IRS says offsetting currency forwards are not substantially similar to a listed transaction

Plain-English summary

The IRS ruled that a taxpayer's proposed offsetting foreign-currency forward contracts were not the same as, or substantially similar to, the listed transaction described in Rev. Rul. 2000-12. The contracts involved opposite positions in two currencies, had substantially similar terms and the same settlement date, and were structured so the taxpayer could not have a net negative value from the contracts. Because the transaction did not present the same or similar tax consequences or tax strategy as the listed transaction, the IRS concluded that it was not a reportable listed transaction under Treas. Reg. § 1.6011-4(b)(2). The ruling expressed no opinion on other federal tax consequences.

Ruling snapshot

• Question: Whether the proposed foreign-currency forward contract transaction was the same as, or substantially similar to, the listed transaction described in Rev. Rul. 2000-12.
• Outcome: Approved.
• Key authorities: IRC §§ 6011, 165, and 1275; Treas. Reg. § 1.6011-4; Rev. Rul. 2000-12; Notice 2009-59.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201234017 Third Party Communication: None
Release Date: 8/24/2012 Date of Communication: Not Applicable
Person To Contact:
Index Number: 6011.01-00; 9300.12-00 ----------------------, ID No. -----------------
Telephone Number:
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-------------------------------------- Refer Reply To:
---------------------------- CC:PSI:B3
-------------------------------------------- PLR-148205-11
--------------------------- Date:
May 14, 2012

                                                  Legend

Taxpayer = -------------------------------------------------------------------------------------------------
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X = -------------------------------------------------------------------------------------------------
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Entities = -------------------------------------------------------------------------------------------------
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Country = --------------------------

State = --------------

Dear -----------------:

    This letter responds to a letter dated November 16, 2011, and subsequent

correspondence, submitted on behalf of Taxpayer, requesting a ruling that the
transaction described below is not the same as, or substantially similar to, transactions
described in Revenue Ruling 2000-12, 2000-1 C.B. 744, and identified in Notice 2009-
PLR-148205-11 2

59, 2009-31 I.R.B. 170, as listed transactions under § 1.6011-4(b)(2) of the Income Tax
Regulations.
Facts

    Taxpayer is a State corporation. X was formed in Country and is treated as a

partnership for U.S. tax purposes. X is owned by Entities, which were formed in
Country. Entities are controlled foreign corporations (within the meaning of § 957 of the
Internal Revenue Code) for U.S. tax purposes, wholly-owned indirectly by Taxpayer.
X’s income and losses will flow through to its partners. Entities are controlled foreign
corporations that qualify for the active dealer exception under § 954(c)(2)(C) and none
of the income or loss from this transaction will be subpart F income to Taxpayer.

   X enters into two offsetting foreign currency forward contracts. X enters into a

forward contract with Party #1 whereby X buys Currency A on a forward basis and sells
Currency B. At the same time, X enters into a forward contract with Party #2 whereby X
sells Currency A on a forward basis and buys Currency B. Neither Party #1 nor Party

2 has any operations in the United States and neither is a 10%-or-more subsidiary of

any U.S. person. Both forward contracts are on substantially similar terms as described
in the Taxpayer’s submission and have the same settlement date. Regardless of
market movements in the spot rate, the net value of the two forward contracts for X can
never be negative. X has a positive present value in both forward contracts and,
therefore, will always have net positive earnings on the forward contracts.

                                       Law

    Section 1.6011-4(a) provides that, in general, every taxpayer that has

participated in a reportable transaction and who is required to file a tax return must
attach a disclosure statement to its return for the taxable year.

   Section 1.6011-4(b)(1) provides that a reportable transaction is a transaction

described in any of § 1.6011-4(b)(2) through (7). The term transaction includes all of
the factual elements relevant to the expected tax treatment of any investment, entity,
plan, or arrangement, and includes any series of steps carried out as part of a plan.

   Section 1.6011-4(b)(2) provides that a listed transaction is a transaction that is

the same as or substantially similar to one of the types of transactions that the Internal
Revenue Service (IRS) has determined to be a tax avoidance transaction and identified
by notice, regulation, or other form of published guidance as a listed transaction.

   Section 1.6011-4(c)(4) provides that the term substantially similar includes any

transaction that is expected to obtain the same or similar types of tax consequences
and that is either factually similar or based on the same or similar tax strategy. Receipt
of an opinion regarding the tax consequences of the transaction is not relevant to the
PLR-148205-11 3

determination of whether the transaction is the same as or substantially similar to
another transaction. Further, the term substantially similar must be broadly construed in
favor of disclosure.

   In Notice 2009-59, the Service identified transactions described in Rev. Rul.

2000-12 as “listed transactions” for purposes of § 1.6011-4(b)(2). The Service had
previously identified these transactions as “listed transactions” in Notice 2004-67, 2004-
2 C.B. 600, Notice 2003-76, 2003-2 C.B. 1181, Notice 2001-51, 2001-2 C.B. 190, and
Notice 2000-15, 2000-1 C.B. 826.

    Rev. Rul. 2000-12 addresses situations in which a taxpayer acquires two debt

instruments that are structured so that it is expected that the value of one will increase
significantly at the same time that the value of the other one decreases significantly.
Rev. Rul. 2000-12 holds that in each situation the taxpayer cannot recognize the
claimed loss on the sale of the debt instrument that decreases in value while not
recognizing the gain on the other debt instrument. In one situation the loss is not
allowable under § 165, in another situation the integration rules of § 1.1275-6(c)(2)
apply, and in the final situation the loss is disallowed under the anti-abuse rule in
§ 1.1275-2(g).

                                    Conclusion

   Based on the facts submitted and representations made, we conclude that this

transaction does not obtain the same or similar types of tax consequences as those
described in Rev. Rul. 2000-12 and is not factually similar to or based on the same or
similar tax strategy as the transaction described in Rev. Rul. 2000-12. Consequently,
we conclude that this transaction is not the same as, or substantially similar to, the listed
transaction described in Rev. Rul. 2000-12.

   Except as specifically set forth above, we express no opinion concerning the

federal tax consequences of the above-described facts under any other provision of the
Internal Revenue Code.
PLR-148205-11 4

  In accordance with a power of attorney on file with this office, we are sending a

copy of this letter to your authorized representative.

  This ruling is directed only to the taxpayer who requested it. Section 6110(k)(3)

provides that it may not be used or cited as precedent.

                                        Sincerely,




                                        Tara P. Volungis
                                        Branch Chief, Branch 3
                                        Office of the Associate Chief Counsel
                                        (Passthroughs & Special Industries)

Enclosures (2):
Copy of this letter
Copy for §6110 purposes

cc: