1. Regulation 1.1001-3 applies to all
modifications of debt instruments.
2. Regulation 1.1001-3 has been criticized for
giving significant tax consequences to insignificant transactions.
3. IRS issued Regulation 1.1001-3 to address
uncertainties in the law of debt modification.
4. Gain results to the issuer of debt every time
a modification of the debt occurs.
5. Alterations that occur by operation of the
debt instrument are never considered modifications.
6. The holder of a debt instrument must
immediately commence collection activities following an issuer's
failure to perform.
7. The parties to a debt instrument may never
delay the effective date of a modification.
8. Shareholder approval is a valid reason for
delaying the effective date of a modification.
9. Modifications that add, delete or alter
customary financial covenants are not considered significant under
10. A modification covered by a bright-line rule
of significance may also be covered by the general rule of
11. All modifications made to a debt instrument
are considered when determining whether a significant modification has
occurred under the general rule of significance.
12. A debt instrument will be considered
significantly modified if, as a result of the modification, the yield
changes by more than 5 percent.
13. Conversion of a debt instrument from recourse
to nonrecourse is always a significant modification.
14. Modifications made to a guarantee of
nonrecourse debt will be considered a significant modification to the
debt instrument if the modification results in changed payment
15. A significant modification will be deemed to
have occurred if the holder of a 15-year debt instrument allows the
issuer to defer payment of an amount due for six years from the date
on which the deferred payment was originally due.
16. Significant modification occurs whenever a
new obligor is substituted on a recourse debt.
17. Code §108 may not be relied upon to exclude
income resulting from a deemed exchange under Regulation 1.1001-3.
18. The holder of a significantly modified debt
instrument is entitled to write-off the entire balance of a
significantly modified debt as worthless in the year in which
19. If Code §108 does not apply, the issuer must
include in income any gain resulting to him from debt modification.
20. Conversion of a debt instrument into property
other than debt will always result in the debt instrument be treated
as significantly modified.