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Abstract: 

On February 25, 2004 the Treasury Department and the IRS issued proposed regulations (the “Proposed Regulations”) regarding the U.S. federal income taxation of notional principal contracts1 that provide for contingent nonperiodic payments (“contingent notional principal contracts”).2 For these purposes, the term “contingent notional principal contract” includes equity swaps and commodity swaps that provide for current payments over the term of the transaction, but the term does not include transactions, such as options, conventional forward contracts, prepaid forward contracts and socalled “bullet swaps,” where all investment returns are paid only upon the transaction’s maturity.3 The Proposed Regulations are the result of a process involving extensive dialogue between the Service and the taxpayer community that began some twelve years ago.

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Affiliations:  1: Cleary, Gottlieb, Steen & Hamilton.