Loss Transactions Exempt from Tax Shelter Disclosure Rules

The IRS specified the losses from the sale or exchange of assets that will not have to be taken into account in determining whether a transaction is reportable under the tax shelter disclosure and advisor-list-maintenance rules. This procedure applies to taxpayers who may be required to disclose reportable transactions under Regs. Sec. 1.6011-4, and to material advisors required to maintain investor lists under Regs. Sec. 301.6112-1.

Under Regs. Sec. 1.6011-4(b), there are six categories of reportable transactions; one category is loss transactions defined in Regs. Sec. 1.6011-4(b)(5). In general, loss transactions are reportable if they exceed a specified dollar threshold. Regs. Sec. 1.6011-4(b)(8)(i) provides that the IRS may determine (by published guidance) that a transaction is not a reportable transaction, or is excluded from any individual category of report-able transaction.

Loss Transactions with Qualified Basis

A loss from the sale or exchange of an asset under Sec. 165 is not taken into account in determining whether a transaction is a reportable loss transaction if:

• The basis is a qualified basis (discussed below);

• The asset is not an interest in a passthrough entity (within the meaning of Sec. 1260(c)(2));

• The loss is not ordinary under Sec. 988;

• The asset has not been separated from any portion of the income it generates; and

• The asset is not, and never has been, part of a straddle under Sec. 1092(c) (excluding a mixed straddle under Temp. Regs. Sec. 1.1092(b)-4T);

A basis is qualified if it is:

• Equal to, and determined solely by reference to, the amount paid in cash for the asset (and any improvements);

• Determined under Sec. 358 (by reason of Sec. 355 or 368) and the taxpayers basis in the exchanged property is qualified

• Determined under Sec. 1014; Determined under Sec. 1015, and the donors basis was qualified; or

• Determined under Sec. 1031(d), the taxpayers basis in the exchanged property was qualified and any debt instrument issued or assumed by the taxpayer in connection with the transaction is a payment in cash under the procedure.

In general, an amount paid in cash is not disregarded under these rules merely because the taxpayer issued a debt instrument to obtain the cash. However, if the taxpayer (1) issued a debt instrument to the seller or transferor (or a related party described in Sec. 267(b) or 707(b)); (2) assumed a debt instrument (or took an asset subject to a debt instrument) issued by the seller or transferor (or a related party); or (3) issued a debt instrument in exchange for improvements to an asset, the taxpayer is treated as having paid cash only if the debt instrument is secured by the asset and all amounts due have been paid in cash no later than the time of the assets sale or exchange. For stock or securities traded on an established securities market, the amounts due must be paid by the settlement date.

Other Exempt Loss Transactions

The procedure also specifies that the following losses are not taken into account in determining whether a transaction is a reportable loss transaction:

• A casualty or theft loss under Sec. 165(c)(3).

• A compulsory or involuntary conversion (as described in Sec. 1231(a)(3) (A)(ii) and (a)(4)(B)).

• A loss arising from any mark-to-market item under Sec. 475, 1256 or 1296(a)(1), or Regs. Sec. 1.446-4(e), 1.988-5(a)(6) or 1.1275-6(d)(2), if the taxpayer computes its loss (1) using a qualifying basis (described above) or a basis resulting from previously marking the item to market, or (2) by making appropriate adjustments for previously determined mark-to-market gain or loss.

• A hedging transaction loss described in Sec. 1221(b), if the taxpayer properly identifies the transaction as a hedging transaction, or from a mixed straddle account under Temp. Regs. Sec. 1.1092(b)-4T.

• A loss attributable to basis increases under Sec. 860C(d)(1) during the period of the taxpayers ownership.

•  An abandonment loss of depreciable tangible property used by the taxpayer in a trade or business and having a qualifying basis as described above.

• A loss arising from the bulk sale of inventory, if the basis of the inventory is determined under Sec. 263A.

A loss equal to, and determined solely by reference to, a cash payment by the taxpayer (e.g., a cash payment by a guarantor that results in a loss, or a cash payment treated as a loss from the sale of a capital asset under Sec. 1234A or 1234B).The procedure is effective for transactions entered into after Feb. 27, 2003, unless the taxpayer applies Regs. Sec. 1.6011-4 retroactively to transactions entered into after 2002.

Rev. Proc. 2003-24, IRB 2003-11, 599

Reflections: Another category of reportable transactions is a transaction with a significant book-tax difference as described in Regs. Sec. 1.6011-4(b)(6). In Rev. Proc. 2003-25, IRB 2003-11, 601, the IRS published a list of 30 items that are not taken into account in determining whether a transaction has a significant book-tax difference under Regs. Sec. 1.6011-4(b)(6).