The IRS identifies another cross-border event as a "listed transaction".

IRS Notice 2007-57 adds a new category of listed transaction that involves loss importation. (1) The technique involves the most elementary of "planning" techniques: the domestic taxpayer arranges to reflect on its U.S. income tax return the loss leg of a hedge entered into by a foreign entity. In order to avoid also reporting on its U.S. return the gain leg of the hedge, the taxpayer insures that the foreign entity is a "corporation" for U.S. tax purposes when it recognizes the gain. Finally, to close the loop, it is necessary for the U.S. taxpayer not to own the foreign entity long enough as a corporation to have to report its income under subpart F.

Thus, the key elements for the U.S. taxpayer hoping to make this plan work would be:

(1) use of the disregarded entity regulations and the impact of a change of status of a foreign entity;

(2) use of the narrow exception from subpart F income imputation for foreign corporations owned less than 30 days during the year; and

(3) the ability to create offsetting gains and losses without any significant economic impact (according to the IRS).

Facts

An S corporation ("S Corporation") buys a controlling interest in a foreign entity ("X"). X is classified as a corporation for U.S. tax purposes and is a CFC. X enters into offsetting options in foreign currency and recognizes a gain on the gain leg of the hedge. According to the Notice, X "virtually eliminate[s] further economic risk."