SECTION 1. BACKGROUND

Issuers of debt obligations that are required to be in registered form but are not issued in registered form are subject to the disallowance of interest deductions under section 163(f) and the imposition of an excise tax under section 4701. Any gain on the sale or other disposition of such an obligation is generally treated under section 1287 as ordinary income rather than capital gain, and, under section 165(j), no deduction is permitted for any loss sustained. In addition, the exception from tax for U.S. source portfolio interest received by a nonresident alien or foreign corporation under section 871(h) and section 881(c) (portfolio interest exception) is generally not available with respect to interest paid on debt that is not issued in registered form (bearer debt).

The foregoing rules generally do not apply with respect to bearer debt that complies with the foreign-targeting rules of section 163(f)(2)(B) and the regulations thereunder. However, section 502 of the HIRE Act generally eliminated the various exceptions for foreign-targeted bearer debt, effective for obligations issued after March 18, 2012. As a result of this change in law, with respect to obligations issued after March 18, 2012, the portfolio interest exception will be available only for obligations issued in registered form.

In the case of debt obligations in registered form, the portfolio interest exception is generally available only if the United

States person (U.S. person) who would otherwise be required to deduct and withhold tax from the interest under section 1441(a) (U.S. withholding agent) receives a statement (usually on Form W–8) indicating that the beneficial owner of the obligation is not a U.S. person. Under section 871(h)(5), this statement generally may be made by either the beneficial owner of the obligation or by a securities clearing organization, bank, or other financial institution that holds customers’ securities in the ordinary course of its trade or business. With respect to obligations issued after March 18, 2012, section 871(h)(2)(B)(ii)(II) provides that the portfolio interest exception is available in the absence of such a statement if the Secretary has determined that such a statement is not required in order to carry out the purposes of the portfolio interest exception.

Section 1.871–14(e) provides that the portfolio interest exception is available for debt obligations in registered form that comply with certain foreign-targeting requirements if (1) the registered owner is a financial institution that holds customers’ securities in the ordinary course of its trade or business; and (2) the U.S. withholding agent complies with certain simplified procedures to obtain, either from the financial institution or from a beneficial owner that is a member of a clearing organization, a certification that the beneficial owner is not a U.S. person. Notice 2006–99 announced, however, that Treasury and the IRS intended to amend § 1.871–14(e) to eliminate this exception for foreign-targeted registered obligations (FTROs), retroactive to the date of the notice. Notice 2006–99, 2006–2 C.B. 907. Regulations implementing the guidance provided in Notice 2006–99 have not been issued.