MFA Comment Letter on Proposed Rules Under Section 305(c) of the Tax Code

On July 12, MFA submitted a comment letter to Treasury and the IRS on the proposed rules regarding deemed distributions to convertible securities holders.  In our letter, we stated our view that conversion ratio adjustments should not, as a matter of tax policy, be subject to withholding taxes under Section 305(c).  We noted that, to the extent withholding taxes do apply, we agreed with the proposal to tax the change in value of the embedded option in the convertible security, though we also noted that further guidance on how to value the amount subject to withholding taxes should be provided.  We further encouraged Treasury and the IRS to exclude from withholding taxes convertible owners who had substantially hedged the underlying equity portion of the convertible security, as those owners do not receive the economic equivalent of a distribution.  Finally, we noted the need for the 305(c) rules to be coordinated with the convertible payment debt instrument rules to avoid double taxation and the need for guidance under the qualified dividend income rules for convertible owners.