Notional Principal Contracts
Legal and Factual
______/s/ Diane S. Ryan____________ February 8, 2006_
DIRECTOR, TECHNICAL SERVICES DATE
EFFECTIVE DATE: February 8, 2006
*Any line marked with a # is for Official Use Only*
NOTIONAL PRINCIPAL CONTRACTS
(CONTINGENT DEFERRED SWAPS)
On May 28, 2002, the Service issued Notice 2002-35, 2002-1 C.B. 992 announcing that
the Service will challenge transactions involving the use of a notional principal contract
(“NPC”) to claim current deductions for periodic payments made by a taxpayer while
disregarding the accrual of a right to receive offsetting payments in the future. The
taxpayer using this type of NPC, also referred to as a swap, is typically a limited
Is the Partnership required to accrue, and include in income, a payment ratably
over the term of the NPC under Treas. Reg. § 1.446-3(f)(2)(i)?
Should the NPC payment received by the Partnership on the early termination
date of an NPC be treated by the Partnership as ordinary income or capital gain?
Should the Partnership’s loan be disregarded for federal income tax purposes?
Does I.R.C. § 465 limit the Investor's amount at risk?
Is the Investor entitled to deductions under I.R.C. § 162 for payments made by the
Partnership on the notional principal contract (NPC)?
6. Do the Partnership’s transactions lack economic substance?
7. Should the Investor be allowed to take deductions attributable to his investment in
the Partnership under I.R.C. § 183(a) if the Partnershi