April 27, 2018

By Electronic Delivery

Mr. Tom West
Tax Legislative Counsel
U.S. Department of the Treasury
1500 Pennsylvania Ave., NW
Washington, DC 20220

Mr. William Paul
Acting Chief Counsel and Deputy Chief Counsel (Technical)
Internal Revenue Service
1111 Constitution Ave., NW
Washington, DC 20224

RE: Request for Section 451(b) guidance regarding certain debt instruments with discount

Dear Mr. West and Mr. Paul,

Section 13221 of P.L. 115-97 (commonly known as the Tax Cuts and Jobs Act of 2017, or the “TCJA”) enacted new rules under Section 451(b) of the Internal Revenue Code1 governing the taxable year of inclusion of gross income for taxpayers that prepare an applicable financial statement under generally accepted accounting principles (“GAAP”). The Securities Industry and Financial Markets Association’s Asset Management Group (“SIFMA AMG”) 2 represents banks, broker dealers, and asset managers whose clients may be affected by these new rules.

New Section 451(b) creates a number of questions for accrual-method taxpayers investing in bonds and other similar debt instruments. As explained below, there is disagreement among practitioners about the interaction of Section 451(b) and certain rules of Part V of Subchapter P of the Code, leaving a number of questions concerning implementation. Members’ most significant and time-sensitive issues relate to market discount and original issue discount (“OID”) (collectively,“discount”), and we are writing to urge you to clarify in the near term that new Section 451(b) does not apply to (i) market discount or (ii) OID (if such OID is treated as discount for GAAP3).

If that is not possible in the near term, then, in the interim, we would strongly encourage you to release transitional guidance delaying implementation of new Section 451(b) in the case of bonds and other debt instruments that have market discount and/or OID (if such OID is treated as discount for GAAP) until guidance resolving these uncertainties can be provided. Specifically, we would suggest a delay to the first taxable year beginning on or after a date that is at least 12 months after the date guidance resolving these uncertainties is finalized (i.e., issuance of final regulations).

Background

Section 451 states that an accrual method taxpayer include items of income when all the events have occurred which fix the right to receive such income and the amount thereof can be determined with reasonable accuracy (the “all events test”).4 Under new Section 451(b), for an accrual method taxpayer, the all events test is treated as met not later than the taxable year in which such income is taken into account as revenue in an applicable financial statement. Accrual method taxpayers with an applicable financial statement are directed to apply the income recognition rules under Section 451(b) before applying the special rules under Part V of Subchapter P (Sections 1271-1288). 5 These changes to Section 451 have created a number of questions and uncertainties for our members concerning the interplay between the new Section 451(b) and the existing tax rules in Part V of Subchapter P relating to discount on bonds and other debt instruments.

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1 Except as otherwise expressly provided herein, all section references herein are to the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder.

2 SIFMA AMG brings the asset management community together to provide views on U.S. and global policy and to create industry best practices. SIFMA AMG’s members represent U.S. and global asset management firms whose combined assets under management exceed $39 trillion. The clients of SIFMA AMG member firms include, among others, tens of millions of individual investors, registered investment companies, endowments, public and private pension funds, UCITS and private funds such as hedge funds and private equity funds. For more information, visit http://www.sifma.org/amg.

3 We note that GAAP does not distinguish between market discount and OID. Rather, both types are labeled as “discount” for GAAP, which is accrued over the term of a bond or other debt instrument.

4 See new Sec. 451(b)(1)(C) (adding definition of all events test to the Code); Treas. Reg. Sec. 1.451-1 (articulating the all events test under prior law).

5 Sec. 451(b)(2). One reason for the reference to Part V of Chapter P was to make clear that Congress intended to reverse the result in Capital One Financial Corp. v. Comm’r, 133 T.C. 136 (2009) a case that is also cited in the Conference Report on the TCJA. H.R. Conf. Rep. No. 115-466, n.870 (the “Conference Report”) (available at https://www.congress.gov/115/crpt/hrpt466/CRPT-115hrpt466.pdf )