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can be given that the IRS or a
court will agree with the tax treatment described herein. We intend
to treat a security
for U.S. federal income tax
purposes as a single financial contract that provides for a coupon
that will be treated as gross income to you at the time received or
accrued in accordance with your regular method of tax accounting.
In the opinion of our counsel, Davis Polk & Wardwell LLP, this
treatment of the securities
is reasonable under current
law; however, our counsel has advised us that it is unable to
conclude affirmatively that this treatment is more likely than not
to be upheld, and that alternative treatments are possible.
Moreover, our counsel’s opinion is based on market conditions as of
the date of this preliminary pricing supplement and is subject to
confirmation on the pricing date.
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.
Holders
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:
●a
citizen or individual resident of the United
States;
●a
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
●an
estate or trust the income of which is subject to U.S. federal
income taxation regardless of its source.
Tax Treatment of the
Securities
Assuming the treatment of
the securities
as set forth above is
respected, the following U.S. federal income tax consequences
should result.
Tax
Basis.
A U.S. Holder’s tax basis in the securities
should equal the amount paid
by the U.S. Holder to acquire the securities.
Tax
Treatment of Coupon
Payments.
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.
Sale,
Exchange or Settlement
of the
Securities.
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 in the same manner 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 limitations.
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
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