(a)(1) through (a)(3) [Reserved] For further guidance, see § 1.956-2(a) through (b)(1)(x).
(4) [Reserved]
(b)(1) introductory text through (b)(1)(x) [Reserved] For further guidance, see § 1.956-2(a) through (b)(1)(x).
(xi) An obligation of a United States person arising from a nonperiodic payment by a controlled foreign corporation (within the meaning of section 957(a)) with respect to a notional principal contract described in § 1.446-3T(g)(4)(ii)(B)(1) or (2) if the following conditions are satisfied—
(A) The controlled foreign corporation that makes the nonperiodic payment is either a dealer in securities (within the meaning of section 475(c)(1)) or a dealer in commodities; and
(B) The conditions set forth in § 1.446-3T(g)(4)(ii)(C)(1) (relating to full margin or collateral in cash) are satisfied.
(C) Examples. The following examples illustrate the application of this paragraph (b)(1)(xi):
Full margin—cleared contract. (i) A domestic corporation (U.S.C.) wholly owns a controlled foreign corporation (CFC) that is a dealer in securities under section 475(c)(1). CFC enters into an interest rate swap contract with unrelated counterparty B. The contract is required to be cleared and is accepted for clearing by a U.S.-registered derivatives clearing organization (DCO). CFC is not a member of the DCO. CFC uses a U.S. affiliate (CM), which is a member of the DCO, as its clearing member to submit the contract to be cleared. CM is a domestic corporation that is wholly owned by U.S.C.. The standardized terms of the contract provide that, for a term of X years, CFC will pay B a fixed coupon of 1% per year and receive a floating coupon on a notional principal amount of $Y. When CFC and B enter into the contract, the market coupon for similar interest rate swaps is 2% per year. The DCO requires CFC to make an upfront payment to compensate B for the below-market annual coupon payments that B will receive, and CFC makes the upfront payment in cash. CFC makes the upfront payment through CM to the DCO, which then makes the payment to B. The DCO also requires B to post initial variation margin in an amount equal to the upfront payment and requires each party to post and collect daily variation margin in an amount equal to the change in the fair market value of the contract on a daily basis for the entire term of the contract. B posts the initial variation margin in U.S. dollars, which is received by CFC (through DCO and CM), and the parties post and collect daily variation margin in U.S. dollars.
(ii) Because the contract is subject to initial variation margin in an amount equal to the upfront payment and daily variation margin in an amount equal to the change in the fair market value of the contract on a daily basis for the entire term of the contract, the contract is described in § 1.446-3T(g)(4)(ii)(B)(1). Furthermore, because the additional conditions set forth in this paragraph (b)(1)(xi) are satisfied, the obligation of CM arising from the upfront payment by CFC does not constitute United States property for purposes of section 956.
Full margin—uncleared contract. (i) Assume the same facts as in Example 1, except for the following. CFC's counterparty to the contract is U.S.C., CM is not involved, and the contract is not required to be cleared and is not accepted for clearing by a U.S.-registered derivatives clearing organization. The contract requires CFC to make an upfront payment to compensate U.S.C. for the below-market annual coupon payments that U.S.C. will receive, and CFC makes the upfront payment in U.S. dollars. Pursuant to the requirements of a federal regulator, U.S.C. is obligated to post initial variation margin with CFC in an amount equal to CFC's upfront payment, and U.S.C. and CFC are obligated to post and collect daily variation margin in an amount equal to the change in the fair market value of the contract on a daily basis for the entire term of the contract. U.S.C. posts the initial variation margin in U.S. dollars, which is received by CFC, and the parties post and collect daily variation margin in U.S. dollars.
(ii) Because the contract is subject to initial variation margin in an amount equal to the upfront payment and daily variation margin in an amount equal to the change in the fair market value of the contract on a daily basis for the entire term of the contract, the contract is described in § 1.446-3T(g)(4)(ii)(B)(2). Furthermore, because the additional conditions set forth in this paragraph (b)(1)(xi) are satisfied, the obligation of U.S.C. arising from the upfront payment by CFC does not constitute United States property for purposes of section 956.
(b)(2) through (c)(4) [Reserved] For further guidance, see § 1.956-2(b)(2) through (c)(4).
(5) [Reserved]
(d) introductory text through (d)(1) [Reserved] For further guidance, see § 1.956-2(b)(2) through (d)(1).
(2) [Reserved]
(e) [Reserved] For further guidance see § 1.956-2(e).
(f) Effective/applicability date. Paragraph (b)(1)(xi) of this section applies to payments described in 1.956-2T(b)(1)(xi) made on or after May 8, 2015. Taxpayers may apply the rules of paragraph (b)(1)(xi) to payments made before May 8, 2015.
(g) Expiration date. The applicability of paragraph (b)(1)(xi) of this section expires on May 7, 2018.
(h) [Reserved]
The preliminary Code is a preliminary release of the Internal Revenue Code of 1986 (the "Code") by the Office of the Law Revision Counsel and is subject to further revision before it is released again as a final version. The source of the preliminary Code used in TouchTax is available here: https://uscode.house.gov/download/download.shtml. The Code is a consolidation and codification by subject matter of the general and permanent laws of the U.S. prepared by the Office of the Law Revision Counsel of the U.S. House of Representatives. The Treasury Regulations are a codification of the general and permanent rules published in the Federal Register by the departments and agencies of the federal government. The version of the Treasury Regulations available within TouchTax is part of the Electronic Code of Federal Regulations which is not an official legal edition of the Code of Federal Regulations but is an editorial compilation of CFR material and Federal Register amendments produced by the National Archives and Records Administration's Office of the Federal Register (OFR) and the Government Publishing Office. The source of the CFR used in TouchTax is available here: https://www.govinfo.gov/bulkdata/ECFR/title-26. Those using TouchTax for legal research should verify their results against the printed versions of the Code and Treasury Regulations. TouchTax is copyright 2024 by Com-Lab (Mobile). Learn more at http://touchtax.edrich.de.