Daily Tax Update - September 5, 2012: Temporary Regulations Issued Regarding Certain Integrated Hedging Transactions

TEMPORARY REGULATIONS ISSUED REGARDING CERTAIN INTEGRATED HEDGING TRANSACTIONS:  Today, the Treasury Department and the IRS issued temporary regulations regarding integrated hedging transactions that involve a foreign currency denominated debt instrument and multiple associated hedging transactions.  The text of the temporary regulations also serves as the text of proposed regulations issued concurrently.

The preamble states that, under the current section 988 regulations, if a taxpayer disposes of a qualifying debt instrument that is integrated with a hedge described in Treasury regulation 1.988-5(a) prior to the maturity of the hedge, the debt is treated as sold for its fair market value on the date of disposition of the hedge.  One qualifier is that the synthetic debt instrument must not be denominated in a nonfunctional currency.

The preamble states further that some taxpayers, who are in a loss position with respect to an integrated debt instrument, have used these rules to recognize the loss on a debt instrument without recognizing all of the corresponding gain on the hedge.  According to the preamble, this is accomplished by hedging nonfunctional currency debt instruments with multiple financial instruments and selectively disposing of less than all of these positions. 

The new temporary regulations provide that, if at least one of the components of an integrated hedge is disposed of, all of the remaining components of the hedge, including the debt, are treated as sold for their fair market value.

For additional information, contact: -Matthew D. Lerner - mailto:mlerner@steptoe.com or J. Walker Johnson  - mailto:wjohnson@steptoe.com or the Steptoe attorney(s) with whom you usually work.

The regulations can be accessed here and here.

IRS PROVIDES GUIDANCE ON SEASONAL AND PART-TIME EMPLOYEES’ STATUS FOR 2014 HEALTH COVERAGE MANDATE:  On August 31, 2012, the IRS released Notices 2012-58 and 2012-59.  Notice 2012-58 provides preliminary guidance defining a full-time employee for purposes of the requirements of the Affordable Care Act (ACA) beginning in 2014 that large employers (with at least 50 full-time employees) provide full-time employees affordable health insurance or face penalties.  Generally a full-time employee is defined as someone who works 30 hours a week.  Notice 2012-58 addresses how to determine whether part-time employees whose hours cannot be predicted in advance or seasonal employees (both defined as "variable hour employees" ) are full-time employees required to be offered health coverage.  The Notice provides a safe harbor for classifying variable hour employees by allowing a look-back measurement period of between 3 and 12 months, and then applying  and allowing that classification as full-time (or not full-time) to be "locked in" during a subsequent stability period.  The stability period generally must be at least 6 consecutive calendar months but no shorter than the measurement period for employees classified as full-time; for employees classified as not full-time, the stability period can be no longer than the standard measurement period. Slightly different rules apply for new and for ongoing employees.   The Notice says that employers can rely on the guidance in the Notice at least through 2014.  Notice 2012-59 explains how the waiting period for required coverage is coordinated with the measurement and stability periods described above. (Under the ACA for plan years beginning on or after January 1, 2014, a group health plan cannot have a waiting period of more than 90 days.)

Notice 2012-58 confirms prior guidance that said that that employers can assess the affordability of coverage offered to employees based on the employee’s Form W-2 (instead of household income) and states that the proposed regulations will be issued providing this as a safe harbor.   See Notice at II (D). This relief applies at least through 2014.  

The notices can be accessed via: n-12-58.pdf & n-12-59.pdf.

Comments on the Notices are required by September 30, 2012. 

Please contact Anne E. Moran - mailto:amoran@steptoe.com (202-429-6449) or Don Wellington dwellington@steptoe.com (213-439-9457) if you have any questions.

MISCELLANEOUS GUIDANCE RELEASED:

Revenue Procedure 2012-40 provides the domestic asset/liability percentages and domestic investment yields needed by foreign life insurance companies and foreign property and liability insurance companies to compute their minimum effectively connected net investment income under section 842(b) of the Internal Revenue Code for taxable years beginning after December 31, 2010.

INTERNAL REVENUE SERVICE - CIRCULAR 230 DISCLOSURE: 
As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

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