The chapter on notional principal contracts is probably the most comprehensive treatment of the subject in print. The author, Erika W. Nijenhuis of Clearly Gottlieb, publishes frequently on the taxation of financial instruments. Nijenhuis begins with the definition of notional principal contract (NPC), explaining each of the clauses of the definition in the regulations. She then goes into the general timing rules for taking into account payment under an NPC and includes a discussion of other regulations that may override the general timing regulations, such as the straddle rules. That is followed by a discussion of the character of payments under NPCs; tax ownership questions; the effect of an NPC on a particular stock on the ability to claim dividends received deduction with respect to that stock; withholding on payments under an NPC and source rules; treaty issues; characterization of swap income for subpart F and foreign tax credit purposes; and other ancillary issues. Nijenhuis includes excellent footnotes detailing some of the complexity and uncertainty that is glossed over in text, and her references are comprehensive and extremely useful. Two areas that she does not discuss and I believe do deserve some mention are NPCs, tax-exempt entities, and the unincorporated business tax, and the treatment of those contracts that are labeled swaps by the financial community but do not fit within the tax definition of NPC.
The chapter on foreign currency transactions also attempts to address a massive subject matter in a small space, and so we are left with a guide to the regulations, with little embellishment. It would have been useful had the author addressed the issues raised by the interaction between the mixed straddle rules and the foreign currency rules; the proper treatment of individuals engaging in foreign currency transactions; and the intersection between the interest equivalent rules of reg. section 1.861-9T and the foreign currency rules.
The taxation aspects of securities lending transactions are one that has received relatively little attention in the financial literature, and so Linda Swart’s chapter is a welcome introduction to the subject. After briefly outlining the business transactions that gave impetus to the legislative regime, she leads us through the tax rules, describing their applications to those transactions. It would have been useful if there had been some reference to finance texts that provide greater detail on the legal and transactional aspects of securities loans and repos, given the brevity of the Swartz introduction, and considering that many novices would be using Swartz’s chapter as their first introduction to the subject.
In the next chapter, Limitations on Loss Recognition, Peter Canellos of Wachtell, Lipton describes some of the exceptions to the U.S federal realization-based tax system. He discusses wash sales and the straddle rules, as well as judicially developed loss limitation doctrines. It will be interesting to see if this chapter is expanded to include mandatory gains recognition rules if the Clinton constructive sales rules make it through the legislative process, or if the author will add other exceptions to realization-based tax accounting, such as the dealer mark-to-market regime.
The last two chapters of this book deal with recent statutory and regulatory changes relating to preferred stock, and debt restructuring transactions. The former subject is very topical in light of the Internal Revenue Service’s crackdown on stripping transactions. The latter is brief summary of a difficult subject that has been well covered in the literature.
Taxation of Financial Products has an index of code and regulations references, as well as cases. There is also a subject-matter index, which is disappointingly brief. It is a mystery why, in this era of computer word searches, there cannot be very long and detailed indices dealing with every topic discussed in a book. For example, although the index has one reference to REMICs, it does not have any entry for REITs at all, even though REITs are mention a number of times in the chapter on asset securitization.
Overall, this is a motley collection of articles at different depths on subjects varying from very basic to quite specialized. I hope that the authors continue collecting such pieces, and eventually sort them thematically in a multi-volume collection on this new, and multi-faceted, area of tax law.”
Viva Hammer is a principal consultant at Price Waterhosue LLP, New York.