[Federal Register Volume 78, Number 215 (Wednesday, November 6, 2013)]
[Rules and Regulations]
[Pages 66639-66641]
From the Federal Register Online via the Government Publishing 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