| ||Bearer or Registered? Lingering Issues Under TEFRA|
Stephen B. Land*
*Partner, Linklaters, New York, New York; Harvard College, A.B., 1975; Harvard Graduate School of Business Administration, M.B.A., 1979; Harvard Law School, J.D., 1979. The author gratefully acknowledges the assistance and advice of Arthur van Aalst, Jeffrey Allen, Yvette Budé, Eli Cohen, John Paton, Bernie Pistillo, Burt Rosen, Michael Schler, and Christopher Warner, and of many colleagues at Linklaters, including Emma Aldred, Georgina Behrens, Stuart Boyd, Lindita Bresa, Federico Briano, Lachlan Burn, Martina Butler, Jason Carss, Edouard Chapellier, Caird Forbes-Cockell, Sandra Deane, Francisco Duque, Jörgen Durban, Edward Fleischman, Chris Frieda, Patrick Geortay, Jan-Christian Heins, Bill Hobbs, Patrick Kelley, Saba Khairi, Jürgen Killius, Martin Krause, Valerie Leipheimer, Vincent Maguire, Anders Malm, Ruth McFarlane, Ruth Olson, Ivo Onkelinx, Cecil Quillen, Bob Smith, António Soares, Conrado Tenaglia, Friedemann Thomma, Neal Todd, Paul Tulcinsky, Henk Vanhulle, Peter Waltz, Naoko Watanabe, and Matthew Welsh. An earlier version of this Article was presented to the Tax Forum in New York on June 7, 2004.
Federal tax law imposes sanctions on U.S. persons who hold bearer debt securities and on issuers of bearer debt to U.S. persons. Sanctions on the holder include disallowance of deductions for any losses on sale, taxation of any gains at ordinary rates, loss of the withholding tax exemption for portfolio interest, and, in the case of municipal debt, loss of the tax exemption. Sanctions on the issuer include disallowance of the deduction for interest and an excise tax on the issuance. Because these are serious consequences, much depends on whether a particular debt instrument is in registered or bearer form.
In the easy cases, it is obvious whether an obligation is bearer or registered. An obligation is bearer if it is evidenced by a note made payable to “bearer,” so that legal title can be transferred by physical delivery of the note. An obligation is registered if it is evidenced by a note made payable to a specific holder, and title can be transferred only by surrendering the note to the issuer and having a new note issued in the name of the new holder. Unfortunately, the easy cases have little relevance to modern securities markets. Today, securities are traded through clearing systems, with layers of custody, depositary, and brokerage arrangements; buyers and sellers rarely see any underlying notes.
The tax law has struggled to keep up with these evolving arrangements. As a result, problems frequently arise in determining whether a particular issue of debt securities is bearer or registered. The situation is complicated by the fact that, for offerings by U.S. issuers outside the United States, the U.S. tax law actually favors bearer debt by exempting it from reporting requirements that require holders to disclose their identity to the issuer. In other cases, conflicting provisions of U.S. and foreign law require that an issue be treated as registered under U.S. law, but as bearer under foreign law.
This article explores the problems inherent in classifying debt as bearer or registered under a variety of arrangements for issuance and trading. The article also addresses related issues under the rules restricting the issuance and holding of bearer debt.