Deloitte & Touche Sees Ambiguity In OID Regulations.

In comments on the proposed original issue discount (OID) regulations, Edward A. Sair of Deloitte & Touche, Washington, has suggested that the Service clarify section 1.1275-4(c)(4)(ii) regarding nonquotable contingent payments accompanied by a payment of adequate stated interest. It is ambiguous, Sair says, whether a contingent payment that provides for a calculation of principal at a yield in excess of the test rate qualifies as a payment accompanied by adequate stated interest. He also asserts that contingent amounts on materially modified debt instruments that have an issue price less than stated principal should be limited to stated principal on the amounts of nonquotable contingent payments recharacterized under proposed reg. section 1.1275-4(c)(4)(ii). Along with his comments, Sair has submitted a computation under the Black-Scholes Model for valuing put options.

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May 17, 1995

Mr. Andrew Kittler

Dear Andy:

As per out telephone conversation, I have attached a computation under the Black-Scholes Model performed by Jim Calvin of our Boston office. His number is 617-261-8365 and I left a message that you may call. The Black-Scholes Model gives a different value for a put option than spot price compounded at the AFR under Prop. Reg. section 1.1275-4(b)(4)(i)(D).

In addition, I suggest that you clarify Prop. Reg. section 1.1275-4(c)(4)(ii) regarding nonquotable contingent payments accompanied by a payment of adequate stated interest. It is ambiguous whether a contingent payment which provides for a calculation of principal under Prop. Reg. section 1.1275-4(c)(ii) at a yield in excess of the test rate qualifies as a payment accompanied by adequate stated interest.

Also, contingent amounts on materially modified debt instruments within the meaning of section 1001 that have an issue price less than state principal should be limited to stated principal on the amounts of nonquotable contingent payments recharacterized under Reg. section 1.1275-4(c)(4)(ii). If you have any questions, please call me at 202- 879-4931.

                                   Sincerely,

                                   Edward A. Sair

           Black-Scholes Model -- European-style Exercise

(User Inputs in Red)       Nondiv Paying   Div Paying   Div Paying

Strike price (K)               100.00         100.00         100.00

Applicable Federal

Put Option Values:

Strike price (K)               100.00         100.00         100.00

d (continuous dividend