Insights & News

Tax Insights, January 20, 2015
Tracking Tax News You Need to Know

January 20, 2015
Publications

IRS Uses Substance-Over-Form Doctrine to Recast Swaption Transaction
In Chief Counsel Advice 201501012, the IRS has concluded that the substance-over-form doctrine applied to a transaction entered into by the taxpayer that was marketed and sold as a "Leveraged Forward Contract." The transaction consists of two legs: (1) a loan obligation, and (2) prepaid forward contracts which were designed to create offsetting rights and obligations. By applying the substance over form doctrine the IRS disregarded: (1) the loan as lacking genuineness under recent case law that examined similar circular flows of supposedly borrowed money; and (2) the form of the forward contract, which included a component designed only to repay the loan and a component that functioned like a swaption rather than a forward contract. The IRS found that the transaction was in substance the purchase of a swaption, subject to the rules governing notional principal contracts.

Opening of the International Data Exchange Service Under FATCA Announced by IRS
The IRS has announced the opening of the International Data Exchange Service (IDES) for enrollment available at https://www.ides-support.com/. IDES will serve as the single point of delivery for both financial institutions and host country tax authorities to electronically exchange FATCA data with the United States. IDES will also enable the United States to make reciprocal exchanges as described in the Intergovernmental Agreements. The IRS has also updated a list of frequently asked questions on the IDES system and on the international compliance management model system that are used for FATCA data, adding questions about data format and structure (see http://www.irs.gov/Businesses/Corporations/FATCA-IDES-Technical-FAQs).

IRS Issues Guidance Regarding Total Return Swaps
In PLR 201502008, the borrower under a conduit issue of fixed-rate current refunding bonds that matured on two separate dates (bonds) and the bondholder who purchased all of the bonds entered into a total return swap (TRS) with respect to each maturity of the bonds. The notional principal amount of the TRS equaled the principal amount of the bonds and amortized as the bonds amortized. Under the TRS, the bondholder makes fixed rate payments to the borrower and the borrower makes variable rate payments to the bondholder based on the SIFMA Index. By comparing the coupon rate on the bonds with the bondholder's fixed payment under the TRS, the borrower's net cost of financing is SIFMA plus 95 basis points.

When the bonds were issued, neither the issuer nor the borrower identified a swap on Form 8038, or otherwise, to integrate as a qualified hedge the TRS with the bonds for purposes of Treas. Reg, Section 1.148-4. 2. The borrower and the bondholder planned to amend the TRS to extend its term for an additional five years. The bondholder represented that the issuer would treat, as a precautionary matter, the amendment and extension of the TRS as a potential reissuance of the bonds and would file a new Form 8038 without indicating that the hedge has been identified for integration under Treas. Reg, Section 1.148-4. The IRS ruled that the extension of the TRS would not be an abusive arbitrage device and that the TRS would not be integrated with the bonds under the authority of 1.148-10(e).

IRS Forms and Revenue Procedures

  • New forms, and new lines on forms, for reporting health care information on 2014 returns as required by the Affordable Care Act (see http://www.irs.gov/Affordable-Care-Act/Individuals-and-Families/Health-Care-Law-Brings-Changes-to-IRS-Tax-Forms).
  • Final Instructions for Form 8938, Statement of Specified Foreign Financial Assets (see http://www.irs.gov/pub/irs-pdf/i8938.pdf).
  • Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, for use by U.S. citizens or resident aliens in furnishing information for some foreign business entities.
  • Publication 598, Tax on Unrelated Business Income of Exempt Organizations, explaining which organizations are subject to the tax on unrelated business income, what the requirements are for filing a return, what an unrelated trade or business is, and how to figure unrelated business taxable income (see http://www.irs.gov/pub/irs-pdf/p598.pdf).
  • Revenue Procedure 2015-9, 2015-02 IRB 249, which provides procedures for issuing determination letters on exempt status of organizations under Sections 501 and 521 of the Code. The procedures also apply to revocation and modification of determination letters, and provide guidance on exhaustion of administrative remedies for purposes of declaratory judgment under Section 7428 of the Code.
  • Revenue Procedure 2015-10, 2015-02 IRB 262, which provides procedures with respect to issuing rulings and determination letters on Section 509(a) private foundation status, Section 4942(j)(3) operating foundation status, and Section 4940(d)(2) exempt operating foundation status. This guidance also applies to issuance of determination letters on Section 509(a)(3) foundation status of nonexempt charitable trusts described in Section 4947(a)(1).

Information contained in this publication should not be construed as legal advice or opinion or as a substitute for the advice of counsel. The articles by these authors may have first appeared in other publications. The content provided is for educational and informational purposes for the use of clients and others who may be interested in the subject matter. We recommend that readers seek specific advice from counsel about particular matters of interest.

Copyright © 2015 Stradley Ronon Stevens & Young, LLP. All rights reserved.

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