You should consult your tax
adviser regarding all aspects of the U.S. federal tax consequences
of an investment in the securities (including possible alternative
treatments of the securities). Unless otherwise stated, the
following discussion is based on the treatment of each security as
described in the previous paragraph.
Tax Consequences to U.S.
This section applies to you
only if you are a U.S. Holder. As used herein, the term “U.S.
Holder” means a beneficial owner of a security that is, for U.S.
federal income tax purposes:
citizen or individual resident of the United
corporation, or other entity taxable as a corporation, created or
organized in or under the laws of the United States, any state
thereof or the District of Columbia; or
estate or trust the income of which is subject to U.S. federal
income taxation regardless of its source.
Tax Treatment of the
Assuming the treatment of the
securities as set forth above is respected, the following U.S.
federal income tax consequences should result.
A U.S. Holder’s tax basis in the securities should equal the amount
paid by the U.S. Holder to acquire the
Treatment of Coupon
Any coupon payment on the securities should be taxable as ordinary
income to a U.S. Holder at the time received or accrued, in
accordance with the U.S. Holder’s regular method of accounting for
U.S. federal income tax purposes.
Exchange or Settlement
Upon a sale, exchange or settlement of the securities, a U.S.
Holder should recognize gain or loss equal to the difference
between the amount realized on the sale, exchange or settlement and
the U.S. Holder’s tax basis in the securities sold, exchanged or
settled. For this purpose, the amount realized does not include any
coupon paid at settlement and may not include sale proceeds
attributable to an accrued coupon, which may be treated as a coupon
payment. Any such gain or loss recognized should be long-term
capital gain or loss if the U.S. Holder has held the securities for
more than one year at the time of the sale, exchange or settlement,
and should be short-term capital gain or loss otherwise. The
ordinary income treatment of the coupon payments, in conjunction
with the capital loss treatment of any loss recognized upon the
sale, exchange or settlement of the securities, could result in
adverse tax consequences to holders of the securities because the
deductibility of capital losses is subject to
Possible Alternative Tax
Treatments of an Investment in the Securities
Due to the absence of
authorities that directly address the proper tax treatment of the
securities, no assurance can be given that the IRS will accept, or
that a court will uphold, the treatment described above. In
particular, the IRS could seek to analyze the U.S. federal income
tax consequences of owning the securities under Treasury
regulations governing contingent payment debt instruments (the
“Contingent Debt Regulations”). If the IRS were successful in
asserting that the Contingent Debt Regulations applied to the
securities, the timing and character of income thereon would be
significantly affected. Among other things, a U.S. Holder would be
required to accrue into income original issue discount on the
securities every year at a “comparable yield” determined at the
time of their issuance, adjusted upward or downward to reflect the
difference, if any, between the actual and the projected amount of
any contingent payments on the securities. Furthermore, any gain
realized by a U.S. Holder at maturity or upon a sale, exchange or
other disposition of the securities would be treated as ordinary
income, and any loss realized would be treated as ordinary loss to
the extent of the U.S. Holder’s prior accruals of original issue
discount and as capital loss thereafter. The risk that financial
instruments providing for buffers, triggers or similar downside
protection features, such as the securities, would be
recharacterized as debt is greater than the risk of
recharacterization for comparable financial instruments that do not
have such features.
Other alternative federal
income tax treatments of the securities are possible, which, if
applied, could significantly affect the timing and character of the
income or loss with respect to the securities. In 2007, the U.S.
Treasury Department and the IRS released a notice requesting
comments on the U.S. federal income tax treatment of “prepaid
forward contracts” and similar instruments. The notice focuses on
whether to require holders of “prepaid forward contracts” and
similar instruments to accrue income over the term of their
investment. It also asks for comments on a number of related
topics, including the character of income or loss with respect to
these instruments; whether short-term instruments should be subject
to any such accrual regime; the relevance of factors such as the
exchange–traded status of the instruments and the nature of the
underlying property to which the