comprehensive tax reform: financial products

Comprehensive Tax Reform: Financial Products DiscussionFinancial Products Discussion Draft

KPMG Tax Governance Institute WebcastFebruary 7, 2013y

Tax

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Speakers

Hank Gutman– Director, Tax Governance Institute, principal in charge, Legislative and Regulatory

Services group, KPMG LLP, former chief of staff of the Congressional Joint Committee T tion Taxation

Ray Beeman– Tax counsel and special advisor for tax reform for the Ways and Means Committee

of the U S House of Representativesof the U.S. House of Representatives

Lucy Farr– Partner, Davis Polk & Wardwell LLP

St R th l Steve Rosenthal– Visiting fellow, Urban-Brookings Tax Policy Center

Mark Price– Principal in charge, Financial Institutions & Products group, Washington National Tax,

KPMG LLP


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Agenda

• Introduction to the Camp Discussion Draft (the “Draft”)

• Objectives of the Draft

• Description of the Provisions

• Analysis of the Draft

• Proposed Changes

• Next Steps


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Camp Discussion Draft Provisions

PART 1 – DERIVATIVES AND HEDGING

Sec. 401. Treatment of DerivativesSec 402 Treatment of hedges identified for financial accounting purposesSec. 402. Treatment of hedges identified for financial accounting purposes.

PART 2 – TREATMENT OF DISCOUNT AND INCOME

Sec. 411. Determination of issue price in the case of specified debt difi timodifications.

Sec. 412. Deduction for amortizable bond premium allowed in determining adjusted gross income.

S 413 C t i l i i i f k t di tSec. 413. Current inclusion in income of market discount.Sec. 414. Rules regarding certain government debt.

PART 3 – CERTAIN RULES FOR DETERMINING GAIN AND LOSS

Sec. 421. Cost basis of specified securities determined in accordance with average basis method.

Sec. 422. Wash sales by related parties.


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Derivatives and Hedging

• Generally requires all derivatives to be marked to market annually unless they are part of hedging transactions

• T t ll it f i d f d i ti di• Treats all items of income and expense from derivatives as ordinary

• Takes a broad view of the term derivative, including embedded derivative components of debt instrumentsp

• Treats financial accounting designation of hedging transactions as meeting tax identification requirements


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Examples

• Taxpayer buys a call option on a U.S. publicly traded equity

• Taxpayer enters into a contract to acquire a privately held partnership i t t iinterest in a year

• Taxpayer regularly enters into physical forward contracts to sell its property. These contracts are treated as normal sales and not subject to p p y jthe mark-to-market rules in ASC 815

• Taxpayer holds a corporate bond portfolio as part of its liquidity management program Taxpayer enters into interest rate swaps tomanagement program. Taxpayer enters into interest rate swaps to manage its interest rate exposure

• Taxpayer issues convertible debt


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We will return in a moment.We will return in a moment.

Treatment of Discount and Income

• Generally provides that borrowers will not realize cancellation of indebtedness income unless principal is forgiven

• M k i d d ti b th li d d ti• Makes premium deductions above-the-line deductions

• Requires current inclusion of market discount for secondary market purchasers of debt, but limits inclusionsp

• Changes the rules for savings bonds and short-term government obligations


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Rules for Determining Gain and Loss

• Requires taxpayers to use the average basis method to determine cost for securities disposed after December 31, 2013, instead of specific identificationidentification

• Extends the wash sale rules to transactions involving related parties (e.g., shareholder and controlled corporation)


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© 2013 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International

Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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© 2013 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

The information contained herein is of a general nature and is not intended to addressthe circumstances of any particular individual or entity. Although we endeavour to provideaccurate and timely information, there can be no guarantee that such information is accurateas of the date it is received or that it will continue to be accurate in the future. No one shouldact on such information without appropriate professional advice after a thorough examinationact on such information without appropriate professional advice after a thorough examinationof the particular situation.

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comprehensive tax reform: financial products

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