Currency Strategy


On December 4, 2003, the Service issued Notice 2003-81, 2003- 2 C.B. 1223PDF, announcing that it will challenge transactions involving the assignment of offsetting foreign currency options to a charity in order to claim substantial artificial losses and identifying these transactions as listed transactions for purposes of Internal Revenue Code sections 6011, 6111, and 6112. The transaction purportedly creates permanent tax deductions (either ordinary or capital losses) when a taxpayer donates two foreign currency contracts to a charity where only one such contract is subject to the mark to market recognition rules contained in Code section 1256.

The Notice describes a situation which a taxpayer claims a loss upon the assignment of a section 1256 contract to a charity but fails to report the recognition of gain when the taxpayer's obligation under an offsetting non-section 1256 contract terminates.  The notice identifies the described transaction and those that are substantially similar to that transaction as listed transactions.  As described in the Notice, the charity accepts the assignment of the purchased option that has a loss and assumes the taxpayer's obligation under the offsetting written option that has a gain.  The notice holds that the taxpayer must either recognize gain when the option is assumed by the charity or must recognize the premium at the time the taxpayer's obligations under the option contract terminate.

Additional information:

Notice 2007-71PDF modifies and supplements Notice 2003-81 by correcting a statement in the Facts section of the previous notice.  Pursuant to section 7805(b), certain taxpayers who reasonably relied on Notice 2003-81 in adopting methods of accounting are granted relief from retroactive application of the new ruling.