IRS NOTICE IMPLEMENTS 1988 ACT ELECTION PROVISIONS FOR FOREIGN CURRENCY TRANSACTIONS; FIRST ELECTIONS DUE BY DECEMBER 31, 1988.

The Origin of the Elections

Both elections were added to the Code as part of the Other Substantive Revenue Provisions in section 6130 of TAMRA. Under TAMRA, the section 1256 carve-out from the foreign currency transaction rules for regulated futures contracts and nonequity options was retained, but an election was provided in section 988(c)(1)(D) to allow a taxpayer to consent to have the regulated futures contracts and nonequity options treated as section 988 transactions. TAMRA also provided special rules for transactions in forward contracts, futures contracts, options, and similar instruments where they are held by certain "qualified funds." Foreign currency commodities funds or similar partnerships can elect under section 988(c)(1)(E) to be treated as "qualified funds" to get capital treatment for marked-to- market instruments falling within an expanded definition of the term "section 1256 contract."

Regulated Futures Contracts and Nonequity Options Elections

The taxpayer's election to consent to have the regulated futures contracts and nonequity options treated as section 988 currency transactions is made by the taxpayer sending a statement to the Kansas City Internal Revenue Service Center. The statement must contain, among other things, the date of the beginning of the taxable year for which the election is being made. The election must be made, in the case of a partnership, by each partner separately; in the case of an S corporation, by each shareholder separately; and, in the case of a trust or estate, by the fiduciary of such trust or estate. The election by a corporation shall be binding on all members of such corporation's affiliated group.

The time for making the election shall be on or before the first day of the taxable year or, if later, on or before the first day during such year on which the taxpayer holds a contract described in section 988(c)(1)(D)(i). A taxpayer also may make a "late" election under section 988(c)(1)(D)(ii) within 30 days after this prescribed time. This late election will be effective as of the beginning of the taxable year; however, any losses recognized during the taxable year with respect to applicable contracts which were entered into or acquired after October 21, 1988, and held on or before the date of the late election, shall not be treated as derived from a section 988 transaction.

Under a transitional rule, a calendar year taxpayer may make the election under section 988(c)(1)(D)(ii) for the 1988 taxable year on or before December 31, 1988. A fiscal year taxpayer may make the election for its 1988 taxable year or its 1989 taxable year on or before December 31, 1988. An election under this transitional rule shall only apply to contracts entered into or acquired after October 21, 1988; shall apply to the taxable year for which made and all succeeding taxable years and shall not be considered a "late" election.

Qualified Fund Election

The qualified fund election must be made by a general partner with management responsibility for the partnership's activities. The time for making the election is on or before the first day of the taxable year or, if later, on or before the first day during such year on which the partnership holds an instrument described in section 988(c)(1)(E)(i).

Under a transitional rule, a calendar year partnership may make the election under section 988(c)(1)(E)(iii)(V) for the 1988 taxable year on or before December 31, 1988. A fiscal year partnership may make this election for its 1988 taxable year or its 1989 taxable year on or before December 31, 1988. The notice makes no provision for a "late" qualified fund election.

Administrative, Procedural and Miscellaneous

This notice provides rules regarding the time and manner in which elections are to be made under section 988(c)(1)(D) and (E) prior to the time regulations are effective under that section. Section 988(c)(1)(D) allows a taxpayer to consent to have certain regulated futures contracts and nonequity options treated as section 988 transactions. Section 988(c)(1)(E) provides special rules for qualified funds.

1. ELECTION PROVIDED IN SECTION 988(c)(1)(D)(ii)

(a) PROCEDURE FOR MAKING THE ELECTION. A taxpayer shall make the election provided in section 988(c)(1)(D)(ii) by sending to the Internal Revenue Service Center, Examination Branch, Stop Number 92, Kansas City, MO 64999 a statement titled "ELECTION TO TREAT REGULATED FUTURES CONTRACTS AND NONEQUITY OPTIONS AS SECTION 988 TRANSACTIONS UNDER SECTION 988(c)(1)(D)(ii)" that contains the following:

(i) The taxpayer's name, address and taxpayer identification number;

(ii) The date the notice is mailed or otherwise delivered to the Internal Revenue Service Center;

(iii) A statement that the taxpayer (including all members of such person's affiliated group as defined in section 1504 or in the case of an individual all persons filing a joint return with such individual) elects to have section 988(c)(1)(D)(i) not apply;

(iv) The date of the beginning of the taxable year for which the election is being made;

(v) If the election is filed after the first day of the taxable year, then a statement regarding whether the taxpayer has previously held a contract described in section 988(c)(1)(D)(i) during such taxable year, and if so, the first date during the taxable year on which such contract was held; and

(vi) The signature of the person making the election (in the case of individuals filing a joint return, the signature of all persons filing such return).

The election shall be made by the following persons: in the case of an individual, by such individual; in the case of a partnership, by each partner separately; in the case of an S corporation, by each shareholder separately; in the case of a trust (other than a grantor trust) or estate, by the fiduciary of such trust or estate; in the case of any corporation other than an S corporation, by such corporation. With respect to a corporation (other than an S corporation), the election shall be binding on all members of such corporation's affiliated group as defined in section 1504. The election shall be binding on any income or loss derived from all contracts described in section 988(c)(1)(D)(i) in which the taxpayer holds a direct interest or indirect interest through a partnership or S corporation; however, the election shall not apply to any income or loss of a partnership for any taxable year if such partnership made an election under section 988(c)(1)(E)(iii)(V) for such year or any preceding year. A copy of the election must be attached to the taxpayer's income tax return for the first year it is effective. (It is not required to be attached to subsequent returns.)

(b) TIME FOR MAKING THE ELECTION -- (1) IN GENERAL. Except as provided in section 1(b)(2) and (3) of this notice, an election under section 988(c)(1)(D)(ii) for any taxable year shall be made on or before the first day of the taxable year or, if later, on or before the first day during such year on which the taxpayer holds a contract described in section 988(c)(1)(D)(i). The election under section 988(c)(1)(D)(ii) shall apply to contracts entered into or acquired after October 21, 1988 and held on or after the effective date of the election. The election shall be effective as of the beginning of the taxable year and shall be binding with respect to all succeeding taxable years unless revoked with the consent of the Commissioner. In determining whether to grant revocation of the election, recapture of the tax benefit derived from the election in previous taxable years will be considered.

(2) LATE ELECTIONS. A taxpayer may make an election under section 988(c)(1)(D)(ii) within 30 days after the time prescribed in the first sentence of section 1(b)(1) of this notice. Such a late election shall be effective as of the beginning of the taxable year; however, any losses recognized during the taxable year with respect to contracts described in section 988(c)(1)(D)(i) which were entered into or acquired after October 21, 1988, and held on or before the date on which the late election is mailed or otherwise delivered to the Internal Revenue Service Center shall not be treated as derived from a section 988 transaction. A late election must comply with the procedures set forth in section 1(a) of this notice.

(3) TRANSITIONAL RULE. A calendar year taxpayer may make the election under section 988(c)(1)(D)(ii) for the 1988 taxable year on or before December 31, 1988. A fiscal year taxpayer may make the election under section 988(c)(1)(D)(ii) for its 1988 taxable year or its 1989 taxable year on or before December 31, 1988. An election made under this section (1)(b)(3) of this notice --

(i) Shall only apply to contracts entered into or acquired after October 21, 1988,

(ii) Shall apply to the taxable year for which made and all succeeding taxable years, and

(iii) Shall not be considered a late election under section 1(b)(2) of this notice.

2. ELECTION PROVIDED IN SECTION 988(c)(1)(E)(iii)(V)

(a) PROCEDURE FOR MAKING THE ELECTION. A partnership shall make the election provided in section 988(c)(1)(E)(iii)(V) by sending to the Internal Revenue Service Center, Examination Branch, Stop Number 92, Kansas City, MO 64999 a statement titled "QUALIFIED FUND ELECTION UNDER SECTION 988(c)(1)(E)(iii)(V)" that contains the following:

(i) The partnership's name, address, and taxpayer identification number;

(ii) The name, address and taxpayer identification number of the general partner making the election on behalf of the partnership;

(iii) The date the notice is mailed or otherwise delivered to the Internal Revenue Service Center;

(iv) A brief description of the activity of the partnership;

(v) A statement that the partnership is making the election provided in section 988(c)(1)(E)(iii)(V);

(vi) The date of the beginning of the taxable year for which the election is being made;

(vii) If the election is filed after the first day of the taxable year, then a statement regarding whether the partnership previously held an instrument referred to in section 988(c)(1)(E)(i) during such taxable year, and if so, the first date during the taxable year on which such contract was held; and

(viii) The signature of the general partner making the election.

The election shall be made by a general partner with management responsibility of the partnership's activities and a copy of such election shall be attached to the partnership's income tax return (Form 1065) for the first year it is effective. (It is not required to be attached to subsequent returns.)

(b) TIME FOR MAKING THE ELECTION. Except as provided in section 2(c) of this notice, the election under section 988(c)(1)(E)(iii)(V) for any taxable year shall be made on or before the first day of the taxable year or, if later, on or before the first day during such year on which the partnership holds an instrument described in section 988(c)(1)(E)(i). The election under section 988(c)(1)(E)(iii)(V) shall apply to the taxable year for which made and all succeeding taxable years. Such election may only be revoked with the consent of the Commissioner. In determining whether to grant revocation of the election, recapture by the partners of the tax benefit derived from the election in previous taxable years will be considered.

(c) TRANSITIONAL RULE. A calendar year partnership may make the election under section 988(c)(1)(E)(iii)(V) for the 1988 taxable year on or before December 31, 1988. A fiscal year partnership may make the election under section 988(c)(1)(E)(iii)(V) for its 1988 taxable year or its 1989 taxable year on or before December 31, 1988. An election made under this section 2(c) of this notice --

(i) Shall only apply to instruments entered into or acquired after October 21, 1988, and

(ii) Shall apply to the taxable year for which made and all succeeding taxable years.