Listed Transaction #36 (Basket Option Contracts)
NEW! - LISTED TRANSACTION - Basket Option Contracts (Reissued 10-21-15)
IRS Notice 2015-74 (reissued guidance)
The option is to last more than one year. By and through performance in the basket, as managed or overseen by Bank (Counterparty), long-term capital gains are generated.
We are concerned that taxpayers are using basket option contracts to inappropriately defer income recognition and convert ordinary income and short-term capital gain into long-term capital gain. Sometimes, this is being done to avoid application of IRC § 1260, U.S. tax liability under §§ 871 and 881, and withholding and reporting obligations under the Code.
IRS will make a number of arguments on this, including, but not limited to:
That Bank (C) holds the assets in the “basket” as an agent of T and that T is the beneficial owner of the assets for tax purposes;
That the basket option contract is not an “option” for tax purposes;
That changes to the assets in the basket during the year materially modify the basket option contract and result in taxable dispositions of the contract itself under I.R.C. § 1001 throughout the term of the contract;
That T actually owns separate contractual rights with respect to each asset in the basket such that each change to the assets in the basket results in a taxable disposition of a contract right under § 1001 with respect to the asset affected by the change.
IRS reserves the making of any other argument that supports the conclusion that T is the beneficial owner of the assets in the basket for tax purposes.
If you believe that you may have engaged in a transaction that is the same or substantially similar to the transaction described above, Federal law may require you to disclose your and other parties’ participation in any such “listed transaction” on IRS Form 8886. For more information, please contact us.
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