Part I. Rulings — Internal Revenue Bulletin 2012-23

Section 42.—Low-Income Housing Credit

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of June 2012. See Rev. Rul. 2012-15, page 975.

Section 163.—Interest

26 CFR 1.163–11: Allocation of certain prepaid qualified mortgage insurance premiums.

T.D. 9588

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1

Allocation of Mortgage Insurance Premiums

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations and removal of temporary regulations.

SUMMARY: This document contains final regulations that explain how to allocate prepaid qualified mortgage insurance premiums to determine the amount of the prepaid premium that is treated as qualified residence interest each taxable year. The final regulations reflect changes to the law made by the Tax Relief and Health Care Act of 2006, the Mortgage Forgiveness Debt Relief Act of 2007, and the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. The regulations affect taxpayers who pay prepaid qualified mortgage insurance premiums.

DATES: Effective Date: These regulations are effective on May 4, 2012.

Applicability Dates: For dates of applicability, see §1.163–11(d).

FOR FURTHER INFORMATION CONTACT: Charles Kim, (202) 622–5020 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This document contains amendments to 26 CFR part 1. On May 7, 2009, the Treasury Department and IRS published temporary regulations (T.D. 9449, 2009–22 I.R.B. 1044) under section 163 of the Internal Revenue Code (Code) in the Federal Register (74 FR 21256) that explain how to allocate prepaid qualified mortgage insurance premiums to determine the amount of the prepaid premium that is treated as qualified residence interest each taxable year. On the same day, the Treasury Department and IRS published a notice of proposed rulemaking (REG–107271–08, 2009–22 I.R.B. 1051) cross-referencing the temporary regulations in the Federal Register (74 FR 21295). No public hearing was requested or held. No comments responding to the notice of proposed rulemaking were received. The proposed regulations under section 163 are adopted as amended by this Treasury decision, and the corresponding temporary regulations under section 163 are removed.

T.D. 9449 also contained temporary regulations under section 6050H(h) that require persons who receive premiums, including prepaid premiums, for mortgage insurance to make a return setting forth the amount of premiums received. A notice of proposed rulemaking (REG–107271–08) cross-referencing the temporary regulations was published in the Federal Register on the same day (74 FR 21295). Because the deduction for mortgage insurance premiums currently does not apply to amounts paid or accrued after December 31, 2011, the Treasury Department and the IRS are not taking any action at this time with respect to the temporary regulations or the proposed regulations under section 6050H(h). The temporary regulations will expire on May 4, 2012.

Section 419 of the Tax Relief and Health Care Act of 2006, Public Law 109–432 (120 Stat. 2967) (2006), added

sections 163(h)(3)(E), (h)(4)(E), and (h)(4)(F) to the Code. Section 3 of the Mortgage Forgiveness Debt Relief Act of 2007, Public Law 110–142 (121 Stat. 1803) (2007), amended section 163(h)(3)(E)(iv). Section 759(a) of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Public Law 111–312 (124 Stat. 3296) (2010), further amended section 163(h)(3)(E)(iv). In general, these new provisions treat certain qualified mortgage insurance premiums as qualified residence interest. This treatment only applies to certain qualified mortgage insurance premiums paid or accrued on or after January 1, 2007, and on or before December 31, 2011, on mortgage insurance contracts issued on or after January 1, 2007.

Section 163(h)(3)(E)(i) provides that premiums paid or accrued for qualified mortgage insurance in connection with acquisition indebtedness for a qualified residence are treated as qualified residence interest for purposes of section 163. Section 163(h)(4)(E) defines quali- fied mortgage insurance as (i) mortgage insurance provided by the Veterans Administration (VA), the Federal Housing Administration (FHA), or the Rural Housing Administration (Rural Housing), ¹ and (ii) private mortgage insurance (as defined by section 2 of the Homeowners Protection Act of 1998 (12 U.S.C. 4901) as in effect on December 20, 2006). The amount treated as qualified residence interest may be reduced or eliminated under section 163(h)(3)(E)(ii), which provides that the amount allowed as a deduction is phased out ratably by 10 percent for each $1,000 ($500 in the case of a married individual filing a separate return) (or fraction thereof) that the taxpayer’s adjusted gross income exceeds $100,000 ($50,000 in the case of a married individual filing a separate return).

Section 163(h)(4)(F) states that any amount paid by the taxpayer for qualified mortgage insurance that is properly allocable to any mortgage the payment of which extends to periods that are af

1 References in section 163(h)(4)(E)(i) to the Veterans Administration and Rural Housing Administration are interpreted to mean their respective successors, the Department of Veterans Affairs and Rural Housing Service.

2012–23 I.R.B. 969 June 4, 2012

be allowed for any amount of the premium that is allocable to periods after the mortgage is satisfied.

(b) Scope . The allocation requirement in paragraph (a) of this section applies only to mortgage insurance provided by the Federal Housing Administration or private mortgage insurance (as defined by section 2 of the Homeowners Protection Act of 1998 (12 U.S.C. 4901) as in effect on December 20, 2006). It does not apply to mortgage insurance provided by the Department of Veterans Affairs or the Rural Housing Service. Paragraph (a) of this section applies whether the qualified mortgage insurance premiums are paid in cash or are financed, without regard to source.

(c) Limitation on the treatment of mort- gage insurance premiums as interest . This section applies to prepaid qualified mortgage insurance premiums described in paragraph (a) of this section that are paid or accrued on or after January 1, 2011, and during periods to which section 163(h)(3)(E) is applicable. This section does not apply to any amount of prepaid qualified mortgage insurance premiums that are allocable to any periods to which section 163(h)(3)(E) is not applicable.

(d) Effective/applicability date . This section is applicable on and after January 1, 2011. For regulations applicable before January 1, 2011, see §1.163–11T in effect prior to January 1, 2011 (§1.163–11T as contained in 26 CFR part 1 edition revised as of April 1, 2011).

§1.163–11T [Removed]

Par. 3. Section 1.163–11T is removed.

Steven T. Miller, Deputy Commissioner for Services and Enforcement.

Approved April 24, 2012.

Emily S. McMahon, Acting Assistant Secretary of the Treasury (Tax Policy).

(Filed by the Office of the Federal Register on May 4, 2012, 8:45 a.m., and published in the issue of the Federal Register for May 7, 2012, 77 F.R. 26698)

ter the close of the taxable year in which the amount is paid shall be chargeable to capital account and shall be treated as paid in the periods to which the amount is allocated. No deduction shall be allowed for the unamortized balance of the account if the mortgage is satisfied before the end of its term. Section 163(h)(4)(F) provides that the allocation rules under section 163(h)(4)(F) do not apply to amounts paid for qualified mortgage insurance provided by the VA or Rural Housing. Additionally, section 163(h)(3)(E)(iv)(II) disallows a deduction for amounts allocable to any period after December 31, 2011.

Explanation of Provisions

These final regulations provide rules regarding the allocation of prepaid qualified mortgage insurance premiums to determine the amount of the prepaid premium that is treated as qualified residence interest each taxable year under section 163(h)(4)(F). These final regulations apply to prepaid qualified mortgage insurance premiums paid or accrued on or after January 1, 2011. The treatment of mortgage insurance premiums as interest described in these final regulations is limited to prepaid qualified mortgage insurance premiums that are paid or accrued on or after January 1, 2011, and during periods to which section 163(h)(3)(E) is applicable. The temporary regulations are applicable to prepaid qualified mortgage insurance premiums paid or accrued on or after January 1, 2008, and on or before December 31, 2010.

Special Analyses

It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866, as supplemented by Executive Order 13563. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations, and because the regulations do not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Code, the notice of proposed rulemaking preceding these regulations was submitted to the Chief Counsel

for Advocacy of the Small Business Administration for comment on its impact on small business, and no comments were received.

Drafting Information

The principal author of these regulations is Charles Kim, Office of the Associate Chief Counsel (Income Tax and Accounting). However, other personnel from the IRS and the Treasury Department participated in their development.

- - - -

Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 1 is amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for part 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * * Par. 2. Section 1.163–11 is added to read as follows:

§1.163–11 Allocation of certain prepaid qualified mortgage insurance premiums .

(a) Allocation —(1) In general . As provided in section 163(h)(3)(E), premiums paid or accrued for qualified mortgage insurance during the taxable year in connection with acquisition indebtedness with respect to a qualified residence (as defined in section 163(h)(4)(A)) of the taxpayer shall be treated as qualified residence interest (as defined in section 163(h)(3)(A)). If an individual taxpayer pays such a premium that is properly allocable to a mortgage the payment of which extends to periods beyond the close of the taxable year in which the premium is paid, the taxpayer must allocate the premium to determine the amount treated as qualified residence interest for each taxable year. The premium must be allocated ratably over the shorter of—

(i) The stated term of the mortgage; or (ii) A period of 84 months, beginning with the month in which the insurance was obtained.

(2) Limitation . If a mortgage is satisfied before the end of its stated term, no deduction as qualified residence interest shall

June 4, 2012 970 2012–23 I.R.B.

Section 280G.—Golden Parachute Payments

Federal short-term, mid-term, and long-term rates are set forth for the month of June 2012. See Rev. Rul. 2012-15, page 975.

Section 382.—Limitation on Net Operating Loss Carryforwards and Certain Built-In Losses Following Ownership Change

The adjusted applicable federal long-term rates is set forth for the month of June 2012. See Rev. Rul. 2012-15, page 975.

Section 412.—Minimum Funding Standards

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of June 2012. See Rev. Rul. 2012-15, page 975.

Section 467.—Certain Payments for the Use of Property or Services

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of June 2012. See Rev. Rul. 2012-15, page 975.

Section 468.—Special Rules for Mining and Solid Waste Reclamation and Closing Costs

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of June 2012. See Rev. Rul. 2012-15, page 975.

Section 482.—Allocation of Income and Deductions Among Taxpayers

Federal short-term, mid-term, and long-term rates are set forth for the month of June 2012. See Rev. Rul. 2012-15, page 975.

Section 483.—Interest on Certain Deferred Payments

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of June 2012. See Rev. Rul. 2012-15, page 975.

Section 642.—Special Rules for Credits and Deductions

Federal short-term, mid-term, and long-term rates are set forth for the month of June 2012. See Rev. Rul. 2012-15, page 975.

Section 807.—Rules for Certain Reserves

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of June 2012. See Rev. Rul. 2012-15, page 975.

Section 846.—Discounted Unpaid Losses Defined

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of June 2012. See Rev. Rul. 2012-15, page 975.

Section 956.—Investment of Earnings in United States Property

26 CFR 1.956–2: Definition of United States prop- erty.

T.D. 9589

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1

Modifications to Definition of United States Property

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

SUMMARY: This document contains final and temporary regulations relating to the treatment of upfront payments made pursuant to certain notional principal contracts for U.S. federal income tax purposes. The temporary regulations provide that certain obligations of United States persons arising from upfront payments made by controlled foreign corporations pursuant to contracts that are cleared by a derivatives clearing organization or clearing agency do not constitute United States property. These regulations affect United

States shareholders of controlled foreign corporations that make such payments. The text of the temporary regulations also serves as the text of the proposed regulations set forth in the notice of proposed rulemaking (REG–107548–11) on this subject in this issue of the Bulletin.

DATES: Effective Date: These regulations are effective on May 11, 2012.

Applicability Date: These regulations apply to payments described in §1.956–2T(b)(1)(xi) made on or after May 11, 2012.

FOR FURTHER INFORMATION CONTACT: Kristine A. Crabtree at (202) 622–3840 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

A. Section 956

Section 956 was enacted to require an income inclusion by United States shareholders (as defined in section 951(b)) of a controlled foreign corporation (as defined in section 957(a)) that invests certain earnings and profits in United States property (U.S. property) “on the grounds that [the investment] is substantially the equivalent of a dividend being paid to them.” S. Rep. No. 87–1881, 1962–3 C.B. 703, 794 (1962). Under section 951(a)(1)(B), each United States shareholder (U.S. shareholder) of a controlled foreign corporation (CFC) is generally required to currently include in its gross income the amount determined under section 956 with respect to such shareholder.

The amount determined under section 956 with respect to a U.S. shareholder of a CFC for any taxable year is the lesser of: (1) the excess, if any, of the shareholder’s pro rata share of the average of the amounts of U.S. property held (directly or indirectly) by the CFC as of the close of each quarter of such taxable year, over the amount of earnings and profits of the CFC described in section 959(c)(1)(A) with respect to such shareholder; or (2) the shareholder’s pro rata share of the applicable earnings of the CFC. In general, the amount taken into account with respect to any U.S. property for this purpose is the adjusted basis of such

2012–23 I.R.B. 971 June 4, 2012

are discussed in this section of the preamble). Cash margin payments (as well as other payments made pursuant to the terms of a cleared contract) to and from a U.S.-registered clearinghouse are made to or through a clearing member (that is, a futures commission merchant, broker, or dealer who is a member of the clearinghouse) which, in turn, makes corresponding payments to or receives corresponding payments from a counterparty.

(1) Initial Variation Margin Required to Offset Upfront Payment

The party that makes an upfront payment pursuant to a cleared contract (the first party) has credit risk with respect to that payment because, if the clearinghouse (or the first party’s clearing member) were to default, the first party would not receive the full benefit it paid for (the benefit of making below-market fixed rate payments or receiving above-market payments for the term of the contract). When the U.S.-registered clearinghouse makes the upfront payment to the other party to the cleared contract (the second party), the U.S.-registered clearinghouse similarly has credit risk with respect to that second party (or its clearing member). The second party (the ultimate recipient of the upfront payment) is thus required to make a payment in the nature of variation margin (initial variation margin) to the U.S.-registered clearinghouse, generally no later than the end of the business day on which the upfront payment is made, in an amount that is equal to the upfront payment.

In some instances, the total amount of margin posted by the second party on the day that it is required to post initial variation margin may not equal the amount of the first party’s upfront payment, due to either: (1) the netting of the second party’s notional exposure to the first party, or to the clearinghouse, as a result of other transactions; or (2) changes in the value of the contract between the time the contract is entered into and the time when the required margin is paid, requiring daily variation margin to be added to or subtracted from the second party’s initial variation margin payment, as the case may be. However, on a transaction-by-transaction basis, the payment of initial variation margin by the second party should equal the first party’s

property as determined for purposes of computing earnings and profits, reduced by any liability to which the property is subject. Earnings and profits described in section 959(c)(1)(A) are attributable to amounts previously included in gross income by the U.S. shareholder under section 951(a)(1)(B) (or which would have been included except for section 959(a)(2)). Section 956(c)(1) defines U.S. property to generally include stock of a domestic corporation and an obligation of a United States person (U.S. person). Section 956(c)(2), however, generally excludes from the definition of U.S. property the stock or obligations of a domestic corporation that is neither a U.S. shareholder of the CFC nor a domestic corporation, 25 percent or more of the total combined voting power of which, immediately after the CFC’s acquisition of stock in such domestic corporation, is owned, or is considered as being owned, by U.S. shareholders of the CFC. Under §1.956–2T(d)(2), subject to certain exceptions not relevant here, the term “obligation” includes any bond, note, debenture, certificate, bill receivable, account receivable, note receivable, open account, or other indebtedness, whether or not issued at a discount and whether or not bearing interest.

B. NPCs with Nonperiodic (Upfront) Payments

When a notional principal contract (within the meaning of §1.446–3(c)(1)) (NPC) includes a significant nonperiodic payment, the contract is generally treated as two separate transactions. One transaction is an on-market, level payment swap; the other is a loan. For purposes of section 956, the Commissioner may treat any nonperiodic payment in connection with an NPC, whether or not it is significant, as one or more loans. See §1.446–3(g)(4). If a party to an NPC makes below-market periodic payments or receives above-market periodic payments under the terms of the contract, typically that party will make a nonperiodic payment, such as an upfront payment, to the counterparty in order to compensate for the off-market coupon payments specified in the contract.

For example, if A and B enter into an off-market interest rate swap the terms of which require A to make periodic below

market fixed rate payments to B and require B to make periodic on-market floating rate payments to A, then A typically will compensate B (for receiving the below-market fixed rate payments) by making a nonperiodic payment at the outset of the interest rate swap (henceforth, an upfront payment) so that the present value of the fixed rate leg of the swap will equal the present value of the floating rate leg of the swap.

Recently, certain contracts (cleared contracts), including some credit default swaps and interest rate swaps, have begun to be cleared through U.S.-registered derivatives clearing organizations or clearing agencies (collectively, U.S.-registered clearinghouses). Contracts cleared through a U.S.-registered clearinghouse generally are required to have standardized terms. For example, credit default swaps that are cleared through a U.S.-registered clearinghouse have common documentation and standardized coupons (currently 100 or 500 basis points). Consequently, except for the rare instance when the market coupon rate for a particular credit default swap is exactly 100 or 500 basis points, a credit default swap with a standardized coupon will be off-market and will require an upfront payment to equalize the present value of the payment obligations under the contract.

The volume of contracts cleared by U.S.-registered clearinghouses is expected to increase substantially as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Public Law No. 111–203, 124 Stat. 1376 (the Dodd-Frank Act). Title VII of the Dodd-Frank Act, among other things: (1) provides for the registration and comprehensive regulation of swap dealers and major swap participants; (2) imposes clearing and trade execution requirements on many swap contracts; and (3) creates rigorous recordkeeping and real-time reporting regimes.

C. Clearinghouse Margin Requirements to Manage Credit Risk

U.S.-registered clearinghouses manage credit risk (the risk of counterparty default) in part by requiring that each party to a cleared contract provide various types of margin, including initial variation margin and daily variation margin (both of which

June 4, 2012 972 2012–23 I.R.B.

lation is the type of transaction intended to be covered by section 956, whether or not the payment is treated as a loan under the NPC rules under section 446. While the section 956 exception in these temporary regulations currently is limited to cleared contracts, the IRS and the Treasury Department continue to study, and request comments on, whether and under what circumstances it would be appropriate to extend the exception to contracts that are not cleared by a U.S.-registered clearinghouse, but that would otherwise meet the criteria set forth in these temporary regulations.

Effective/Applicability Date

These regulations apply to payments described in §1.956–2T(b)(1)(xi) made on or after May 11, 2012. However, taxpayers may apply the rules of these regulations retroactively to payments made prior to May 11, 2012.

Special Analyses

It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations. For the applicability of the Regulatory Flexibility Act (5 U.S.C. chapter 6), refer to the crossreference notice of proposed rulemaking published in the proposed rules section in this issue of the Bulletin. Pursuant to section 7805(f) of the Internal Revenue Code, these regulations have been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small entities.

Drafting Information

The principal author of these regulations is Kristine A. Crabtree of the Office of Associate Chief Counsel (International). However, other personnel from the IRS and the Treasury Department participated in their development.

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Amendments to the Regulations

Accordingly, 26 CFR part 1 is amended as follows:

upfront payment when any daily variation margin is treated as separate from the initial variation margin posted on that day.

After receiving the second party’s initial variation margin payment, the U.S.registered clearinghouse will pay the same amount to the first party. In each case, unless the first party and the second party are clearing members of the U.S.-registered clearinghouse, the payment will be made to or through each party’s clearing member, which may be an affiliate of that party.

Assume that D (a dealer under section 475) and C (a customer) enter into a contract that is accepted for clearing by a U.S.-registered clearinghouse, the terms of which require D to make below-market periodic payments to C. D is required under the contract to make an upfront payment of $25,000 to compensate C for the below-market coupon payments that C will receive. D (not a clearing member) makes that upfront payment to its clearing member, who then pays the U.S.-registered clearinghouse an identical amount. The U.S.-registered clearinghouse in turn pays that amount to the clearing member for C, which makes the upfront payment to C. C, on the same business day, makes an initial variation margin payment of $25,000 to its clearing member, who then pays that amount to the U.S.-registered clearinghouse; the U.S.-registered clearinghouse makes the initial variation margin payment to D’s clearing member; and D’s clearing member makes the payment to D. Thus, the upfront payment from D is immediately offset by an initial variation margin payment in the same amount from C.

(2) Daily Variation Margin Required to Account for Daily Market Fluctuation

In addition to initial variation margin, U.S.-registered clearinghouses manage credit risk by requiring that each party to a cleared contract provide daily variation margin (also referred to as mark-to-market or maintenance margin). Daily variation margin is a cash margin payment made on a daily or intraday basis between the counterparties to a contract to protect against the risk of counterparty default. The rules of U.S.-registered clearinghouses generally require that daily variation margin be paid in an amount equal to the change in the fair market value of the contract.

Explanation of Provisions

The text of these temporary regulations also serves as the text of the proposed regulations set forth in the notice of proposed rulemaking on this subject in this issue of the Bulletin. These temporary regulations establish an exception to the definition of U.S. property for obligations of U.S. persons arising from upfront payments made with respect to certain cleared contracts that are properly classified as NPCs. The temporary regulations provide that obligations of U.S. persons arising from such upfront payments by a CFC that is a dealer in securities or commodities (within the meaning of section 475) do not constitute U.S. property for purposes of section 956(a). To qualify for this exception: (1) the upfront payment must be required under a contract that is cleared by a derivatives clearing organization (as such term is defined in section 1a of the Commodity Exchange Act (7 U.S.C. 1a)) or a clearing agency (as such term is defined in section 3 of the Securities Exchange Act of 1934 (15 U.S.C. 78c)) that is registered as a derivatives clearing organization under the Commodity Exchange Act or as a clearing agency under the Securities Exchange Act of 1934, respectively; (2) the CFC must make the upfront payment to or through a United States person that is a clearing member of the derivatives clearing organization or clearing agency, or directly to the derivatives clearing organization or clearing agency if the CFC is a clearing member of such derivatives clearing organization or clearing agency; (3) the upfront payment must be made, directly or indirectly, to the counterparty to the contract; (4) the counterparty to the contract must be required to make a payment in the nature of initial variation margin that is equal (before taking into account any change in the value of the contract between the time the contract is entered into and the time at which the payment is made) to the amount of the upfront payment made by the CFC; and (5) such payment in the nature of initial variation margin must be paid, directly or indirectly, to the CFC.

The IRS and the Treasury Department do not believe that an obligation of a U.S. person created by an upfront payment resulting from a cleared contract that satisfies the requirements listed in this regu

2012–23 I.R.B. 973 June 4, 2012

PART 1— INCOME TAXES

Paragraph 1. The authority citation for part 1 is amended by adding an entry in numerical order to read in part as follows:

Authority: 26 U.S.C. 7805 * * * Section 1.956–2T(b)(1)(xi) also issued under 26 U.S.C. 956(e). - * *

Par. 2. Section 1.956–2 is amended by adding a new paragraph (b)(1)(xi) to read as follows:

§1.956–2 Definition of United States property.

- - - (b) - - (1) - - (xi) [Reserved]. For further guidance, see §1.956–2T(b)(1)(xi).
- - - Par. 3. Section 1.956–2T is amended by:

Revising paragraphs (a) through (d)(1).
Adding new paragraphs (f) and (g). The revisions and additions read as follows:

§1.956–2T Definition of United States property (temporary) .

(a) 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 an upfront payment by a controlled foreign corporation (within the meaning of section 957(a)) with respect to a notional principal contract (within the meaning of §1.446–3(c)(1)) where the following conditions are satisfied—

(A) The controlled foreign corporation that makes the upfront payment is a dealer in securities or commodities (within the meaning of section 475(c)(1) or (e)(1));

(B) The upfront payment is required under a contract that is cleared by a derivatives clearing organization (as such term is defined in section 1a of the Commodity Exchange Act (7 U.S.C. 1a)) or a clearing agency (as such term is defined in section 3 of the Securities Exchange Act of 1934 (15 U.S.C. 78c)) that is registered as a derivatives clearing organization under the

Commodity Exchange Act or as a clearing agency under the Securities Exchange Act of 1934, respectively;

( 1 ) To or through a United States person that is a clearing member of a derivatives clearing organization or clearing agency, or

( 2 ) Directly to the derivatives clearing organization or clearing agency if the controlled foreign corporation is a clearing member of such derivatives clearing organization or clearing agency;

(D) The upfront payment is made by the derivatives clearing organization or clearing agency, directly or indirectly, to the original counterparty to the contract;

(E) The original counterparty to the contract that receives the upfront payment, as described in paragraph (b)(1)(xi)(D) of this section, is required by the derivatives clearing organization or clearing agency to make, by the end of the business day on which the upfront payment is made by the controlled foreign corporation, a payment in the nature of initial variation margin that is equal (before taking into account any change in the value of the contract between the time the contract is entered into and the time at which the payment is made) to the amount of the upfront payment and such payment is made, directly or indirectly, to the derivatives clearing organization or clearing agency; and

(F) The payment in the nature of initial variation margin is paid by the derivatives clearing organization or clearing agency, directly or indirectly, to the controlled foreign corporation.

(G) Examples . The following examples illustrate the application of this paragraph (b)(1)(xi):

Example 1 . CFC is a controlled foreign corporation that is wholly owned by USP, a domestic corporation. CFC is a dealer in securities under section 475(c)(1). CFC enters into a credit default swap (that it treats as a notional principal contract for U.S. federal income tax purposes) with unrelated counterparty B. The credit default swap is accepted for clearing by a U.S.-registered derivatives clearing organization (DCO). CFC is not a member of DCO. CFC uses a U.S. affiliate (CM), which is a member of DCO, as its clearing member to submit the credit default swap to be cleared. CM is a domestic corporation that is wholly owned by USP. The standardized terms of the credit default swap provide that, for a term of X years, CFC will pay B a fixed coupon

of 100 basis points per year on a notional amount of $Y. At the time CFC and B enter into the credit default swap, the market coupon for similar credit default swaps is 175 basis points per year. To compensate B for the below-market annual coupon payments that B will receive, the contract requires CFC to make an upfront payment through CM to DCO. DCO then makes the upfront payment to B through B’s clearing member. DCO also requires B to post initial variation margin in an amount equal to the upfront payment. B pays the initial variation margin through its clearing member to DCO. DCO then pays the initial variation margin through CM to CFC. Because the conditions set out 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.

Example 2 . Assume the same facts as in Example 1, except that counterparty B is, like CM, a domestic corporation that is wholly owned by USP. Because the conditions set out in this paragraph (b)(1)(xi) are satisfied, the obligations of CM and B arising from the upfront payment by CFC do not constitute United States property for purposes of section 956.

Example 3 . Assume the same facts as in Example 2, except that CFC uses an unrelated person as its clearing member. Because the conditions set out in this paragraph (b)(1)(xi) are satisfied, the obligation of B arising from the upfront payment by CFC does not constitute United States property for purposes of section 956.

(b)(2) through (d)(1) [Reserved]. For further guidance, see §1.956–2(b)(2) through (d)(1).

- - - (f) Effective/applicability date . Paragraph (b)(1)(xi) applies to payments described in §1.956–2T(b)(1)(xi) made on or after May 11, 2012. Taxpayers may apply the rules of paragraph (b)(1)(xi) to payments described in §1.956–2T(b)(1)(xi) made prior to May 11, 2012.

(g) Expiration date . The applicability of paragraph (b)(1)(xi) expires on May 8, 2015.

Steven T. Miller, Deputy Commissioner for Services and Enforcement.

Approved May 1, 2012.

Emily S. McMahon, Acting Assistant Secretary of the Treasury (Tax Policy).

(Filed by the Office of the Federal Register on May 10, 2012, 8:45 a.m., and published in the issue of the Federal Register for May 11, 2012, 77 F.R. 27612)

June 4, 2012 974 2012–23 I.R.B.

Section 1274.—Determi- nation of Issue Price in the Case of Certain Debt Instru- ments Issued for Property

(Also Sections 42, 280G, 382, 412, 467, 468, 482, 483, 642, 807, 846, 1288, 7520, 7872.)

Federal rates; adjusted federal rates; adjusted federal long-term rate and the long-term exempt rate. For purposes of sections 382, 642, 1274, 1288, and other sections of the Code, tables set forth the rates for June 2012.

Rev. Rul. 2012–15

This revenue ruling provides various prescribed rates for federal income tax pur

poses for June 2012 (the current month). Table 1 contains the short-term, mid-term, and long-term applicable federal rates (AFR) for the current month for purposes of section 1274(d) of the Internal Revenue Code. Table 2 contains the short-term, mid-term, and long-term adjusted applicable federal rates (adjusted AFR) for the current month for purposes of section 1288(b). Table 3 sets forth the adjusted federal long-term rate and the long-term tax-exempt rate described in section 382(f). Table 4 contains the appropriate percentages for determining the low-income housing credit described in section 42(b)(1) for buildings placed in service during the current month. However, under section 42(b)(2), the applicable percentage for non-federally subsidized new buildings placed in service after July 30, 2008, and before December 31, 2013, shall not be less than 9%. Finally, Table 5 contains the federal rate for determining the present value of an annuity, an interest for life or for a term of years, or a remainder or a reversionary interest for purposes of section 7520.

Applicable Federal Rates (AFR) for June 2012

Period for Compounding

Annual Semiannual Quarterly Monthly

Short-term

AFR .23% .23% .23% .23% 110% AFR .25% .25% .25% .25% 120% AFR .28% .28% .28% .28% 130% AFR .30% .30% .30% .30%

Mid-term

AFR 1.07% 1.07% 1.07% 1.07% 110% AFR 1.18% 1.18% 1.18% 1.18% 120% AFR 1.28% 1.28% 1.28% 1.28% 130% AFR 1.39% 1.39% 1.39% 1.39% 150% AFR 1.62% 1.61% 1.61% 1.60% 175% AFR 1.88% 1.87% 1.87% 1.86%

Long-term

AFR 2.64% 2.62% 2.61% 2.61% 110% AFR 2.90% 2.88% 2.87% 2.86% 120% AFR 3.16% 3.14% 3.13% 3.12% 130% AFR 3.44% 3.41% 3.40% 3.39%

REV. RUL. 2012–15 TABLE 2

Adjusted AFR for June 2012

Period for Compounding

Annual Semiannual Quarterly Monthly

Short-term adjusted .26% .26% .26% .26% AFR

Mid-term adjusted AFR 1.16% 1.16% 1.16% 1.16%

Long-term adjusted 3.06% 3.04% 3.03% 3.02% AFR

2012–23 I.R.B. 975 June 4, 2012

REV. RUL. 2012–15 TABLE 3

Rates Under Section 382 for June 2012

Adjusted federal long-term rate for the current month 3.06%

Long-term tax-exempt rate for ownership changes during the current month (the highest of the adjusted federal long-term rates for the current month and the prior two months.) 3.26%

REV. RUL. 2012–15 TABLE 4

Appropriate Percentages Under Section 42(b)(1) for June 2012

Note: Under Section 42(b)(2), the applicable percentage for non-federally subsidized new buildings placed in service after July 30, 2008, and before December 31, 2013, shall not be less than 9%.

Appropriate percentage for the 70% present value low-income housing credit 7.43%

Appropriate percentage for the 30% present value low-income housing credit 3.18%

REV. RUL. 2012–15 TABLE 5

Rate Under Section 7520 for June 2012

Applicable federal rate for determining the present value of an annuity, an interest for life or a term of years, or a remainder or reversionary interest 1.2%

Section 7872.—Treatment of Loans With Below-Market Interest Rates

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of June 2012. See Rev. Rul. 2012-15, page 975.

Section 1288.—Treatment of Original Issue Discount on Tax-Exempt Obligations

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of June 2012. See Rev. Rul. 2012-15, page 975.

Section 7520.—Valuation Tables

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of June 2012. See Rev. Rul. 2012-15, page 975.

June 4, 2012 976 2012–23 I.R.B.