Volume 5 Winter 2011 Number 2 - Charleston Law Review

2011] Tax Aspects—Financially Troubled Entitiestest. 42 If a modification of one of the “specific” rules “is effectiveonly upon the occurrence of a substantial contingency,” thesignificant modification test is to be applied under the generalrule. 43 If a degree of change relating to one of the specific rules isnot great enough to cause a significant modification, then suchchange cannot constitute a significant modification under thegeneral rule. 44 Also, modifications of different terms of a debtinstrument, none of which would constitute a significantmodification under the specific rules, do not collectively result ina significant modification. 45 If the changes are effectuated at onepoint in time or if there are a series of modifications over time(e.g., changes in the maturity date), the cumulative effect canresult in a significant modification. 46 Thus, the modificationbecomes significant “at the time that the cumulative modificationwould be significant . . . .” 47The Service has ruled that breaking an obligation into smallproportionate instruments does not constitute a substantialmodification. 48 If one splits an obligation into two or more newobligations where the new obligations are not proportional toeach other, such break-up should not trigger a significantmodification, provided that the payments are the same as theoriginal instrument. This should be the case because there wouldbe no material deferral of scheduled payments.A. Tax Consequences to Significant Modifications ofDebt InstrumentsIn the event that there has been a significant modification ofthe debt instrument, the transaction is characterized as a42. § 1.1001-3(f)(1)(i); see also § 1.1001-3(e)(1) (weighing whether “the legalrights or obligations that are altered and the degree to which they are alteredare economically significant”).43. § 1.1001-3(f)(1)(ii).44. § 1.1001-3(f)(2).45. § 1.1001-3(f)(4).46. § 1.1001-3(f)(3).47. Id.48. I.R.S. Priv. Ltr. Rul. 98-19-043 (Feb. 11, 1998).239