§860K. Treatment of transfers of high-yield interests to disqualified holders

(a) General rule

In the case of any high-yield interest which is held by a disqualified holder-

(1) the gross income of such holder shall not include any income (other than gain) attributable to such interest, and

(2) amounts not includible in the gross income of such holder by reason of paragraph (1) shall be included (at the time otherwise includible under paragraph (1)) in the gross income of the most recent holder of such interest which is not a disqualified holder.

(b) Exceptions

Rules similar to the rules of paragraphs (4) and (7) of section 860E(e) shall apply to the tax imposed by reason of the inclusion in gross income under subsection (a).

(c) Disqualified holder

For purposes of this section, the term "disqualified holder" means any holder other than-

(1) an eligible corporation (as defined in section 860L(a)(2)), or

(2) a FASIT.

(d) Treatment of interests held by securities dealers

(1) In general

Subsection (a) shall not apply to any high-yield interest held by a disqualified holder if such holder is a dealer in securities who acquired such interest exclusively for sale to customers in the ordinary course of business (and not for investment).

(2) Change in dealer status

(A) In general

In the case of a dealer in securities which is not an eligible corporation (as defined in section 860L(a)(2)), if-

(i) such dealer ceases to be a dealer in securities, or

(ii) such dealer commences holding the high-yield interest for investment,

there is hereby imposed (in addition to other taxes) an excise tax equal to the product of the highest rate of tax specified in section 11(b)(1) and the income of such dealer attributable to such interest for periods after the date of such cessation or commencement.

(B) Holding for 31 days or less

For purposes of subparagraph (A)(ii), a dealer shall not be treated as holding an interest for investment before the thirty-second day after the date such dealer acquired such interest unless such interest is so held as part of a plan to avoid the purposes of this paragraph.

(C) Administrative provisions

The deficiency procedures of subtitle F shall apply to the tax imposed by this paragraph.

(e) Treatment of high-yield interests in pass-thru entities

(1) In general

If a pass-thru entity (as defined in section 860E(e)(6)) issues a debt or equity interest-

(A) which is supported by any regular interest in a FASIT, and

(B) which has an original yield to maturity which is greater than each of-

(i) the sum determined under clauses (i) and (ii) of section 163(i)(1)(B) with respect to such debt or equity interest, and

(ii) the yield to maturity to such entity on such regular interest (determined as of the date such entity acquired such interest),

there is hereby imposed on the pass-thru entity a tax (in addition to other taxes) equal to the product of the highest rate of tax specified in section 11(b)(1) and the income of the holder of such debt or equity interest which is properly attributable to such regular interest. For purposes of the preceding sentence, the yield to maturity of any equity interest shall be determined under regulations prescribed by the Secretary.

(2) Exception

Paragraph (1) shall not apply to arrangements not having as a principal purpose the avoidance of the purposes of this subsection.

(Added Pub. L. 104–188, title I, §1621(a), Aug. 20, 1996, 110 Stat. 1861 .)

Section Referred to in Other Sections

This section is referred to in section 26 of this title.