Source: http://www.jdsupra.com/legalnews/legal-alert-irs-issues-final-regulation-69354/
Timestamp: 2015-01-25 13:25:46
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Legal Alert: IRS Issues Final Regulations Regarding Transfers of Derivative Contracts | Sutherland Asbill & Brennan LLP - JDSupra
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On November 5, 2013, the Internal Revenue Service (IRS) issued final regulations relating to the transfer or assignment of certain derivative contracts. The final regulations, which are provided as Treas. Reg. § 1.1001-4, address:
Whether a transfer or assignment of certain derivative contracts is treated as a deemed exchange under Treas. Reg. § 1.1001-1(a); and
Whether such transfers are subject to the embedded loans rules under Treas. Reg. § 1.446-3(g)(4).
The final regulations finalize existing temporary regulations that provide an exception to sale or exchange treatment to a non-assigning party in the case of the assignment of derivative contracts between dealers or clearinghouses. In addition, the final regulations expand on the temporary regulations by clarifying that any payment made between a transferor and a transferee of a swap contract does not result in an embedded loan under the section 446 regulations.
For a detailed discussion of the temporary regulations, please view Sutherland’s previous coverage here.
Treas. Reg. § 1.446-3(g)(4) requires certain derivative contracts with significant non-periodic payments be treated as two separate transactions consisting of (1) an on-market, level-payment contract, and (2) a loan. The final regulations provide that any payment between the transferor and the transferee of a derivative contract will not give rise to this embedded loan rule of Treas. Reg. § 1.446-3(g)(4), and the resulting bifurcated treatment. The IRS said that it would be inconsistent for an embedded loan to result from such a payment in a situation where the general rule under Treas. Reg. § 1.1001-4(a) treats the transfer or assignment of a notional principal contract as a non-taxable event.
Topics: Derivatives, IRS, Transfers