(i.e., not able to pay its debts as they become due) or would be rendered insolvent by the payment. Second, sinking fund payments are not permitted if they would impair E's capital. The first restriction is not a contingency that prevents the payments from being considered fixed. See § 1.385-5(d)(5)(iii). The second restriction is, in effect, a subordination provision in that it merely prevents preferential treatment of the Class A preferred stock over equal or more senior issues of preferred stock. Based on these facts, the Class A preferred stock provides for fixed payments in the nature of principal. Therefore, the Class A preferred stock is treated as an instrument. Assuming that sinking fund payments must include all accrued and unpaid dividends, the Class A preferred stock also provides for fixed payments in the nature of interest. For this purpose, the dividends are considered to be fixed at the time they become part of a sinking fund payment. See example (13) of § 1.385-5(e). Example (3). The facts are the same as in example (2) except that the weighted average life of the preferred stock issue is more than 10 years. Additionally, the preferred stock is treated as preferred stock under applicable nontax law; the issue price of the preferred stock is equal to its redemption price; and default in the making of a dividend payment does not entitle the holders of the preferred stock to accelerate sinking fund payments. Based on these facts, the Class A preferred stock is treated as stock under paragraph (b) of this section. The result would be the same if, under applicable local law, E would be considered insolvent (and therefore sinking fund payments would not be permitted) if its liabilities exceeded its assets (rather than if E were not able to pay its debts as they became due). Example (4). F is a large, stable, and consistently profitable corporation. On March 21, 1985, F issues 50,000 shares of $100 par value, 9-percent sinking fund preferred stock. Dividends and sinking fund payments, which begin five years after issuance, are mandatory to the extent of retained earnings. In addition, dividends are cumulative, but they are payable only out of retained earnings. Based on these facts, the preferred stock does not provide for fixed payments in the nature of either principal or interest. Therefore, the preferred stock is treated as stock. Example (5). The facts are the same as in example (1). In addition, corporation G. which owns all the common stock of D, unconditionally guarantees timely payment of all dividends on the preferred stock. Further, G guarantees that the preferred stock will be called for redemption by August 8, 2005. Based on these facts, the preferred stock is treated as an instrument. See § 1.385-5(d)(7). Example (6). H, a closely-held corporation, issues 1,000 shares of $100 par value, 12-percent preferred stock on January 1, 1984. Dividends are cumulative but are payable only out of earned surplus. The preferred stock is subject to mandatory redemption after 9 years at a redemption price of $100 per share plus accrued but unpaid dividends. However, the accrued but unpaid dividends are payable, upon redemption, only out of earned surplus plus unrealized appreciation of H's assets (but not out of capital or capital surplus). Based on these facts, the preferred stock does not provide for fixed payments in the nature of interest but does provide for fixed payments in the nature of principal. Therefore, the preferred stock is treated as an instrument. [T.D. 7747, 45 FR 86458, Dec. 31, 1980] FINDING AIDS A list of CFR titles, subtitles, chapters, subchapters and parts and an alpha- Table of CFR Titles and Chapters Alphabetical List of Agencies Appearing in the CFR Table of CFR Titles and Chapters (As of March 11, 1983) Title 1-General Provisions Chap. I II III Administrative Committee of the Federal Register (Parts 1-49) Administrative Conference of the United States (Parts 300-399) IV Miscellaneous Agencies (Parts 400-499) Title 2-[Reserved] Title 3-The President Proclamations Executive Orders Presidential Documents Other Than Proclamations and Executive Orders I Executive Office of the President (Parts 100-199) II Federal Claims Collection Standards (General Accounting III General Accounting Office (CASB) (Parts 300-499) Title 5-Administrative Personnel I Office of Personnel Management (Parts 1-1199) II Merit Systems Protection Board (Parts 1200-1299) III IV V Office of Management and Budget (Parts 1300-1399) Advisory Committee on Federal Pay (Parts 1400-1499) The International Organizations Employees Loyalty Board (Parts 1500-1599) VII Advisory Commission on Intergovernmental Relations (Parts 1700-1799) IX Appalachian Regional Commission (Parts 1900-1999) XI United States Soldiers' and Airmen's Home (Parts 2100-2199) XIV Federal Labor Relations Authority, General Counsel of the Federal Labor Relations Authority and Federal Service Impasses Panel (Parts 2400-2499) Chap. XV Office of Administration, Executive Office of the President (Parts 2500-2599) I II III IV V VI VII VIII IX Title 6-[Reserved] Title 7-Agriculture SUBTITLE A-Office of the Secretary of Agriculture (Parts 025a) SUBTITLE B-Regulations of the Department of Agriculture Animal and Plant Health Inspection Service, Department of Federal Crop Insurance Corporation, Department of Agricul- Agricultural Research Service, Department of Agriculture (Parts 500-599) Soil Conservation Service, Department of Agriculture (Parts 600-699) Agricultural Stabilization and Conservation Service (Agricultural Adjustment), Department of Agriculture (Parts 700799) Federal Grain Inspection Service, Department of Agriculture (Parts 800-899) Agricultural Marketing Service (Marketing Agreements and Orders; Fruits, Vegetables, Nuts), Department of Agriculture (Parts 900-999) X Agricultural Marketing Service (Marketing Agreements and Orders; Milk), Department of Agriculture (Parts 1000-1199) Agricultural Marketing Service (Marketing Agreements and Orders; Miscellaneous Commodities), Department of Agriculture (Parts 1200-1299) XI XII XIV XV XVI XVII XVIII XXI XXIV Statistical Reporting Service (Agricultural Statistics), Department of Agriculture (Parts 1300-1399) [Reserved] Commodity Credit Corporation, Department of Agriculture (Parts 1400-1499) Foreign Agricultural Service, Department of Agriculture (Parts 1500-1599) Rural Telephone Bank, Department of Agriculture (Parts 16001699) Rural Electrification Administration, Department of Agriculture (Parts 1700-1799) Farmers Home Administration, Department of Agriculture (Parts 1800-2099) Foreign Economic Development Service, Department of Agriculture (Parts 2100-2199) Board of Contract Appeals, Department of Agriculture (Parts 2400-2499) |