United States - US Taxation of High-Yield Debt: The End of the Reprieve Is Coming
- United States
- V. Hammer
- Derivatives & Financial Instruments, 2009 (Volume 11), No 6
- 13 November 2009
A punishing regime for the taxation of high-yield OID debt was introduced in 1989, which we call the “AHYDO rules”. The rules were one of Congress’ chief responses to the leveraged buyout frenzy of the 1980s. For 20 years, these absurdly complex rules rested in hibernation, but reared their heads in 2008, during the financial crisis. Recognizing that the application of the AHYDO regime to a large swath of American corporate debt was not what Congress intended in enacting the rules, Congress abrogated them in 2009 – but only for a brief period. In this article, the author (1) explains the history of the AHYDO rules, (2) walks readers through the maze of their application, (3) explains attempts by Treasury and Congress to mitigate their barb during the financial crisis and (4) offers some long-term solutions to the problem of what to do when the rules rear their heads once again in a few months.