[Federal Register Volume 76, Number 141 (Friday, July 22, 2011)]
[Rules and Regulations]
[Pages 43892-43893]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-18529]
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9538]
RIN 1545-BK14
Modifications of Certain Derivative Contracts
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final and temporary regulations.
-----------------------------------------------------------------------
SUMMARY: This document contains final and temporary regulations that
address when a transfer or assignment of certain derivative contracts
does not result in an exchange to the nonassigning counterparty for
purposes of Sec. 1.1001-1(a). The text of these temporary regulations
also serves as the text of the proposed regulations (REG-109006-11) set
forth in the Proposed Rules section in this issue of the Federal
Register.
DATES: Effective Date: These regulations are effective on July 22,
2011.
Applicability Date: For the date of applicability, see Sec.
1.1001-4T(d).
FOR FURTHER INFORMATION CONTACT: Andrea M. Hoffenson, (202) 622-3920
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
Section 1001 of the Internal Revenue Code (Code) 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 notional principal 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 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.''). Section 1.1001-4(a)
provides, however, that the substitution of a new party on a notional
principal contract is not treated as a deemed exchange of the contract
by the nonassigning party for purposes of Sec. 1.1001-1(a) if two
conditions are satisfied: the assignment is between dealers in notional
principal contracts and the terms of the contract permit the
substitution.
Many notional principal contracts permit assignment of the contract
only with the consent of the nonassigning counterparty. There has been
some uncertainty as to whether a contract that requires the consent of
the nonassigning counterparty as a condition to assignment will satisfy
the second requirement of Sec. 1.1001-4(a) as described in the
previous paragraph. In addition, commenters have suggested that the
scope of Sec. 1.1001-4 is too narrow because it only applies to
notional principal contracts. The need to amend Sec. 1.1001-4 has been
increased by the Dodd-Frank Wall Street Reform and Consumer Protection
Act, Public Law 111-203 (124 Stat 1376 (2010)) (Dodd-Frank), which in
some cases will necessitate the movement of entire books of derivative
contracts. In particular, there is a concern that the assignment of
derivative contracts may create a taxable event for the nonassigning
counterparties to the assigned contracts.
The IRS and the Treasury Department agree that Sec. 1.1001-4
should be amended and expanded to include derivative contracts other
than notional principal contracts. These temporary regulations replace
the current, final regulations of Sec. 1.1001-4.
Explanation of Provisions
These temporary regulations provide that there is no exchange to
the nonassigning counterparty for purposes of Sec. 1.1001-1(a) solely
because a dealer in securities or a clearinghouse transfers or assigns
a derivative contract to another dealer in securities or clearinghouse,
provided that the transfer or assignment is permitted by the terms of
the contract. The derivative contracts to which these regulations apply
are those described in section 475(c)(2)(D), 475(c)(2)(E), or
475(c)(2)(F). In addition, these temporary regulations provide that
transfers or assignments are permitted by the terms of the contract
when consent of the nonassigning counterparty is required as well as
those transfers or assignments that do not require consent. If
consideration passes between the assignor and assignee in connection
with the transfer or assignment, the consideration will not affect the
treatment of the nonassigning counterparty for purposes of Sec.
1.1001-4. If any consideration is paid to or received by the
nonassigning counterparty, however, the payment or receipt of the
consideration is analyzed under the general principles of section 1001
to determine its effect on the nonassigning counterparty. In addition,
any changes to the terms of the contract are analyzed under the general
principles of section 1001 to determine whether there has been a sale
or disposition of the contract by the parties.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in Executive Order 12866.
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 their impact on small business.
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.
[[Page 43893]]
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
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) through (d) [Reserved]. For further guidance, see Sec. 1.1001-
4T(a) through (d).
0
Par. 3. Section 1.1001-4T is added to read as follows:
Sec. 1.1001-4T Modifications of certain derivative contracts
(temporary).
(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
in securities 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 in securities. For purposes of this
section, a dealer in securities is a taxpayer who meets the definition
of a dealer in securities in section 475(c)(1).
(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 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.
(c) Consideration for the assignment. Any consideration for the
transfer or assignment that passes 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 will
not affect the treatment of the nonassigning counterparty for purposes
of this section.
(d) Effective/applicability date. This section applies to transfers
or assignments of derivative contracts on or after July 22, 2011.
(e) Expiration date. The applicability of this section expires on
or before July 21, 2014.
Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
Approved: July 15, 2011.
Emily S. McMahon,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2011-18529 Filed 7-21-11; 8:45 am]
BILLING CODE 4830-01-P