SECTION 5. DRAFTING

INFORMATION

The principal authors of this notice are Orla J. O’Connor and Robert A. Martin of the Office of the Associate Chief Counsel (Financial Institutions and Products). For further information regarding this notice, contact Ms. O’Connor at (202) 317-6367 or Mr. Martin at (202) 317-4455 (not tollfree numbers).

Transaction of Interest– Basket Contracts

Notice 2015–74

The Treasury Department and the Internal Revenue Service (the “IRS”) are aware of a type of structured financial transaction, described below, in which a taxpayer attempts to defer income recognition and may attempt to convert shortterm capital gain and ordinary income to long-term capital gain through a contract denominated as an option, notional principal contract, forward contract, or other derivative contract. The Treasury Department and the IRS believe this transaction (the “basket contract”) has a potential for tax avoidance or evasion but lack enough information to determine whether the transaction should be identified specifically as a tax avoidance transaction. Notice 2015– 48, 2015–30 I.R.B. 77, identified the basket

method of accounting in accordance with § 446(e).

Rev. Proc. 2015–13, 2015–5 I.R.B. 419, as clarified and modified by Rev. Proc. 2015–33, 2015–24 I.R.B. 1067, provides the procedures for obtaining the consent of the Commissioner to change a method of accounting for Federal income tax purposes. Under the non-automatic change procedures of Rev. Proc. 2015–13, a taxpayer generally must file a Form 3115 during the year of change. When a taxpayer computes its taxable income using a method of accounting that differs from the method of accounting used during the preceding taxable year, a § 481(a) adjustment is required to prevent the duplication or omission of taxable income. See § 1.446–1(e)(3)(ii).

Section 11.02 of Rev. Proc. 2015–13 states that the national office will deny any Form 3115 requesting consent to make a change in method of accounting in any situation in which the national office determines that permitting the requested change in method of accounting would not clearly reflect income or would otherwise not be in the interest of sound tax administration. As part of this determination, the national office will consider whether the change in method of accounting would clearly and directly frustrate compliance efforts of the IRS in administering the income tax laws. The national office will consider all the facts and circumstances and exercise discretion under §§ 446(e) and 481(c) in a manner that generally minimizes distortions of income across taxable years, as well as on an annual basis.

Rev. Rul. 90–38, 1990–1 C.B. 57, provides that, if a taxpayer uses an erroneous method of accounting for two or more consecutive taxable years, the taxpayer has adopted a method of accounting. The ruling further provides that a taxpayer may not, without the Commissioner’s consent, retroactively change from an erroneous to a permissible method of accounting by filing an amended return. See also Rev. Proc. 2015–13, section 2.03(1).

(2) In general . The IRS has determined that it is not in the interest of sound tax administration to permit a prospective change in method of ac

counting ⁶ for a transaction within the scope of this notice. Accordingly, the IRS will not process applications for any changes in method of accounting filed under the non-automatic change procedures of Rev. Proc. 2015–13 for a transaction within the scope of this notice. A taxpayer may, however, change its method of accounting for a transaction within the scope of this notice by filing an amended return in accordance with section 3.06(3) of this notice.

(3) Change in method of accounting by filing amended returns .

(a) In general . In accordance with § 1.446–1(e)(3)(ii) and Rev. Rul. 90–38, consent is hereby granted for any taxpayer that has engaged in a transaction within the scope this notice to file amended returns to retroactively change from an impermissible method of accounting to a permissible method of accounting for the transaction. This consent is granted only if the taxpayer files such amended returns using a permissible method of accounting for such transactions for the first taxable year in which the taxpayer used the impermissible method of accounting for any such transaction (or if the period of limitations has expired for such taxable year, for the first taxable year for which the period of limitations has not expired) and for each subsequent taxable year in which the taxpayer’s use of the impermissible method of accounting for these transactions affected the taxpayer’s taxable income. If the period of limitations has expired for the first taxable year in which a taxpayer used the impermissible method of accounting for these transactions and the taxpayer files amended returns pursuant to this notice, the amended return for the first taxable year for which the period of limitations has not expired must include the entire amount of the § 481(a) adjustment, whether positive or negative, attributable to the change in accounting method as ordinary in character. The terms, conditions, and administrative procedures of Rev. Proc. 2015–13, as clarified and modified by Rev. Proc. 2015–33, do not apply to a taxpayer changing its method of accounting by amending its Federal income tax returns under section 3.06(3) of this notice.

6Nothing in this notice may be construed as identifying whether the taxpayer’s treatment of any particular aspect of a transaction described in this notice is a method of accounting.

Bulletin No. 2015–46 663 November 16, 2015

contract and substantially similar transactions as transactions of interest for purposes of § 1.6011–4(b)(6) of the Income Tax Regulations and §§ 6111 and 6112 of the Internal Revenue Code (“the Code”). Notice 2015–48 also alerted persons involved in these transactions about certain responsibilities that may arise from their involvement with these transactions.

Commenters expressed concern that difficulty in identifying transactions that are the same as, or substantially similar to, the transaction described in Notice 2015–48 may cause taxpayers to file disclosures for transactions that are not intended to be treated as transactions of interest at this time. This notice revokes Notice 2015–48. Section 2 of this notice provides additional details on the types of transactions that are the same as or substantially similar to the transaction described in this notice, and thus transactions of interest for purposes of § 1.6011– 4(b)(6) and §§ 6111 and 6112 of the Code. Section 3.06 of this notice provides procedures for taxpayers to change their method of accounting for transactions within the scope of this notice.

Section 2.04 of this notice more specifically describes the tax benefits that identify the transaction described in this notice as a transaction of interest. No inference is intended regarding the appropriate treatment of transactions not described in this notice. The IRS may challenge, including by asserting judicial doctrines, claimed tax benefits under §§ 871, 881 and 882 or other provisions of the Code, and assert failures to comply with reporting obligations associated with investments in passive foreign investment companies and withholding and reporting obligations under Chapters 3 and 4 of the Code.