CCA 1204012: Counsel comments on claimed losses and transaction costs

Plain-English summary

Chief Counsel provided comments on a rebuttal involving claimed losses and transaction costs. The advice distinguishes the timing rule for loss deductions under IRC § 165 from the separate question whether the taxpayer was entitled to any loss deduction at all. It also explains that transaction costs associated with legitimate business transactions may be deductible, but costs from transactions with no business purpose and designed only to obtain fictitious tax losses are not ordinary and necessary business expenses under IRC § 162(a). The memorandum refers to a case identified in the document as Winn-Dixie.

Ruling snapshot

• Question: How should proposed rebuttal changes address claimed losses under IRC § 165 and transaction costs under IRC § 162?
• Outcome: advice given
• Key authorities: IRC §§ 162(a), 165, and 6110(k)(3); Treas. Reg. § 1.165-1(d).

Full text (IRS public release)

ID: CCA-851350-11 Number: 201204012
Release Date: 1/27/2012
Office: ----------------------------
UILC: 9300.43-00

From: -------------------
Sent: Tuesday, May 03, 2011 5:44 PM
To: ---------------
Cc: --------------------------------------------------------------
Subject: RE: ---------- ---- Rebuttal Review

Hi ---------

Attached is the rebuttal with our recommended changes tracked. Please look it over and let me know if you agree/disagree with the changes or if you have questions. Thanks for your patience.

Also, there is one minor general comment from ----- (which isn’t reflected in the Rebuttal document). I am posting this comment below:

               Two minor comments:

               On the section 165 issue, the taxpayer argues that the losses
               were evidenced by closed and completed transactions and fixed
               by an identifiable event. This concerns the timing of a loss
               deduction, see Reg. § 1.165-1(d), but the issue here is not timing
               -- the taxpayer is not entitled to a loss deduction at all.

               On the section 162 issue, the taxpayer quibbles with the
               statement in the NOPA that "transaction costs paid to achieve
               planned tax benefits do not constitute ordinary and necessary
               business expenses under Section 162(a)." It is true that
               transaction costs paid in connection with legitimate business
               transactions are deductible even though the transactions have
               legitimate tax benefits. However, this is not true with respect to
               transactions that have no business purposes and are designed
               solely to obtain fictitious tax losses. See Winn-Dixie, cited in
               the NOPA.

Attachment 1: Redacted