Thursday, October 18, 2007

Back Taxes Section 6111 and 6112 - reportable loss importation transaction

Notice 2007-57 , I.R.B. 2007-29, June 21, 2007.

[ 6111 and Reg. §1.6011-4(b)(2) and 6112. A loss importation transaction is a transaction in which a taxpayer, in determining U.S. taxable income, uses foreign entities and offsetting positions with regard to foreign property or currency, and imports the loss but not the gain. The IRS has identified several variations of the transaction, sometimes involving an S corporation or a partnership, and warns taxpayers that such operations are considered tax avoidance transactions and will be disallowed or otherwise challenged by the IRS. Taxpayers involved in such in such transactions are advised to take immediate corrective action with regard to such operations and are further warned that failure to report these transactions may subject them to penalties. Back references: ¶37,002.156, ¶37,022.158.The Internal Revenue Service and the Treasury Department are aware of a type of transaction, described below, in which a U.S. taxpayer uses offsetting positions with respect to foreign currency or other property for the purpose of importing a loss, but not the corresponding gain, in determining U.S. taxable income. This notice alerts taxpayers and their representatives that these transactions are tax avoidance transactions and identifies these transactions, and substantially similar transactions, as listed transactions for purposes of §§6111 and §1504(a)(2). When S Corporation purchases the Foreign Entity stock, Foreign Entity is classified as a corporation for U.S. tax purposes under §301.7701-2(b)(2) and §301.7701-3(b)(2)(i)(B) of the Procedure and Administration Regulations, and is a controlled foreign corporation (CFC) within the meaning of §§881 and §351 applies. Variations also exist in how the offsetting positions may be used in the transaction described above. For example, taxpayers may use positions with respect to property other than foreign currency.DISCUSSIONThe transactions described in this notice are designed so that taxpayers may claim losses without taking into account the corresponding gains attributable to the offsetting positions in foreign currency or other property. In the loss importation transaction described above, taxpayers are attempting to exploit the entity classification rules and §§165, 482, and §§1.6011-4(b)(2) and 6112 effective June 20, 2007, the date this notice was released to the public. Independent of their classification as listed transactions, transactions that are the same as, or substantially similar to, the transactions described in this notice may already be subject to the requirements of §6111, §1.6011-4 who fail to do so may be subject to the penalty under §1.6011-4 who fail to do so may be subject to an extended period of limitations under §6111 who fail to do so may be subject to the penalty under §6112 who fail to do so (or who fail to provide such lists when requested by the Service) may be subject to the penalty under §6662 or

Alvin S. Brown
Tax Attorney
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