Federal Tax Legislative Developments: Current Developments in the Taxation of Financial Products

[...]Rev. Rul. 2020-5 modifies previous guidance on the sale or surrender of life insurance contracts to account for statutory changes made by the TCJA. [...]the liquidation method for de minimis OID is strikingly similar to the method of accounting for market discount under Code Sec. 1276(a).14 The...

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Bibliographic Details
Published in:Journal of Taxation of Financial Products 2020-03, Vol.17 (1), p.5-46
Main Author: Rodrick, Jeffrey T
Format: Article
Language:English
Subjects:
Accounting
Accrual basis accounting
Credit card fees
Dividends
Documentation
Finance
Hedging
Income tax
Investment products
Methods
Mortgage servicing
Original issue discount
Regulation
Student loans
Tax Cuts & Jobs Act 2017-US
Taxable income
Taxation
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Summary:[...]Rev. Rul. 2020-5 modifies previous guidance on the sale or surrender of life insurance contracts to account for statutory changes made by the TCJA. [...]the liquidation method for de minimis OID is strikingly similar to the method of accounting for market discount under Code Sec. 1276(a).14 The IRS has held that market discount is not subject to acceleration under Code Sec. 451(b), presumably because market discount income is not realized until payments are received or the bond is sold.15 This view is further supported by the Blue Book, which indicates that amounts accounted for under Code Sec. 1271 (de minimis OID) and Code Sec. 1276 (market discount) are not within the purview of Code Sec. 451(b).16 Third, if Code Sec. 451(b) were interpreted to override the de minimis OID rules, this would change not only the timing but also the character of the income from debt instruments with de minimis OID. The preamble indicates that this delayed effective date for specified fees is provided because "the treatment of these fees is unclear for tax purposes (and in some cases for financial reporting purposes)" and that this additional time will "allow the Treasury Department and the IRS to determine the types of fees that should be subject to section 451(b). "21 Credit card specified fees-a subset of specified fees which include credit card late fees, cash advance fees, and interchange fees-do not qualify for this delayed effective date given the legislative history's clear indication that they should be covered by the AFS income inclusion rule.22 With the exception of the rules on specified fees, taxpayers may rely on the proposed regulations currently so long as they are consistently applied.
ISSN:1529-9287