Volume 5 Winter 2011 Number 2 - Charleston Law Review

CHARLESTON LAW REVIEW [Volume 5noncontingent bond method. 74 This method specifies that theamount of interest that must be reported is determined byconstructing a projected payment schedule for the new debtinstrument and applying rules similar to those for accruingoriginal issue discount on a noncontingent debt instrument. Ifthe contingent payments do not equate to the projectedpayments, one must adjust the income or deductions to accountfor the differences. 75If the new debt instrument falls within the coverage of a nonpubliclytraded debt instrument, the contingent payments arenot included in the issue price. 76 The noncontingent paymentsare treated as a separate debt instrument, and the issue price ofthe new debt instrument is the lesser of the instrument’snoncontingent principal payments and the sum of the presentvalues of the noncontingent payments. 77Putting to one side a special rule for certain delayedcontingent payments, a contingent payment is treated as apayment of principal in an amount equal to the present value ofthe payment, determined by discounting the payment at the testrate from the date the payment is made to the issue date. 78 Thetest rate is the three-month applicable federal rate. 79 The amountin excess of the amount treated as principal is treated asinterest. 80There is a special rule for certain delayed contingentpayments which provides that if a contingent payment becomesfixed more than six months before the payment is due, the issuerand holder are viewed as having issued a separate debtinstrument on the date that the payment becomes fixed. 81 Thematurity date is the due date of the payment. 82 The statedprincipal amount of this instrument is the amount of the24474. I.R.C. § 1273; § 1.1275-4(a)(1)-(b)(1).75. § 1.1275-4(b)(2).76. § 1.1274-2(g).77. § 1.1275-4(c)(3).78. § 1.1275-4(c)(4)(ii).79. § 1.1274-4(a).80. § 1.1275-4(c)(4)(ii).81. § 1.1275-4(c)(4)(iii).82. Id.