Temp. regs. issued on obligations arising from certain upfront payments by CFCs.

• Author: Nevius, Alistair M.
• Position: Controlled foreign corporations

The IRS issued temporary regulations relating to the treatment of upfront payments made pursuant to certain notional principal contracts (NPCs) for U.S. federal income tax purposes (T.D. 9589). The temporary regulations establish an exception to the definition of U.S. property for obligations of U.S. persons arising from upfront payments made with respect to certain cleared contracts that are properly classified as NPCs. The temporary regulations provide that obligations of U.S. persons arising from such upfront payments by a controlled foreign corporation (CFC) that is a dealer in securities or commodities (within the meaning of Sec. 475) do not constitute U.S. property for purposes of Sec. 956(a).

To qualify for this exception:

1. The upfront payment must be required under a contract that is cleared by a derivatives clearing organization or a clearing agency that is registered as a derivatives clearing organization under the Commodity Exchange Act or as a clearing agency under the Securities Exchange Act of 1934, respectively;

2. The CFC must make the upfront payment to or through a U.S. person that is a clearing member of the derivatives clearing organization or clearing agency, or directly to the derivatives clearing organization or clearing agency if the CFC is a clearing member of the derivatives clearing organization or clearing agency;

3. The upfront payment must be made, directly or indirectly, to the counterparty to the contract;

4. The counterparty to the contract must be required to make a payment in the nature of initial variation margin that is equal (before taking into account any change in the value of the contract between the time the contract...