Information For...

For you and your family
Standard mileage and other information

Forms and Instructions

Individual Tax Return
Instructions for Form 1040
Request for Taxpayer Identification Number (TIN) and Certification
Request for Transcript of Tax Return

 

Employee's Withholding Allowance Certificate
Employer's Quarterly Federal Tax Return
Employers engaged in a trade or business who pay compensation
Installment Agreement Request

Popular For Tax Pros

Amend/Fix Return
Apply for Power of Attorney
Apply for an ITIN
Rules Governing Practice before IRS

Testimony: Charitable Giving Problems (cont-7)

Notice: Historical Content

This is an archival or historical document and may not reflect current law, policies or procedures.

Offsetting Foreign Currency Option Contracts

This marketed promotion exploits the Code’s rules for recognizing gain or loss on foreign currency contracts. The taxpayer holds offsetting positions in contracts on a currency traded on a regulated futures exchange (these contracts are subject to section 1256 of the Code), and contracts on a currency that is not traded on a regulated futures exchange (these contracts are not subject to section 1256). Straddle positions are taken so that all gains are offset by losses.

Section 1256 of the Code requires a taxpayer to recognize the inherent gain or loss at the time of any assignment of a currency contract traded on a regulated futures exchange. However, assignments of contracts on currencies that are not traded on a regulated futures exchange are not subject to section 1256.

Before the close of the calendar year, a participating taxpayer assigns the offsetting section 1256 contracts and non-section 1256 contracts to a recognized public charity. Although this generates a small charitable deduction for the donor, the main feature is that the donor can recognize the loss on the section 1256 contracts without recognizing the corresponding gain on the non-section 1256 contracts. Rather, the charity, which is not subject to tax, recognizes this gain on the non-section 1256 contracts.

We have identified dozens of entities, both taxable and tax-exempt, that are involved in this type of transaction. Examinations are underway. Because we identified and began enforcement action on this issue early, we are still gathering data on the dollar impact of these transactions and we believe the revenue loss may have been minimized by early detection. However, preliminary data suggests the impact may exceed one million dollars per transaction. We listed this transaction in Notice 2003-81, 2003-51 I.R.B. 1223, which requires disclosure by participants. 

Continue with testimony text

Return to testimony outline