The IRS on May 8 issued temporary regulations under Treas. Reg.
Sec. 1.446-3T (
T.D. 9719), which provide that a notional principal contract
(NPC) with one or more nonperiodic payments must generally be
treated as two transactions with certain exceptions.
An NPC, defined under Treas. Reg. Sec. 1.446-3, is a financial
instrument providing for payments by one party to another at
specified intervals calculated by reference to a specified index on
a notional principal amount, in exchange for specified
consideration or a promise to pay similar amounts. An example of an
NPC includes an interest rate swap that requires a party to pay a
fixed interest rate (for example, 5%) on a quarterly basis on a
notional principal amount (for example, $1,000) to a counterparty
in exchange for the counterparty's quarterly payment of a
variable interest rate (for example, LIBOR) on the notional
principal amount.
