Treasury and IRS Publish Proposed Tax Regulations Affecting Debt Exchanges and Restructurings

Proposed regulations interpreting the definition of “traded on an established securities market” were published on January 6, 2011. The proposed regulations are likely to cause many more debt instruments (in particular loans) to be treated as publicly traded for tax purposes than under current law. This will make it more likely that U.S. issuers of relatively illiquid debt trading at less than par will recognize “cancellation of debt” income on an exchange or restructuring of that debt. Under the proposed regulations, secondary market investors will be less likely to recognize uneconomic gain such transaction.