SECTION 2. BACKGROUND

.01 In general, an auction rate security is a security in which the payment rate is reset periodically (typically every seven to 28 days), pursuant to an auction rate-setting process or a similar remarketing agent rate-setting process that is designed to produce the minimum payment rate necessary to enable all interested sellers to sell the security to willing buyers at a price equal to the par amount of the security, plus accrued but unpaid periodic payments. A “failed” auction or remarketing occurs if the auction or remarketing fails to produce buyers for all interested sellers at a payment rate that is at or below the maximum payment rate specified by the terms of the auction rate security. Upon a failed auction or remarketing, the periodic payment rate is reset at a prescribed maximum rate until the next auction or remarketing. In addition, in the case of some issues of auction rate securities, the periodic payment rate may escalate further to prescribed increasing maximum rates based on the continued occurrence of failed auctions or remarketings for increasing periods of time. See, e.g., Notice 2008–55, 2008–27 I.R.B. 11.

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the administrative guidance expressly provided in this revenue procedure, no inferences should be drawn from this revenue procedure in any other context regarding the ownership of any other security (or the effect of a loan secured by such security), the application of the replacement or restoration of capital doctrine, or any other federal tax issues.