The IRS on Nov. 6 issued final regulations under Treas. Reg. Section 1.1001-4 (T.D. 9639), which provide that certain transfers or assignments of a derivative do not result in exchange treatment for the nonassigning counterparty. The final regulations replace Treas. Reg. Section 1.1001-4T.
In accordance with Treas. Reg. Section 1.1001-4(a), the transfer or assignment of a derivative contract is not treated by the nonassigning counterparty as a deemed exchange (i.e., an exchange of the original contract for a modified contract that differs materially) if:
- both the assigning party and the assigned party are either:
- a dealer in securities (as defined in Section 475(c)(1)), or
- a clearinghouse (as defined in Treas. Reg. Section 1.1001-4(b)(2));
- the terms of the derivative contract permit the transfer or assignment of such contract, whether or not the consent of the nonassigning party is required; and
- the terms of the derivative contract are not otherwise modified in a manner that results in a taxable exchange under Section 1001.
In addition, any payment between the assigning and assigned parties will not affect the treatment of the nonassigning counterparty under Treas. Reg. Section 1.1001-4. That payment will also not result in an embedded loan between the parties under Treas. Reg. Section 1.446-3(g)(4).
For purposes of Treas. Reg. Section 1.1001-4, a derivative contract is a contract described in (i) Sections 475(c)(2)(D), (E) or (F) (i.e., certain specified derivatives) without regard to the last sentence in Section 475(c)(2) referring to Section 1256; (ii) Sections 475(e)(2)(B), (C) or (D) (i.e., certain derivatives related to commodities); or (iii) Treas. Reg. Section 1.446-3(c)(1) (i.e., a notional principal contract).
The final regulations under Treas. Reg. Section 1.1001-4 apply to transfers or assignments of derivative contracts on or after July 22, 2011.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.