Washington (Dec. 5, 2003) -- The Treasury Department and the Internal Revenue Service have issued guidance to bar transactions in which taxpayers dispose of a pair of offsetting options, claiming a loss on one of the options but contending that they never have to recognize the corresponding gain on the other. These transactions are now "listed transactions." Taxpayers who have entered into these transactions must disclose them to the IRS, and advisors promoting their use will be required to maintain lists of participating taxpayers.
"This is another step in our ongoing efforts to stop abusive tax avoidance transactions," stated the Treasury assistant secretary for tax policy Pam Olson. "We have given taxpayers notice that if they assign an option in one of these transactions they must recognize the gain. If they fail to do so, they will have to disclose their transaction to the IRS."
"We are seeing increasingly creative and complex deals involving foreign currencies and charities that are designed to abuse the tax code," said IRS Commissioner Mark W. Everson. "Today's guidance closes the door on this transaction. We are continuing to use all the tools at our disposal to combat potentially abusive transactions."
These transactions involve two pairs of offsetting options on foreign currencies that, collectively, are structured to have little real risk of economic gain or loss. The taxpayer assigns two offsetting options to a charity, claiming an immediate loss on one of the options and taking the position that it does not have to take into account the offsetting gain in the other assigned option. The taxpayer disposes of the remaining pair of offsetting options. The result is a large tax benefit (the claimed tax loss on one assigned option) without recognition of the matching economic gain on the other assigned option.
The Treasury and the IRS believe that the promoters and taxpayers involved in these transactions are misapplying the rules relating to the inclusion of gain on the assigned option in taxable income. The IRS says it will challenge the tax benefits claimed by taxpayers who have entered into these transactions.
-- WebCPA staff
