Integrated Hedging Transactions of Qualifying Debt, 54808-54811 [2012-21986]
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Federal Register / Vol. 77, No. 173 / Thursday, September 6, 2012 / Rules and Regulations
§ 232.101 Mandated electronic
submissions and exceptions.
(a) * * *
(1) * * *
(ix) Form ID (§§ 239.63, 249.446,
269.7 and 274.402 of this chapter); the
Form ID authenticating document
required by Rule 10(b) of Regulation S–
T (§ 232.10(b)) also shall be filed in
electronic format as an uploaded
Portable Document Format (PDF)
attachment to the Form ID filing. Other
related correspondence and
supplemental information submitted
after the Form ID filing shall not be
submitted in electronic format;
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4. Section 232.301 is revised to read
as follows:
Dated: August 29, 2012.
Elizabeth M. Murphy,
Secretary.
DEPARTMENT OF THE TREASURY
Internal Revenue Service
[FR Doc. 2012–21805 Filed 9–5–12; 8:45 am]
[TD 9598]
RIN 1545–BK98
DEPARTMENT OF HOMELAND
SECURITY
Integrated Hedging Transactions of
Qualifying Debt
Customs and Border Protection
AGENCY:
19 CFR Part 4
Vessels in Foreign and Domestic
Trades
CFR Correction
■
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§ 232.301
EDGAR Filer Manual.
Filers must prepare electronic filings
in the manner prescribed by the EDGAR
Filer Manual, promulgated by the
Commission, which sets out the
technical formatting requirements for
electronic submissions. The
requirements for becoming an EDGAR
Filer and updating company data are set
forth in the updated EDGAR Filer
Manual, Volume I: ‘‘General
Information,’’ Version 13 (July 2012).
The requirements for filing on EDGAR
are set forth in the updated EDGAR Filer
Manual, Volume II: ‘‘EDGAR Filing,’’
Version 20 (July 2012). All of these
provisions have been incorporated by
reference into the Code of Federal
Regulations, which action was approved
by the Director of the Federal Register
in accordance with 5 U.S.C. 552(a) and
1 CFR Part 51. You must comply with
these requirements in order for
documents to be timely received and
accepted. You can obtain paper copies
of the EDGAR Filer Manual from the
following address: Public Reference
Room, U.S. Securities and Exchange
Commission, 100 F Street NE., Room
1543, Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Electronic
copies are available on the
Commission’s Web site. The address for
the Filer Manual is https://www.sec.gov/
info/edgar.shtml. You can also inspect
the document at the National Archives
and Records Administration (NARA).
For information on the availability of
this material at NARA, call 202–741–
6030, or go to:https://www.archives.gov/
federal_register/code_of_
federal_regulations/ibr_
locations.html.
In Title 19 of the Code of Federal
Regulations, Parts 1 to 99, revised as of
April 1, 2012, on page 14, in § 4.7,
paragraph (b)(4) introductory text is
corrected to read as follows;
§ 4.7 Inward foreign manifest; production
on demand; contents and form; advance
electronic filing of cargo declaration.
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(b) * * *
(4) Carriers of bulk cargo as specified
in paragraph (b)(4)(i) of this section and
carriers of break bulk cargo to the extent
provided in paragraph (b)(4)(ii) of this
section are exempt, with respect only to
the bulk or break bulk cargo being
transported, from the requirement set
forth in paragraph (b)(2) of this section
that an electronic cargo declaration be
received by CBP 24 hours before such
cargo is laden aboard the vessel at the
foreign port. With respect to exempted
carriers of bulk or break bulk cargo
operating voyages to the United States,
CBP must receive the electronic cargo
declaration covering the bulk or break
bulk cargo they are transporting 24
hours prior to the vessel’s arrival in the
United States (see § 4.30(n)). However,
for any containerized or non-qualifying
break bulk cargo these exempted
carriers will be transporting, CBP must
receive the electronic cargo declaration
24 hours in advance of loading.
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[FR Doc. 2012–21999 Filed 9–5–12; 8:45 am]
BILLING CODE 1505–01–D
By the Commission.
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Internal Revenue Service (IRS),
Treasury.
ACTION: Temporary and final
regulations.
This document contains
temporary regulations that address
certain integrated transactions that
involve a foreign currency denominated
debt instrument and multiple associated
hedging transactions. The regulations
provide that if a taxpayer has identified
multiple hedges as being part of a
qualified hedging transaction, and the
taxpayer has terminated at least one but
less than all of the hedges (including a
portion of one or more of the hedges),
the taxpayer must treat the remaining
hedges as having been sold for fair
market value on the date of disposition
of the terminated hedge. The text of the
temporary regulations also serves as the
text of the proposed regulations set forth
in the notice of proposed rulemaking on
this subject in the Proposed Rules
section in this issue of the Federal
Register.
DATES: Effective Date. These regulations
are effective on September 6, 2012.
Applicability Date. These regulations
apply to leg-outs within the meaning of
§ 1.988–5(a)(6)(ii) which occur on or
after September 6, 2012.
FOR FURTHER INFORMATION CONTACT:
Sheila Ramaswamy, at (202) 622–3870
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
SUMMARY:
Background
Section 1.988–5 provides detailed
rules that permit the integration of a
qualifying debt instrument with a
§ 1.988–5(a) hedge. The effect of
integration under the regulations is to
create a synthetic debt instrument.
Generally, if a taxpayer enters into a
qualified hedging transaction and meets
the requirements of the regulations, no
exchange gain or loss is recognized on
the debt instrument or the hedge for the
period that it is part of a qualified
hedging transaction (provided that the
synthetic debt instrument is not
denominated in a nonfunctional
currency). See § 1.988–5(a)(9). A
qualified hedging transaction is an
integrated economic transaction
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Federal Register / Vol. 77, No. 173 / Thursday, September 6, 2012 / Rules and Regulations
consisting of a qualifying debt
instrument and a § 1.988–5(a) hedge.
See § 1.988–5(a)(1). A qualifying debt
instrument is any debt instrument
described in § 1.988–1(a)(2)(i) regardless
of its denominated currency. See
§ 1.988–5(a)(3). A § 1.988–5(a) hedge is
a spot contract, futures contract, forward
contract, option contract, notional
principal contract, currency swap
contract, or similar financial instrument,
or series or combinations of such
instruments, that when integrated with
a qualifying debt instrument permits the
calculation of a yield to maturity in the
currency in which the synthetic debt
instrument is denominated. See § 1.988–
5(a)(4).
Under § 1.988–5(a)(6)(ii), a taxpayer
that disposes of all or a part of the
qualifying debt instrument or hedge
prior to the maturity of the qualified
hedging transaction, or that changes a
material term of the qualifying debt
instrument or hedge, is viewed as
‘‘legging out’’ of integrated treatment.
One of the consequences of legging out
is that if the hedge is disposed of, the
qualifying debt instrument is treated as
sold for its fair market value on the date
of disposition of the hedge (leg-out
date). See § 1.988–5(a)(6)(ii)(B). Any
gain or loss on the qualifying debt
instrument from the date of
identification to the leg-out date is
recognized on the leg-out date. The
intended result of this deemed
disposition rule is that the gain or loss
on the qualifying debt instrument will
generally be offset by the gain or loss on
the hedge.
The Internal Revenue Service (IRS)
and the Department of the Treasury
(Treasury Department) have become
aware that some taxpayers who are in a
loss position with respect to a qualifying
debt instrument that is part of a
qualified hedging transaction are
interpreting the legging-out rules of
§ 1.988–5(a)(6)(ii)(B) to permit the
recognition of the loss on the debt
instrument without recognition of all of
the corresponding gain on the hedging
component of the transaction.
Taxpayers claim to achieve this result
by hedging nonfunctional currency debt
instruments with multiple financial
instruments and selectively disposing of
less than all of these positions.
Taxpayers take the position that
§ 1.988–5(a)(6)(ii)(B) triggers the entire
loss in the qualifying debt instrument
but not the gain in the remaining
components of the hedging side of the
integrated transaction.
For example, a taxpayer may fully
hedge a fixed rate nonfunctional
currency denominated debt instrument
that it has issued with two swaps—a
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nonfunctional currency/dollar currency
swap and a fixed for floating dollar
interest rate swap. The effect of
matching the currency swap with the
foreign currency denominated debt is to
create synthetic fixed rate U.S. dollar
debt while the effect of the interest rate
swap is to simultaneously transform the
synthetic fixed rate U.S. dollar debt into
synthetic floating rate U.S. dollar debt.
Thus, assuming that the rules of
§ 1.988–5(a) are otherwise satisfied, the
taxpayer will have effectively converted
the fixed rate foreign currency
denominated debt instrument into a
synthetic floating rate U.S. dollar
denominated debt instrument.
As the U.S. dollar declines in value
relative to the foreign currency in which
the debt instrument is denominated, the
taxpayer disposes of the interest rate
swap while keeping the currency swap
in existence. The taxpayer takes the
position that the disposition of the
interest rate swap allows it to treat the
debt instrument as having been
terminated on the date of disposition
and claims a loss on the debt instrument
without taking into account the
offsetting gain on the remaining
component of the hedge. Thus, the
taxpayer claims the transaction
generates a net loss. The IRS and the
Treasury Department believe that these
results are inappropriate under the
legging-out rules since the claimed loss
is largely offset by unrealized gain on
the remaining component of the hedging
transaction. Therefore, the IRS and the
Treasury Department are issuing these
regulations to clarify the rules regarding
the consequences of legging-out of
qualified hedging transactions that
consist of multiple components. No
inference is intended regarding the
merits of the position taken by the
taxpayer with respect to the transaction
described above (or comparable
positions taken by taxpayers with
respect to similar transactions) in the
case of transactions occurring prior to
the applicability date of these
regulations, and in appropriate cases the
IRS may challenge the claimed results.
Explanation of Provisions
Section 1.988–5(a) is amended to
provide that if a hedge with more than
one component has been properly
identified as being part of a qualified
hedging transaction, and at least one but
not all of the components of the hedge
that is a part of the qualified hedging
transaction has been terminated or
disposed of, all of the remaining
components of the hedge (as well as the
qualifying debt) shall be treated as sold
for their fair market value on the leg-out
date of the terminated hedge. Similarly,
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if a part of any component of a hedge
(whether a hedge consists of a single or
multiple components) has been
disposed of, the remaining part of that
component (as well as other
components in the case of a hedge with
multiple components) that is still in
existence (as well as the qualifying debt
instrument) shall be treated as sold for
its fair market value on the leg-out date
of the terminated hedge.
Effective/Applicability Date
The regulation applies to leg-outs
within the meaning of § 1.988–5(a)(6)(ii)
which occur on or after September 6,
2012.
Special Analyses
It has been determined that these
regulations are not a significant
regulatory action as defined in
Executive Order 12866. Therefore, a
regulatory assessment is not required. It
has also been determined that section
553(b) of the Administrative Procedure
Act (5 U.S.C. chapter 5) does not apply
to these regulations, and because these
regulations do not impose a collection
of information on small entities, the
provisions of the Regulatory Flexibility
Act (5 U.S.C. chapter 6) do not apply.
Pursuant to section 7805(f) of the
Internal Revenue Code, these
regulations will be submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment
on their impact on small business.
Drafting Information
The principal author of these
regulations is Sheila Ramaswamy,
Office of Associate Chief Counsel
(International). However, other
personnel from the IRS and the Treasury
Department participated in their
development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.
Amendment to the Regulations
Accordingly, 26 CFR part 1 is
amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation
for part 1 continues to read in part as
follows:
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Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.988–5 is amended
by:
■ 1. Revising paragraph (a)(6)(ii).
■ 2. Adding Example 11 in paragraph
(a)(9)(iv).
The revision and addition read as
follows:
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§ 1.988–5 Section 988(d) hedging
transactions.
(a) * * *
(6) * * *
(ii) [Reserved]. For further guidance
see § 1.988–5T(a)(6)(ii).
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(9) * * *
(iv) * * *
Example 11. [Reserved]. For further
guidance see § 1.988–5T(a)(9)(iv).
Example 11.
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Par. 3. Section 1.988–5T is added to
read as follows:
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§ 1.988–5T Section 988(d) hedging
transactions (temporary).
(a) through (a)(6)(i) [Reserved]. For
further guidance see § 1.988–5(a)
through (a)(6)(i).
(ii) Legging out. With respect to a
qualifying debt instrument and hedge
that are properly identified as a
qualified hedging transaction, ‘‘legging
out’’ of integrated treatment under this
paragraph (a) means that the taxpayer
disposes of or otherwise terminates all
or any portion of the qualifying debt
instrument or the hedge prior to
maturity of the qualified hedging
transaction, or the taxpayer changes a
material term of the qualifying debt
instrument (for example, exercises an
option to change the interest rate or
index, or the maturity date) or the hedge
(for example, changes the interest or
exchange rates underlying the hedge, or
the expiration date) prior to maturity of
the qualified hedging transaction. A
taxpayer that disposes of or terminates
a qualified hedging transaction (that is,
disposes of or terminates both the
qualifying debt instrument and the
hedge in their entirety on the same day)
shall be considered to have disposed of
or otherwise terminated the synthetic
debt instrument rather than legging out.
If a taxpayer legs out of integrated
treatment, the following rules shall
apply:
(A) The transaction will be treated as
a qualified hedging transaction during
the time the requirements of this
paragraph (a) were satisfied.
(B) If all of the instruments
comprising the hedge (each such
instrument, a component) are disposed
of or otherwise terminated, the
qualifying debt instrument shall be
treated as sold for its fair market value
on the date the hedge is disposed of or
otherwise terminated (the leg-out date),
and any gain or loss (including gain or
loss resulting from factors other than
movements in exchange rates) from the
identification date to the leg-out date is
realized and recognized on the leg-out
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date. The spot rate on the leg-out date
shall be used to determine exchange
gain or loss on the debt instrument for
the period beginning on the leg-out date
and ending on the date such instrument
matures or is disposed of or otherwise
terminated. Proper adjustment must be
made to reflect any gain or loss taken
into account. The netting rule of
§ 1.988–2(b)(8) shall apply.
(C) If a hedge has more than one
component (and such components have
been properly identified as being part of
the qualified hedging transaction) and at
least one but not all of the components
that comprise the hedge has been
disposed of or otherwise terminated, or
if part of any component of the hedge
has been terminated (whether a hedge
consists of a single or multiple
components), the date such component
(or part thereof) is disposed of or
terminated shall be considered the legout date and the qualifying debt
instrument shall be treated as sold for
its fair market value in accordance with
the rules of paragraph (a)(6)(ii)(B) of this
section on such leg-out date. In
addition, all of the remaining
components (or parts thereof) that have
not been disposed of or otherwise
terminated shall be treated as sold for
their fair market value on the leg-out
date, and any gain or loss from the
identification date to the leg-out date is
realized and recognized on the leg-out
date. To the extent relevant, the spot
rate on the leg-out date shall be used to
determine exchange gain or loss on the
remaining components (or parts thereof)
for the period beginning on the leg-out
date and ending on the date such
components (or parts thereof) are
disposed of or otherwise terminated.
(D) If the qualifying debt instrument
is disposed of or otherwise terminated
in whole or in part, the date of such
disposition or termination shall be
considered the leg-out date.
Accordingly, the hedge (including all
components making up the hedge in
their entirety) that is part of the
qualified hedging transaction shall be
treated as sold for its fair market value
on the leg-out date, and any gain or loss
from the identification date to the legout date is realized and recognized on
the leg-out date. To the extent relevant,
the spot rate on the leg-out date shall be
used to determine exchange gain or loss
on the hedge (including all components
thereof) for the period beginning on the
leg-out date and ending on the date such
hedge is disposed of or otherwise
terminated.
(E) Except as provided in paragraph
(a)(8)(iii) of this section (regarding
identification by the Commissioner), the
part of the qualified hedging transaction
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that has not been terminated (that is, the
remaining debt instrument in its
entirety even if partially hedged, or the
remaining components of the hedge)
cannot be part of a qualified hedging
transaction for any period subsequent to
the leg-out date.
(F) If a taxpayer legs out of a qualified
hedging transaction and realizes a gain
with respect to the disposed of or
terminated debt instrument or hedge,
then paragraph (a)(6)(ii)(B), (C), and (D)
of this section, as appropriate, will not
apply if during the period beginning 30
days before the leg-out date and ending
30 days after that date the taxpayer
enters into another transaction that,
taken together with any remaining
components of the hedge, hedges at
least 50 percent of the remaining
currency flow with respect to the
qualifying debt instrument that was part
of the qualified hedging transaction or,
if appropriate, an equivalent amount
under the hedge (or any remaining
components thereof) that was part of the
qualified hedging transaction. Similarly,
in a case in which a hedge has multiple
components that are part of a qualified
hedging transaction, if the taxpayer legs
out of a qualified hedging transaction by
terminating one such component or a
part of one or more such components
and realizes a gain with respect to the
terminated component, components, or
portions thereof, then paragraphs
(a)(6)(ii)(B), (C), and (D) of this section,
as appropriate, will not apply if the
remaining components of the hedge
(including parts thereof) by themselves
hedge at least 50 percent of the
remaining currency flow with respect to
the qualifying debt instrument that was
part of the qualified hedging
transaction.
(a)(7) through (a)(9)(iv) Examples 10
[Reserved]. For further guidance see
§ 1.988–5(a)(7) through (a)(9)(iv)
Example 10.
Example 11. (i) K is a U.S. corporation
with the U.S. dollar as its functional
currency. On January 1, 2013, K borrows 100
British pounds (£) for two years at a 10% rate
of interest payable on December 31 of each
year with no principal payment due until
maturity on December 31, 2014. Assume that
the spot rate on January 1, 2013, is £1=$1. On
the same date, K enters into two swap
contracts with an unrelated counterparty that
economically results in the transformation of
the fixed rate £100 borrowing to a floating
rate dollar borrowing. The terms of the swaps
are as follows:
(A) Swap #1, Currency swap. On January
1, 2013, K will exchange £100 for $100.
(1) On December 31 of both 2013 and 2014,
K will exchange $8 for £10;
(2) On December 31, 2014, K will exchange
$100 for £100.
(B) Swap #2, Interest rate swap. On
December 31 of both 2013 and 2014, K will
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pay LIBOR times a notional principal amount
of $100 and will receive 8% times the same
$100 notional principal amount.
(ii) Assume that K properly identifies the
pound borrowing and the swap contracts as
a qualified hedging transaction as provided
in paragraph (a)(8) of this section and that the
other relevant requirements of paragraph (a)
of this section are satisfied.
(iii) Assume also that on January 1, 2014,
the spot exchange rate is £1:$2; the U.S.
dollar LIBOR rate of interest is 9%; and the
market value of K’s note in pounds has not
changed. K terminates swap #2. K will incur
a loss of ($.91) (the present value of $1) with
respect to the termination of such swap on
January 1, 2014. Pursuant to paragraph
(a)(6)(ii)(C) of this section, K must treat swap
#1 as having been sold for its fair market
value on the leg-out date, which is the date
swap #2 is terminated. K must realize and
recognize gain of $100.92 [the present value
of £110 discounted in pounds to equal £100
× $2 ($200) less the present value of $108
($99.08)]. The loss inherent in the pound
borrowing from January 1, 2013 to January 1,
2014 is realized and recognized on January
1, 2014. Such loss is exchange loss in the
amount of $100 [the present value of £110
that was to be paid at the end of the year
discounted at pound interest rates to equal
£100 times the change in exchange rates:
(£100 × $1, the spot rate on January 1, 2013)
¥ (£100 × $2, the spot rate on January 1,
2014)]. Except as provided in paragraph
(a)(8)(iii) of this section (regarding
identification by the Commissioner), the
pound borrowing and currency swap cannot
be part of a qualified hedging transaction for
any period subsequent to the leg-out date.
(iv) Assume the facts are the same as in
paragraph (iii) of this section except that on
January 1, 2014, the U.S. dollar LIBOR rate
of interest is 7% rather than 9%. When K
terminates swap #2, K will realize gain of
$0.93 (the present value of $1) received with
respect to the termination on January 1, 2014.
Fifty percent or more of the remaining pound
cash flow of the pound borrowing remains
hedged after the termination of swap #2.
Accordingly, under paragraph (a)(6)(ii)(F) of
this section, paragraphs (a)(6)(ii)(B) and (C) of
this section do not apply and the gain on
swap #1 and the loss on the qualifying debt
instrument is not taken into account. Thus,
K will include in income $0.93 realized from
termination of swap #2.
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(a)(10) through (g) [Reserved]. For
further guidance see § 1.988–5(a)(10)
through (g).
(h) Effective/applicability date. This
section applies to leg-outs that occur on
or after September 6, 2012.
(i) Expiration date. This section
expires on September 4, 2012.
Steven T. Miller,
Deputy Commissioner for Services and
Enforcement.
Approved: August 17, 2012.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax
Policy).
[FR Doc. 2012–21986 Filed 9–5–12; 8:45 am]
BILLING CODE 4830–01–P
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DEPARTMENT OF HOMELAND
SECURITY
Coast Guard
33 CFR Part 165
[Docket Number USCG–2012–0800]
RIN 1625–AA00
Safety Zone; TriRock San Diego, San
Diego Bay, San Diego, CA
Coast Guard, DHS.
Temporary final rule.
AGENCY:
ACTION:
The Coast Guard is
establishing a safety zone upon the
navigable waters of the San Diego Bay,
San Diego, CA, in support of a bay swim
in San Diego Harbor. This safety zone is
necessary to provide for the safety of the
participants, crew, spectators,
participating vessels, and other vessels
and users of the waterway. Persons and
vessels are prohibited from entering
into, transiting through, or anchoring
within this safety zone unless
authorized by the Captain of the Port, or
his designated representative.
DATES: This rule is effective from 6:30
a.m. to 9:30 a.m. on September 9, 2012.
ADDRESSES: Documents mentioned in
this preamble are part of docket USCG–
2012–0800. To view documents
mentioned in this preamble as being
available in the docket, go to https://
www.regulations.gov, type the docket
number in the ‘‘SEARCH’’ box and click
‘‘SEARCH.’’ Click on Open Docket
Folder on the line associated with this
rulemaking. You may also visit the
Docket Management Facility in Room
W12–140 on the ground floor of the
Department of Transportation West
Building, 1200 New Jersey Avenue SE.,
Washington, DC 20590, between 9 a.m.
and 5 p.m., Monday through Friday,
except Federal holidays.
FOR FURTHER INFORMATION CONTACT: If
you have questions on this rule, call or
email Petty Officer Deborah Metzger,
Waterways Management, U.S. Coast
Guard Sector San Diego; telephone (619)
278–7656, email
d11marineeventssd@uscg.mil. If you
have questions on viewing or submitting
material to the docket, call Renee V.
Wright, Program Manager, Docket
Operations, telephone (202) 366–9826.
SUPPLEMENTARY INFORMATION:
SUMMARY:
Table of Acronyms
DHS Department of Homeland Security
FR Federal Register
NPRM Notice of Proposed Rulemaking
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54811
A. Regulatory History and Information
The Coast Guard is issuing this final
rule without prior notice and
opportunity to comment pursuant to
authority under section 4(a) of the
Administrative Procedure Act (APA) (5
U.S.C. 553(b)). This provision
authorizes an agency to issue a rule
without prior notice and opportunity to
comment when the agency for good
cause finds that those procedures are
‘‘impracticable, unnecessary, or contrary
to the public interest.’’ Under 5 U.S.C.
553(b)(B), the Coast Guard finds that
good cause exists for not publishing a
notice of proposed rulemaking (NPRM)
because it would be impracticable to do
so with respect to this rule, as the
logistical details of the San Diego Bay
swim were not finalized nor presented
to the Coast Guard in enough time to
draft and publish an NPRM. As such,
the event would occur before the
rulemaking process was complete.
Under 5 U.S.C. 553(d)(3), the Coast
Guard finds that good cause exists for
making this rule effective less than 30
days after publication in the Federal
Register. Delaying the effective date
would be impracticable and contrary to
the public interest, since immediate
action is needed to ensure public safety.
B. Basis and Purpose
Competitor Group is sponsoring the
TriRock Triathlon, consisting of 2000
swimmers swimming a predetermined
course. The sponsor will provide 18
safety vessels including boats, paddle
boards, and PWCs for this event. A
safety zone is necessary to provide for
the safety of the participants, crew,
spectators, sponsor vessels, and other
users of the waterway.
C. Discussion of the Final Rule
The Coast Guard is establishing a
safety zone that will be enforced on
September 9, 2012, from 6:30 a.m. to 10
a.m. The limits of the safety zone will
be navigable waters of the San Diego
Bay behind the San Diego Convention
Center bound by the following
coordinates including the marina;
32°42′16″ N, 117°09′58″ W to 32°42′15″
N, 117°10′02″ W then south to 32°42′00″
N, 117°09′45″ W to 32°42′03″ N,
117°09′40″ W.
This safety zone is necessary to
ensure unauthorized personnel and
vessels remain safe by keeping clear
during the bay swim. Persons and
vessels are prohibited from entering
into, transiting through, or anchoring
within this safety zone unless
authorized by the Captain of the Port, or
his designated representative.
E:\FR\FM\06SER1.SGM
06SER1
]]>Agencies
[Federal Register Volume 77, Number 173 (Thursday, September 6, 2012)]
[Rules and Regulations]
[Pages 54808-54811]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-21986]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9598]
RIN 1545-BK98
Integrated Hedging Transactions of Qualifying Debt
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Temporary and final regulations.
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SUMMARY: This document contains temporary regulations that address
certain integrated transactions that involve a foreign currency
denominated debt instrument and multiple associated hedging
transactions. The regulations provide that if a taxpayer has identified
multiple hedges as being part of a qualified hedging transaction, and
the taxpayer has terminated at least one but less than all of the
hedges (including a portion of one or more of the hedges), the taxpayer
must treat the remaining hedges as having been sold for fair market
value on the date of disposition of the terminated hedge. The text of
the temporary regulations also serves as the text of the proposed
regulations set forth in the notice of proposed rulemaking on this
subject in the Proposed Rules section in this issue of the Federal
Register.
DATES: Effective Date. These regulations are effective on September 6,
2012.
Applicability Date. These regulations apply to leg-outs within the
meaning of Sec. 1.988-5(a)(6)(ii) which occur on or after September 6,
2012.
FOR FURTHER INFORMATION CONTACT: Sheila Ramaswamy, at (202) 622-3870
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
Section 1.988-5 provides detailed rules that permit the integration
of a qualifying debt instrument with a Sec. 1.988-5(a) hedge. The
effect of integration under the regulations is to create a synthetic
debt instrument. Generally, if a taxpayer enters into a qualified
hedging transaction and meets the requirements of the regulations, no
exchange gain or loss is recognized on the debt instrument or the hedge
for the period that it is part of a qualified hedging transaction
(provided that the synthetic debt instrument is not denominated in a
nonfunctional currency). See Sec. 1.988-5(a)(9). A qualified hedging
transaction is an integrated economic transaction
[[Page 54809]]
consisting of a qualifying debt instrument and a Sec. 1.988-5(a)
hedge. See Sec. 1.988-5(a)(1). A qualifying debt instrument is any
debt instrument described in Sec. 1.988-1(a)(2)(i) regardless of its
denominated currency. See Sec. 1.988-5(a)(3). A Sec. 1.988-5(a) hedge
is a spot contract, futures contract, forward contract, option
contract, notional principal contract, currency swap contract, or
similar financial instrument, or series or combinations of such
instruments, that when integrated with a qualifying debt instrument
permits the calculation of a yield to maturity in the currency in which
the synthetic debt instrument is denominated. See Sec. 1.988-5(a)(4).
Under Sec. 1.988-5(a)(6)(ii), a taxpayer that disposes of all or a
part of the qualifying debt instrument or hedge prior to the maturity
of the qualified hedging transaction, or that changes a material term
of the qualifying debt instrument or hedge, is viewed as ``legging
out'' of integrated treatment. One of the consequences of legging out
is that if the hedge is disposed of, the qualifying debt instrument is
treated as sold for its fair market value on the date of disposition of
the hedge (leg-out date). See Sec. 1.988-5(a)(6)(ii)(B). Any gain or
loss on the qualifying debt instrument from the date of identification
to the leg-out date is recognized on the leg-out date. The intended
result of this deemed disposition rule is that the gain or loss on the
qualifying debt instrument will generally be offset by the gain or loss
on the hedge.
The Internal Revenue Service (IRS) and the Department of the
Treasury (Treasury Department) have become aware that some taxpayers
who are in a loss position with respect to a qualifying debt instrument
that is part of a qualified hedging transaction are interpreting the
legging-out rules of Sec. 1.988-5(a)(6)(ii)(B) to permit the
recognition of the loss on the debt instrument without recognition of
all of the corresponding gain on the hedging component of the
transaction. Taxpayers claim to achieve this result by hedging
nonfunctional currency debt instruments with multiple financial
instruments and selectively disposing of less than all of these
positions. Taxpayers take the position that Sec. 1.988-5(a)(6)(ii)(B)
triggers the entire loss in the qualifying debt instrument but not the
gain in the remaining components of the hedging side of the integrated
transaction.
For example, a taxpayer may fully hedge a fixed rate nonfunctional
currency denominated debt instrument that it has issued with two
swaps--a nonfunctional currency/dollar currency swap and a fixed for
floating dollar interest rate swap. The effect of matching the currency
swap with the foreign currency denominated debt is to create synthetic
fixed rate U.S. dollar debt while the effect of the interest rate swap
is to simultaneously transform the synthetic fixed rate U.S. dollar
debt into synthetic floating rate U.S. dollar debt. Thus, assuming that
the rules of Sec. 1.988-5(a) are otherwise satisfied, the taxpayer
will have effectively converted the fixed rate foreign currency
denominated debt instrument into a synthetic floating rate U.S. dollar
denominated debt instrument.
As the U.S. dollar declines in value relative to the foreign
currency in which the debt instrument is denominated, the taxpayer
disposes of the interest rate swap while keeping the currency swap in
existence. The taxpayer takes the position that the disposition of the
interest rate swap allows it to treat the debt instrument as having
been terminated on the date of disposition and claims a loss on the
debt instrument without taking into account the offsetting gain on the
remaining component of the hedge. Thus, the taxpayer claims the
transaction generates a net loss. The IRS and the Treasury Department
believe that these results are inappropriate under the legging-out
rules since the claimed loss is largely offset by unrealized gain on
the remaining component of the hedging transaction. Therefore, the IRS
and the Treasury Department are issuing these regulations to clarify
the rules regarding the consequences of legging-out of qualified
hedging transactions that consist of multiple components. No inference
is intended regarding the merits of the position taken by the taxpayer
with respect to the transaction described above (or comparable
positions taken by taxpayers with respect to similar transactions) in
the case of transactions occurring prior to the applicability date of
these regulations, and in appropriate cases the IRS may challenge the
claimed results.
Explanation of Provisions
Section 1.988-5(a) is amended to provide that if a hedge with more
than one component has been properly identified as being part of a
qualified hedging transaction, and at least one but not all of the
components of the hedge that is a part of the qualified hedging
transaction has been terminated or disposed of, all of the remaining
components of the hedge (as well as the qualifying debt) shall be
treated as sold for their fair market value on the leg-out date of the
terminated hedge. Similarly, if a part of any component of a hedge
(whether a hedge consists of a single or multiple components) has been
disposed of, the remaining part of that component (as well as other
components in the case of a hedge with multiple components) that is
still in existence (as well as the qualifying debt instrument) shall be
treated as sold for its fair market value on the leg-out date of the
terminated hedge.
Effective/Applicability Date
The regulation applies to leg-outs within the meaning of Sec.
1.988-5(a)(6)(ii) which occur on or after September 6, 2012.
Special Analyses
It has been determined that these regulations are not a significant
regulatory action as defined in Executive Order 12866. Therefore, a
regulatory assessment is not required. It has also been determined that
section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5)
does not apply to these regulations, and because these regulations do
not impose a collection of information on small entities, the
provisions of the Regulatory Flexibility Act (5 U.S.C. chapter 6) do
not apply. Pursuant to section 7805(f) of the Internal Revenue Code,
these regulations will be submitted to the Chief Counsel for Advocacy
of the Small Business Administration for comment on their impact on
small business.
Drafting Information
The principal author of these regulations is Sheila Ramaswamy,
Office of Associate Chief Counsel (International). However, other
personnel from the IRS and the Treasury Department participated in
their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Amendment to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
0
Par. 2. Section 1.988-5 is amended by:
0
1. Revising paragraph (a)(6)(ii).
0
2. Adding Example 11 in paragraph (a)(9)(iv).
The revision and addition read as follows:
[[Page 54810]]
Sec. 1.988-5 Section 988(d) hedging transactions.
(a) * * *
(6) * * *
(ii) [Reserved]. For further guidance see Sec. 1.988-5T(a)(6)(ii).
* * * * *
(9) * * *
(iv) * * *
Example 11. [Reserved]. For further guidance see Sec. 1.988-
5T(a)(9)(iv).
Example 11.
* * * * *
0
Par. 3. Section 1.988-5T is added to read as follows:
Sec. 1.988-5T Section 988(d) hedging transactions (temporary).
(a) through (a)(6)(i) [Reserved]. For further guidance see Sec.
1.988-5(a) through (a)(6)(i).
(ii) Legging out. With respect to a qualifying debt instrument and
hedge that are properly identified as a qualified hedging transaction,
``legging out'' of integrated treatment under this paragraph (a) means
that the taxpayer disposes of or otherwise terminates all or any
portion of the qualifying debt instrument or the hedge prior to
maturity of the qualified hedging transaction, or the taxpayer changes
a material term of the qualifying debt instrument (for example,
exercises an option to change the interest rate or index, or the
maturity date) or the hedge (for example, changes the interest or
exchange rates underlying the hedge, or the expiration date) prior to
maturity of the qualified hedging transaction. A taxpayer that disposes
of or terminates a qualified hedging transaction (that is, disposes of
or terminates both the qualifying debt instrument and the hedge in
their entirety on the same day) shall be considered to have disposed of
or otherwise terminated the synthetic debt instrument rather than
legging out. If a taxpayer legs out of integrated treatment, the
following rules shall apply:
(A) The transaction will be treated as a qualified hedging
transaction during the time the requirements of this paragraph (a) were
satisfied.
(B) If all of the instruments comprising the hedge (each such
instrument, a component) are disposed of or otherwise terminated, the
qualifying debt instrument shall be treated as sold for its fair market
value on the date the hedge is disposed of or otherwise terminated (the
leg-out date), and any gain or loss (including gain or loss resulting
from factors other than movements in exchange rates) from the
identification date to the leg-out date is realized and recognized on
the leg-out date. The spot rate on the leg-out date shall be used to
determine exchange gain or loss on the debt instrument for the period
beginning on the leg-out date and ending on the date such instrument
matures or is disposed of or otherwise terminated. Proper adjustment
must be made to reflect any gain or loss taken into account. The
netting rule of Sec. 1.988-2(b)(8) shall apply.
(C) If a hedge has more than one component (and such components
have been properly identified as being part of the qualified hedging
transaction) and at least one but not all of the components that
comprise the hedge has been disposed of or otherwise terminated, or if
part of any component of the hedge has been terminated (whether a hedge
consists of a single or multiple components), the date such component
(or part thereof) is disposed of or terminated shall be considered the
leg-out date and the qualifying debt instrument shall be treated as
sold for its fair market value in accordance with the rules of
paragraph (a)(6)(ii)(B) of this section on such leg-out date. In
addition, all of the remaining components (or parts thereof) that have
not been disposed of or otherwise terminated shall be treated as sold
for their fair market value on the leg-out date, and any gain or loss
from the identification date to the leg-out date is realized and
recognized on the leg-out date. To the extent relevant, the spot rate
on the leg-out date shall be used to determine exchange gain or loss on
the remaining components (or parts thereof) for the period beginning on
the leg-out date and ending on the date such components (or parts
thereof) are disposed of or otherwise terminated.
(D) If the qualifying debt instrument is disposed of or otherwise
terminated in whole or in part, the date of such disposition or
termination shall be considered the leg-out date. Accordingly, the
hedge (including all components making up the hedge in their entirety)
that is part of the qualified hedging transaction shall be treated as
sold for its fair market value on the leg-out date, and any gain or
loss from the identification date to the leg-out date is realized and
recognized on the leg-out date. To the extent relevant, the spot rate
on the leg-out date shall be used to determine exchange gain or loss on
the hedge (including all components thereof) for the period beginning
on the leg-out date and ending on the date such hedge is disposed of or
otherwise terminated.
(E) Except as provided in paragraph (a)(8)(iii) of this section
(regarding identification by the Commissioner), the part of the
qualified hedging transaction that has not been terminated (that is,
the remaining debt instrument in its entirety even if partially hedged,
or the remaining components of the hedge) cannot be part of a qualified
hedging transaction for any period subsequent to the leg-out date.
(F) If a taxpayer legs out of a qualified hedging transaction and
realizes a gain with respect to the disposed of or terminated debt
instrument or hedge, then paragraph (a)(6)(ii)(B), (C), and (D) of this
section, as appropriate, will not apply if during the period beginning
30 days before the leg-out date and ending 30 days after that date the
taxpayer enters into another transaction that, taken together with any
remaining components of the hedge, hedges at least 50 percent of the
remaining currency flow with respect to the qualifying debt instrument
that was part of the qualified hedging transaction or, if appropriate,
an equivalent amount under the hedge (or any remaining components
thereof) that was part of the qualified hedging transaction. Similarly,
in a case in which a hedge has multiple components that are part of a
qualified hedging transaction, if the taxpayer legs out of a qualified
hedging transaction by terminating one such component or a part of one
or more such components and realizes a gain with respect to the
terminated component, components, or portions thereof, then paragraphs
(a)(6)(ii)(B), (C), and (D) of this section, as appropriate, will not
apply if the remaining components of the hedge (including parts
thereof) by themselves hedge at least 50 percent of the remaining
currency flow with respect to the qualifying debt instrument that was
part of the qualified hedging transaction.
(a)(7) through (a)(9)(iv) Examples 10 [Reserved]. For further
guidance see Sec. 1.988-5(a)(7) through (a)(9)(iv) Example 10.
Example 11. (i) K is a U.S. corporation with the U.S. dollar as
its functional currency. On January 1, 2013, K borrows 100 British
pounds ([pound]) for two years at a 10% rate of interest payable on
December 31 of each year with no principal payment due until
maturity on December 31, 2014. Assume that the spot rate on January
1, 2013, is [pound]1=$1. On the same date, K enters into two swap
contracts with an unrelated counterparty that economically results
in the transformation of the fixed rate [pound]100 borrowing to a
floating rate dollar borrowing. The terms of the swaps are as
follows:
(A) Swap #1, Currency swap. On January 1, 2013, K will exchange
[pound]100 for $100.
(1) On December 31 of both 2013 and 2014, K will exchange $8 for
[pound]10;
(2) On December 31, 2014, K will exchange $100 for [pound]100.
(B) Swap #2, Interest rate swap. On December 31 of both 2013 and
2014, K will
[[Page 54811]]
pay LIBOR times a notional principal amount of $100 and will receive
8% times the same $100 notional principal amount.
(ii) Assume that K properly identifies the pound borrowing and
the swap contracts as a qualified hedging transaction as provided in
paragraph (a)(8) of this section and that the other relevant
requirements of paragraph (a) of this section are satisfied.
(iii) Assume also that on January 1, 2014, the spot exchange
rate is [pound]1:$2; the U.S. dollar LIBOR rate of interest is 9%;
and the market value of K's note in pounds has not changed. K
terminates swap 2. K will incur a loss of ($.91) (the
present value of $1) with respect to the termination of such swap on
January 1, 2014. Pursuant to paragraph (a)(6)(ii)(C) of this
section, K must treat swap 1 as having been sold for its
fair market value on the leg-out date, which is the date swap
2 is terminated. K must realize and recognize gain of
$100.92 [the present value of [pound]110 discounted in pounds to
equal [pound]100 x $2 ($200) less the present value of $108
($99.08)]. The loss inherent in the pound borrowing from January 1,
2013 to January 1, 2014 is realized and recognized on January 1,
2014. Such loss is exchange loss in the amount of $100 [the present
value of [pound]110 that was to be paid at the end of the year
discounted at pound interest rates to equal [pound]100 times the
change in exchange rates: ([pound]100 x $1, the spot rate on January
1, 2013) - ([pound]100 x $2, the spot rate on January 1, 2014)].
Except as provided in paragraph (a)(8)(iii) of this section
(regarding identification by the Commissioner), the pound borrowing
and currency swap cannot be part of a qualified hedging transaction
for any period subsequent to the leg-out date.
(iv) Assume the facts are the same as in paragraph (iii) of this
section except that on January 1, 2014, the U.S. dollar LIBOR rate
of interest is 7% rather than 9%. When K terminates swap 2,
K will realize gain of $0.93 (the present value of $1) received with
respect to the termination on January 1, 2014. Fifty percent or more
of the remaining pound cash flow of the pound borrowing remains
hedged after the termination of swap 2. Accordingly, under
paragraph (a)(6)(ii)(F) of this section, paragraphs (a)(6)(ii)(B)
and (C) of this section do not apply and the gain on swap 1
and the loss on the qualifying debt instrument is not taken into
account. Thus, K will include in income $0.93 realized from
termination of swap 2.
(a)(10) through (g) [Reserved]. For further guidance see Sec.
1.988-5(a)(10) through (g).
(h) Effective/applicability date. This section applies to leg-outs
that occur on or after September 6, 2012.
(i) Expiration date. This section expires on September 4, 2012.
Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
Approved: August 17, 2012.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2012-21986 Filed 9-5-12; 8:45 am]
BILLING CODE 4830-01-P
