The IRS released advance versions of two notices—Notice 2015-47 and Notice 2015-48—identifying certain structured financial transactions involving basket option contracts as tax avoidance transactions and, as such, has categorized these transactions as “listed transactions,” and identifying certain transactions involving basket contracts as “transactions of interest” because they may have the potential for tax avoidance or evasion.
The notices were posted on the IRS website, with a posting date notation of July 8, 2015.
Notice 2015-47 [PDF 165 KB] concerns basket option contracts—identified as a situation in which a taxpayer attempts to defer income recognition and to treat short-term capital gain and ordinary income as long-term capital gain using a contract denominated as an option contact. The notice describes a sample transaction in detail.
The contract is denominated as an option contract that references a basket of actively traded personal property (i.e., securities). As briefly summarized in an IRS transmittal message, the contract allows the taxpayer to trade the securities referenced in the contract, while the contract purportedly remains open.
The IRS notice concludes that option treatment is not warranted, and the income deferral and conversion to long-term capital gain is improper. Notice 2015-47 further provides:
Independent of their classification as listed transactions, transactions that are the same as, or substantially similar to, the transaction described in [Notice 2015-47] may already be subject to the requirements of §§ 6011, 6111, or 6112, or the regulations thereunder. If a transaction is identified as a listed transaction under section 2.01 of this notice and as a transaction of interest in Notice 2015-48, the transaction is identified as a listed transaction. Persons satisfying the disclosure requirements for a listed transaction under [Notice 2015-47] are deemed to have satisfied the disclosure requirements under Notice 2015-48.
Notice 2015-48 [PDF 162 KB] concerns a type of structured financial transaction in which a taxpayer attempts to defer and treat ordinary income and short-term capital gain as long-term capital gain. The transaction may be denominated as an option, notional principal contract, or forward contract.
The contract may reference assets that are not actively traded—such as interests in hedge funds—and the taxpayer has the right to change the assets in the referenced basket.
As concluded by the IRS, the taxpayer’s ability to control the assets in the basket raises the issue of whether the form of the transaction is to be respected and, thus, whether the income deferral and conversion to long-term capital gain is improper.
Notice 2015-48 states that this such “basket contracts” have a potential for tax avoidance or evasion, but that the IRS and Treasury lack enough information to determine whether the transaction is to be identified specifically as a tax avoidance transaction. Therefore, the basket contract and substantially similar transactions are identified as “transactions of interest.”
Notice 2015-47 provides that transactions in effect on or after January 1, 2011, that are the same as, or substantially similar to, the transaction described by the IRS are “listed transactions,” effective July 8, 2015. Taxpayers engaged in transactions in effect on or after January 2, 2011, must disclose the transaction for each tax year in which the taxpayer participated in the transactions (provided that the statute of limitations on assessment of taxes has not expired on or before July 8, 2015).
Notice 2015-48 provides that transactions entered into on or after November 2, 2006, that are the same as or substantially similar to the transactions described by the IRS and in effective on or after January 1, 2011, are identified as “transactions of interest,” effective July 8, 2015. Taxpayers engaged in transactions entered into on or after November 2, 2006, and in effect on or after January 1, 2011, must disclose the transactions for each tax year in which the taxpayer participated in the transactions (provided the statute of limitations on assessment has not ended on or before July 8, 2015).
Both notices include a provision extending the period for taxpayers to disclose a transaction described in the notices for 120 days (instead of the 90-day period under Reg. section 301.6111-3(e)).
Persons required to disclosure these transactions, but fail to do so, may be subject to a penalty under section 6707A. In addition, the IRS may impose other penalties on parties involved in these transactions or substantially similar transactions, including the accuracy-related penalty under section 6662 or 6662A.
Also, persons required to disclose Notice 2015-47 transactions, but fail to do so, may be subject to an extended statute of limitations under section 6501(c)(10).
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