I 
110TH CONGRESS 
1ST SESSION H. R. 4912 
To amend the Internal Revenue Code of 1986 with respect to the treatment 
of prepaid derivative contracts. 
IN THE HOUSE OF REPRESENTATIVES 
DECEMBER 19, 2007 
Mr. NEAL of Massachusetts introduced the following bill; which was referred 
to the Committee on Ways and Means 
A BILL 
To amend the Internal Revenue Code of 1986 with respect 
to the treatment of prepaid derivative contracts. 
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled, 
SECTION 1. TREATMENT OF PREPAID DERIVATIVE CON-
TRACTS. 
(a) IN GENERAL.—Part V of subchapter P of chapter 
1 of the Internal Revenue Code of 1986 (relating to spe-
cial rules for bonds and other debt instruments) is amend-
ed by adding at the end the following new subpart: 
‘‘Subpart E—Prepaid Derivative Contracts 
‘‘Sec. 1289. Treatment of prepaid derivative contracts. 
‘‘Sec. 1289A. Definitions. 
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‘‘SEC. 1289. TREATMENT OF PREPAID DERIVATIVE CON-
TRACTS. 
‘‘(a) CURRENT INCLUSION IN INCOME.—For pur-
poses of this title, there shall be included in the gross in-
come of the holder of a prepaid derivative contract an 
amount equal to the holder’s interest accrual amount with 
respect to such contract for the taxable year. Any amount 
included in gross income under the preceding sentence 
shall be treated as interest. 
‘‘(b) BASIS ADJUSTMENTS.—If any interest accrual 
amount is included in the gross income of the holder of 
a prepaid derivative contract under subsection (a), such 
holder’s basis in such contract shall be increased by the 
amount so included. 
‘‘(c) LOSS TREATED AS ORDINARY TO EXTENT OF 
BASIS INCREASES.—In the case of any loss recognized on 
the disposition of any prepaid derivative contract, so much 
of such loss as does not exceed the aggregate increases 
in the basis of such contract under subsection (b) shall 
be treated as an ordinary loss. 
‘‘(d) TREATMENT OF DISTRIBUTIONS.—In the case 
of any distribution under a prepaid derivative contract— 
‘‘(1) except as provided in paragraph (3), such 
distribution shall not be includible in gross income, 
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‘‘(2) the adjusted basis of such contract shall be 
reduced (but not below zero) by the amount of such 
distribution, and 
‘‘(3) the excess (if any) of such distribution 
over such adjusted basis (determined before any re-
duction under paragraph (2)) shall be treated as 
gain from the sale of such contract. 
For purposes of this subsection, adjusted basis shall be 
determined after any adjustment to such basis under sub-
section (b) for the taxable year. 
‘‘(e) INTEREST ACCRUAL AMOUNT.— 
‘‘(1) IN GENERAL.—For purposes of this sec-
tion, the interest accrual amount with respect to any 
prepaid derivative contract for any taxable year is 
the product of— 
‘‘(A) the holder’s adjusted basis in such 
contract as of the beginning of such taxable 
year, multiplied by 
‘‘(B) the greater of— 
‘‘(i) the monthly Federal short-term 
rate determined under section 1274(d) for 
the first month ending during such taxable 
year, or 
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‘‘(ii) in the case of a contract under 
which notional amounts are credited, the 
rate at which such amounts are credited. 
‘‘(2) 
PRORATION
OF
INTEREST
ACCRUAL 
AMOUNT.—In the case of a taxpayer who acquires or 
disposes of any prepaid derivative contract during 
the taxable year, the interest accrual amount deter-
mined under paragraph (1) with respect to such con-
tract for such year shall be an amount which bears 
the same ratio to— 
‘‘(A) the amount which would be so deter-
mined without regard to this subparagraph, as 
‘‘(B) the portion of such taxable year dur-
ing which such contract was held by such tax-
payer bears to the entire taxable year. 
‘‘(3) ADJUSTED BASIS DETERMINED AT ACQUI-
SITION.—In the case of the acquisition of any pre-
paid derivative contract during the taxable year, 
paragraph (1) shall be applied by substituting ‘the 
acquisition of such contract’ for ‘the beginning of 
such taxable year’. 
‘‘(f) SPECIAL RULES FOR PUBLICLY TRADED PRE-
PAID DERIVATIVE CONTRACTS.— 
‘‘(1) LIMITATION ON INCLUSION.—The amount 
includible under subsection (a) with respect to the 
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holder of any publicly traded prepaid derivative con-
tract for any taxable year shall not exceed the excess 
(if any) of— 
‘‘(A) the sum of— 
‘‘(i) the fair market value of such con-
tract as of the close of such taxable year 
(or, in the case of the disposition of such 
contract during the taxable year, as of 
such disposition), plus 
‘‘(ii) any distributions to the holder 
under such contract during such taxable 
year, over 
‘‘(B) the holder’s adjusted basis in such 
contract as of the close of the preceding taxable 
year (or, in the case of the acquisition of the 
contract during the taxable year, as of such ac-
quisition). 
‘‘(2) EXCESS CARRIED FORWARD.—If the inter-
est accrual amount with respect to any publicly trad-
ed prepaid derivative contract for any taxable year 
exceeds the limitation determined under paragraph 
(1) with respect to the holder of such contract for 
such year, the interest accrual amount of such hold-
er with respect to such contract for the succeeding 
taxable year shall be increased by such excess. 
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