The Treasury Department and Internal Revenue Service are proposing regulations that would make so-called basket contract transactions as listed transactions under section 6011(a) of the Internal Revenue Code.
The proposed regulations generally would define a basket contract transaction as follows:
- Taxpayer (“T”) enters into a contract with a counterparty (“C”), including a contract denominated as an option contract, notional principal contract, forward contract, or other derivative contract, to receive a return based on the performance of a reference basket (defined as a notional basket of assets that may include actively traded personal property, securities, commodities, foreign currency, digital assets, similar property, or interests in entities that trade any of the above-mentioned property);
- The contract has a stated term of more than one year, or overlaps two or more of T’s taxable years;
- T has exercised discretion (either directly or through a request to C) to change the assets in the reference basket or the trading algorithm; and
- T’s tax return for a taxable year ending on or after January 1, 2011, reflects a tax benefit with respect to the transaction.[1]
The tax benefits targeted by the proposed regulation are “the deferral of income into a later taxable year or a conversion of ordinary income or short-term capital gain or loss into long-term capital gain or loss.”[2]
If the proposed regulations become final, taxpayers that participate in basket contract transactions and persons acting as material advisors with respect to these transactions, would be required to disclose these transactions. Material advisors also would have list maintenance obligations under section 6112 of the Internal Revenue Code.[3]
These proposed regulations expand upon Notice 2015-73 and Notice 2015-74, which also targeted these transactions.
[1]89 Fed. Reg. 57115, 57118-119 (Prop. Reg. § 1.6011-16(b)(6), (c)).
[2] 89 Fed. Reg. 57119 (Prop. Reg. § 1.6011-16(b)(5).
[3] 89 Fed. Reg. 57116.
