Tax News

CCH (cch.taxgroup.com) reports:

  An individual could deduct tax losses generated from his participation in a foreign currency options investment transaction. The program was not a sham transaction because it had economic substance, defined as a reasonable possibility of profits beyond the tax benefits, and the taxpayer had a business purpose for engaging in the transaction other than tax avoidance. Furthermore, the taxpayer's losses were deductible because he met the Code Sec. 165(c)(2) requirement that the deduction arise from a transaction entered into for profit.

  The loss generated in the first year of this ongoing multi-year investment relationship was not required to be analyzed separately. The evidence showed that all of the parties to the investment program intended that it be a long-term program. Consequently, the program was required to be considered in its entirety. However, the "step-transaction" doctrine did not apply because each step in the program had a purpose other than achievement of the end result, and participants could back out of further participation up to a certain point.

  The taxpayer's basis in an S corporation properly included cash and both long positions transferred to the corporation and contingent obligations represented by short positions. Because substantially all of the assets associated with the contingent obligations were transferred, the taxpayer's basis was not reduced by the contingent liability value of the short options. Because the short options were not taken into account when calculating basis in the stock, Code Sec. 1366 did not limit the amount of deduction available. Moreover, this basis equalled his potential for loss; thus, the taxpayer's amount at risk under Code Sec. 465 was the adjusted basis of the property at issue plus a cash amount.

 
Reg. §1.752-6, which the IRS argued reduced the individual's basis in the partnership due to contingent liabilities, was held to be unlawful because it exceeded the Treasury's authority. Code Sec. 309(c) authorized the Treasury to issue rules comparable to Code Sec. 358(h) that would apply to transactions involving partnerships. However, Reg. §1.752-6 is not comparable to the rules in Code Sec. 358(h), it does not address acceleration or duplication of losses, and it does not address liabilities described in Code Sec. 358(h)(3). Furthermore, even if the regulation was properly issued, it would not have retroactive effect under the anti-abuse provisions of Code Sec. 7805(b)(3).

  Finally, the government was not entitled to offset the individual's tax refund with an accuracy-related penalty because the government did not show an underpayment of taxes. Furthermore, the individual had filed a "qualified amended return." The government's argument that the individual's amended return was not qualified because of an ongoing investigation of the promoter of the program was rejected. The government failed to show that the promoter was contacted regarding the particular investment program in which the taxpayer participated.

  Related cases at 2007-2 USTC ¶50,567, et al.

C.E. Sala, DC Colo., 2008-1 USTC ¶50,308

Other References:

 
Code Sec. 165

  CCH Reference - 2008FED ¶9900.80

 
Code Sec. 358

  CCH Reference - 2008FED ¶16,553.43

 
Code Sec. 465

  CCH Reference - 2008FED ¶21,893.63

 
Code Sec. 752

  CCH Reference - 2008FED ¶25,526.17

 
Code Sec. 1366

  CCH Reference - 2008FED ¶32,084.425

 
Code Sec. 6662

  CCH Reference - 2008FED ¶39,651G.2255

 
Code Sec. 6664

  CCH Reference - 2008FED ¶39,661.021

  CCH Reference - 2008FED ¶39,661.65

  Tax Research Consultant

  CCH Reference - TRC BUSEXP: 30,106
CCH Reference -
TRC IRS: 12,054
CCH Reference - TRC IRS: 12,054.10
CCH Reference -
TRC PART: 9,102
CCH Reference - TRC PENALTY: 3,108.20