Insights & News

Tax Insights, July 15, 2015
Tracking Tax News You Need to Know

July 15, 2015
IRS Identifies Basket Option Contracts and Basket Contracts as Listed Transactions and Transactions of Interest
The IRS issued Notices 2015-47 and 2015-48, under which it announced that a "basket option contract" is considered a listed transaction, and a "basket contract" is considered a transaction of interest. A basket option contract is one styled as an option contract that references a basket of actively traded personal property (i.e., securities). The contract allows the taxpayer to trade the securities referenced in the contract while the contract ostensibly remains open. A basket contract may be denominated as an option, notional principal contract or forward contract; the contract may reference assets that are not actively traded (e.g., an interest in hedge funds) and the taxpayer has the right to change the referenced assets. The contracts may be used in an attempt to defer income recognition and convert short-term capital gain and ordinary income to long-term capital gain.

A taxpayer, under Section 6011 (Section references are to the Internal Revenue Code of 1986, as amended), must disclose the taxpayer's participation in reportable (tax-shelter-like) transactions by attaching an information statement to the taxpayer's tax return. Material advisers under Section 6111, also must disclose reportable transactions (generally by identifying them and describing them and the claimed tax benefits). Section 6112 requires material advisers to prepare and maintain lists for reportable transactions (generally by identifying each person with respect to whom the adviser acted as a material adviser for the transactions). Under Treasury Regulation Section 1.6011-4(b)(1), reportable transactions include listed transactions and transactions of interest.

IRS Rules That REIT Income From Hedging Transactions Is Not Gross Income for REIT Qualification Purposes
The IRS ruled, in Private Letter Rulings 201527012 and 201527013, that income earned by a real estate investment trust (REIT) from certain hedging transactions does not constitute gross income for purposes of the income tests that a REIT must satisfy to qualify as such. Income from one set of hedging transactions hedged against the risk of interest rate changes on borrowings related to the REIT's ownership and acquisition of mortgages and met the requirements for exclusion under Section 856(c)(5)(G)(i). Income from the other hedging transactions was intended to counteract all or part of the first set of hedging transactions to maintain a desirable level of hedging exposure and was excluded under the IRS's discretionary authority provided in Section 856(c)(5)(J).

IRS Rules That Portfolios Will Not Be Treated as Publicly Traded Partnerships
In Private Letter Ruling 201527039, the IRS ruled that three portfolios of assets classified as partnerships will not be treated as publicly traded partnerships (taxable as corporations) for federal income tax purposes. The trust described in the ruling is an open-end management investment company (mutual fund) organized as a state law business trust. The trust consists of a series of segregated portfolios of assets (Portfolios), including Portfolios 1-3 (Electing Portfolios), each with separate investments. The trust issues shares of each Portfolio (Shares) to support life insurance contracts and variable annuity contracts. Shares may only be purchased by domestic life insurance companies, either directly or through separate accounts of such companies, or other permissible owners under Treasury Regulation Section 1.817-5(f)(3) (e.g., qualified pension or retirement plans, 529 plans, etc.).

IRS Corrects Regulations Regarding Partnership Distributions of Stock to Corporate Partner
The IRS corrected temporary regulations issued June 12, 2015, that prevent a corporate partner from avoiding corporate-level gain through transactions with a partnership involving equity interests of the partner. We wrote to you about these regulations in our June 17 edition of Tax Insights. The IRS announced and published, in Internal Revenue Bulletin 2015-26 (June 29, 2015), a correction to the definition of "Stock of the Corporate Partner" for purposes of the regulations. The correction narrows the scope of regulations.

Senate Finance Committee Releases Tax Reform Reports
The Senate Finance Committee working groups recently issued the following tax reform reports:
  • Report of the Business Income Tax Reform Working Group (July 2015).
  • Report of the Individual Income Tax Reform Working Group (July 7, 2015).
  • International Tax Reform Working Group: Final Report (July 7, 2015).
  • Report of the Savings and Investment Tax Reform Working Group (July 7, 2015).
  • Report of the Community Development and Infrastructure Working Group (July 7, 2015).
India Signs Intergovernmental Agreement on FATCA

India, on July 9, signed an intergovernmental agreement (a Model 1A reciprocal IGA) to implement the Foreign Account Tax Compliance Act (FATCA).

Information contained in this publication should not be construed as legal advice or opinion or as a substitute for the advice of counsel. The articles by these authors may have first appeared in other publications. The content provided is for educational and informational purposes for the use of clients and others who may be interested in the subject matter. We recommend that readers seek specific advice from counsel about particular matters of interest.

Copyright © 2015 Stradley Ronon Stevens & Young, LLP. All rights reserved.

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