IRS Proposed Rules Mistakenly Classify Section 1256 Contracts, IRS Witnesses Say

While the Dodd-Frank Wall Street Reform and Consumer Protection Act sought to exclude derivatives that have traditionally been categorized as notional principal contracts from becoming §1256 contracts, it did not suggest that §1256 contracts be reclassified as notional principal contracts, a CME Group managing director told the IRS Jan. 19.

The new “two-payment rule” for delineating between §1256 contracts—such as futures and foreign currency contracts—and notional principal contracts found in IRS proposed rules (REG-118283-11) “creates substantial uncertainty by potentially reclassifying a significant proportion of the futures market across a wide array of products,” David ...