California Bar Journal
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Self-Assessment Test
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Answer the following questions after reading the MCLE article on modifying debt. Use the answer form provided to send the test, along with a $20 processing fee, to the State Bar. If you do not receive your certificate within four weeks, call Ibrahim Bah at 415/538-2028.

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 Regulation 1.1001-3.

10. A modification covered by a bright-line rule of significance may also be covered by the general rule of significance.

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 expectations.

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 modification occurs.

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.