CCA 201114021: Advice weighs whether a promissory note represented genuine debt

Plain-English summary

Chief Counsel Advice considered a foreign currency loss claimed by a taxpayer after a promissory note was exchanged for two notes denominated in another currency. The advice stated that whether the loss should be allowed depended on whether the promissory note represented genuine debt for federal income tax purposes. It identified the lack of consideration and irregular interest payments as factors supporting disregard of the debt. It also noted that the taxpayer might have arguments for respecting the note, but the released text does not state a final resolution.

Ruling snapshot

• Question: Did the promissory note represent genuine debt for federal income tax purposes, so that the claimed foreign currency loss could be allowed?
• Outcome: Advice given.
• Key authorities: IRC § 988.

Full text (IRS public release)

ID: CCA_2010111009242942 Number: 201114021
Release Date: 4/8/2011
Office: ----------------
UILC: 988.02-02

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 ------------. ------------------------------------
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