SECTION 4. APPLICATION

.01 In general. Losses from the sale or exchange of an asset with a qualifying basis under section 4.02 or losses described in section 4.03 of this revenue procedure are not taken into account in determining whether a transaction is a reportable transaction.

.02 Sale or exchange of an asset with a qualifying basis.

(1) General rule. A loss under § 165 of the Internal Revenue Code from the sale or exchange of an asset is not taken into account in determining whether a transaction is a loss transaction under § 1.6011– 4(b)(5) if— (a) the basis of the asset (for purposes of determining the loss) is a qualifying basis;

(b) the asset is not an interest in a passthrough entity (within the meaning of § 1260(c)(2));

(c) the loss from the sale or exchange of the asset is not treated as ordinary under § 988;

(d) the asset has not been separated from any portion of the income it generates; and

(e) the asset is not, and has never been, part of a straddle within the meaning of § 1092(c), excluding a mixed straddle under § 1.1092(b)–4T.

(2) Qualifying basis . For purposes of section 4 of this revenue procedure, a taxpayer’s basis in an asset (less adjustments for any allowable depreciation, amortization, or casualty loss) is a qualifying basis if—

(a) the basis of the asset is equal to, and is determined solely by reference to, the amount (including any option premium) paid in cash by the taxpayer for the asset and for any improvements to the asset;

(b) the basis of the asset is determined under § 358 by reason of a transaction under § 355 or § 368, and the taxpayer’s basis in the property exchanged in the transaction was described in this section 4.02(2); (c) the basis of the asset is determined under § 1014;

(d) the basis of the asset is determined under § 1015, and the donor’s basis in the asset was described in this section 4.02(2); or

(e) the basis of the asset is determined under § 1031(d), the taxpayer’s basis in the property that was exchanged for the asset in the § 1031 transaction was described in this section 4.02(2), and any debt instrument issued or assumed by the taxpayer in connection with the § 1031 transaction is treated as a payment in cash under section 4.02(3) of this revenue procedure.

(3) Debt instruments . Except as provided below, an amount paid in cash will not be disregarded for purposes of section 4.02(2) of this revenue procedure merely because the taxpayer issued a debt instrument to obtain the cash. However, if the taxpayer has issued a debt instrument to the person (or a related party as described in § 267(b) or § 707(b)) who sold or transferred the asset to the taxpayer, assumed a debt instrument (or took an asset subject to a debt instrument) issued by the person (or a related party as described in § 267(b) or § 707(b)) who sold or transferred the asset to the taxpayer, or issued a debt instrument in exchange for improvements to an asset, 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

March 17, 2003 600 2003–11 I.R.B.

.16 Items resulting from debt-for-debt exchanges.

.17 Items resulting solely from the treatment as a sale, purchase, or lease for book purposes and as a financing arrangement for tax purposes.

.18 Treatment of a transaction as a sale for book purposes and as a nontaxable transaction under § 860F(b)(1)(A) for tax purposes, not including differences resulting from the application of different valuation methodologies to determine the relative value of REMIC interests for purposes of allocating tax basis among those interests.

.19 Items resulting from differences solely due to the use of hedge accounting for book purposes but not for tax purposes, the use of hedge accounting under § 1.446–4 for tax purposes but not for book purposes, or the use of different hedge accounting methodologies for book and tax purposes.

.20 Items resulting solely from (i) the use of a mark-to-market method of accounting for book purposes and not for tax purposes, (ii) the use of a mark-to-market method of accounting for tax purposes but not for book purposes, or (iii) in the case of a taxpayer who uses mark-to-market accounting for both book purposes and tax purposes, the use of different methodologies for book purposes and tax purposes.

.21 Items resulting from the application of § 1286.

.22 Inside buildup, death benefits, or cash surrender value of life insurance or annuity contracts.

.23 Life insurance reserves determined under § 807 and non-life insurance reserves determined under § 832(b).

.24 Capitalization of policy acquisition expenses of insurance companies.

.25 Imputed interest income or deductions under §§ 483, 1274, 7872, or 1.1275–4. .26 Gains and losses arising under §§ 986(c), 987, and 988.

.27 Items excluded under § 883, § 921, or an applicable treaty from a foreign corporation’s income that would otherwise be subject to tax under § 882.

.28 Section 481 adjustments. .29 Inventory valuation differences whether attributable to differences in lastin, first-out (LIFO) computations or obsolescence reserves.

in § 1.6011–4(h), to transactions entered into on or after January 1, 2003, then this revenue procedure will be effective January 1, 2003, for those transactions.