Reportable Transaction Rules Updated for Certain Losses

Rev. Proc. 2013-11, issued on Thursday, provides that certain losses are not taken into account in determining whether a transaction is a reportable transaction.

Regs. Sec. 1.6011-4 requires taxpayers that participate in reportable transactions to disclose those transactions. One category of reportable transaction is a loss transaction, which is defined as any transaction in which the taxpayer claims a loss under Sec. 165 of (1) at least $10 million in a single tax year or $20 million in any combination of tax years for corporations or certain partnerships; (2) at least $2 million in any single tax year or $4 million in any combination of tax years for all other partnerships, individuals, S corporations, and trusts; or (3) at least $50,000 in any single tax year for individuals or trusts, if the loss is attributable to a foreign currency transaction. The IRS is permitted to issue rules exempting certain transactions from these disclosure requirements.

Under Rev. Proc. 2013-11, losses from the sale or exchange of an asset are excluded if the basis of the asset is a qualifying basis, which is defined below. In addition, the asset cannot be an interest in a passthrough entity (within the meaning of Sec. 1260(c)(2), other than regular interests in a REMIC (real estate mortgage investment conduit) as defined in Sec. 860G(a)(1)); the loss from the sale or exchange of the asset is not treated as ordinary under Sec. 988, except in the case of a loss that is recognized by certain banks; the asset has not been separated from any portion of the income it generates; and the asset is not, and has never been, part of a straddle within the meaning of Sec. 1092(c), excluding a mixed straddle under Temp. Regs. Sec. 1.1092(b)-4T.

Qualifying basis

According to Rev. Proc. 2013-11, Section 4.02(2), a taxpayer’s basis in an asset is qualifying basis if:

1. The asset’s basis is equal to, and is determined solely by reference to, the amount (including any option premium) the taxpayer paid in cash for the asset and for any improvements to the asset;
2. The asset’s basis is determined under Sec. 358 (basis to distributees) because it was received in an exchange to which Sec. 354, 355, or 361 applies, and the taxpayer’s basis in the property exchanged in the transaction was described in this section;
3. The asset’s basis is determined under Sec. 1014 (acquired from a decedent);
4. The asset’s basis is determined under Sec. 1015 (gift or transfer to trust), and the donor’s basis in the asset was described in this section; 
5. The asset’s basis is determined under Sec. 1031(d) (like-kind exchange); the taxpayer’s basis in the property that was exchanged for the asset in the Sec. 1031 transaction was described in this section; and any debt instrument issued or assumed by the taxpayer in connection with the like-kind exchange is treated as a payment in cash under this revenue procedure; 
6. The basis of the asset is adjusted under Sec. 961 or Regs. Sec. 1.1502-32, and the taxpayer’s basis in the asset immediately prior to the adjustment was described in this section; or 
7. The basis of the asset is adjusted under Sec. 1272(d)(2) or 1278(b)(4), and the taxpayer’s basis in the asset immediately prior to the adjustment was described in this section.

Sec. 83 income

If a taxpayer’s basis in an asset was recognized as compensation income under Sec. 83, the amount will be treated as cash for purposes of these rules.

Debt instruments

If, to obtain the cash to buy property, a taxpayer issued a debt instrument to the party the taxpayer bought the property from, the taxpayer will be treated as having paid cash for the asset or the improvement only if the debt instrument is secured by the asset and all amounts due under the debt instrument have been paid in cash no later than the time of the sale or exchange of the asset (except in the case of stock or securities traded on an established securities market, the settlement date) for which the loss is claimed.

Other losses

Rev. Proc. 2013-11 also excludes the following losses:

• From fire, storm, shipwreck, or other casualty, or from theft;
• From a compulsory or involuntary conversion;
• From certain items that have been marked to market;
• Arising from a hedging transaction or from a mixed straddle account;
• Attributable to basis increases under Sec. 860C(d)(1) (basis rules for REMICs) during the period of the taxpayer’s ownership;
• Attributable to the abandonment of depreciable tangible property that was used by the taxpayer in a trade or business and that has a qualifying basis under this revenue procedure;
• From the bulk sale of inventory if the basis of the inventory is determined under Sec. 263A;
• Equal to, and determined solely by reference to, a payment of cash by the taxpayer (for example, a cash payment by a guarantor that results in a loss or a cash payment that is treated as a loss from the sale of a capital asset under Sec. 1234A or 1234B);
• From the sale to a person other than a related party of property described in Sec. 1221(a)(4) in a factoring transaction in the ordinary course of business; or
• Arising from the disposition of an asset to the extent that the taxpayer’s basis in the asset is determined under Sec. 338(b).

The revenue procedure is effective Dec. 6, 2012, and generally applies to transactions entered into on or after Jan. 1, 2003; the revenue procedure applies to losses by certain banks with respect to Sec. 988 transactions recognized on or after Dec. 6, 2012.