IRS Chief Counsel: Consent payments made to note holders

Consent payments made to note holders

The IRS today publicly released a redacted field advice memorandum* addressing whether a “consent payment” made by a company to the holders of a certain percentage of the aggregate outstanding principal amount of the company’s notes, in order to induce those holders to consent to changes to the notes’ indenture, was a capital expenditure subject to capitalization under Reg. sections 1.263(a)-4 or -5. 20151704F (dated November 21, 2014)


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The field advice memo [PDF 104 KB] concluded that the consent payment was not subject to capitalization but instead was a payment on the notes for purposes of Reg. section 1.1275-2(a), which addresses payments on debt instruments with original issue discount (OID).

Accordingly, the IRS concluded that the consent payment was:

  • First, a payment of OID that had accrued on the notes but had not been allocated to prior payments
  • Second, a payment of principal

KPMG observation

Although the “Analysis” portion of the field advice memo is entirely redacted, the legal advice memo states elsewhere that Reg. sections 1.263(a)-4 and -5 do not change the treatment of any amount specifically provided for under any other provision of the Code and regulations (except for sections 162 and 212), and that Reg. section 1.1275-2(a) thus supersedes Reg. sections 1.263(a)-4 and -5 with respect to the treatment of the consent payment.

*Field advice memo documents are prepared by IRS field attorneys in the Office of Chief Counsel, are reviewed by an Associate Office, and are subsequently issued to IRS field or service center employees. The memo cannot be used or cited as precedent.

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