Are All Contingent Payment Instruments CPDI Taxable?

A debt instrument’s being subject to contingencies does not necessarily make it a contingent payment debt instrument (CPDI) taxable under the rules of Reg. §1.1275-4. The CPDI rules do not address all contingencies that can affect the calculation of interest payments, but rather focus on contingencies such as unpredictable financial results like the movement of a stock index or the borrower’s gross receipts. Losing sight of that focus makes the rules for CPDIs seem broader than they are.

For example, there appears to be a concern that if the interest rate on a debt instrument increases because the instrument ...