[Federal Register Volume 78, Number 215 (Wednesday, November 6, 2013)]
[Rules and Regulations]
[Pages 66639-66641]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-26575]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9639]
RIN 1545-BK13
Modifications of Certain Derivative Contracts
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations and removal of temporary regulations.
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SUMMARY: This document contains final regulations relating to the
transfer or assignment of certain derivative contracts. The final
regulations provide guidance to the nonassigning counterparty to a
derivative contract and an assignee on certain notional principal
contracts that are derivative contracts. The final regulations provide
that the nonassigning counterparty does not have an exchange for
purposes of Sec. 1.1001-1(a) when certain derivative contracts are
transferred or assigned and clarify that the embedded loan rules of
Sec. 1.446-3(g)(4) do not apply to such transactions.
DATES: Effective Date: These regulations are effective on November 6,
2013.
Applicability Date: For the date of applicability, see Sec.
1.1001-4(d).
FOR FURTHER INFORMATION CONTACT: Andrea M. Hoffenson, (202) 622-3920
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains amendments to 26 CFR part 1. On July 22,
2011, temporary regulations (TD 9538) relating to the effect of the
transfer or assignment of certain derivative contracts under section
1001 of the Internal Revenue Code (Code) were published in the Federal
Register (76 FR 43892). A notice of proposed rulemaking (REG-109006-11)
cross-referencing the temporary regulations was published in the
Federal Register for the same day (76 FR 43957). A correction to the
temporary regulations was published on August 19, 2011, in the Federal
Register (76 FR 51878). No public hearing was requested or held. No
written or electronic comments responding to the notice of proposed
rulemaking were received. The proposed regulations are adopted as
amended by this Treasury decision, and the corresponding temporary
regulations are removed.
Section 1001 provides rules for the computation and recognition of
gain or loss from a sale or other disposition of property. For purposes
of section 1001, Sec. 1.1001-1(a) of the Income Tax Regulations
generally provides that gain or loss is realized upon an exchange of
property for other property differing materially either in kind or in
extent. As a general matter, the assignment of a derivative contract is
treated as a taxable disposition to a nonassigning counterparty if the
resulting contract differs materially either in kind or in extent. See
Cottage Savings Association
[[Page 66640]]
v. Commissioner, 499 U.S. 554, 566 (1991) [1991-2 CB 34, 38] (``Under
[the Court's] interpretation of [section] 1001(a), an exchange of
property gives rise to a realization event so long as the exchanged
properties are `materially different'--that is, so long as they embody
legally distinct entitlements.''). The temporary regulations provide,
however, that the transfer or assignment of a derivative contract by a
dealer or clearinghouse to another dealer or clearinghouse is not
treated as a deemed exchange of the contract by the nonassigning
counterparty for purposes of Sec. 1.1001-1(a) provided that the
transfer or assignment is permitted by the terms of the contract and
the terms of the contract are not otherwise modified.
Explanation of Revisions
The final regulations adopt the general rule in the temporary
regulations providing that a transfer or assignment of a derivative
contract that satisfies the conditions specified in the regulations is
generally not treated by the nonassigning counterparty as a deemed
exchange of the original contract under Sec. 1.1001-1(a). As explained
below, a sentence has been added to the final regulations to clarify
that a loan is not created when a notional principal contract (NPC) is
transferred or assigned under the conditions specified in these final
regulations.
In general, Sec. 1.446-3(h) provides rules that prescribe the
treatment of a termination payment made or received by the assignor or
assignee pursuant to an assignment of an NPC, while the consequences to
the nonassigning counterparty are governed by section 1001. A
termination payment made or received on an NPC is treated by the
assignee as a nonperiodic payment under Sec. 1.446-3(h)(3). See Sec.
1.446-3(h)(5), Example 2. In addition, Sec. 1.446-3(h)(3) makes the
special rules of Sec. 1.446-3(g)(4) applicable to a termination
payment made pursuant to an NPC. Section 1.446-3(g)(4) generally
provides that a swap with significant nonperiodic payments is treated
as two transactions, an on-market, level payment swap and a loan.
These final regulations expressly provide that a payment between
the party transferring or assigning its rights and obligations under
the contract and the party to which the rights and obligations are
transferred or assigned pursuant to the transfer or assignment of an
NPC that meets the conditions specified in these regulations is not
subject to the embedded loan rules in Sec. 1.446-3(g)(4). Thus,
neither the assignee nor the nonassigning counterparty is treated as
having an embedded loan under Sec. 1.446-3(g)(4) as a result of a
payment made between the assignor and the assignee of an NPC pursuant
to a transfer or assignment that satisfies the requirements of Sec.
1.1001-4(a). The Treasury Department and the IRS believe that it would
be inconsistent for an embedded loan to result from such a payment in
circumstances in which the general rule in Sec. 1.1001-4(a) treats the
transfer or assignment of an NPC as not creating a taxable event for
the nonassigning counterparty.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in Executive Order 12866, as
supplemented by Executive Order 13563. Therefore, a regulatory
assessment is not required. It has also been determined that section
553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does
not apply to these regulations, and because the regulations do not
impose a collection of information on small entities, the Regulatory
Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to
section 7805(f) of the Code, these regulations have been submitted to
the Chief Counsel for Advocacy of the Small Business Administration for
comment on its impact on small business, and no comments were received.
Drafting Information
The principal author of these regulations is Andrea M. Hoffenson,
Office of Associate Chief Counsel (Financial Institutions and
Products). However, other personnel from the IRS and the Treasury
Department participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
0
Par. 2. Section 1.1001-4 is revised to read as follows:
Sec. 1.1001-4 Modifications of certain derivative contracts.
(a) Certain assignments. For purposes of Sec. 1.1001-1(a), the
transfer or assignment of a derivative contract is not treated by the
nonassigning counterparty as a deemed exchange of the original contract
for a modified contract that differs materially either in kind or in
extent if--
(1) Both the party transferring or assigning its rights and
obligations under the derivative contract and the party to which the
rights and obligations are transferred or assigned are either a dealer
or a clearinghouse;
(2) The terms of the derivative contract permit the transfer or
assignment of the contract, whether or not the consent of the
nonassigning counterparty is required for the transfer or assignment to
be effective; and
(3) The terms of the derivative contract are not otherwise modified
in a manner that results in a taxable exchange under section 1001.
(b) Definitions--(1) Dealer. For purposes of this section, a dealer
is a taxpayer who meets the definition of a dealer in securities in
section 475(c)(1) or is a dealer in commodities derivative contracts.
(2) Clearinghouse. For purposes of this section, a clearinghouse is
a derivatives clearing organization (as such term is defined in section
1a of the Commodity Exchange Act (7 U.S.C. 1a)) or a clearing agency
(as such term is defined in section 3 of the Securities Exchange Act of
1934 (15 U.S.C. 78c(a))) that is registered, or exempt from
registration, under each respective Act.
(3) Derivative contract. For purposes of this section, a derivative
contract is a contract described in--
(i) Section 475(c)(2)(D), 475(c)(2)(E), or 475(c)(2)(F) without
regard to the last sentence of section 475(c)(2) referencing section
1256;
(ii) Section 475(e)(2)(B), 475(e)(2)(C), or 475(e)(2)(D); or
(iii) Section 1.446-3(c)(1).
(c) Consideration for the assignment. Any payment between a party
transferring or assigning its rights and obligations under the contract
and the party to which the rights and obligations are transferred or
assigned pursuant to a transfer or assignment described in paragraph
(a) of this section will not affect the treatment of the nonassigning
counterparty for purposes of this section. A payment described in the
preceding sentence made or received to transfer or assign rights and
obligations under a notional principal contract (as defined in Sec.
1.446-3(c)(1)) is not subject to Sec. 1.446-3(g)(4).
[[Page 66641]]
(d) Effective/applicability date. This section applies to transfers
or assignments of derivative contracts on or after July 22, 2011.
Sec. 1.1001-4T [Removed]
0
Par. 3. Section 1.1001-4T is removed.
Heather C. Maloy,
Acting Deputy Commissioner for Services and Enforcement.
Approved: October 29, 2013.
Mark Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2013-26575 Filed 11-5-13; 8:45 am]
BILLING CODE 4830-01-P