Code Section 163
| Code Section | Effective Date | Name of Act | Name of Provision | 10yr Revenue Estimate ($millions) |
|---|---|---|---|---|
| 163 | 12/31/2011 | The American Taxpayer Relief Act of 2012 | Mortgage insurance premiums | -1,297 |
| 163 | 12/31/2010 | The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 | Mortgage insurance premiums | -348 |
| 149, 163, 165, 871, 881, 1287, and 4701 | **3/18/2010 | The Hiring Incentives to Restore Employment Act | Repeal of certain foreign exceptions to registered bond requirements | ***See sec. 1471 |
| 163 | *See Notes Below | The American Recovery and Reinvestment Act of 2009 (Public Law 111-5) | Modifications of rules for original issue discount on certain high yield obligations |
* Notes on Effective Date
The temporary suspension of section 163(e)(5) applies to obligations issued after August 31, 2008, in taxable years ending after such date. The additional authority granted to the Secretary to use a rate higher than the applicable Federal rate for purposes of applying section 163(e)(5) applies to obligations issued after December 31, 2009, in taxable years ending after such date.
** Notes on Effective Date
The provision applies to debt obligations issued after the date which is two years after the date of enactment (March 18, 2010).
***Notes on Revenue Estimate
See section 1471, provision: Reporting on certain foreign accounts.
Mortgage insurance premiums
Explanation of Provision
The provision extends the deduction for private mortgage insurance premiums for two years (with respect to contracts entered into after December 31, 2006). Thus, the provision applies to amounts paid or accrued in 2012 and 2013 (and not properly allocable to any period after 2013).306
Mortgage insurance premiums
Explanation of Provision
The provision extends the deduction for private mortgage insurance premiums for one year (only with respect to contracts entered into after December 31, 2006). Thus, the provision applies to amounts paid or accrued in 2011 (and not properly allocable to any period after 2011)
Repeal of certain foreign exceptions to registered bond requirements
Explanation of Provision
- Repeal of the foreign targeted obligation exception to the registration requirement
- Preservation of exception to the registration requirement for excise tax purposes
- Repeal of treatment as portfolio interest
- Dematerialized book-entry systems treated as registered form
- Repeal of exception to requirement that Treasury obligations be in registered form
1. Repeal of the foreign targeted obligation exception to the registration requirement
The provision repeals the foreign targeted obligation exception to the denial of a deduction for interest on bonds not issued in registered form. Thus, under the provision, a deduction for interest is disallowed with respect to any obligation not issued in registered form, unless that obligation (1) is issued by a natural person, (2) matures in one year or less, or (3) is not of a type offered to the public.
Also, the provision repeals the foreign targeted obligation exception to the denial of the tax exemption on interest on State and local bonds not issued in registered form. Therefore, under the provision, interest paid on State and local bonds not issued in registered form will not qualify for tax exemption unless that obligation (1) is not of a type offered to the public, or (2) matures in one year or less.
The Act preserves the ordinary income treatment under present law of any gain realized by the beneficial owner from the sale or other disposition of a registration-required obligation that is not in registered form. Similarly, the Act does not change the present law rule disallowing deductions for losses realized by a beneficial owner of a registration-required obligation that is not in a registered form.
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2. Preservation of exception to the registration requirement for excise tax purposes
Under the provision, the foreign targeted obligation exception is available with respect to the excise tax applicable to issuers of registration- required obligations that are not in registered form. Thus, the excise tax applies with respect to any obligation that is not in registered form unless the obligation (1) is issued by a natural person, (2) matures in one year or less, (3) is not of a type offered to the public, or (4) is a foreign targeted obligation.
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3. Repeal of treatment as portfolio interest
The provision repeals the treatment as portfolio interest of interest paid on bonds that are not issued in registered form but meet the foreign targeting requirements of section 163(f)(2)(B). Under the provision, interest qualifies as portfolio interest only if it is paid on an obligation that is issued in registered form and either (1) the beneficial owner has provided the withholding agent with a statement certifying that the beneficial owner is not a United States person (on IRS Form W–8), or (2) the Secretary has determined that such statement is not required in order to carry out the purposes of the subsection. It is anticipated that the Secretary may exercise its authority under this rule to waive the requirement of collecting Forms W–8 in circumstances in which the Secretary has determined there is a low risk of tax evasion and there are adequate documentation standards within the country of tax residency of the beneficial owner of the obligations in question or in the country where the book-entry system exists. Generally, however, as a result of the provision, interest paid to a foreign person on an obligation that is not issued in registered form is subject to U.S. withholding tax at a 30-percent rate, unless the withholding agent can establish that the beneficial owner of the amount is eligible for an exemption from withholding other than the portfolio interest exemption or for a reduced rate of withholding under an income tax treaty.
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4. Dematerialized book-entry systems treated as registered form
The provision provides that a debt obligation held through a dematerialized book entry system, or other book entry system specified by the Secretary, is treated, for purposes of section 163(f), as held through a book entry system for the purpose of treating the obligation as in registered form.553 A debt obligation that is formally in bearer form is treated, for the purposes of section 163(f), as held in a book-entry system as long as the debt obligation may be transferred only through a dematerialized book entry system or other book entry system specified by the Secretary.
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5. Repeal of exception to requirement that Treasury obligations be in registered form
The provision includes a conforming change to title 31 of the United States Code that repeals the foreign targeted exception to the definition of a registration-required obligation. Thus, a foreign targeted obligation of the Treasury must be in registered form.
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Modifications of rules for original issue discount on certain high yield obligations
Explanation of Provision
The Act adds a provision that suspends the rules in section 163(e)(5) for certain obligations issued in a debt-for-debt exchange, including an exchange resulting from a significant modification of a debt instrument, after August 31, 2008, and before January 1, 2010.
In general, the suspension does not apply to any newly issued debt instrument (including any debt instrument issued as a result of a significant modification of a debt instrument) that is issued for an AHYDO. However, any newly issued debt instrument (including any debt instrument issued as a result of a significant modification of a debt instrument) for which the AHYDO rules are suspended under the provision is not treated as an AHYDO for purposes of a subsequent application of the suspension rule. Thus, for example, if a new debt instrument that would be an AHYDO under present law is issued in exchange for a debt instrument that is not an AHYDO, and the provision suspends application of section 163(e)(5), another new debt instrument, issued during the suspension period in exchange for the instrument with respect to which the rule in section 163(e)(5) was suspended, would be eligible for the relief provided by the provision despite the fact that it is issued for an instrument that is an AHYDO under present law.
In addition, the suspension does not apply to any newly issued debt instrument (including any debt instrument issued as a result of a significant modification of a debt instrument) that is (1) described in section 871(h)(4) (without regard to subparagraph (D) thereof) (i.e., certain contingent debt) or (2) issued to a person related to the issuer (within the meaning of section 108(e)(4)).
The provision provides authority to the Secretary to apply the suspension rule to periods after December 31, 2009, where the Secretary determines that such application is appropriate in light of distressed conditions in the debt capital markets. In addition, the provision grants authority to the Secretary to use a rate that is higher than the applicable Federal rate for purposes of applying section 163(e)(5) for obligations issued after December 31, 2009, in taxable years ending after such date if the Secretary determines that such higher rate is appropriate in light of distressed conditions in the debt capital markets.
306- The provision corrects the names of the Department of Veterans Affairs and the Rural
Housing Service.
-Return to Explanation of Provision
553- By reason of cross references, this rule will also apply to sections 165(j), 312(m), 871(h), 881(c), 1287 and 4701.
-Return to Explanation of Provision
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