a-02-97.pdf

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Part IV - Items of General Interest

Settlement Initiative for Section 302/318 Basis-Shifting Transactions.

Announcement 2002-97
The Internal Revenue Service announces an initiative to resolve cases involving basis-
shifting transactions that are the same as or substantially similar to those described in
Notice 2001-45, 2001-2 C.B. 129. Under the terms of this Announcement, taxpayers
who have engaged in basis-shifting transactions will be given the opportunity to resolve
this issue on the terms set forth below with minimal further examination or other
administrative proceedings. If taxpayers elect to resolve their cases in accordance with
this Announcement, they must notify the Service on or before December 3, 2002, as set
forth below. Appeals is expected to issue settlement guidelines on the tax effect of
basis-shifting transactions soon that will be the same as, or less favorable than, the
terms set forth below.
ELIGIBILITY REQUIREMENTS
Taxpayers are eligible to participate in this settlement initiative if:
1) The underpayment of tax attributable to the basis-shifting transaction is
not due to fraud;
2) The basis-shifting transaction is not in litigation, i.e.
, the issue is not
docketed in and under the jurisdiction of any court, for any year, on the
date the taxpayer elects to participate;

3) The basis-shifting transaction has not been designated for litigation,
and, if not designated for litigation, the taxpayer has not been notified that
the basis-shifting transaction issue is under consideration for designation
for litigation;
4) Within 60 days from the mailing date of written notification from the Service of
the decision not to designate, or to remove the designation of, the basis-shifting
transaction issue, the taxpayer notifies the Service that it wishes to participate in
this settlement initiative;
5) Upon request, the taxpayer provides to the Service the transactional
documents to support the basis-shifting transaction, and the transaction
conforms to the taxpayer=s documents; and
6) The statute of limitations has not expired for any year in which the
taxpayer claimed tax benefits relating to the basis-shifting transaction.
TERMS OF THE RESOLUTION
This settlement initiative focuses on three aspects of a basis-shifting transaction: (i) the
purchase and sale of shares in a corporation and options on shares in that corporation
(hereinafter the Aforeign bank@); (ii) the loss attributable to the amount of the claimed
basis shift; and (iii) associated transaction costs. For purposes of this settlement
initiative, the transaction costs will be deemed to be 8% of the sum of the amount of the
basis shift and the cost of an option or warrant in a tax indifferent entity (hereinafter the
Aforeign corporation@), that was a party to the basis-shifting transaction.
1. The gain or loss on the taxpayer=s purchase and sale of shares in a foreign

bank and options on shares in the foreign bank will be reported in accordance
with the terms of the purchase and sale transactions, but without regard to the
claimed basis shift and excluding all transaction costs. Thus, if the taxpayer paid
100x dollars for 100x shares of the foreign bank on day one of the transaction,
and sold 95x shares on day 100 of the transaction for 97x dollars, the taxpayer
would report a gain of 2x dollars as either long or short term gain, either ordinary
or capital, as would be otherwise appropriate.
2. The taxpayer will concede 80% of the claimed basis shift.
3. The taxpayer will concede the deduction of all transaction costs (other than
deemed transaction costs, as described above) relating to the basis-shifting
transaction. The taxpayer will concede 80% of the deemed transaction costs
and treat 20% of the deemed transaction costs as a capital loss. The cost of the
option or the warrant in the foreign corporation shall not be given any other
effect.
APPLICATION OF PENALTIES
The application of accuracy-related penalties to this transaction will be considered in
each case. The following terms will be applied under this settlement initiative:
1. Transactions that were disclosed pursuant to the Disclosure Initiative, set
forth in Announcement 2002-02, 2002-2 I.R.B. 304, will not be subject to
accuracy-related penalties.
2. Transactions that were not disclosed pursuant to the Disclosure Initiative may
be subject to penalties based on the merits of the case, including whether the

transaction was otherwise voluntarily disclosed.
3. Participation in this settlement initiative does not preclude taxpayers from
contesting the application of penalties through normal audit and deficiency
procedures.
PROCEDURE FOR RESOLVING CASES
A decision by a taxpayer to resolve a case under the terms of this Announcement must
be mailed or delivered to the appropriate Service function, as set out below, on or
before December 3, 2002.
If a taxpayer is under examination for the year(s) in which benefits from the basis-
shifting transaction were claimed, the taxpayer must notify the examining agent in
writing that the taxpayer wishes to participate in the settlement initiative. The examining
agent will make the appropriate adjustments and prepare any necessary closing
documents.
If a taxpayer is not under examination for any year in which benefits from the basis-
shifting transaction were claimed, the taxpayer must notify the Office of Tax Shelter
Analysis that it wishes to participate in the settlement initiative by sending a letter to the
Office of Tax Shelter Analysis with the following information:
1. The taxpayer's name and address;
2. The taxpayer's Taxpayer Identification Number (either Social Security
Number or Employer Identification Number);
3. The type of return filed;
4. The taxable periods for which the benefits of the basis-shifting transaction

were claimed;
5. The amount attributable to the claimed basis-shifting transaction;
6. The cost of the option or warrant in the foreign corporation; and
7. A statement that the taxpayer is electing to resolve the case under the terms
of this Announcement.
The address of the Office of Tax Shelter Analysis is LM:PFTG:OTSA, 1111 Constitution
Ave., N.W., Washington, D.C. 20224 and the fax number is (202) 283-8406.
Taxpayers must provide to the Service within ten (10) days of their request the
information required by Announcement 2002-02 and certify under penalties of perjury
that the person signing the disclosure has examined the disclosure and that to the best
of that person=s knowledge and belief, the information provided contains all relevant
facts and is true, correct and complete.
If applicable, a settlement entered into as a result of this settlement initiative will be
reported to the Joint Committee on Taxation in accordance with section 6405.
Denial of a taxpayer=s request to participate in this shelter initiative is not subject to
judicial review.
PAPERWORK REDUCTION ACT
The collection of information contained in this Announcement has been reviewed and
approved by the Office of Management and Budget in accordance with the Paperwork
Reduction Act (44 U.S.C. ' 3507) under control number 1545-1803. An agency may
not conduct or sponsor, and a person is not required to respond to, a collection of
information unless the collection of information displays a valid OMB number.

The collection of information in this Announcement is in the sections titled
APPLICATION OF PENALTIES and PROCEDURE FOR RESOLVING CASES. This
information is required to apply the terms of the settlement set forth in this
Announcement and determine the appropriate amount of penalties due, if any. The
information will be used to determine whether the taxpayer has reported the disclosed
item properly for income tax purposes. The collection of information is required to
obtain the benefit described in this Announcement. The likely respondents are
businesses or other for-profit institutions, small businesses or organizations, and
individuals.
The estimated total annual reporting burden is 2000 hours.
The estimated annual burden per respondent varies from 3 hours to 7 hours, depending
on individual circumstances, with an estimated average of 5 hours. The estimated
number of respondents is 400.
The estimated frequency of responses is one time per respondent.
Books or records relating to a collection of information must be retained as long as their
contents may become material in the administration of any internal revenue law.
Generally tax returns and tax return information are confidential, as required by 26
U.S.C. ' 6103.
CONTACT INFORMATION
For information regarding this announcement, call Carol Poindexter, Senior Program
Analyst at (630) 493-5937 (not a toll-free call). Ms Poindexter may also be reached by

fax at (630) 493-5910. Alternatively, taxpayers may transmit comments electronically
via the following e-mail address: Carol.Poindexter@irs.gov. Please include
AAnnouncement 2002-97@ in the subject line of any electronic communication.