United States: IRS Issues Notices Covering "Basket Option" And "Basket Contract"

On July 8, 2015, the IRS issued Notice 2015-47 and Notice 2015-48, which designated  "basket option" transactions as listed transactions and "basket contract" transactions as  transactions of interest. The Notices state that the Service is concerned that taxpayers  may be using basket options and basket contracts to defer income recognition and  convert ordinary income and short-term capital gain into long-term capital gain, among  other potential abuses.

Notice 2015-47

Notice 2015-47 identified transactions that it referenced to as "basket option contracts"  and any substantially similar transactions as "listed transactions."17  A basket option  contract is described as a contract denominated as an option between a taxpayer and its  counterparty (a bank) with a stated term of more than one year. Under the contract, the  taxpayer pays an amount to the bank upfront, and the bank promises to pay the taxpayer  a return based on the performance of a notional basket of actively traded property,  reduced by a fee to compensate bank for entering into the contract. The contract typically  terminates automatically if the reference basket value decreases by an amount that  approaches the amount of the upfront payment. In addition, either party may terminate  the contract at any time with proper notice.

The components of the basket are determined by the taxpayer (or its designee) or by an  algorithm selected by the taxpayer or designee. During the contract term, the taxpayer may request changes to the basket components or the algorithm, subject to the bank's  right to reject certain requested changes. In practice, the bank generally accepts the  taxpayer's requests. The bank typically acquires the basket components as a hedge of its  risk under the contract and acquires and disposes of the basket components as changes to  the reference basket are made.

The taxpayer takes the position that short-term gains and ordinary income with respect  to the referenced property are not includible in income by the taxpayer; rather, the  taxpayer reports long-term capital gain with respect to the termination of the option  contract. The Notice states concern that such treatment is inappropriate and identifies  basket option contracts and substantially similar transactions as listed transactions. For  this purpose, the Notice states that a transaction is considered substantially similar to a  basket option contract if: (i) the transaction is denominated as an option contract;  (ii) substantially all of the assets in the referenced basket primarily consist of actively  traded personal property as defined under Section 1.1092(d)-1(a); (iii) the purchaser of  the option or the purchaser's designee has the right to: (1) determine the assets in the  reference basket both at inception and periodically over the term of the transaction, or  (2) select or use a specific trading algorithm under its control to determine the assets in  the reference basket and (iv) the purchaser of the option, the purchaser's designee or the  specified trading algorithm actually changes one or more of the assets in the reference  basket during the term of the basket option contract.

Notice 2015-48

Notice 2015-48 identified transactions that it referred to as "basket contracts" and any  substantially similar transactions as "transactions of interest." The basket contract  transactions bear some similarities to the basket options designated as listed transactions  in Notice 2015-47, but need not be denominated as options (and instead may be  denominated as any type of derivative contract), and may reference non-actively traded  property. Pursuant to the Notice, the basket contracts identified as transactions of  interest entitle a taxpayer to receive payments based on the return of a referenced basket  of assets, which may include hedge fund interests, securities, commodities, foreign  currency or similar property, that is determined by the taxpayer, its designee or a trading  algorithm selected by the taxpayer or its designee. During the term of the contract, the  taxpayer or its designee has the right to request changes in this reference basket assets or  the specified algorithm, which the counterparty generally accepts. To manage its risk  under the basket contract, the counterparty typically acquires all or substantially all of the  reference basket of assets. Notice 2015-48 does not specifically define when a transaction  is substantially similar to the transaction of interest described in the Notice. However,  Treas. Reg. § 1.6011-4(c)(4) states that a transaction is substantially similar if it: (i) is  expected to obtain the same or similar types of tax consequences as the transaction of  interest, and is either (A) factually similar, or (B) based on the same or similar tax strategy. Generally, the term "substantially similar" must be broadly construed in favor of  disclosure. 

Notice 2015-47 applies to transactions in effect on or after January 1, 2011. Notice  2015-48 applies to transactions entered into on or after November 2, 2006 and in effect  on or after January 1, 2011. Participants in the Notice transaction include the purchaser of  the contract, any general partners or managing members of a contract purchaser that is a  partnership or LLC and the counterparty to the contract.

Taxpayers involved in transactions that fall under either Notice must disclose the  transaction, under Section 6011, for each taxable year in which the taxpayer participated  in the transaction for which the statute of limitations had not run on or before July 8,  2015. Disclosure is required within 120 days of the issuance of the Notices (i.e., by  November 5, 2015). Material advisors (as defined under the Code) who made a tax  statement on or after January 1, 2011 with respect to such transactions have a duty to  register under Section 6111 and a duty to maintain an investor list under Section 6112.

Potential Penalties

The penalties for failure to disclose, register and maintain a list can be substantial. The  penalty under Section 6707A for failure to disclose a reportable transaction under  Section 6011 is 75 percent of the decrease in tax as a result of the transaction, subject to a  maximum cap of $200,000 in the case of a listed transaction for an entity, or $100,000  for an individual. The basket option contracts are considered to be listed transactions.  The penalty under Section 6707 for failure to register the transaction is the greater of  $200,000 or 50 percent of the gross income derived by such person. The penalty under  Section 6708 related to maintaining an investor list is $10,000 for each day a material  advisor fails to furnish a reportable transaction advisee list to the Service starting the day  after the 20th day from which such list was requested in writing from the Service. A  reasonable cause defense is applicable to Section 6708, but is not applicable to  Section 6707.


17   The basket option contracts identified as listed transactions in the Notice are similar in many respects to the basket contract options addressed in GLAM 2010-005, which was issued by the IRS in 2010. The GLAM concluded that a basket option contract was not an option and that the hedge fund that purchased the "option" instead owned the reference basket of assets.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.