[Code of Federal Regulations]
[Title 26, Volume 11]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.1274-3]

[Page 536]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.1274-3  Potentially abusive situations defined.

    (a) In general. For purposes of section 1274, a potentially abusive 
situation means---
    (1) A tax shelter (as defined in section 6662(d)(2)(C)(ii)); or
    (2) Any other situation involving--
    (i) A recent sales transaction;
    (ii) Nonrecourse financing;
    (iii) Financing with a term in excess of the useful life of the 
property; or
    (iv) A debt instrument with clearly excessive interest.
    (b) Operating rules--(1) Debt instrument exchanged for nonrecourse 
financing. Nonrecourse financing does not include an exchange of a 
nonrecourse debt instrument for an outstanding recourse or nonrecourse 
debt instrument.
    (2) Nonrecourse debt with substantial down payment. Nonrecourse 
financing does not include a sale or exchange of a real property 
interest financed by a nonrecourse debt instrument if, in addition to 
the nonrecourse debt instrument, the purchaser makes a down payment in 
money that equals or exceeds 20 percent of the total stated purchase 
price of the real property interest. For purposes of the preceding 
sentence, a real property interest means any interest, other than an 
interest solely as a creditor, in real property.
    (3) Clearly excessive interest. Interest on a debt instrument is 
clearly excessive if the interest, in light of the terms of the debt 
instrument and the creditworthiness of the borrower, is clearly greater 
than the arm's length amount of interest that would have been charged in 
a cash lending transaction between the same two parties.
    (c) Other situations to be specified by Commissioner. The 
Commissioner may designate in the Internal Revenue Bulletin situations 
that, although described in paragraph (a)(2) of this section, will not 
be treated as potentially abusive because they do not have the effect of 
significantly misstating basis or amount realized (see Sec. 
601.601(d)(2)(ii) of this chapter).
    (d) Consistency rule. The issuer's determination that the debt 
instrument is or is not issued in a potentially abusive situation is 
binding on all holders of the debt instrument. However, the issuer's 
determination is not binding on a holder who explicitly discloses a 
position that is inconsistent with the issuer's determination. Unless 
otherwise prescribed by the Commissioner, the disclosure must be made on 
a statement attached to the holder's timely filed Federal income tax 
return for the taxable year that includes the acquisition date of the 
debt instrument. See Sec. 1.1275-2(e) for rules relating to the 
issuer's obligation to disclose certain information to holders.

[T.D. 8517, 59 FR 4822, Feb. 2, 1994]