Dual Classification of Hybrid Securities for Tax Purposes

Recent developments indicate that US tax authorities have started to view hybrid securities as a combination of debt and equity and seek to split these financial instruments into their component parts. The use of bifurcation, while theoretically superior to an all-or-nothing approach, may greatly increase the complexity and uncertainty involved with hybrid security issuances. Ideally, bifurcation should meet the requirements of both tax authorities and taxpayers as well as accurately reflect the economic substance of hybrid instruments. The best approach for identifying the debt and equity components of a hybrid security may be the use of present values. Other alternatives include the factor approach, appraised market values, and statistical analysis. Methods for evaluating hybrid instruments may be more