Basket options [listed transactions] basket contracts [transactions of interest]

Basket options, basket contracts

The IRS today released an advance version of Notice 2015-73, clarifying the types of transactions that are “basket options” and that are to be treated as “listed transactions” that must be disclosed, and an advance version of Notice 2015-74, clarifying the types of transactions that are “basket contracts” and that are to be treated as “transactions of interest” that must be disclosed. [NOTE: The IRS on November 2, 2015, re-issued these two notices, with the amended notices providing clarifications concerning effective date provisions. The hyperlinks, below, are to the text of the amended versions of these two notices.]

Related content

  • Notice 2015-73 [PDF 62 KB] involving basket options, revokes Notice 2015-47, but continues to cause basket options to be treated as listed transactions that must be disclosed by participants and material advisors.  
  • Notice 2015-74 [PDF 64 KB] involving basket contracts, revokes Notice 2015-48, but continues to treat basket contracts as transactions of interest that must be disclosed by participants and material advisors.  

Each notice provides more details than the respective earlier notice about transactions within the scope of each notice, and further clarifies that a taxpayer must have reflected on a tax return a tax benefit described in the applicable notice. Also, each of today’s notices describe when a person is treated as the taxpayer’s designee and when the taxpayer or its designee would be treated as having discretion to change the assets in the reference basket or the trading algorithm and lists certain contracts that are excluded from each notice, including when a counterparty would not have to disclose a transaction.

Accounting method changes

There are special rules for method of accounting changes for transactions within the scope of either notice. Each notice provides rules for a taxpayer that wishes to changes its method of accounting for a transaction within the scope of the notice. Notice 2015-73 provides the exclusive procedures that a taxpayer must follow to change its method of accounting for transactions within the scope of the notice. In general, a taxpayer must file amended returns to retroactively change its method accounting.  

Similarly, Notice 2015-74 provides the exclusive procedures for transactions it defines as “conversion transactions” (a transaction that involves the conversion of ordinary income or short-term capital gain or loss into long-term capital gain or loss), and generally requires a taxpayer to retroactively change its method of accounting by filing amended returns. For transactions that are defined by Notice 2015-74 as “deferral transactions” (a transaction whose only tax benefit was a deferral of income into a later tax year), a taxpayer may change its method of accounting by following the notice’s retroactive change procedures, or if eligible, by complying with the non-automatic procedures of Rev. Proc. 2015-13, as modified by certain requirements in the notice.

Effective dates

Under Notice 2015-73, transactions in effect on or after January 1, 2011, and that are the same as, or substantially similar to, the transaction described in Notice 2015-73 are identified as listed transactions for purposes of Reg. section 1.6011-4(b)(2) and sections 6111 and 6112.  In general, disclosure of such transactions must be done by January 19, 2016.

Under Notice 2015-74, transactions entered into on or after November 2, 2006, that are the same as, or substantially similar to, transactions described in Notice 2015-74, and in effect on or after January 1, 2011 are identified as transactions of interest for purposes of Reg. section 1.6011-4(b)(6) and sections 6111 and 6112.  In general, disclosure of such transactions must be done by January 19, 2016.

In general, these IRS notices provide special rules for taxpayers that want to change their method of accounting for transactions within the scope of either notice and generally require that transactions be disclosed by January 19, 2016.

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