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Alternative Market Briefing

IRS likely to challenge basket contracts

Friday, July 17, 2015

Bailey McCann, Opalesque New York:

The IRS issued two notices late last week that suggest the Service is likely to start challenging basket contract transactions, and assessing penalties. According to the IRS, basket options contracts and basket contracts could be used as schemes for tax avoidance. As such, the Service is making them reportable transactions. Failure to report could result in penalties.

According to an alert from law firm Morgan Lewis, "In June, the US Senate Committee on Finance’s ranking minority member Senator Ron Wyden (D-OR) sent a letter to the Department of the Treasury (Treasury) urging it and the IRS to shut down these "basket" transactions because they enable taxpayers to convert short-term capital gains to long-term capital gains. In March, the Senate Committee on Finance’s Democratic staff issued a report calling for the IRS and Treasury to identify the transactions as reportable transactions."

The first notice 2015-47, 2015-30 IRB 1, makes basket options contract transactions into listed transactions. According to the Service, taxpayers can use these transactions to avoid constructive ownership rules or US tax liabilities for non-effectively connected income for non-US persons or entities. Going forward such transactions may be challenged on the basis o......................

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