IV. Proposed Regulation and the use of Contribution Gains to offset Non-FASIT Losses.
As discussed earlier, the issues has been raised as to whether gains that are recognized by an owner upon a sale or contribution of assets to a FASITS can be offset with the owner’s unrelated capital losses. The New York State Bar Association Tax Section’s report on suggested FASIT regulations suggested that the gains that are recognized on an asset transferred in exchange for the receipt of such interest (or to increase the value of an existing interest), in not an amount that is recognized “with respect to” the ownership or high yield interest, and this, the loss limitation rule should not apply. The NYSBA has suggested that Treasury issue regulations that clarify that gains recognized by an owner or holder of a high yield interest on a transfer of assets to a FASIT can be offset by the transferor’s capital losses.
On 4 February 2000 the Treasury issued proposed regulations do not specifically address the use of contribution gain to offset non-FASIT losses. In addition the proposed regulations include 1 an expanded definition of “traded on an established securities market” and a broad anti-abuse rule. Each of these elements and their relation to the proposed transaction is examined in greater details below.
A. Use of contribution gains to offset non-FASIT losses not addressed
- Section 860J
The Senate version of Section 860J provided, in pertinent part, that the taxable income of the holder of the ownership interest or nay high yield interest in a FASIT for any taxable year shall in no event be less than the sum of (i) such holder’s taxable income determined solely with respect to such interests and (ii) the excess inclusion (if any) under Section 860E(a)(1) for such taxable year.
The conference agreement goes on to elaborate that “the taxable income of the holder of the ownership interest or a high-yield interest that may not be offset by non-FASIT losses, ‘includes gain or loss from the sale of the ownership interest or high yield interest‘. As a result, Section 869J reads as follows: the taxable income. of the holder of the ownership interest or any high yield interest in a FASIT for any taxable year shall no in no event be less than the sum of (i) such holder’s taxable income determined solely with respect to such interests (including gains and losses from sales and exchanges of such interests) and (ii) the excess inclusion if any under Section 860E(a)(1) for such taxable year.
It is critical to note that no mention is made of gains recognized upon contribution of assets to a FASIT. The drafters of the FASIT legislation had the opportunity to clarify the ambiguous language of this provision. Upon further consideration they decided to include the elaboration that gains and losses from sales and exchanges were to be included in the offset prohibitions. At this time any further clarification of the statutory language to include other prohibited income would have been appropriate. As such, it would appear that the offset restriction apply only to FASIT income (including gains and losses from sales and exchanges of such interests). Had Congress intended to prevent gain recognized upon contribution to a FASIT from being available to offset non-FASIT losses it would have specifically included additional parenthetical language dealing with gain upon contribution to its added clarification.