Reminder: Warrants Issued To Lenders In Connection With Loans OID
“[B]ecause the warrants were issued as part of an entire loan transaction (as opposed to in return for services), they are considered OID and, under I.R.C. S 1273(b)(2) and (c)(2), must be valued at the time of grant.”
Warrants issued to lenders may be issued at a discount, and are not subject to IRC Section 409A.
“Here, the warrants (effectively equivalent to options5 ) were granted at the same time the loan was provided to Custom Chrome. The most straightforward reading of S 1273 is that the value of the warrants should be considered as OID and should be valued at the time the warrants were granted. First, the warrants were clearly intended to compensate the Bank for its additional risk, thereby raisingthe effective interest rate of the loan and resulting in OID. Second, in order to deduct the OID ratably over the life of the loan, it is necessary to value the warrants at the time of grant. This is borne out by reading together SS 1273(b)(2) and (c)(2), which require that the warrants be valued as part of the "price paid by the first buyer of such debt instrument." I.R.C. S 1273(c)(2) (emphasis added). The most sensible approach is that the first buyer's price must be determined at the time of that buyer's purchase of the debt instrument, which includes the warrants. For example, in Monarch Cement, the Tenth Circuit treated the "equity kicker" portion of a loan -which was comprised of warrants -as OID subject to valuation at the time of issuance. See 634 F.2d at 485-86.”
Custom Chrome, Inc. and Subsidiaries v. Comm'r, 217 F.3d 1117 (9th Cir. 2000).
