IRS Revises Rules for Basket Options


The IRS has revised a rule on basket options that allowed hedge funds to avoid billions of dollars of taxes. The new IRS guidance applies retroactively, applying to transactions through January 1, 2011. The taxpayers claiming the tax strategy in the past will be required to file amended returns and pay additional taxes. If they don’t, whistleblowers could report them to the Internal Revenue Service through the § 7623(b) program.

Last year, a U.S. Senate Permanent Subcommittee on Investigations reported that at least 13 hedge funds were using basket options as a tax shelter. Deutsche Bank AG and Barclays Bank PLC were selling the instruments to the hedge funds. The Subcommittee’s information suggested that tax avoidance from 2000 to 2013 exceeded $6 billion.

These financial institutions used the basket options to change tax treatment of their short-term stock trades. By exercising the options shortly after one-year had passed, they could capture the lower tax treatment from a long-term capital gain. The option structure and bank actions appeared to transfers the assets to the bank when in reality the hedge funds were in total control over the assets, trades and profits.

If you have questions about this or another aspect of the tax whistleblower program, feel free to contact one of our IRS whistleblower attorneys via our contact form or by calling 1-800-590-4116.  Our law firm offers a free, confidential initial legal consultation with a lawyer for whistleblowers.

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