Par. 5. Section 1.1234A-1 is added to read as follows:
(a) General rule. If a taxpayer has a position in a notional principal contract governed by the rules of § 1.446-3, any gain or loss arising from a termination payment as defined in § 1.446-3(h)(1) is treated as gain or loss from a termination of the notional principal contract.
(b) Nonapplicability to payments other than termination payments. For purposes of section 1234A, none of the following payments terminate or cancel a right or obligation: a periodic payment described in § 1.446-3(e), a nonperiodic payment described in § 1.446-3(f), a contingent nonperiodic payment described in § 1.446-3(g)(6) to which § 1.446-3(g)(6)(ii) applies, or mark-to-market income inclusions and deductions described in § 1.446-3(i)(1). Accordingly, section 1234A does not apply to any of these items, including any final scheduled payment. If a payment made or received pursuant to a notional principal contract is not a termination payment as defined in § 1.446-3(h)(1), the payment constitutes ordinary income or expense. See sections 162 and 212 and the regulations thereunder.
(c) Bullets swaps and forward contracts —(1) Any gain or loss arising from the settlement of obligations under a bullet swap or forward contract (including a payment pursuant to the terms of the obligations) is treated as gain or loss from a termination of the bullet swap or forward contract.
(2) Definition of bullet swap. A bullet swap is a financial instrument that is not an excluded contract as defined in § 1.446-3(c)(1)(ii), that provides for the computation of an amount or amounts due from one party to another by reference to a specified index upon a notional principal amount, and that provides for settlement of all the parties' obligations at or close to maturity of the contract.
(d) Effective date. Paragraphs (b)(1) and (c) of this section are applicable to notional principal contracts, bullet swaps, and forward contracts entered into on or after 30 days after the date a Treasury decision based on these proposed regulations is published in the Federal Register .