United States: ABCs Of Cross-Border Derivatives
Last Updated: July 24 2012

Article by Linda Z. Swartz *

I. INTRODUCTION

This outline examines the U.S. tax consequences produced by derivative instruments in international financing transactions and highlights the inconsistent U.S. tax treatment that results from the use of different derivative financial instruments with the same economic results in cross-border financing transactions. The final section of the outline, which analyzes the tax provisions contained in the 1992 ISDA master multi-currency cross-border agreement, provides a practical illustration of these tax consequences.

As discussed below, the disparate results in the taxation of cross-border derivatives are in large part attributable to the historical development of separate U.S. tax rules governing each specific derivative instrument.1 A specific example of this inconsistent treatment is illustrated by the comparison below of the tax consequences of certain notional principal contracts and substitute payments under securities loans, two derivative instruments that produce the same economic result but very different U.S. tax results. As the outline illustrates, the current patchwork of U.S. withholding tax rules is ill-equipped to address the issues raised by the use of derivative products, and U.S. income tax treaties negotiated to date have also failed to provide sensible results when treaty partners engage in cross-border derivative transactions.

Treasury is, and has for some time been, well aware of the shortcomings in the application of existing U.S. tax rules and treaties to derivative transactions. In 1994, then Treasury International Tax Counsel Cynthia Beerbower was quoted as saying that "opportunities for synthetic investments, as opposed to real investments, are so prevalent that withholding taxes are no longer real."2 Despite several spates of rulemaking, eighteen years later, Treasury has not yet proposed a single, workable set of tax rules to govern the use of derivative products between either domestic parties or domestic and foreign parties, and until that goal is achieved (if ever), well-advised taxpayers will continue to choose the specific form of derivative transaction that produces the desired economic result with the most favorable U.S. tax consequences.3

II. COMPARISON OF SOURCE AND WITHHOLDING RULES FOR CROSS-BORDER DERIVATIVE INSTRUMENTS

This section compares the tax treatment of different cross-border derivative instruments. A short definition is provided for each instrument, followed by the rules regarding the timing, character and source of income and/or gain recognition, together with applicable withholding rules. As illustrated below, there are three principal tax regimes for sourcing income and gain from derivative instruments.

  • First, payments on notional principal contracts ("NPCs") that do not have an embedded loan component ("non-amortizing swaps") generally are sourced to the recipient's residence.4 However, payments that are deemed to be interest on NPCs with embedded loans ("self-amortizing swaps"), are sourced according to general rules for interest payments.

    • Under the Hiring Incentives to Restore Employment Act (the "HIRE Act"),5 enacted March 18, 2010, dividend equivalent payments made after September 14, 2010 but before March 18, 2012 pursuant to certain NPCs that reference U.S. source dividends are treated as U.S. source income and subject to withholding.6 Temporary regulations (also issued in proposed form) extend the HIRE Act rules through the end of 2012.7 Additional proposed regulations would extend dividend equivalent withholding to a broader class of equity swaps, as well as to other equity-linked instruments.8

  • Second, "substitute payments" on securities loans are sourced in the same manner as actual dividends or interest payment on the borrowed securities, while borrow and rebate fees on securities loans are attributed according to general source rules.
  • Third, payments on options, forward contracts and regulated futures contracts, which generally produce only gain or loss, are sourced in accordance with the residence of the recipient under general source rules. This result is obtained notwithstanding the application of the mark to market rules of sections 1256 and 475 of the Internal Revenue Code of 1986, as amended (the "Code"). Each of these specific regulatory sourcing regimes suffers from different limitations, as discussed below. The HIRE Act will also alter the applicable sourcing rules for classes of options, forwards, and regulated futures contracts beginning in 2013, and U.S. source dividend equivalent payments under these contracts could be subject to withholding.9

A. Notional Principal Contracts

  1. Definition NPCs include swaps, caps, and floors whereby a party agrees to make periodic payments reflecting the value of a "specified index" applied to a "notional" agreed-upon principal amount, and the counterparty agrees to either make periodic payments based on a different index or pay a fixed premium for the contract.10 The notional principal amount may vary over the term of the NPC as long as the variances are set in advance or are based on certain objective or financial information.11 Caps are contracts whereby a seller makes periodic payments equal to the product of a notional principal amount and any excess of a specified index over the agreed level (the cap rate). The buyer pays a single premium or makes a series of fixed periodic payments for the contract. Floors are contracts whereby a seller makes periodic payments equal to the product of a notional principal amount and any amount by which a specified index falls below a specific level (the floor rate). The buyer pays a single premium or makes a series of fixed periodic payments for the contract. Combinations of caps and floors, whereby a party purchases a cap and sells a floor, or purchases a floor and sells a cap, are known as collars; although collars are not themselves NPCs, the cap and the floor that together form a collar may be treated as a single notional principal contract.12 An option to enter into an NPC is not considered an NPC.13

    Regulations proposed in 2011 would clarify that a "specified index" (essentially, non-financial indices) includes any indices that (i) are based on objectively determinable non-financial information, (ii) are not within the control of either counterparty nor unique to a party's circumstance, and (iii) are not reasonably expected to front-load or back-load the payments accrued under the swap.14 This expanded definition of "specified index" would explicitly bring weather-related, catastrophe-related, and mortality swaps within the ambit of NPC treatment.15

    The proposed regulations also address ambiguity with respect to bullet swaps16 by redefining "payment" to include "an amount that is fixed on one date and paid or otherwise taken into account on a later date."17 Under this definition of payment, bullet swaps and other contracts that provide a single payment at maturity (such as accumulated dividends) that was fixed on one or more earlier dates during the contract will be subject to the NPC rules.18
  2. Timing of Income Income and deductions attributable to an NPC must be recognized using accounting methods that "reflect the economic substance of such contracts."19 Three types of income are typically received in connection with NPCs: periodic payments, non-periodic payments and termination payments. Each type of income is accrued somewhat differently:

    • Periodic PaymentsPeriodic payments are payments made or received pursuant to an NPC that are payable at intervals of one year or less during the entire term of the contract, are based on a specified index, and are based on a notional principal amount.20 Periodic payments (payable at least annually) accrue ratably over the period to which they relate.21
    • Non-Periodic PaymentsNon-periodic payments (including up-front premiums, prepayments of one leg of a swap, and premiums for exercised options to enter into a swap, but not termination payments) are recognized over the term of the contract in accordance with their economic substance.22 In this regard, non-periodic swap payments generally would be allocated based on values of a series of cash-settled forwards written on a specified index at the notional principal amount. Similarly, non-periodic payments on a cap or a floor generally would be allocated in accordance with a series of cash-settled options.23 Non-periodic payments, other than up-front payments, may be amortized by treating the contract as if it provided for a single up-front payment (equal to the present value of the non-periodic payments) and a loan between the parties.24 The deemed single up-front payment is then amortized under the level payment method described in Treasury Regulation section 1.446-3(f)(2)(iii)(A). The time value component of the loan is not treated as interest, but is instead recognized as a periodic payment together with the amortized amount of the deemed up-front payment.25
      • Swaps with "significant" up-front non-periodic payments are bifurcated into an on-market, level payment swap and a separate loan.26 The parties must separately account for the loan and the swap. The time value component associated with the loan is not included in the net income or net deduction from the swap, and is instead recognized as interest for all purposes.27 Deemed payments on the loan are calculated by assuming the loan is an installment obligation with level payments and a constant yield to maturity.28
    • Termination PaymentsTermination payments (payments on extinguishment or assignment) accrue in the year that the contract is extinguished, assigned, or exchanged. If such event is a deemed sale or exchange of the contract, the non-assigning party also recognizes gain or loss, and may amortize any amount recognized over the remaining term of the contract.29
    • Recognition of income (and deductions) under the general rules outlined above may be affected if the NPC is (i) a foreign currency contract under section 988,30 (ii) a hedge or part of a straddle,31 (iii) held by a taxpayer required (or electing) to mark the NPC to market under section 475, or (iv) an equity swap with respect to a corporation's own stock governed by section 1032.
    • Treasury regulations proposed in 2004 address the timing and character of income, gain, loss and deductions in respect of NPCs with contingent non-periodic payments (the "Proposed Contingent Non-Periodic Regulations").32 If adopted, these regulations will likely require most market participants to change their current methods of accounting. The Proposed Contingent Non-Periodic Regulations would apply only to transactions entered into on or after 30 days after the date final regulations are published in the Federal Register.33
      • Prior to the issuance of these regulations, the IRS had solicited comments and had proposed the following approaches: (i) non-contingent swap method, (ii) full allocation method, (iii) modified full allocation method, and (iv) mark to market method.34 At that time, the International Swaps and Derivatives Association ("ISDA") advocated (and continues to advocate) the commonly used "wait and see" approach in lieu of the four methods proposed by the IRS, and advised that only the full allocation method could be justified on policy grounds.35
      • Most significantly, the preamble to the Proposed Contingent Non-Periodic Regulations declares the "wait and see approach" to be "inconsistent" with existing authorities.36 Moreover, the preamble effectively requires any taxpayer that is a party to a contingent payment NPC on or after March 27, 2004 and has not yet adopted a method of accounting to accrue the contingent payment under a "reasonable amortization method."37
    • If adopted, the Proposed Contingent Non- Periodic Regulations would require taxpayers to report income using one of two alternative methods of accrual for contingent non-periodic payments:
      • The non-contingent swap method will apply to most payments. This method (which is a more complicated version of the method described in Notice 2001-44) generally requires the potential recipient of a contingent payment to accrue, and the potential payer to deduct, the projected amount of a contingent payment (and, generally, interest) over the term of the NPC and to readjust the projection (and the accrual) in each subsequent year,38 or
      • The mark to market method, which is only available if (i) the contract is actively traded (as specially defined), (ii) the taxpayer marks the contract to market for financial accounting purposes (subject to certain additional requirements that are not specified in the Proposed Contingent Non- Periodic Regulations), (iii) one of the parties to the contract is a dealer and agrees to provide the taxpayer with valuation information, or (iv) the taxpayer is either an "open" regulated investment company (i.e., one that offers its shares) or a closed regulated investment company that redeems its shares at net asset value.39
    • Revenue Ruling 2002-30 requires that non-periodic payments comprised of contingent and non-contingent components be separated and each component be treated separately for purposes of applying the NPC rules in Treasury Regulation section 1.446-3 in order to properly reflect the economic substance of the NPC.40

      The non-periodic or fixed payment associated with the transaction must be recognized over the term of the NPC in a manner consistent with Treasury Regulation sections 1.446-3(f)(2)(ii) or (iii), and 1.446-3(g)(4).41 However, it is not entirely clear how this rule functions when an NPC's non-periodic payments are not described with reference to contingent and non-contingent components, but rather, as a single contingent payment referencing the value of a stock index that produces the same result in substance.42
    • Notice 2002-35, released at the same time as Revenue Ruling 2002-30, provides that an NPC constitutes a "listed transaction" that is subject to the tax shelter rules if one party is required to make periodic payments to another at regular intervals of one year or less based on a fixed or floating rate index, and in return, the other party is required to make a single payment at the end of the term of the NPC that consisted of a non-contingent component and a contingent component.43 Consistent with Revenue Ruling 2002-30, the non-contingent portions of such payments must be recognized over the term of the NPC in a manner that reflects the economic substance of the transaction, whether or not the payments are based on a fixed or floating interest rate.
    • Subsequently, the IRS issued Notice 2006-16, limiting the scope of Notice 2002-35.44 Specifically, Notice 2006-16 provides that an NPC with contingent non-periodic payments is not a listed transaction if (i) the taxpayer uses a method of accounting for the NPC that takes the contingent non-periodic payments into account over the term of the NPC under a reasonable amortization method or (ii) the taxpayer properly accounts for the NPC under section 475 and Treasury Regulations under sections 446 and 988.

  3. Character of Income Termination payments produce capital gain or loss where the contract is held as a capital asset.45 Periodic and non-periodic payments on interest rate NPCs should produce ordinary income, because payments are made in exchange for money rather than property. By contrast, although such payments on contracts involving commodities, equities, or other personal property may produce ordinary income or loss,46 capital gain or loss arguably may result where payments relate to rights with respect to a capital asset.

    However, if a taxpayer holds a long position under a contract with respect to certain pass-thru "financial assets" under the constructive ownership rules,47 the amount the taxpayer could recognize as long-term capital gain upon a termination of the contract is limited to the amount of such gain the taxpayer would have recognized if it had held the financial asset directly during the term of the contract. Any additional gain would be treated as ordinary income, accrued over the term of the contract at a constant rate. Such recharacterized gain would be taxed at the highest marginal rate applicable to each taxable year and an interest charge would be imposed based on the inclusion of such recharacterized gain in the taxpayer's income at a constant rate over the term of the contract. However, the constructive ownership rules do not apply if the contract is marked to market.

    • If adopted, the Proposed Contingent Non- Periodic Regulations would change the predominant view that non-periodic "value" payments under an equity swap (i.e., the appreciation or depreciation payments under an equity swap) give rise to capital gain or loss. Instead, if finalized in their proposed form, these regulations would treat all net periodic and non-periodic payments under the NPC as giving rise to ordinary income or loss.48 In addition, the preamble to the Proposed Contingent Non- Periodic Regulations effectively requires any taxpayer that is a party to a contingent payment NPC after March 27, 2004, and that has not yet adopted a method of accounting, to accrue the non-periodic contingent payment over the term of the NPC. However, terminations of swaps prior to their scheduled maturity will continue to give rise to capital gain or loss, as under current law.49 Accordingly, holders could generally elect ordinary or capital treatment simply by terminating the NPC early or holding it to maturity.

To read this report in full, please click here.

Footnotes

* My thanks to Richard Andrade for contributing Section VI, and to my partner Gary T. Silverstein and our colleagues Janicelynn Asamoto and Shlomo Boehm for their efforts in graciously updating this outline.

This outline is an evolution of U.S. International Tax Treatment of Financial Derivatives, NYU Conference on Tax Issues in Corporate and International Transactions, Vol. II (April, 1996); 14 International Tax Notes 787 (Mar. 3, 1997) and 74 Tax Notes 1703 (Mar. 31, 1997), co-authored by Reuven Avi-Yonah and Linda Z. Swartz.

1 See generally Joint Committee on Taxation, Present Law and Analysis Relating to the Tax Treatment of Derivatives (JCX-21-08, Mar. 4, 2008).

2 Kathleen Matthews, "U.S. Branch IFA Meeting Highlights Cross- Border Corporate Reshufflings, Tax Treaties, APAs," 94 TNI 54-3 (1994).

3 Taxpayers are forewarned that Schedule UTP (Form 1120) requires certain taxpayers to report their "uncertain tax positions"-those for which the taxpayer has recorded a reserve in its audited financial statements-to the IRS. See 2011 Instructions for Schedule UTP (Form 1120) (Feb. 2012).

4 Regulations under section 863 govern notional principal contracts generally, and section 988 regulations govern such contracts involving foreign currency. The sourcing rules of the two sets of regulations are generally consistent. Temporary 871(m) regulations govern dividend equivalent payments made under specified notional principal contracts through the end of 2012. Proposed regulations would extend general sourcing rules to most equity swaps beginning in 2013.

5 Pub. L. No. 111-147.

6 I.R.C. § 871(m).

7 Treas. Reg. §§ 1.863-7T, 1.881-2T; see also T.D. 9572 (Jan. 23, 2012) (describing these temporary and proposed regulations and changes to the section 1441 withholding regulations). The text of the temporary and proposed regulations is identical with respect to dividend equivalent treatment through the end of 2012; the temporary regulations are effective January 23, 2012.

8 Notice of Proposed Rulemaking, 77 Fed. Reg. 3202 (Jan. 23, 2012).

9 Pub. L. No. 111-147.

10 Treas. Reg. § 1.446-3(c)(1); see discussion regarding timing in section II.A.2 below.

11 See Treas. Reg. § 1.446-3(c)(3). Note, however, that proposed regulations permit the IRS to recharacterize a transaction based on its substance. The anti-abuse rule would allow separating a single contract into a series of contracts or treating part or all of the contract as a loan. Prop. Treas. Reg. § 1.446-3(c)(3). Commentators have noted that the anti-abuse rule could plausibly affect swaps that provide taxpayers with exposures to different and successive investment strategies, particularly when the period of exposure to one strategy is less than the holding period for long-term capital gains. See Mark Leeds and Yoram Keinan, "Sometimes a Vague Notion: IRS Proposes To Update Rules for Swaps and Futures," BNA Daily Tax Report (Sept. 27, 2011).

12 Treas. Reg. § 1.446-3(c)(1)(i). The IRS has also concluded that an instrument issued by a corporation referencing the price of another corporation's stock (held by the issuer) constitutes equity rather than debt, and is part of a straddle that may be analyzed as a cash-settled collar. See F.S.A. 2001-50-012 (Sept. 11, 2001). The issuer may be viewed as maintaining a long position in the other corporation's stock by owning the stock and a short position by issuing the instrument. Alternatively, the instrument may be viewed as a prepaid forward contract.

13 Treas. Reg. §§ 1.446-3(c)(1)(ii), (g)(3). Note, however, that such an option may qualify as a hedge under certain circumstances.

14 Prop. Treas. Reg. § 1.446-3(c)(2)(ii).

15 Although the treatment of weather-related swaps moving forward is clear, language in the Preamble of the proposed regulations has raised concerns that the past market practice of treating weather-related metrics as objectively determined economic information may not be respected by the IRS. See Preamble to Proposed Regs (Swap Exclusion for Section 1256 Contracts), 76 Fed. Reg. 57,684 (Sept. 16, 2011) (noting that a "weather-related swap currently is not a notional principal contract because a weather index does not qualify as a 'specified index'").

16 Bullet swaps are swap-like contracts that accrue payments based on a specified index that references a notional principal amount but provide only for a single payment at contract maturity. Because payments under such contracts were not periodic, many practitioners had applied a wait-and-see principle for tax purposes (deferring any income accrued under the contract until its maturity). See, e.g., Stevie D. Conlon, "New Proposed Regulations Defining Swaps Create Controversy," J. of Tax. (Nov. 2011).

17 Prop. Treas. Reg. § 1.446-3(c)(1)(ii).

18 See, e.g., Stevie D. Conlon, "New Proposed Regulations Defining Swaps Create Controversy," J. of Tax., at 272-74 (Nov. 2011); Anthony Tuths, "Fundamental Tax Reform of Derivatives," Tax Notes, at 436-38 (Jan. 23, 2012) (discussing the proposed regulation's deemed payment rule).

19 See Treas. Reg. § 1.446-3(b).

20 See Treas. Reg. § 1.446-3(e)(1).

21 See Treas. Reg. § 1.446-3(e)(2).

22 See Treas. Reg. § 1.446-3(f).

23 See Treas. Reg. § 1.446-3(f)(2).

24 See Treas. Reg. § 1.446-3(f)(2)(iii)(B).

25 See Treas. Reg. § 1.446-3(f)(2)(iii)(B).

26 See Treas. Reg. § 1.446-3(g)(4). It is not clear at what level an up-front payment is treated as significant (9% is not; 40% is, under the examples in the section 446 regulations).

27 See Treas. Reg. § 1.446-3(g)(4); see also Rev. Rul. 2002-30, 2002-1 C.B. 971.

28 See Treas. Reg. §§ 1.446-3(g)(4), (6), Ex. 3.

29 See Treas. Reg. § 1.446-3(h).

30 The proposed swap regulations would apply to most foreign currency denominated NPCs that reference currency or property whose value is determined by reference to an interest rate. Prop. Treas. Reg. §§ 1.446-3(c)(1)(iii)(B), 1.988-1(a)(2)(iii)(B)(2).

31 Losses on positions in personal property that are part of a straddle (other than straddles comprised entirely of contracts marked to market under section 1256, identified straddles, hedges that are not marked to market, or straddles consisting of a qualified covered call on stock and ownership of the optioned stock under circumstances that will result in capital gain or loss) may be recognized only to the extent such losses exceed any unrecognized gain on offsetting positions under the rules of section 1092. A position includes an interest in actively traded personal property but generally excludes stock (e.g., futures, forwards and options), and an offsetting position is a position that substantially diminishes the risk of loss on other positions. Unrecognized gain is the amount of gain recognized on a hypothetical sale of the offsetting positions at fair market value at year end.

Losses suspended under the straddle rules can be deducted in subsequent years to the extent the taxpayer's unrecognized gain decreases below the suspended losses, to prevent a taxpayer from recognizing loss before gain once risk has been laid off. In addition, unless a taxpayer has held a position for at least the duration of the long-term capital gain holding period, the holding period for any position that is part of a straddle begins on the date the taxpayer no longer holds an offsetting position with respect to such position. See F.S.A. 2001-50-012 (Sept. 11, 2001).

Under section 263(g), interest and other carrying charges, if any, allocable to positions that are components of a straddle (a cash and carry) must be capitalized to the extent they exceed certain income earned on the property (e.g., OID, market discount or taxable portion of dividends), unless the straddle is a business hedge. As a result, business deductions that would generally shelter ordinary income are only available to either reduce capital gain or increase capital loss on a disposition of the position.

32 69 Fed. Reg. 8886 (Feb. 26, 2004).

33 The IRS has publicly confirmed that it is still working on NPC guidance, although no fixed timetable has been set. See "IRS Still Working on Notional Principal Contract Guidance," 118 Tax Notes 1194 (Mar. 17, 2008).

34 Notice 2001-44, 2001-2 C.B. 77. Under the non-contingent swap method described in the Notice, the contingent non-periodic payment would be converted into a non-contingent periodic amount payment taken into account over the life of the NPC on a constant yield basis. Under the full allocation method, no payments required under the NPC (e.g., periodic, non-periodic, contingent, and non-contingent payments) would have been included or deducted until the tax year in which all contingencies are resolved. The modified full allocation method would have required each party to an NPC to net any non-contingent payments it makes in a taxable year against payments it receives in that year, and would have permitted a deduction only if the amounts received exceeded the amounts paid. The mark-to-market method would have required NPCs to be marked to market, and gain or loss would be recognized, either annually or when the contract was terminated, assigned, or otherwise disposed of.

35 ISDA Comments on Notice 2001-44, Concerning Treatment of Notional Principal Contracts, Derivatives Report at 23 (Feb. 2002); ISDA, Comments on Proposed Regulations Relating to Notional Principal Contracts with Contingent Nonperiodic Payments (Oct. 13, 2004), available at ( http://www.isda.org/c_and_a/tax.html).

36 69 Fed. Reg. 8886 (Feb. 26, 2004), preamble.

37 If a taxpayer has adopted a method of accounting to accrue the contingent payment of these NPCs, the preamble to these regulations states that the IRS will not require a change in accounting method earlier than the first year ending on 30 days or more after the regulations are finalized. In general, a taxpayer adopts a proper method of accounting by filing a return reflecting that method and cannot change such method without IRS consent. Treas. Reg. § 1.446-1(e)(1). However, if the method is impermissible, the taxpayer is considered to have adopted a method of accounting only after the taxpayer has filed two returns reflecting the method. Treas. Reg. § 1.446-1(e)(2)(i); Temp. Treas. Reg. § 1.446-1T(e)(2)(ii). Query whether the wait-and-see method is an impermissible method.

38 Prop. Treas. Reg. § 1.446-3(g)(6).

39 Prop. Treas. Reg. § 1.446-3(i)(2); see also Erika Nijenhuis, "New Tax Issues Arising From Derivatives Regulatory Reform", 2010 TNT 114-3 (June 14, 2010) (arguing that the section 1256 mark-to-market rule as a policy matter should not apply to cleared or exchange traded swaps).

40 Rev. Rul. 2002-30, 2002-1 C.B. 971.

41 Presumably, the treatment of the contingent non-periodic component would be governed by the Proposed Contingent Non-Periodic Regulations, if adopted.

42 For an excellent discussion regarding the issues surrounding Revenue Ruling 2002-30, see D. Hariton, "Confusion About Swaps and Rev. Rul. 2002-30," 95 Tax Notes 1211 (May 20, 2002).

43 Notice 2002-35, 2002-1 C.B. 992. The Notice fails to give an example of a non-contingent payment based on a floating rate. For further insight into the IRS' analysis of the transactions described in Notice 2002-35, see ISP Coordinated Issue Paper, All Industries- Notional Principal Contracts (Jan. 6, 2005), Daily Tax Rep. (BNA) No. 8, at G 4 (Jan. 12, 2005).

44 Notice 2006-16, 2006-1 C.B. 538. This Notice responds to the IRS' concern that Notice 2002-35 has caused large numbers of taxpayers to file disclosure statements on IRS Form 8886 for common transactions, such as total return swaps, that are entered into for bona fide non-tax purposes.

45 The Taxpayer Relief Act of 1997 expanded former section 1234A, which had provided for capital gain or loss treatment with respect to any gain or loss attributable to the cancellation, lapse, expiration, or other termination of rights or obligations with respect to actively traded personal property, to include rights and obligations with respect to all property which is (or on acquisition would be) a capital asset in the hands of the taxpayer. See S. Rep. No. 105-33, at 135-36 (1997). Moreover, the Proposed Contingent Non-Periodic Regulations specifically apply section 1234A treatment to termination payments. See Prop. Treas. Reg. § 1.1234A-1; see also Joint Committee on Taxation, Present Law and Issues Related to the Taxation of Financial Instruments and Products 73-74 (Dec. 2, 2011).

46 Prop. Treas. Reg. § 1.162-30 states that payments on NPCs, other than interest on the loan component of a significant non-periodic payment and termination payments, are deductible as ordinary and necessary business expenses. See also Priv. Ltr. Rul. 98-24-026 (Mar. 12, 1998) (payment or receipt of periodic and non-periodic payments, including up-front payments, constituted ordinary income or expense); Priv. Ltr. Rul. 97-30-007 (Apr. 10, 1997) (periodic payments made and received on commodity swap constituted ordinary income and expense).

47 See section 1260, adopted as part of the Tax Relief Extension Act of 1999, which is generally effective for constructive ownership transactions entered into after December 17, 1999.

48 See Prop. Treas. Reg. § 1.162-30(a).

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Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.