.M. (CCH) 1179 (1983).

/18/ Rev. Rul. 68-419, 1968-2 C.B. 196, amplified by Rev. Rul. 72-570, 1972-2 C.B. 241.

/19/ Rev. Rul. 55-429, 1955-2 C.B. 252, amplified by Rev. Rul. 72-570, 1972-2 C.B. 241.

/20/ Rev. Rul. 82-122, 1982-1 C.B. 80; Rev. Rul. 75-457, 1975-2 C.B. 196, amplified by Rev. Rul. 82-122, 1982-1 C.B. 80; Rev. Rul. 61-215, 1961-2 C.B. 110.

/21/ Rev. Rul. 55-5, 1955-1 C.B. 331.

/22/ The Service has stated that the law established under Section 453B should not be used as precedent for purposes of applying Section 1001. Gen. Couns. Mem. 39225 (April 25, 1984).

/23/ See supra note 17.

END OF FOOTNOTES