SECTION 2. BACKGROUND

.01 Development of dematerialized book-entry systems

IRS and Treasury are aware of the development of dematerialized book-entry systems for holding and transferring bonds. In such systems, bonds are required to be represented only by book entries, and no physical certificates are issued or transferred. Such dematerialized book-entry systems offer significant efficiencies for securities markets, and in order to capture those efficiencies, markets in certain foreign countries have adopted such systems.

For example, Foreign Country law requires that, beginning on a certain date, bonds issued in that country must be held through the book-entry system operated by Foreign Country Clearing Organization. Foreign Country Clearing Organization is an entity which is in the business of holding obligations for member organizations and transferring obligations among such members by credit or debit to the account of a member without the necessity of physical delivery of the obligation. Within the

book-entry system, bonds are not represented by any physical certificates, but are represented only by book entries. Holders do not have the ability to withdraw bonds from the book-entry system and obtain physical certificates representing the bonds. Holders may obtain physical certificates in bearer form only if Foreign Country Clearing Organization goes out of business without a successor that will continue to operate the book-entry system. Bonds that were issued before the book-entry system became mandatory must be transferred into the system by a specified date.

.02 Obligations in registered form Section 5f.103–1(c)(1) provides that an obligation is in registered form if the obligation is registered as to both principal and interest and the obligation may be transferred only by surrender and re-issuance of the physical certificate or through a book-entry system. Section 5f.103–1(c)(2) provides that an obligation is considered transferable through a book-entry system if the ownership of an interest in the obligation is required to be reflected in a book entry that identifies the owner of an interest in the obligation. Section 5f.103–1(e) provides that an obligation that is not in registered form is considered to be in bearer form. An obligation in registered form that is convertible into bearer form is considered to be in bearer form. Treas. Reg. § 1.871–14(c) provides that for purposes of determining the application of the portfolio interest exception, the conditions for an obligation to be in registered form are identical to the conditions described in Treas. Reg. § 5f.103–1.