The FDIC announced the TLGP on October 14, 2008 in response to the current market crisis. Under the TLGP, newly-issued senior unsecured debt issued by participating "eligible institutions" will be guaranteed by the FDIC and backed by the full faith and credit of the United States. Pursuant to the TLGP, the FDIC will guarantee debt issued through June 30, 2009 and the debt will be covered by the guarantee through June 30, 2012.
In 1982, Congress passed the Tax Equity and Fiscal Responsibility Act ("TEFRA") which restricts the issuance of debt instruments in bearer form. Under TEFRA, issuers of bearer debt generally are denied deductions for U.S. federal income tax purposes for interest paid on the bearer debt and are subject to an excise tax. However, the issuer sanctions do not apply in the case of bearer debt instruments that are issued under arrangements reasonably designed to ensure that they will not be sold to United States persons. These arrangements include an issuance of bearer debt instruments that complies with Treasury regulations referred to as "TEFRA D." For example, many U.S. issuers have European Medium-Term Note or other programs under which they issue bearer notes to non-U.S. investors. These issuances comply with TEFRA D and, as such, the instruments do not trigger the sanctions described above.
The ban on bearer U.S. government guaranteed debt dates back to 1984. Shortly after the U.S. withholding tax was repealed for "portfolio" interest, various investment banks stripped U.S. Treasury bonds by contributing the bonds to a trust and taking back bearer trust certificates. The bearer trust certificates were sold to foreign investors in compliance with TEFRA. In response, then-Secretary of the Treasury Donald Regan issued a news release announcing that regulations would be promulgated that prohibited U.S. Treasury bonds and other instruments guaranteed by the U.S. government from being issued in bearer form. The regulations subsequently promulgated under TEFRA generally provide that an obligation guaranteed by a United States Government-owned agency cannot satisfy requirements for exemption from the sanctions described above.
Consequently, it appears that issuers of bearer debt instruments covered by an FDIC guarantee under TLGP would generally be subject to the sanctions described above. Rather than bearer debt, an issuer of FDIC-guaranteed debt may, conceivably, issue debt that complies with rules that apply to "foreign targeted registered obligations" which permit the issuance of properly structured registered debt into foreign markets without requiring that the issuer obtain tax certifications from each investor. These rules, however, are in flux. In Notice 2006-99, the IRS announced its intention to issue regulations providing that tax certifications would be required for foreign targeted registered obligations issued after 2006, except for debt instruments issued before January 1, 2009 with a stated maturity of no more than 10 years. To date, no such regulations have been issued.
It is possible that the Treasury Department could issue guidance addressing the U.S. tax consequences of issuing bearer debt instruments under TLGP as part of the ongoing effort to minimize impediments on liquidity in the credit markets. To date, however, no such guidance has been issued.
Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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