Financing International Operations

The source of a debt issuer's ordinary income arising from net negative adjustments with respect to a contingent payment debt instrument (CPDI) has raised concerns since the CPDI regulations were first proposed. The source of an issuer's cancellation of indebtedness (COD) income has also b...

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Bibliographic Details
Published in:International Tax Journal 2010-03, Vol.36 (2), p.9
Main Authors: "Chip" Harter, L G, Mou, Michael (Wei-Chin)
Format: Article
Language:English
Subjects:
Contingent interest
Contingent payments
Debt cancellation
Financing
Foreign business
Foreign source income
Foreign tax credits
Retirement
Schedules
Tax benefit rule
Tax regulations
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Summary:The source of a debt issuer's ordinary income arising from net negative adjustments with respect to a contingent payment debt instrument (CPDI) has raised concerns since the CPDI regulations were first proposed. The source of an issuer's cancellation of indebtedness (COD) income has also been a subject of dispute among practitioners. This article first discusses the source of negative adjustments under the current CPDI regulations. Next, the article discusses the complex case of COD income, which can arise from a discharge of the obligation to make payments of either principal or accrued interest, or both. The sparse authorities dealing with the source of COD income are discussed. This article concludes that the issuer's ordinary income resulting from net negative adjustments under Reg §§1.1275-4(b)(7)(iv) and 1.1275-4(b)(6)(iii)(B) on the scheduled retirement of a CPDI should be sourced in the same manner as prior deductions for interest expense on those obligations were allocated for purposes of Code Sec 862 and Sec 904.