Finance Committee hearing, tax avoidance strategies identified

Finance Committee hearing, tax avoidance strategies

Coinciding with a Senate Finance Committee hearing today focusing on “tax fairness,” ranking member Senator Ron Wyden (D-OR) released a report that identifies the six strategies identified by his staff as “tax avoidance” as well as broad policy and regulatory recommendations by his tax staff to address some of these strategies.

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Among the items listed in Senator Wyden’s report are the following:

  • Using collars to avoid paying capital gains taxes - Wyden’s staff recommended that Treasury be required to use their current authority to write regulations for section 1259 that would define the use of some “collars” as constructive sales.
  • Using wash sales to time the recognition of capital income - Among other potential changes, the Democratic staff recommended that Congress update section 1091 to apply wash sale rules to forward contracts, swaps, and certain derivatives involving commodities and currencies.
  • Using derivatives to convert ordinary income to capital gains or convert capital losses to ordinary losses - Wyden’s staff recommended that mark-to-market rules be enacted, to require the taxation of resulting gains or losses as ordinary income without consideration of whether the contract is held to maturity or disposed of early.
  • Using derivatives to avoid constructive ownership rules for partnership interests - The Finance Committee’s minority staff recommended that section 1260 be updated to specify additional derivative transactions, such as holders of one-sided put or call options. It was also suggested that Treasury could complete its earlier work to extend the transaction list contained in section 1260.
  • Using basket options to convert short-term gains into long-term gains - The Democratic staff reportedly has encouraged the IRS and Treasury to consider issuing a tax shelter notice to identify this financial structure as a tax shelter.
  • Avoiding income taxes by deferring compensation - Wyden’s staff mentioned a number of potential law changes that could be enacted to curtail perceived loopholes in the section 162(m) limitation as well as to modify the tax recognition timing of some compensation deferred under nonqualified deferred compensation plans.

Ranking Member Wyden is expected to work to make the items that he and his staff highlighted in the report―and the accompanying recommendations―part of future discussions of tax reform and legislation.

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