Debt Instruments

ID:
Office:
UILC:
CCA_2010111009242942
---
988.02-02
Number: 201114021
Release Date: 4/8/2011
From: ---
Sent: Wednesday, November 10, 2010 9:24:33 AM
To: ---
Cc: ---
Subject: RE: IRC 988 Issue/Reverse SILO
---
You have asked for my views regarding a foreign currency loss claimed by the taxpayer. The subject of the claimed loss was a promissory note given by ---, to ------ in ---. In ---, the note was exchanged for two promissory notes denominated not in ---, as was the original note, but in ---. Whether the loss purportedly resulting from this exchange should be allowed depends on whether the --- promissory note represented genuine debt for federal income tax purposes.
One argument for not respecting the debt is that in substance there was no consideration for the promissory note. According to your draft Notice of Proposed Adjustment, the purported consideration was --- acquisition of a ---facility from ---and --- agreement to pay the purchase price. In substance, however, ---did not own the facility and could not sell it to ---. ---had acquired bare legal title to the facility in --- in a transaction the taxpayer would concede was a financing, not a sale, and which can more fairly be described as a sale of tax benefits to ---. Moreover, ---, in substance, would never pay ---any sum of money that can be characterized as the purchase price of the facility.
This amount, rather, would be "paid" from an account that was established as part of the --- transaction and at all times was within the control of ---and unavailable to --- or any other taxpayer-related entity. (As you point out, under this view of the transaction, taxpayer should not recognize foreign currency gain on any disposition of the foreign currency in the account, as it would not be treated as the account's owner.) Besides the apparent lack of consideration for the --- promissory note, the infrequent and irregular payment of interest also is a factor supporting disregard of the debt for federal income tax purposes.
On the other hand, taxpayer may have arguments for respecting the --- promissory note, including theories that do not rely on the purported consideration provided to ---. ---------------------------