[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]


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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.

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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