Modifications of Bad Debts and Dealer Assignments of Notional Principal Contracts

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In the Rules and Regulations section of this issue of the Federal Register, the IRS is issuing temporary regulations relating to the allowance of a deduction for a partially worthless debt when the terms of a debt instrument have been modified. The temporary regulations provide relief to certain taxpayers that are required to recognize gain as the result of modifying a debt instrument, when a portion of the gain is in part caused by a reduction of the debt's basis attributable to a bad debt deduction claimed in a prior taxable year. The temporary regulations provide guidance to taxpayers that modify the terms of a debt instrument after deducting an amount for partial worthlessness. In the Rules and Regulations section of this issue of the Federal Register, the IRS is also issuing temporary regulations relating to certain assignments of notional principal contracts by dealers in those contracts. The temporary regulations provide guidance to taxpayers relating to consequences of these assignments. The text of those temporary regulations also serves as the text of these proposed regulations.