The IRS concluded in a field attorney advice memorandum (FAA 20172901F
), drafted on July 1, 2016, but released on July 21, 2017, that a taxpayer could deduct the unamortized debt issuance costs related to its existing debt upon its exchange for new debt.
In the FAA, the taxpayer, a corporation, incurred debt issuance costs when it issued certain term loans. The taxpayer capitalized and amortized the loan costs over the term of the loans.
The loans were refinanced with new term loans. Some of the existing holders received new term loans for their existing loans, and a portion of the existing loans were repaid in cash from the proceeds of the new term loans. Approximately 51% of the new term loans were issued for money.
To the extent that the new term loans were exchanged for existing loans, the new term loans created a change in yield that constituted a significant modification under Treas. Reg. Sec. 1.1001-3.
The IRS concluded that all of the unamortized loan costs were deductible. Specifically, the loan costs allocable to loans repurchased for money were deductible when such loans were repurchased, and the loan costs allocable to loans exchanged for new term loans were deductible upon the exchange.
Treasury Reg. Sec. 1.446-5(a) provides that “debt issuance costs” capitalized pursuant to Treas. Reg. Sec. 1.263(a)-5 are deductible by the issuer over the term of the debt as determined in Treas. Reg. Sec. 1.446-5(b).
Treasury Reg. Sec. 1.446-5(b) provides that, the issuer treats the costs as if they create deemed original issue discount (OID), and such deemed OID is taken into account by the issuer under the rules of Treas. Reg. Sec. 1.163-7.
The IRS based its conclusion on Treas. Reg. Sec. 1.163-7(c), which provides for the deduction of a repurchase premium. Specifically, because there was a “substantial amount” of new term loans issued for money, Treas. Reg. Sec. 1.163-7(c) would not require the repurchase premium from a debt-for-debt exchange to be amortized over the term of the new term loans. Thus, the IRS concluded that the unamortized loan costs were deductible, including the loan costs allocable to the existing loans that were exchanged for the new term loans in a debt-for-debt exchange.
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