Final Debt Instrument Rules Clarify Classification for Tax Purposes

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Final regulations on the modification of debt instruments (T.D. 9513) clarify that Regulations Section 1.1001-3(f)(7) will determine whether a modified debt instrument received in an exchange is debt for federal tax purposes, IRS says. The final rules adopt proposed rules (REG-106750-10) released in June 2010, with some revisions, IRS says, explaining that the only comment submitted on the proposed rules was a request that the service clarify that Reg. Section 1.1001-3 “applies not only to determine whether an exchange of the original debt instrument has occurred but also to classify the modified instrument resulting from the exchange.”