Temporary and Proposed Regulations Address Gain or Loss on Assignment of Derivative Contracts (T.D. 9538; NPRM REG-109006-11)

The IRS has issued temporary and final regulations, and has proposed new regulations, addressing the tax consequences of the assignment of derivative contracts. Under Code Sec. 1001, gain or loss is recognized on an exchange of property for materially different property. Assignment of a notional principal contract is treated as taxable if the resulting contract differs materially in kind or extent. Substitution of a new party on a notional principal contract is not a deemed exchange, however, if (1) the assignment is between dealers in notional principal contracts and (2) the terms of the contract permit substitution of parties. If the contract permits assignment only with the consent of the nonassigning counterparty, however, the law has been unclear on whether condition (2), above, has been satisfied.

Reg. §1.1001-4, which governs these issues, is amended and expanded in the form of temporary regulations that include derivative contracts other than notional principal contracts. They provide that there is no exchange to the nonassigning counterparty solely because a securities dealer or clearinghouse transfers or assigns a derivative contract to another dealer or clearinghouse, provided that the transfer or assignment is allowed by the contract. Further, the temporary regulations provide that transfers or assignments are permitted by the terms of the contract whether or not consent of the nonassigning counterparty is required. Finally, if consideration passes between the assignor and the assignee, it will not affect the nonassigning counterparty. If that counterparty is paid consideration, however, the usual rules of Code Sec. 1001 will determine the consequences to the counterparty.

The temporary regulations replace the existing final regulations. In addition, the text of the temporary regulations serves as the text of the proposed regulations (NPRM REG-109006-11).

A public hearing is scheduled on the proposed regulations on October 27, 2011, and outlines of topics to be discussed at that hearing must be received by October 20, 2011. Submissions may be mailed or sent electronically via the Federal eRulemaking Portal at http://www.regulations.gov (IRS REG-109006-11). The public hearing will be held in the IRS Auditorium, Internal Revenue Building, 1111 Constitution Avenue, NW., Washington, D.C.

T.D. 9538, 2011FED ¶47,033

Proposed Regulations, NPRM REG-109006-11, 2011FED ¶49,488

Other References:

Code Sec. 1001

CCH Reference – 2011FED ¶29,223F

CCH Reference – 2011FED ¶29,223G

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CCH Reference – TRC SALES: 45,250

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