Loss transactions exempt from tax shelter disclosure rules.

• Author: O'Driscoll, David

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 reportable 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 taxpayer's basis in the exchanged property is qualified;

* Determined under Sec. 1014;

* Determined under Sec. 1015, and the donor's basis was qualified; or

* Determined under Sec. 1031(d), the taxpayer's 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...