Tax Watch: Proposed commodity swaps rules are clarified

The Department of the Treasury and the Internal Revenue Service have clarified the rules they proposed last spring for tax-exempt bonds issued by state and local governments.

The newly proposed regulations amend the definitions of “private loan” and “investment-type property.”

Specifically, the proposed regulations address the circumstances in which a prepayment for property or services will be treated as a loan under the tax law’s private-loan-financing test and when it will give rise to investment-type property.

Among other things, the proposed regulations add a unique exception to the definition of private loans and investment-type property for natural-gas prepayments, as long as they meet certain requirements.

According to the existing tax rules, any commodity swap contract between the issuer and an unrelated party (other than the gas supplier), or between the gas supplier and an unrelated party (other than the issuer), will qualify for that exception, so long as each swap contract is an independent contract.

The contract is considered to be independent, at least for these purposes, if each party’s obliga- tion to perform under the swap contract isn’t dependent on performance for any purposes (other than the other party to the swap contract) under another contract (for example, a gas-supply contract or a different swap contract).

Under the newly proposed regulations, a natural-gas swap contract won’t fail to be an independent contract solely because the swap contract may terminate in the event that a gas supplier fails to deliver gas for which the swap contract is a hedge.

The agency is requesting comments concerning the limitations on commodity swap contracts under the terms of those proposed regulations.

Pricewaterhouse, IRS settle dispute

The IRS announced recently that it had reached an agreement with PricewaterhouseCoopers LLP to resolve a number of issues relating to tax shelter registration and list maintenance under the tax law.

Without admitting or denying wrongdoing or legal liability under the penalty provisions of the Internal Revenue Code, PricewaterhouseCoopers agreed to make a substantial payment to the IRS to resolve issues in connection with advice rendered to clients dating back to 1995.

PricewaterhouseCoopers reportedly has agreed to provide certain client information pursuant to authorized legal processes, such as summonses, to the IRS as required by law and, significantly, to work with the agency to develop processes to ensure continuing compliance with the Internal Revenue Code and Treasury regulations for registering tax shelters and maintaining lists of investors in tax shelters.