Daily Tax Update - November 20, 2015: Treasury, IRS Issue Interim Guidance Relating to Qualified ABLE Programs

Treasury, IRS Issue Interim Guidance Relating to Qualified ABLE Programs:  Notice 2015-81 advises how Treasury and the IRS plan to respond to taxpayer concerns about tax-favored savings accounts for individuals with disabilities.  In particular, Treasury and the IRS will revise three provisions of the proposed regulations under section 529A when such regulations are finalized.  Commenters had noted that the following three requirements for qualified Achieving Better Life Experience (ABLE) programs in the proposed regulations would create significant barriers to the establishment of such programs: (i) the requirement to establish safeguards to categorize distributions from ABLE accounts; (ii) the requirement to request the taxpayer identification number of each contributor to an ABLE account; and (iii) the requirements for disability certifications.

IRS Office of Chief Counsel Releases Advice on Cash-Settled Barrier ‘Call Options’:  In CCA 201547004, the IRS Office of Chief Counsel concludes that certain contracts, styled as “cash-settled equity barrier call options,” should not be treated as options for tax purposes.  The taxpayer entered into such contracts with a bank in order to gain exposure to U.S. and foreign hedge funds.  The CCA reasons that, although labeled as options, the contracts lacked the essential economic and legal characteristics of options.  In particular, according to the CCA, two elements of the contracts between the taxpayer and the bank were contrary to the typical functioning of an option: (i) the interplay between the contracts’ premiums, cash settlement amounts, and the barrier provisions, which imposed costs upon the taxpayer similar to an obligated buyer and precluded any possibility of lapse; and (ii) the taxpayer’s ability to alter the basket while the contracts remained open.  

Miscellaneous Guidance:  Revenue Ruling 2015-25 provides various prescribed rates for December 2015, including the applicable federal interest rates, the adjusted applicable federal interest rates, the adjusted federal long-term rate, and the adjusted federal long-term tax-exempt rate.