Rev. Rul. 89-9

1989-1 C.B. 76, 1989-4 I.R.B. 4.

                       Internal Revenue Service

                                 Revenue Ruling

                      INTEREST; TEMPORARY GLOBAL SECURITY

                          Published: January 23, 1989

26 CFR 1.163-5: Denial of interest deduction of certain obligations issued after December 31, 1982, unless issued in registered form.

  Interest; temporary global security. A temporary security that remains outstanding beyond a reasonable time after the completion of the initial offering must meet the foreign targeting requirements.

  A domestic corporation planned a public offering of bearer bonds in foreign markets through an underwriter. As part of the offering, the corporation issued the underwriter a seven-year obligation which it designated as a 'temporary global security.' The corporation never issued the bearer bonds, the temporary global security remained outstanding for the full seven years, after which the corporation paid the indebtedness in full, and the security was cancelled.

  ISSUES. At issue is whether the term 'temporary global security' includes a security that is not retired within a reasonable time after the initial offering. Also at issue is whether the temporary obligation meets the foreign targeting requirements of the regulations under section 163 if the certificate described in section 1.163-5(c)(2)(i)(B)(iv) is never presented to the issuer or underwriter.

  HOLDING. The Service has held that the term 'temporary global security' does not include a security outstanding beyond a reasonable time after the initial offering. The IRS also ruled that the offering must meet the foreign targeting requirements of section 1.163-5(c)(2).

  ANALYSIS. Generally, interest attributable to a 'registration required obligation' is not deductible under section 163(f) unless the certificate is in registered form. The regulations provide an exemption from registration for temporary global securities. The temporary global securities are typically issued to the underwriter prior to the offering. The underwriter in turn gives an interest in the security to the bond purchasers pending delivery of the bonds. Once the bonds are delivered, the temporary security is retired. The Service stated that a 'temporary' security that remains outstanding for its full term is not a 'temporary global security' because it was not retired promptly at the end of the offering.

ISSUES

  (1) Does the term 'temporary global security' include an obligation that is not retired within a reasonable period of time after the completion of the initial offering?

  (2) Does such a temporary security meet the foreign targeting requirements of section 1.163-5(c)(2)(i)(B), if the certificate described in section 1.163- 5(c)(2)(i)(B)(iv) is not presented to the issuer or underwriter?

FACTS

  X, a domestic corporation, planned a public offering of bearer bonds in foreign markets through Y, an underwriter. The bonds were exempt from registration under section 3 of the Securities Act of 1933. Under the arrangements between X and Y, the bonds satisfied all the pre-delivery requirements of section 1.163-5(c)(2)(B) of the Income Tax Regulations.

  As part of the offering, X issued Y a seven-year obligation designated a 'temporary global security.' A temporary global security is typically issued to the underwriter at the outset of an offering, and interests in the security are given to bond purchasers pending delivery of the bonds. At the close of the offering, the underwriter obtains statements that no United States person owns an interest in the security, the bonds are delivered, and the security is promptly retired.

  X, however, never issued the definitive bearer bonds. The temporary global security remained outstanding for its full term, after which X paid its indebtedness in full and the security was cancelled.

LAW AND ANALYSIS

  Section 163(f) of the Code denies a deduction for interest on any  'registration required obligation' unless the obligation is in registered form. Section 163(f)(2) describes certain foreign targeted obligations that are not registration required obligations.

  Section 1.163-5(c)(2)(i)(B) of the regulations lists five requirements that obligations exempt from registration by section 3 of the Securities Act of 1933 must meet to qualify for the section 163(f)(2) exception. Section 1.163- 5(c)(2)(i)(B)(iv) provides that one of those requirements is that a bearer obligation cannot be delivered to the person entitled to receive it unless that person presents a signed certificate to the issuer or underwriter which states that the obligation is not being acquired by or on behalf of a United States person, or for offer to sell or for resale to a United States person to any person inside the United States. The certification requirement ensures that bearer obligations will not be available to United States persons or to any persons within the United States.

  Section 1.163-5(c)(2)(i) of the regulations provides that a temporary global security need not satisfy the requirements of section 1.163-5(c)(2)(i)(B). The reason for this exception is that a temporary global security is retired promptly at the close of the offering after the underwriter obtains the statement described in section 1.163-5(c)(2)(i)(B)(iv) and delivers the bearer obligations in definitive form.

  The exception provided by section 1.163-5(c)(2)(i) does not apply to the seven-year obligation issued by X. The temporary security issued by X was not promptly retired, but remained outstanding for its full term. It is therefore not a 'temporary global security' within the meaning of section 1.163- 5(c)(2)(i) of the regulation. Because it is not a temporary global security, it must satisfy all of the requirements of section 1.163-5(c)(2)(i)(B), including the certification requirements of section 1.163- 5(c)(2)(c)(B)(iv). That requirement was not satisfied, and therefore the obligation does not qualify under section 1.163-5(c)(2)(i)(B).

HOLDING

  (1) The term 'temporary global security' does not include an obligation that is not retired within a reasonable period of time after the completion of the initial offering.

  (2) A temporary security that remains outstanding beyond a reasonable time after the completion of the initial offering must meet the foreign targeting requirements of section 1.163-5(c)(2). Such an obligation does not qualify under section 1.163-5(c)(2)(i)(B) unless each of the five requirements thereunder is satisfied.

DRAFTING INFORMATION

  The principal author of this revenue ruling is Carl Cooper of the Office of the Associate Chief Counsel (International). For further information about the ruling, call Mr. Cooper at (202) 634- 5406 (not a toll-free call).

Rev. Rul. 89-9, 1989-1 C.B. 76, 1989-4 I.R.B. 4.