Westlaw Tax Delivery Summary Report for ROBILLARD,CHRIST

Date/Time of Request:	Wednesday, December 15, 2010 08:19 Central	
Client Identifier:	ULTRA	
Database:	BNA-TAXCORE-ALL	
Citation Text:	239 DTR G-3, 2010	
Lines:	65	
Documents:	1	
Images:	0	

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Daily Tax Report
Copyright (c) 2010 The Bureau of National Affairs, Inc.
 
Federal Tax & Accounting
Wednesday, December 15, 2010
 
Financial Products: IRS May Hold to Narrow View of Futures Under Dodd-Frank
Wall Street Reform
 
Guidance on the tax treatment of swaps and futures contracts under the new Dodd-Frank Wall Street reform legislation is a priority for Internal Revenue Service regulators, Scott Brown, IRS chief counsel for financial institutions and products, said Dec. 14.

IRS is considering defining what a regulated futures contract is and what a swap is for purposes of tax code Section 1256, Brown said at a D.C. Bar Association forum.

While the Dodd-Frank financial reform law excluded a list of specific derivatives that would not be covered under tax code Section 1256--and therefore do not need to be marked to market--questions have arisen about where the line will be drawn between a futures contract and a swap.

One possibility is that IRS would put something in writing that says a regulated futures contract "is a futures contract, not just a contract--not a swap or a commodity option,"Brown said.

IRS's long-held view has been a narrow one--that a regulated futures contract is only that specific type of instrument, and a swap contract does not qualify, Brown told BNA.

Legislative History.
 
Brown said some have argued that, because Dodd-Frank moved swaps onto exchanges and they are marked-to-market, they would meet the definition of regulated futures contract under Section 1256. But to date, IRS has held to the 1981 legislative history of the section which refers only to regulated futures contracts and does not include types of instruments added by Congress.

Dodd-Frank calls for derivatives to be traded on exchanges to, among other things, improve transparency of complex financial products. But there has been concern in some financial circles that such a requirement would subject derivatives to an annual recognition of gains and losses.

Section 1256 sets a 60 percent/40 percent long-term capital gains to short-term gains ratio for profits of products covered by the section.

John Newton with Prudential Financial Inc. said the problem with marking portfolios to market is that corporations do not get the benefit of the capital gains rate.

"Section 1256 mark-to-market requirements could dramatically increase the volatility of our derivative holdings,"he said. "The main harm that volatility does is that it makes it very difficult for a company like Prudential to forecast its taxable income. We need a reasonably accurate forecast to make intelligent decisions about whether we are going to enter into transactions that have tax implications."

Corporations in general "can't stand capital losses because they can't predict when the gains are coming in to be able to offset them," said panelist Viva Hammer with KPMG LLP.

By Diane Freda

END OF DOCUMENT