7698 / Must bonds be in registered form? What are "registration required" bonds?

Bonds that are “not of a type offered to the public” do not have to meet the registration requirement.³ Temporary regulations state that a bond is “of a type offered to the public” if similar obligations are publicly offered or traded.⁴ Even if a bond is not publicly traded, it may be considered “of a type offered to the public” if: (a) the bond would be treated as readily tradable in an established securities market under the installment sales rules; (2) the bond is comparable to a bond described in (1); or (3) similar obligations are publicly offered or traded.⁵

The Treasury also has authority to require registration of other obligations if they are used frequently for tax avoidance.⁶

A book entry obligation is considered registered if the right to principal of, and stated interest on, the obligation may be transferred only through a book entry system that identifies the owner of an interest in the obligation. Regulations may permit book entries in the case of a nominee or a chain of nominees.⁷

Registration is required for some U.S. Treasury issues after September 3, 1982, and other Treasury issues and issues of U.S. agencies and instrumentalities issued after 1982.⁸ Obligations issued by other than the United States and its agencies and instrumentalities must be in registered form in order for the issuer (or holder, in some cases) to qualify for certain tax benefits (see Q 7699). This requirement generally applies to municipal bonds issued after June 30, 1983 (although some previously had to be in registered form in order to qualify for tax-exemption). Other bonds must be in registered form after 1982.

The constitutionality of the registration requirement was unsuccessfully challenged in South Carolina v. Baker,⁹ in which the Supreme Court upheld the constitutionality of both the registration requirement and the tax consequences imposed on most unregistered bonds.

Issuers of registration required obligations not in registered form are denied a deduction for interest paid or accrued on the obligation, and their earnings and profits may not be decreased by such nondeductible interest (except for certain foreign issuers).¹⁰ In addition, they are subject to an excise tax of 1 percent of the principal times the number of years to maturity, except in the case of obligations that would be tax-exempt if issued in registered form.¹¹

Generally, then, the tax limitations apply to the issuer rather than the holder. However, in the case of obligations the issuance of which would not be subject to the 1 percent excise tax, and obligations that would be tax-exempt if issued in registered form, limitations are imposed directly on the holder (see Q 7699).

An obligation, the terms of which are fixed and for which full consideration is received before December 31, 1982, is not required to be registered even if smaller denomination certificates in that obligation are not distributed to ultimate investors until after that date, according to the General Explanation of the Tax Equity and Fiscal Responsibility Act of 1982 by the Joint Committee on Taxation.

The Service has provided clarification on whether bonds held through certain book-entry systems are treated as registered or in bearer form under Treasury Regulation Sections 5f.103-1(c) and 1.871-14.¹²