SECTION 4. APPLICATION

(a) identify the old debt for which new debt was substituted,

(b) identify the new debt that was substituted for the old debt,

(c) indicate the issue price of the new debt, and

(d) indicate that the election was made under this revenue procedure.

.02 Treatment of substitution. If an election is made under this revenue procedure, the issuer and the electing holders must report the substitution for federal income tax purposes as a repurchase of the old debt in exchange for the new debt in the taxable year in which the substitution occurs. However, the issuer must account for this deemed exchange under the rules described in section 4.03 of this revenue procedure and each electing holder must account for this deemed exchange under the rules described in section 4.04 of this revenue procedure.

.03 Issuer’s treatment. The issuer must take into account over the term of the new debt any difference between the adjusted issue prices of the old debt and the issue price of the new debt (as determined under § 1.1273–2). If the aggregate issue price of the new debt that is transferred to electing holders as a substitute for the old debt is greater than the aggregate adjusted issue prices of the old debt for which it is substituted, the issuer treats the difference as a reduction in the aggregate issue price of the new debt. As a result, the difference is taken into account by the issuer over the term of the new debt as increased original issue discount or as reduced bond issuance premium (within the meaning of § 1.163–13). If the aggregate issue price of the new debt that is transferred to electing holders as a substitute for the old debt is less than the aggregate adjusted issue prices of the old debt for which it is substituted, the issuer treats the difference as an increase in the aggregate issue price of the new debt. As a result, the difference is taken into account by the issuer over the term of the new debt as reduced original issue discount or increased bond issuance premium.

.04 Electing holder’s treatment.

(1) In general. Notwithstanding any provision of subtitle A of the Internal Revenue Code (including §§ 356(a) and 1276(a)), an electing holder does not rec

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ognize any gain or loss as a result of the deemed exchange. Instead, the holder’s basis (immediately after the substitution) in the new debt is the same as the holder’s adjusted basis (determined as of the date of the substitution) in the debt instruments for which the new debt was substituted. In addition, the holder’s holding period for the new debt includes the holder’s holding period for the old debt.

(2) Market discount.

(a) In general. If the stated redemption price at maturity of the new debt (as determined under § 1.1273–1(b)) is greater than the holder’s basis (immediately after the substitution) in the new debt, the holder treats the difference as market discount on the new debt and the new debt as a market discount bond (unless the amount of the discount is a de minimis amount within the meaning of § 1278(a)(2)(C)). See §§ 1276 and 1278 for the treatment of market discount. (The issue date of the old debt rather than the issue date of the new debt is used to determine whether the new debt is a short-term obligation for purposes of § 1278(a)(1)(B)(i).) See section 4.04(2)(b) below for the treatment of any accrued market discount on the old debt.

(b) Accrued market discount. The rules in this section 4.04(2)(b) apply if, as of the date of the substitution, there is any accrued market discount on the old debt that has not been taken into account by the holder as ordinary income. If, under section 4.04(2)(a) above, there is no market discount on the new debt or the amount of any market discount on the new debt is a de minimis amount, the amount of accrued market discount on the new debt is zero, and the accrued market discount on the old debt is ignored. If, under section 4.04(2)(a) above, the amount of market discount on the new debt is more than a de minimis amount, the lesser of this market discount and the accrued market discount on the old debt is treated by the holder, as of the date of the

substitution, as accrued market discount on the new debt. (Solely for purposes of determining the accruals of any additional market discount on the new debt, the holder’s basis is increased by the amount of the accrued market discount on the old debt that is treated as accrued market discount on the new debt.)

(3) Bond premium. If the holder’s basis in the new debt (immediately after the substitution) is greater than the stated redemption price at maturity of the new debt (as determined under § 1.1273–1(b)), the holder treats the difference as bond premium on the new debt. See §§ 1.171– 1 through 1.171–5 for the treatment of bond premium.