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IRS Revenue Ruling 2013-05: New Qualified Board Under IRC §1256

IRS Revenue Ruling 2013-05

Section 1256.—Section 1256 Contracts Marked to Market
(Also: §§ 446, 481, 7805; 1.446-1, 301.7805-1)
Rev. Rul. 2013-5

ISSUE
Is Eurex Deutschland, which is a regulated exchange of Germany, a qualified board or exchange within the meaning of section 1256(g)(7)(C) of the Internal Revenue Code?

FACTS
Eurex Deutschland is a regulated exchange of Germany. On August 10, 1999, the Commodity Futures Trading Commission (CFTC) issued—and on October 25, 2004, and April 25, 2006, it amended—a letter that granted Eurex Deutschland no-action relief. This relief allowed United States members to trade through Eurex Deutschland’s electronic trading system, notwithstanding that the CFTC had not designated Eurex Deutschland as a contract market pursuant to sections 5 and 5a of the Commodity Exchange Act.

On December 23, 2011, the CFTC published final rules regarding the registration with the CFTC of foreign boards of trade (FBOTs), including those with existing noaction relief (“the CFTC FBOT registration system”). See Registration of Foreign Boards of Trade, 76 Fed. Reg. 80674 (Dec. 23, 2011), codified at 17 CFR Part 48. The effective date for the final rules was February 21, 2012. Under the CFTC FBOT registration system, the CFTC may issue an Order of Registration to an FBOT, allowing the FBOT to provide direct access to its electronic trading and order matching system from the United States. The CFTC FBOT registration system replaced the CFTC’s noaction relief system. Under 17 CFR 48.6(c), an FBOT with an existing no-action letter (like Eurex Deutschland) may continue to rely on the letter until the CFTC either revokes the letter or grants that FBOT an Order of Registration under the new system.

An FBOT’s status under the CFTC no-action relief system and the CFTC FBOT registration system is posted online at: http://sirt.cftc.gov/sirt/sirt.aspx?Topic=ForeignTerminalRelief.

LAW
Section 1256(g)(7) provides that the term “qualified board or exchange” means:
(A) a national securities exchange which is registered with the Securities and Exchange Commission,
(B) a domestic board of trade designated as a contract market by the CFTC, or
(C) any other exchange, board of trade, or other market which the Secretary determines has rules adequate to carry out the purposes of section 1256.

HOLDING
The Internal Revenue Service determines that Eurex Deutschland, which is a regulated exchange of Germany, is a qualified board or exchange within the meaning of section 1256(g)(7)(C) as long as—

  • The CFTC continues to allow Eurex Deutschland to provide direct access to its electronic trading and order matching system from the United States under an existing no action letter, pending CFTC approval of an Order of Registration; or
  • Eurex Deutschland holds a valid Order of Registration as an FBOT.

EFFECTIVE DATE
Under the authority of section 7805(b)(8) of the Code, this revenue ruling is effective for Eurex Deutschland Contracts (futures contracts and futures contract options) entered into on or after March 1, 2013.

CHANGE IN METHOD OF ACCOUNTING
A change in the treatment of Eurex Deutschland Contracts to comply with this revenue ruling is a change in method of accounting within the meaning of sections 446 and 481 and the regulations thereunder. The Commissioner grants consent to taxpayers to change to the section 1256 mark-to-market method for the first taxable year during which the taxpayer holds a Eurex Deutschland Contract that was entered into on or after March 1, 2013. Such a taxpayer need not file a Form 3115, Application for Change in Accounting Method, and Eurex Deutschland Contracts that were entered into before March 1, 2013 will not be covered by the change in method for which consent is granted. Because the change is being made on a “cut-off” basis, there is no potential omission or duplication of income or deductions, and therefore no adjustment under section 481 is required.

DRAFTING INFORMATION
The principal author of this revenue ruling is Shawn Tetelman of the Office of Associate Chief Counsel (Financial Institutions & Products). For further information regarding this revenue ruling, contact Ms. Tetelman at (202) 622-3930 (not a toll-free call).

IRS Private Letter Ruling 201216007

The applicability of § 1031(a) in relation to § 1031(f), in the case of a series of transactions between related parties if each transaction in the series otherwise qualifies as a like-kind exchange under § 1031(a), and none of the related parties receive more than a minimal amount of non-like-kind property in their transactions.

Dividend Equivalents from Sources within the United States

TD 9572 – Dividend Equivalents from Sources within the US

SUMMARY: This document amends temporary regulations relating to dividend equivalents for purposes of section 871(m) of the Internal Revenue Code (Code). The regulations affect nonresident aliens and foreign corporations that hold notional principal contracts (NPCs) providing for payments determined by reference to payments of dividends from sources within the United States.

FASB Splits with IASB on Impairment Standards

FASB Splits with IASB on Impairment Standards: “The Financial Accounting Standards Board said it is taking a different approach than the International Accounting Standards Board in the impairment of financial instruments after a joint meeting Wednesday that ended in outspoken disagreement.”

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Qualified Intermediaries and FATCA Implementation


Though final regulations for foreign financial institutions (FFIs) have not been issued, some basics of the administration of the Qualified Intermediary (QI) Program and FATCA implementation are known. These include the following:
 1.  QI’s must become FATCA compliant to retain their QI status and the QI agreement will be modified to reflect the Chapter 4 requirements.
 2.  The renewal of the QI agreement for QI’s whose renewal is expiring December 31, 2012 has been extended per Notice 2011-53 until December 31, 2013. 
 3.  The renewal of the QI agreement will be accomplished through the online FATCA FFI registration system.  This online registration system will be available no later than Jan. 1, 2013.

New Details on FATCA Registration Process Released

In building an online system for foreign financial institutions (FFIs) to register as participating FFIs, the IRS has developed a flexible system that aims to make the registration process as quick and easy as possible, facilitates communication electronically and provides e-mail alerts to keep the registration process moving forward.

safe harbor under which the Internal Revenue Service (IRS) will not challenge a determination by a publicly traded partnership (PTP) that income from discharge of indebtedness (COD income) is qualifying income

Rev. Proc.  2012-28

SECTION 1. PURPOSE
This revenue procedure provides a  under section 7704(d) of the Internal Revenue Code.

SECTION 2. BACKGROUND

.01 Section 61(a) provides generally that gross income means all income from whatever source derived.  Section 61(a)(12) provides that gross income includes COD income. 

.02 Section 7704(a) provides generally that, except as provided in section 7704(c), a PTP is treated as a corporation. 

.03 Section 7704(b) provides that the term “publicly traded partnership” means any partnership if either (1) interests in such partnership are traded on an established securities market, or (2) interests in such partnership are readily tradable on a secondary market (or the substantial equivalent thereof).

.04 Section 7704(c)(1) provides that section 7704(a) shall not apply to any PTP for any taxable year if such partnership met the gross income requirements of section 7704(c)(2) for such taxable year and each preceding taxable year beginning after December 31, 1987, during which the partnership (or any predecessor) was in existence (qualifying income exception).  Section 7704(c)(2) provides that a partnership meets the gross income requirements of section 7704(c) for any taxable year if 90 percent or more of the gross income of such partnership for such taxable year consists of qualifying income.  Section 7704(c)(3) provides that section 7704(c) does not apply to any partnership that would be described in section 851(a) if such partnership were a domestic corporation.

.05 Section 7704(d)(1) provides in general that the term “qualifying income” means: (A) interest, (B) dividends, (C) real property rents, (D) gain from the sale or other disposition of real property (including property described in section 1221(a)(1)), (E) income and gains derived from the exploration, development, mining or production, processing, refining, transportation (including pipelines transporting gas, oil, or products thereof), or the marketing of any mineral or natural resource (including fertilizer, geothermal energy, and timber), or industrial source carbon dioxide, or the transportation or storage of any fuel described in subsection (b), (c), (d), or (e) of section 6426, or any alcohol fuel defined in section 6426(b)(4)(A) or any biodiesel fuel as defined in section 40A(d)(1), (F) any gain from the sale or disposition of a capital asset (or property described in section 1231(b)) held for the production of income described in any of the foregoing subparagraphs, and (G) in the case of a partnership described in the second sentence of section 7704(c)(3), income and gains from commodities (not described in section 1221(a)(1)) or futures, forwards, and options with respect to commodities.  Section 7704(d)(4) provides that “qualifying income” also includes any income that would qualify under section 851(b)(2)(A) or section 856(c)(2).

 .06 The legislative history to section 7704 provides that the purpose of the section 7704(c) exception for PTPs with qualifying income is to except from entity level tax those partnerships that engage in activities that are commonly considered as essentially no more than investing or that have traditionally been conducted in partnership form.  See H.R. Rep. No. 391 (Part 2), 100th Cong., 1st Sess. 1066-69. 

.07 Section 1.163-8T of the temporary Income Tax Regulations prescribes rules for allocating interest expense for purposes of applying the passive loss limitation of section 469 and the nonbusiness interest limitations of section 163(d) and (h).  Under these rules, interest expense is generally allocated in the same manner as the debt to which the interest expense relates.  Debt is allocated by tracing disbursements of the debt proceeds to specific expenditures. 
SECTION 3. SCOPE
This revenue procedure applies to PTPs with COD income that use the qualifying income exception in section 7704(c) to avoid corporate treatment under section 7704(a). 

SECTION 4. SAFE HARBOR
  The IRS will not challenge a PTP’s determination that COD income is qualifying income under section 7704(d) if COD income is attributable to debt incurred in direct connection with activities of the PTP that generate qualifying income (qualifying activities).  The PTP may demonstrate that COD income is attributable to debt incurred in direct connection with the PTP’s qualifying activities by any reasonable method.  One reasonable method for demonstrating that COD income is attributable to debt incurred in direct connection with the PTP’s qualifying activities is to trace the proceeds of the debt generating COD income to qualifying activities under an approach similar to the one used in section 1.163-8T.  Ordinarily, a method that allocates COD income based solely on the ratio of qualifying gross income to total gross income will not be considered reasonable.  The IRS may consider a request for a private letter ruling on whether a method is reasonable.  

SECTION 5. EFFECTIVE DATE
This revenue procedure is effective for COD income of a PTP attributable to debt discharged on or after June 15, 2012.  PTPs may apply this revenue procedure for COD income attributable to debt discharged in any taxable year for which the statute of limitations has not expired.

SECTION 6.  DRAFTING INFORMATION
The principal author of this revenue procedure is Wendy L. Kribell of the Office of Associate Chief Counsel (Passthroughs & Special Industries).  For further information regarding this revenue procedure contact Wendy L. Kribell on (202) 622-3050 (not a toll free call).

financial assets with contractual cash flows

Financial instruments:
Classification and measurement – the ball continues to roll

Highlights
In May 2012, the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) (collectively, the Boards) decided that financial assets with contractual cash flows that are solely payments of principal and interest (e.g., plain vanilla bonds) would be classified for fair value through other comprehensive income (FVOCI) classification and measurement at initial recognition if the entity’s business model for a portfolio is both:

  1. to hold to collect contractual cash flows; and
  2. to sell financial assets.

At their meeting on 13 June 2012, the  Boards reaffirmed their previous decision that a debt instrument (such as a loan or a debt security) will be measured at FVOCI only if it passes the contractual cash flow characteristics assessment and the debt instrument is managed within the relevant business model (as described above).

This means that financial assets with contractual cash flows that are not solely payments of principal and interest will not qualify for the FVOCI category and must therefore be measured at fair value through profit or loss (FVTPL).

Furthermore, the IASB tentatively decided to extend the option in IFRS 9 for designating financial assets at FVTPL under the fair value option (FVO) to debt instruments that would otherwise be measured at FVOCI. This means that an entity may, on initial recognition, irrevocably elect to designate a debt instrument at FVTPL, if doing so eliminates or significantly reduces an accounting mismatch.

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