The IRS has issued proposed regulations under Section 6011 that identify certain “basket contract” transactions as “listed transactions.” The proposed regulations identify as a listed transaction each of the basket option contracts previously identified as a “listed transaction” in Notice 2015-73 and basket contracts previously identified as a “transactions of interest” in 2015-74. The proposed regulations also identify the parties treated as participating in such transactions that are subject to the disclosure requirements related to a reportable transaction.
Background
Regulations under Treas. Reg. Sec. 1.6011-4 require a disclosure statement for every taxpayer that has participated in a “reportable transaction.” A reportable transaction includes a “listed transaction” and a “transaction of interest” as identified by the IRS by notice, regulations, or other published guidance. A “listed transaction” is a transaction determined by the IRS to be a tax avoidance transaction.
Taxpayers that have participated in a reportable transaction and are required to file a tax return must file a disclosure statement within the time period prescribed in Treas. Reg. Sec. 1.6011-4(e). The disclosure statement is Form 8886 and must be attached to the taxpayer’s tax return for each year for which the taxpayer participates in a reportable transaction.
Notices 2015-73 and 2015-74
In 2015, the IRS first addressed concerns around basket contract transactions in Notices 2015-47 and 2015-48. These notices were later replaced by Notices 2015-73 and 2015-74 after comments.
The transaction described in Notice 2015-73 generally consists of:
- A taxpayer entering into a contract denominated as an option with a counterparty to receive a return based on the performance of a notional basket of referenced actively traded personal property (the “reference basket”)
- Substantially all of the assets in the reference basket consisting of actively traded personal property defined under Treas. Reg. Sec. 1.1092(d)-1(a)
- The option is not fully settled at intervals of one year or less
- The taxpayer or the taxpayer’s designee exercising discretion to change the assets in the reference basket or trading algorithm
- The taxpayer’s tax return for a taxable year reflected a tax benefit
The primary concern for abuse by the IRS was taxpayers attempting to convert to defer income recognition and convert short-term capital gain and ordinary income to long-term capital gain, taxed at a lower rate.
Notice 2015-74 described a “transaction of interest,” which was similar to the transactions described in Notice 2015-73. However, Notice 2015-74 described transactions that could be denominated as an option, notional principal contract, forward contract, or other derivative contract with a Reference Basket that could include: (i) interest in entities that trade securities, commodities, foreign currency, or similar property (i.e., hedge fund interests); (ii) securities; (iii) commodities; (iv) foreign currency; or (v) similar property (or positions in such property). Notice 2015-74 also covered contracts that are more than one year and contracts that overlap two taxable years for the taxpayer.
Based on examinations since Notices 2015-73 and 2015-74, the IRS stated that there was sufficient information to conclude that one or both abuses related to their concerns existed.
Prop. Reg. Sec. 1.6011-16
The proposed regulations identify transactions that are the same as, or substantially similar to, the transactions described in both Notices 2015-73 and 2015-74 as listed transactions. The transaction described in the proposed regulations has the following characteristics:
- A taxpayer enters into a contract with a counterparty denominated as an option, notional principal contract, forward contract, or other derivative, to receive a return based on the performance of a basket of referenced actively traded personal property (the reference basket)
- The contract has a stated term of more than one year, or overlaps two or more of taxpayer’s taxable years
- The taxpayer has exercised discretion to change (either directly or through a request to the counterparty) the assets in the reference basket or the trading algorithm
- The taxpayer’s tax return for a taxable year ending on or after Jan. 1, 2011, reflects a tax benefit with respect to the transaction
- The transaction is not described as an exception in Prop. Reg. Sec. 1.6011-16(d)
This list does not include a requirement that substantially all assets in the reference basket be actively traded personal property or that a basket option is not fully settled at intervals of one year or less.
The types of assets that may be included in the reference basket include:
- Actively traded personal property as defined under Treas. Reg. Sec. 1.1092(d)-1(a);
- Interests in entities that trade securities, commodities, foreign currency, digital assets as defined in Section 6045(g)(3)(D) or similar property
- Securities
- Commodities
- Foreign currency
- Digital assets as defined in § 6045(g)(3)(D) or
- Similar property (or positions in such property)
The proposed regulations provide a list of exceptions including the following:
- A contract that is traded on a national securities exchange that is regulated by the SEC or similar governing body
- A contract treated as a contingent payment debt instrument under Treas. Reg. Sec. 1.1275-4 (including a short-term contingent payment debt instrument) or a variable rate debt instrument under Treas. Reg. Sec. 1.1275-5
- If a taxpayer represents to the counterparty in writing that none of taxpayer’s tax returns for taxable years ending on or after Jan. 1, 2011, has reflected or will reflect a tax benefit described in Prop. Reg. Sec. 1.6011-16(b)(5) with respect to the transaction
- The counterparty has established that the taxpayer is a nonresident alien that is not engaged in a U.S. trade or business or a foreign corporation that is not engaged in a U.S. trade or business by obtaining a valid withholding certificate upon which it may rely under the requirements of Treas. Reg. Sec. 1.1441-1 from the taxpayer as the beneficial owner of the payments made or to be made under the basket contract
The proposed regulations also provide, for each year that a transaction described as a listed transaction in the proposed regulations is open, the following parties are treated as participating in the transaction:
- The taxpayer
- If the taxpayer is a partnership with one or more general partners, each general partner or managing member of the taxpayer
- If the taxpayer is a partnership and does not have a general partner or managing member, each partner in the partnership
- The counterparty
Contacts:
Content disclaimer
This content provides information and comments on current issues and developments from Grant Thornton Advisors LLC and Grant Thornton LLP. It is not a comprehensive analysis of the subject matter covered. It is not, and should not be construed as, accounting, legal, tax, or professional advice provided by Grant Thornton Advisors LLC and Grant Thornton LLP. All relevant facts and circumstances, including the pertinent authoritative literature, need to be considered to arrive at conclusions that comply with matters addressed in this content.
For additional information on topics covered in this content, contact a Grant Thornton professional.
Grant Thornton LLP and Grant Thornton Advisors LLC (and their respective subsidiary entities) practice as an alternative practice structure in accordance with the AICPA Code of Professional Conduct and applicable law, regulations and professional standards. Grant Thornton LLP is a licensed independent CPA firm that provides attest services to its clients, and Grant Thornton Advisors LLC and its subsidiary entities provide tax and business consulting services to their clients. Grant Thornton Advisors LLC and its subsidiary entities are not licensed CPA firms.
Tax professional standards statement
This content supports Grant Thornton Advisors LLC’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. It is not, and should not be construed as, accounting, legal, tax, or professional advice provided by Grant Thornton Advisors LLC. If you are interested in the topics presented herein, we encourage you to contact a Grant Thornton Advisors LLC tax professional. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein.
The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal, tax, or professional advice provided by Grant Thornton Advisors LLC. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact a Grant Thornton Advisors LLC tax professional prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton Advisors LLC assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.
Grant Thornton Advisors LLC and its subsidiary entities are not licensed CPA firms.
More tax hot topics
No Results Found. Please search again using different keywords and/or filters.
Share with your network
Share