Sec. 1.1274-3 Potentially abusive situations defined.
(a) In general.
For purposes of section 1274, a potentially abusive situation means --
(1) A tax shelter (as defined in section 6662(d)(2)(C)(ii) ); or
(2) Any other situation involving
(i) A recent sales transaction;
(ii) Nonrecourse financing;
(iii) Financing with a term in excess of the useful life of the property; or
(iv) A debt instrument with clearly excessive interest.
(b) Operating rules
(1) Debt instrument exchanged for nonrecourse financing.
Nonrecourse financing does not include an exchange of a nonrecourse debt instrument for an outstanding recourse or nonrecourse debt instrument.
(2) Nonrecourse debt with substantial down payment.
Nonrecourse financing does not include a sale or exchange of a real property interest financed by a nonrecourse debt instrument if, in addition to the nonrecourse debt instrument, the purchaser makes a down payment in money that equals or exceeds 20 percent of the total stated purchase price of the real property interest. For purposes of the preceding sentence, a real property interest means any interest, other than an interest solely as a creditor, in real property.
(3) Clearly excessive interest.
Interest on a debt instrument is clearly excessive if the interest, in light of the terms of the debt instrument and the creditworthiness of the borrower, is clearly greater than the arm's length amount of interest that would have been charged in a cash lending transaction between the same two parties.
(4) Debt-for-debt exchange
(i) Rule.
A debt instrument issued in a debt-for-debt exchange, including a deemed exchange under § 1.1001-3, will not be treated as the subject of a recent sales transaction for purposes of section 1274(b)(3)(B)(ii)(I) even if the debt instrument exchanged for the newly issued debt instrument was recently acquired prior to the exchange. Therefore, the issue price of the debt instrument will not be determined under section 1274(b)(3). However, if the debt instrument or the property for which the debt instrument is issued is publicly traded within the meaning of § 1.1273-2(f), the rules of § 1.1273-2 will apply to determine the issue price of the debt instrument.
(ii) Effective/applicability date.
Paragraph (b)(4)(i) of this section applies to a debt instrument issued on or after November 12, 2012.
(c) Other situations to be specified by commissioner.
The Commissioner may designate in the Internal Revenue Bulletin situations that, although described in paragraph (a)(2) of this section, will not be treated as potentially abusive because they do not have the effect of significantly misstating basis or amount realized (see section 601.601(d)(2)(ii) of this chapter).
(d) Consistency rule.
The issuer's determination that the debt instrument is or is not issued in a potentially abusive situation is binding on all holders of the debt instrument. However, the issuer's determination is not binding on a holder who explicitly discloses a position that is inconsistent with the issuer's determination. Unless otherwise prescribed by the Commissioner, the disclosure must be made on a statement attached to the holder's timely filed Federal income tax return for the taxable year that includes the acquisition date of the debt instrument. See section 1.1275-2(e) for rules relating to the issuer's obligation to disclose certain information to holders.
[T.D. 8517 , 59 FR 4799-4831, Feb. 2, 1994, as amended by T.D. 9599 , 77 FR 56333-56339, Sept. 13, 2012.]
