|February 22, 2013
Tax Law Update
|House Ways and Means Proposals for Financial Products Tax Reform
|On January 24, 2013, the House Committee on Ways & Means released a discussion draft of legislative provisions (the "Draft" or the "Proposal") that would make fundamental changes in the taxation of certain financial products. There are six specific proposed reforms that would:
The Draft also contains proposals related to amortizable bond premium and government savings bonds.
- require mark-to-market tax accounting for derivatives held by non-dealers;
- simplify the business hedging rules;
- simplify the rules for debt restructurings to reduce the occurrence of phantom income resulting from cancellation of indebtedness;
- harmonize the treatment of bonds acquired at a discount on the secondary market with that of bonds issued at a discount;
- require cost basis of specified securities to be determined on an average basis method; and
- modify the wash sales rules.
The Draft would make fundamental changes to the treatment of derivatives held by non-dealers by requiring that they be marked to market annually with gain or loss treated as ordinary income or loss. These changes would likely be controversial. The Draft also proposes changes to the tax code eliminating cancellation of debt income for certain debt exchanges and modifying the taxation of market discount on distressed debt that would likely be welcomed by the business community.
Click here for a copy of the financial products tax reform statutory language.
- Expand Mark-to-Market Accounting of Derivatives to Non-Dealers.
Under current law, the taxation of derivative financial products varies according to the type of derivative financial product (e.g., options, forward contracts, or swaps) and the nature of the taxpayer. "Dealers in securities" are taxed on a mark-to-market basis under section 475 of the Internal Revenue Code of 1986, as amended (the "Code"). For purposes of section 475, the term "security" is broadly defined and includes six categories of financial instruments. Under section 475(f), traders in securities may elect into mark-to-market treatment. Dealers and traders in commodities may elect to be subject to the rules applicable to dealers and traders in securities. In both cases, gain or loss generally is taxed as ordinary income or loss.
The definition of security under section 475 includes both direct interests in securities and derivative securities. Under section 475(c)(2), a security is defined as (1) a share of stock in a corporation; (2) a partnership or beneficial ownership interest in a widely held or publicly traded partnership or trust; (3) a note, bond, debenture, or other evidence of indebtedness; (4) an interest rate, currency, or equity notional principal contract; (5) an evidence of an interest in, or a derivative financial instrument in, any security described in clauses (1) through (4), or any currency, including any option, forward contract, short position, and any similar financial instrument in such a security or currency; and (6) a position which (i) is not a security described in clauses (1) through (5), (ii) is a hedge with respect to such a security, and (iii) is clearly identified in the dealer's records as being described in this subparagraph before the close of the day on which it was acquired or entered into (or such other time as the Secretary may by regulations prescribe).
Section 1256 contracts are excluded from the application of section 475. While they are taxed on a mark-to-market basis, 60% of the gain or loss is taxable as long-term capital gain or loss and 40% is taxable as short-term capital gain or loss. There are five categories of section 1256 contracts including: (1) regulated futures contracts; (2) foreign currency contracts; (3) non-equity options; (4) dealer equity options; and (5) dealer securities futures contracts. The fact that dealer equity options and dealer securities futures contracts are excluded from ordinary income/loss treatment under the section 475 rules has been the object of some criticism.
By contrast, most other derivative financial products that are held by non-dealers and non-electing traders are taxed on a realization basis, with characterization of gain or loss dependent on whether the income recognition event is characterized as a sale or exchange. For example, option transactions are taxed on a wait and see basis, with gain or loss recognition deferred until the option is exercised or lapses. Notional principal contracts are taxed on a modified accrual basis. The recognition of losses by non-dealers is limited by both the straddle rules and the wash sale rules. The straddle rules, contained in section 1092, very generally, defer losses where there is unrecognized gain. The wash sale rules, contained in section 1091, defer realized losses whereby substantially identical positions have been entered into during a 61-day period (30 days before and 30 days after) surrounding the date of sale.
The Draft would add two new sections to the Code, sections 485 and 486. Under proposed section 485, gain or loss from "derivatives" generally must be reported on an annual basis under a mark-to-market rule. Each derivative held by a taxpayer is treated as if it were sold on the last business day of the year for its fair market value, and any resulting gain or loss is taken into account for such taxable year. All resulting mark-to-market gain or loss with respect to a derivative is treated as ordinary gain or loss and is treated, for purposes of determining the amount of nonbusiness deductions which are allowed in computing a net operating loss, as attributable to the trade or business of the taxpayer.
Proposed section 486 would define the term "derivative" as (1) any evidence of an interest in (or any derivative financial instrument with respect to) (A) any share of stock in a corporation, (B) any partnership or beneficial ownership interest in a partnership or trust, (C) any note, bond, debenture, or other evidence of indebtedness, (D) with limited exceptions, any real property, (E) any commodity which is actively traded, or (F) any currency; (2) any notional principal contract; and (3) any derivative financial instrument with respect to any interest or instrument of the foregoing. The term "derivative financial instrument" includes any option, forward contract, futures contract, short position, swap, or similar financial instrument.
The definition of "derivative" is intended to be broad. For example, the term includes any evidence of an interest in (or any derivative financial instrument with respect to) any partnership or beneficial ownership interest in a partnership or trust, regardless of whether such contract or interest (or underlying contract or interest) is privately held or publicly traded. The Technical Explanation provides that, despite some uncertainty regarding the tax characterization of credit default swaps for U.S. federal income tax purposes, it is intended that a credit default swap be treated as a derivative either because it represents an option with respect to a debt instrument or because it qualifies as a notional principal contract. Further, the definition of a "notional principal contract" under proposed section 486(c) is broader than the definition under current Treasury Regulations. For example, the definition of a "specified index" under proposed section 486 includes indices based on information (including the occurrence or nonoccurrence of any event) which is not within the control of any of the parties to the instrument and is not unique to any of the parties' circumstances, including indices other than those based on objective financial information (e.g., temperature, precipitation, snowfall, or frost). Further, the definition of "notional principal contract" under proposed section 486(c) provides that an amount shall not fail to be treated as a "payment" merely because such amount is fixed on one date and paid or otherwise taken into account on a different date. This provision is consistent with a similar provision included in proposed regulations released in September 2011, proposing to amend the notional principal contract definition in Treasury Regulations section 1.446-3.
Interestingly, debt instruments containing embedded derivative components would be bifurcated, with the derivative, but not the debt instrument, being subject to mark-to-market treatment under proposed section 485. Bifurcation generally is not allowed under the tax law, but is permitted under financial accounting rules. The Technical Explanation provides as an example of a debt instrument with an embedded derivative, debt that is convertible into the stock of the issuer. Such an instrument would be bifurcated into two instruments, non-convertible debt (not subject to the mark-to-market rule), and an option to acquire stock of the issuer (subject to the mark-to-market rule).
Rules for "mixed straddles" have been included in proposed section 485(c). Similar to the definition of mixed straddles under section 1256(d)(4), a mixed straddle is a straddle involving both non-mark-to-market and mark-to-market positions. For instance, it would include the underlying equity in a collar transaction. The mark-to-market and ordinary treatment rules of proposed section 485 would apply to all positions in a straddle that includes any derivative to which proposed section 485 applies, even if these positions are not otherwise marked-to-market. If a position has a built-in gain, the position would be deemed to have been sold at the time of entering into the mixed straddle. The character of such gain would not be determined by proposed section 485. While built-in gain would be recognized at the time of entering into the mixed straddle, any built-in loss would not be allowed either at the time of entering into the mixed straddle or during the period in which the position is subject to the mark-to-market regime. Instead, the built-in loss is taken into account when the position is disposed of in a taxable transaction. The holding period of a position included in a mixed straddle will not include any period during which it is part of such straddle.
The mark-to-market regime under proposed section 485 would not apply to any derivative that is part of a hedging transaction (as defined in proposed section 1221(c)), discussed below, or a section 988 hedging transaction.
The Draft would modify section 475 so as to exclude both notional principal contracts and derivative financial instruments from the definition of security (currently in section 475(c)(2)(D) and (E)) and from the definition of commodity (currently in section 475(e)(2)(B) and (C)). Under the Draft those financial products would no longer be subject to mark-to-market treatment under section 475, but instead under proposed section 485. Further, the Draft would repeal sections 1234B, 1236, and 1256 and make certain coordinating or conforming amendments to the straddle rules (sections 263 and 1092) and sections 856, 988, 1091, 1221, and 4975(f)(11)(D). If adopted, this provision would apply to property acquired and positions established after December 31, 2013.
- Simplify the Business Hedging Rules.
Under section 1221, gains or losses from property transactions generally receive capital treatment. An exception applies for qualified hedging transactions. To be a qualified hedging transaction, among other things, a transaction must be identified as a hedging transaction at the time that it is entered into. The identification of a hedging transaction for financial accounting or regulatory purposes does not qualify as an identification for these purposes unless the taxpayer's books and records indicate that the identification is also being made for tax purposes. Transactions that are improperly identified as hedges or which are not identified as hedges but should have been are subject to whipsaw rules that generally treat realized losses as capital losses.Under the Draft, a new subsection (c) is added to section 1221, defining "hedging transaction" (generally in the same manner as under current section 1221(b)(2)(A)) and providing new hedge identification requirements. A hedging transaction would be treated as meeting the new hedge identification requirements if the transaction is clearly identified as a hedging transaction for tax purposes (as required under existing law) or if the transaction is treated as a hedging transaction within the meaning of GAAP for purposes of the taxpayer's audited financial statement. The audited financial statement must be certified as being prepared in accordance with GAAP by an independent auditor, and must be used for the purposes of a statement or report to shareholders, partners, or other proprietors, or to beneficiaries, or for credit purposes. The Technical Explanation indicates that taxpayers who do not prepare audited financial statements under GAAP will not be able to identify hedging transactions based on a financial statement identification.
A transaction treated as a hedging transaction for purposes of an audited financial statement is treated as a hedging transaction for tax purposes, as long as the transaction also meets the substantive definition of a tax hedging transaction, which is unchanged by the Draft. Thus, common transactions that qualify as hedges for financial accounting purposes, such as "hoover hedges," would not qualify by reason of meeting the financial accounting requirements. The rules under current Treasury regulations for improper identification of a hedging transaction would not be applicable to a hedge which is identified as a hedging transaction for financial statement purposes, but which does not qualify as a hedging transaction for tax purposes, unless the taxpayer improperly treats the transaction as a tax hedging transaction in its tax return for the taxable year which includes such transaction.
The Draft would make certain conforming amendments to the remaining portions of section 1221 and sections 170, 856, and 954. If adopted, this provision would apply to transactions entered into after December 31, 2013.
- Eliminating Cancellation of Debt Income for Debt Restructurings.
Under current law, it must be determined whether the restructuring of a debt obligation constitutes a taxable event by specifically analyzing whether the terms of the restructuring constitute a "significant modification" of the debt obligation. If there is a significant modification, the issuer may be required to recognize cancellation of indebtedness ("COD") income. In addition, a holder of the restructured debt obligation may also have a taxable event, with gain or loss being recognized based on the difference between its tax basis in the obligation and the issue price of the new obligation. The possibility of triggering a taxable event that gives rise to COD income for the issuer (or taxable gain or loss for the holder) on a debt restructuring increased with the recent issuance of regulations that define the term "publicly traded" to include debt for which indicative quotes are available, even where the holder does not forgive any principal owed by the issuer. These recent changes can create COD income in connection with the restructuring of certain bank loans where, traditionally, COD income had not been created. Because of this incongruous result and the potential adverse impact on the financing markets, which was accentuated by the recent regulatory changes, the House Ways and Means Committee has examined the COD income rules as part of its larger review and discussion of financial products tax reform.
The Draft would add new section 1274B, under which the term "specified debt modification" would mean (1) the exchange by an issuer of a new debt instrument for an existing debt instrument issued by such issuer (including any deemed exchange resulting from a modification), and (2) the significant modification of an existing debt instrument, including a significant modification of an existing debt instrument which is accomplished by the issuer and holder indirectly through one or more transactions with unrelated parties. This provision is not intended to change the current definition of when a significant modification of a debt instrument constitutes an exchange pursuant to Treasury Regulations section 1.1001-3.
Under proposed section 1274B, the issue price of modified debt subject to a "specified debt modification," would be the lesser of (i) the adjusted issue price of the existing debt obligation (subject to adjustment for OID), and (ii) the issue price of the modified debt instrument which would be determined under section 1274 if the debt instrument were a debt instrument to which that section applied (i.e., the principal amount if there is adequate stated interest or, otherwise, the imputed principal amount). Since the determination of COD income will be based on the debt instrument's principal amount or on the adjusted issue price in the case of an OID debt instrument, COD income will not result from the deemed exchange. The Technical Explanation notes that because the new debt is subject to section 1274, COD income cannot be avoided by forgiving interest rather than principal on an outstanding debt.
The Technical Explanation provides the following example: If a publicly traded debt instrument with a redemption price and an adjusted issue price of $10,000 is exchanged for a new debt instrument with a redemption price of $10,000 (and adequate stated interest) with an extended maturity, the issue price of the new debt is $10,000 regardless of the fair market value of the old debt. Thus, the issuer will not have any COD income. The holder's treatment would depend on its tax basis in the debt instrument. The Draft would make certain conforming amendments to sections 108 and 1274. If adopted, this provision would apply to transactions after December 31, 2013.
- Harmonize the Treatment of Market Discount and Original Issue Discount.
There are currently two distinct regimes for recognizing discount on debt instruments. One rule applies when debt instruments are acquired at original issue (the "original issue discount rules") and the other rule applies when debt instruments are acquired on the secondary market (the "market discount rules"). Under the original issue discount rules, a holder must accrue original issue discount ("OID") currently on a constant yield basis, whether or not it receives corresponding payments in the relevant period. Under the market discount rules, absent an election, no current accruals of market discount income are required, but a portion of the gain on subsequent disposition of the debt instrument is treated as ordinary income, rather than capital gain. The portion is determined by comparing the holding period of the debt instrument to the number of days from the acquisition of the debt to its maturity. Interest incurred to carry a market discount bond is deferred. However, an election may be made to accrue market discount, in which case the interest is not deferred. The application of the market discount rules has been subject to particular uncertainty and criticism in cases involving distressed bonds, which are often purchased at a deep discount, since the discount in those cases is often attributable to the deterioration in the creditworthiness of the borrower rather than an increase in market interest rates.Amounts of OID includible in gross income in excess of $10 for one year on bonds for a term of more than one year must be reported to the bond holder by the issuer or broker from whom the bond was acquired. In addition, brokers are required to report gross proceeds from sale or disposition of bonds, as well as the adjusted basis in covered securities, and furnish copies of these reports or statements to their customers.
The Draft would designate current section 1278 as section 1279 and add a new section 1278. Under new section 1278, a holder of a market discount bond would include in gross income currently the sum of the daily portions of the market discount for each day during the taxable year that the taxpayer holds the bond. The amount of the inclusion for any taxable year is computed on the basis of a constant interest rate. The amount included in gross income generally is treated as interest, with the same exceptions that apply under present law where an election to accrue market discount has been made. The daily portion of market discount is adjusted to exclude the daily portion of any OID on the bond so as to prevent a double inclusion of OID.
The amount of discount includible in gross income by reason of this provision will not exceed the amount that would be so includible if the basis of the bond immediately after its acquisition was the imputed principal amount determined by using a discount rate equal to the greater of (i) an amount equal to the bond's yield to maturity (determined as of the date of issuance) plus five percentage points or (ii) an amount equal to the applicable Federal rate for the bond (determined at the time of acquisition) plus ten percentage points. Thus, the interest includible in income cannot exceed the greater of the amounts determined above based on the acquisition price.
The adjusted basis of the bond is increased by amounts included in gross income of the holder of the bond under this provision. The market discount provisions of sections 1276 (treatment of gain), 1277 (deferral of interest deduction), and the to-be designated 1279(b) (election for inclusion) would not apply to any bond to which this proposed provision would apply. The provision would also repeal the special rules for short-term non-governmental obligations held by taxpayers subject to current inclusion, which require the accrual of original issue discount but not market discount.
The Draft adds the new term "covered bond" to the Code. A covered bond is any debt instrument that has OID or market discount that was acquired after 2013 through a broker or transferred from a broker with a statement prescribed by the Code with respect to the transfer. Brokers who hold a "covered bond" would be required to report includible OID and market discount with respect to such bonds to the IRS and the customer.
If adopted, this provision would apply to debt instruments acquired after December 31, 2013, however, it would not apply to corporate OID bonds which were issued before July 2, 1982.
- Require Cost Basis of Specified Securities to be Determined on an Average Basis Method.
Currently, in determining the basis of positions disposed of, the taxpayer may use the specific identification or first in, first out method. A taxpayer who owns shares in a regulated investment company ("RIC") generally is permitted to elect, in lieu of the specific identification or first-in-first-out methods, to determine the basis of RIC shares sold under one of two average-cost-basis methods described in Treasury regulations. For purposes of satisfying the basis reporting requirements, a broker must determine a customer's adjusted basis in accordance with rules intended to ensure that the broker's reported adjusted basis numbers are the same numbers that customers must use in filing their tax returns.
The Draft would amend section 1012(d) to require that the cost of any "specified security" sold, exchanged, or otherwise disposed of on or after January 1, 2014, be determined in accordance with the average basis method. Basis is determined on an account-by-account basis, so that if a taxpayer owns specified securities in more than one account, basis computations are made separately for securities in each account. The provision also requires that brokers use the average basis method in satisfying their basis reporting requirements.
To facilitate the determination of the cost of a specified security in accordance with the average basis method, the provision treats any specified security that is acquired before January 1, 2014, as in a separate account from any security that that is acquired on or after that date. Accordingly, a taxpayer determines the basis of any specified security acquired in 2014 and later by disregarding the basis of specified securities acquired before 2014.
- Modify the Wash Sales Rules to Cover Acquisitions of Replacement Securities by Related Parties.
Section 1091 disallows losses realized on the sale of stock or securities when the taxpayer acquires substantially identical stock or securities (or an option thereon) within 30 days (either before or after) of the disposition of the position being disposed of. These rules are commonly referred to as the "wash sale" rules. If a loss is disallowed because of the wash sale rules, the basis of the substantially identical stock or securities is adjusted to include the disallowed loss. The wash sale rules do not apply to dealers in stock or securities. While a common law version of the wash sale rules has extended their application to acquisitions made by related parties, the wash sale provisions in the Code itself do not incorporate related party transactions.
The Draft amends section 1091 to expand application of the wash sale rules to the acquisition of substantially identical stock or securities by a taxpayer or a related party. Additionally, the basis of the substantially identical stock or securities is not adjusted to include the disallowed loss in the case of any acquisition by a related party other than the taxpayer's spouse.
The Draft provides that, for purposes of the wash sale rules, a related party is: (1) the taxpayer's spouse; (2) any dependent of the taxpayer and any other taxpayer with respect to whom the taxpayer is a dependent; (3) any individual, corporation, partnership, trust, or estate that controls, or is controlled by the taxpayer or any individual described in (1) or (2); (4) any individual retirement arrangement, Archer MSA, or health savings account of the taxpayer or of any individual described in (1) or (2); (5) any account under a qualified tuition program or a Coverdell education savings account if the taxpayer or any individual described in (1) or (2) is the designated beneficiary of such account or has the right to make any decision with respect to the investment of any amount in such account; and (6) any account under a qualified retirement plan, qualified annuity plan, tax-sheltered annuity plan, or governmental eligible deferred compensation plan, if the taxpayer or any individual described in (1) or (2) with respect to the taxpayer has the right to make any decision with respect to the investment of any amount in such account. Most relationships are determined as of the time of the acquisition of substantially identical stock or securities, however, spousal and dependency relationships are determined for the taxable year that includes such acquisition.
If adopted, this provision would apply to sales and other dispositions after December 31, 2013.
- Other Proposals.
The Draft would make two additional changes to current tax law. First, the Draft would amend section 62(a) to permit an "above-the-line" deduction for amortizable bond premium, reducing a taxpayer's adjusted gross income. Under current law, amortizable bond premium is first treated as an offset to the interest payments received, and otherwise is treated as an itemized deduction (not subject to the 2-percent floor). If adopted, this provision would apply to taxable years beginning after December 31, 2013.
Under a second Draft provision, the rules for accruing income on government savings bonds would change. Presently, income on a short-term governmental obligation generally is not taxed until maturity, or the obligation is otherwise disposed of. However, for certain taxpayers, such as those using the accrual method of accounting, the discount on a short-term governmental obligation is required to be included currently in income. Further, current tax law provides that United States obligations may be exchanged without recognition of gain or loss. The Draft would repeal current law requiring the accrual of interest on short-term government obligations. The Draft would also repeal current law allowing the tax-free exchange of certain government obligations. If adopted, this provision generally would be effective on the date of enactment, although the repeal of the tax-free exchange provision would apply to exchanges after December 31, 2013.
Click here for a copy of the Ways and Means staff technical explanation of the disussion draft.
Click here for a copy of the Ways and Means staff overview.
Click here for a copy of the Ways and Means Summary
For additional information, you may contact:
Peter J. Connors 212-506-5120
Stephen J. Jackson +33 1 5353 8111
Steven C. Malvey 415-773-5647
John Narducci 212-506-5105
George G. Wolf 415-773-5988
James M. Larkin 212-506-5256
Stephen C. Lessard 212-506-5137
Aviva Roth 202-339-8636
Circular 230 Disclaimer: To ensure compliance with requirements imposed by the IRS, please note that any tax advice contained herein was not intended or written to be used, and cannot be used, for the purpose of avoiding tax-related penalties that may be imposed on the taxpayer.
 All section references are to the Code unless otherwise specified.
 Section 475(c)(2).
 Section 475(e)(1), (f)(2).
 Section 475(d)(3).
 Section 475(c)(2).
 Section 1256(a)(3).
 Section 1256(b)(1). The term section 1256 contract does not include (1) any securities futures contract or option on such a contract unless such contract or option is a dealer securities futures contract, or (2) any interest rate swap, currency swap, basis swap, interest rate cap, interest rate floor, commodity swap, equity swap, equity index swap, credit default swap, or similar agreement. Section 1256(b)(2).
 See, e.g., Am. Bar Ass'n Sec. of Tax'n, "Options for Tax Reform in the Financial Transactions Tax Provisions of the Internal Revenue Code," at 42 (Dec. 2, 2011).
 See Rev. Rul. 78-182, 1978-1 C.B. 265.
 See Treas. Reg. § 1.446-3(e), (f), and (h).
 Section 1092(a).
 Section 1091(a).
 Proposed section 485(a).
 To the extent provided in regulations, if the fair market value of a derivative is not readily ascertainable, then value is determined under the method used by the taxpayer in reports to shareholders, partners, other proprietors, beneficiaries, or as used for purposes of obtaining credit. Proposed section 485(e)(1). The fair market value of an embedded derivative component (as discussed further in the text below) will be the excess of (i) the fair market value of the debt instrument including such component, over (ii) the fair market value of the debt instrument not including such component. Proposed section 485(e)(3). To the extent provided in regulations, fair market value is determined without regard to any premium or discount related to the relative size of the taxpayer's position to the total available trading units of an instrument. Proposed section 485(e)(4).
 Proposed section 485(b).
 Derivatives with respect to (i) a tract of real property (as defined in section 1237(c)) or (ii) only real property that would be inventory in the hands of the taxpayer if held directly by the taxpayer would not be subject to mark-to-market treatment under proposed section 485. Proposed Section 486(e)(1). Under future guidance, multiple tracts of real property may be treated as a single tract of real property if the derivative is of a type which is designed to facilitate the acquisition or disposition of such real property. Proposed section 486(e)(2). The Technical Explanation of the Draft notes that this provision is intended to allow a narrow exclusion from the mark-to-market rule for contracts related to single pieces of real estate and for contracts related to real estate held for sale by real estate developers. See H. Comm. on Ways & Means, "Technical Explanation of the Ways and Means Committee Discussion Draft Provisions to Reform the Taxation of Financial Instruments" (Jan. 24, 2013) (referred to hereinafter as the "Technical Explanation").
 Proposed section 486(a).
 Proposed section 486(b).
 Technical Explanation, supra note 16, at 9.
 Id. Compare proposed section 486(a)(1)(B) and section 475(c)(2)(B).
 Technical Explanation, supra note 16, at 9.
 See Treas. Reg. § 1.446-3(c)(1).
 Compare proposed section 486(c)(2)(B) and Treas. Reg. § 1.446-3(c)(2)(iii).
 Proposed section 486(c)(1). The Technical Explanation notes that this provision is included so as not to exclude a contract that merely rolls more than one interim payment or price adjustment into a single contract payment. Technical Explanation, supra note 16, at 9.
 See REG-111283-11.
 Proposed section 486(d)(2)(A). The term "embedded derivative component" means any terms of a debt instrument that affect some or all of the cash flows or the value of other payments required by the instrument in a manner similar to a derivative. However, bifurcation will not be required merely because a debt instrument is denominated in or specifies payments by reference to a nonfunctional currency, is a contingent payment debt instrument or variable rate debt instrument, or has an alternative payment schedule. Proposed section 486(d)(2)(B) .
 Technical Explanation, supra note 16, at 10.
 Proposed section 485(c)(1).
 Proposed section 485(c)(2)(A).
 Proposed section 485(c)(3)(A).
 Proposed section 485(c)(4).
 Proposed section 485(f).
 Section 1221(a)(7).
 Section 1221(a)(7), Treas. Reg. § 1.1221-2(f)(1). In addition to the same-day identification requirement for the hedging transaction itself, a taxpayer must identify the item, items, or aggregate risk being hedged substantially contemporaneously with (and not more than 35 days after) entering into the hedging transaction. Treas. Reg. § 1.1221-2(f)(2).
 Treas. Reg. § 1.1221-2(f)(4)(ii).
 Treas. Reg. § 1.1221-2(g)(1), (2).
 Proposed section 1221(c)(3).
 Proposed section 1221(c)(3)(B).
 Technical Explanation, supra note 16, at 13 n.56.
 Technical Explanation, supra note 16, at 13.
 Hoover hedges are transactions to manage currency risk exposure arising from equity investments in foreign subsidiaries. These transactions are typically entered into to protect a company's balance sheet from the risk that fluctuations in foreign currency exchange rates will affect the translated value of a company's foreign equity investment. The Tax Court has held that hoover hedges do not satisfy the two primary tests for determining if a commodity future constitutes a "bona fide hedge": (1) that the hedge is entered into in the context of a balanced market position, and (2) that the hedge is a means of protecting ordinary operating profits realized in the day-to-day operation of the business enterprise. See Hoover Company v. Comm'r, 72 T.C. 206 (1979).
 Proposed section 1221(c)(4).
 Treas. Reg. § 1.1001-3(b).
 Treas. Reg. § 1.61-12(a).
 Treas. Reg. § 1.1001-1(a), (g)(1).
 Treas. Reg. § 1.1273-2(f)(1)(ii).
 Proposed section 1274B(c).
 Technical Explanation, supra note 16, at 15.
 Proposed section 1274B(a).
 Technical Explanation, supra note 16, at 15.
 Section 1272(a), Treas. Reg. § 1.1272-1.
 Section 1276(a), (b)(2).
 Section 1276(b)(1).
 Section 1277.
 Section 1278(b).
 See, e.g., Tax Sec. of the New York St. Bar Ass'n, "Report of the Tax Section of the New York State Bar Association on the Taxation of Distressed Debt," Rep. No. 1248 at 3-4 (Nov. 22, 2011).
 Section 6049(a), (d)(6); Treas. Reg. § 1.6049-4(a).
 A covered security is any debt instrument that has OID or market discount that was acquired after 2013 through a broker or transferred from a broker with a statement prescribed by the Code with respect to the transfer, if the recipient of the interest or proceeds is not an exempt recipient. Section 6045(g)(3); Treas. Reg. § 1.6045-1(c)(3).
 Proposed section 1278(a).
 Proposed section 1278(b)(1).
 Proposed section 1278(c)(1).
 Proposed section 1278(b)(3).
 Proposed section 1278(b)(2).
 Technical Explanation, supra note 16, at 18.
 Proposed section 1278(c)(2).
 Technical Explanation, supra note 16, at 19; section 1283(c).
 The term "covered bond" for purposes of the Draft should not be confused with the same term that is employed by the securitization industry to describe a certain type of recourse asset-backed security.
 Proposed section 6045(i)(2).
 Proposed section 6045(i)(1).
 Treas. Reg. § 1.1012-1(c).
 Treas. Reg. § 1.1012-1(e).
 See section 6045(g)(2).
 Proposed Section 1012(d)(1). The term "specified security" has the meaning given such term in section 6045(g). Section 1012(c)(3).
 Technical Explanation, supra note 16, at 23.
 Id. at 24.
 Proposed section 1012(d)(2).
 Technical Explanation, supra note 16, at 23.
 Section 1091(d).
 Section 1091(a).
 Proposed section 1091(g)(1).
 Proposed section 1091(g)(2).
 Proposed section 62(a)(8).
 See Treas. Reg. § 1.171-2(a). Under recently issued Treas. Reg. § 1.171-2T(a)(4)(i)(C), on the sale, retirement or other taxable disposition of a bond, a taxpayer is allowed to deduct any remaining bond premium, rather than treating such unamortized deduction as a capital loss.
 Section 454(b).
 Section 1281(a).
 Section 1037.
 Technical Explanation, supra note 16, at 21.