ExecConsult Switching Sides??

[ExecConsult]

For a long time now I have preached that my analysis of the law and regulations leads to a conclusion that the IRS will view income from currency exchange based on our investment as ordinary income. My analysis can be found here:

Now I'm going to give you arguments for the other side. (Believe it or not.) I never stopped looking for an appropriate argument to save us on taxes. This may be a good start.

I was convinced by another professional to make a submission to the IRS to request to be added to the Guidance Priority List to get guidance for out tax situation. When I drafted the document (with some help from others), I argued the side of capital gains taxes. Do I believe my arguments? Of course I do. I would not say it if I didn't believe it.

My analysis of the law linked to above tells what I believe is the IRS' current stance based on current law and regulations. My request to the IRS copied below shows how I think things should be. While this is not a legal opinion and you can not claim to be my client having received legal advice, I think these arguments may be good enough to support a claim on your return of capital gains. HOWEVER, I'd still figure ordinary income and put the rest away in an interest bearing account in case the IRS comes asking for it.

Hope you enjoy it.

Best of Blessings,

Mark

Plain Text Follows: (Sorry for lousy formatting in plain text.)

Recommendation for the 2011-2012 Guidance Priority List

Part I

Introduction

I am in receipt of a request for public comment on recommendations for items that should be included on the 2011-2012 Guidance Priority List. I, therefore, am submitting a recommendation for inclusion on the 2011-2012 Guidance Priority List based on the criteria provided in Notice 2011-39.

1) The recommended guidance resolves significant issues relevant to many taxpayers;

2) The recommended guidance promotes sound tax administration;

3) The recommended guidance can be drafted in a manner that will enable taxpayers to easily understand and apply the guidance;

4) The recommended guidance involves regulations that are outmoded, ineffective, insufficient or excessively burdensome and that should be modified, streamlined, expanded, or repealed;

5) The Service can administer the recommended guidance on a uniform basis;

6) The recommended guidance reduces controversy and lessens the burden on taxpayers or the Service.

1.01 Executive Summary

The professional community is divided in its opinions about taxes to be assessed to an individual invested in physical nonfunctional currency. One group of professionals believes such transactions are capital gains transactions falling under Section 988(e)(2). Another group of professionals believes just as strongly that Section 988(e)(3) excepts their clients from this treatment and they must instead pay taxes on ordinary income. Without a clear statement from the Service about how the nature of the tax is to be determined, it will have to be decided after the fact, on an individual basis, through private letter rulings, audits, and litigation.

The crux of the problem lies in differing interpretations of the phrase, “expenses properly allocable to such transaction meet the requirements of” section 212 or section 162. It is essential that a measurable and objective means is given to determine the application of this language in a uniform and consistent manner.

While historically immaterial, recent world events have made the issue ripe for guidance.

1.02 Background & History of Issue

In 1990 the value of the Kuwaiti Dinar dropped from over $3.00 to less than $0.50 due to Iraq's invasion of Kuwait. Many currency speculators bought Kuwaiti dinar with a market value as low as $0.10. When Kuwait's government was restored, the value of the Kuwaiti dinar was reinstated. Those who purchased the currency for mere pennies were now able to exchange it for over $3.00. Many people became millionaires over night. Kuwait became the nugget that sparked the equivalent of a modern day currency gold rush.

In response to Iraq's invasion of Kuwait, the United Nations Security Counsel (UNSC) placed severe restrictions on trade with Iraq as well as adding other restrictions that would not be lifted until such time as a host of conditions had been met. At the time the restrictions were put in place, the Iraqi dinar (IQD) was trading at over $3.00. The currency immediately devalued. Upon the invasion of Iraq by allied forces, the value of the currency dropped even further.

Currency speculators who had profited from what had happened in Kuwait saw another opportunity and purchased Iraqi Dinar (IQD) as low as $0.001. In 2004 IQD was selling for about $0.005. For the past few years it has held stable at around $0.008. The news of the potential for profit with IQD spread quickly. For over seven years people have been buying IQD as a speculative investment awaiting the day that all of the UNSC restrictions are lifted, a full government is seated, and (along with the International Monetary Fund (IMF)) the Iraqi government revalues its currency to appropriate values based on its wealth of natural resources and other economic factors. These speculators stand to reap rewards far in excess of those who invested in Kuwaiti dinar. However, a review of current legislation, regulations, and publications does not give clear guidance on how these millions of dollars should be taxed.

The problems discussed in this recommendation for guidance have existed for some time. However, until now they have been largely immaterial. Not enough people were affected and for those who may have been affected, not enough money was involved to make it worthwhile to regard with any real concern. The thousands of people currently involved in currency speculation and the enormous potential profits make this an appropriate topic for immediate guidance.

While I have been reticent to request any official instruction up to this point because of the speculative nature of the investment, the wealth of documentation and information pointing toward the imminence of the factors necessary for growth in the value of the IQD, the necessity for clarity, the number of people affected by this issue, and the billions of dollars generally (and hundreds of millions of dollars at stake for those I have personally counseled) bring me to the point that I believe it is both prudent and appropriate to request guidance.

(Examples of events that lead me to believe that now is an appropriate time to request guidance are: In February of this year, the UN Security Council met and released Iraq from nearly 20 years of restrictions. Since that time large numbers of contracts with the Iraqi government have been announced for oil, infrastructure, and general development. The few resolutions made by the UNSC in February regarding things that Iraq still needed to do were to be resolved by June of this year. The US Treasury department has completed their work with the Iraqi government to develop modern, computerized banking infrastructure. The Iraqi Stock Exchange is in place. Hedge funds and other large investors have begun putting large amounts of money into the development of Iraq. Iraq has one of the largest oil reserves in the world. Prime Minister Nouri Al Maliki made a speech to the Iraqi people on Friday the 27TH of May 2011. It is rumored that in this speech he stated that the dinar would be a frontrunner among the currencies of the world. Unfortunately, I will not have time to verify the contents of the speech prior to submission of this document.)

Even if the government of Iraq should choose (for whatever reason) to go against the direction of the International Monetary Fund (IMF) and does not revalue their currency, once released from the UNSC restrictions, the value of the IQD will grow to match market pressures and reflect the countries underlying economic potential. Even a move of a few cents will mean millions of dollars for some speculators. A move to appropriate levels will mean millions of dollars to thousands of speculators.

These circumstances have shed light on issues that have not been appropriately dealt with; taxation on income for individuals investing in physical, nonfunctional currency.

Part II

The Recommended Guidance Resolves Significant Issues Relevant to Many Taxpayers

2.01 Numerosity

There is an ever growing population of individual speculators in physical nonfunctional currency markets; most notably the Chinese Yuan, the Vietnamese Dong, and the Iraqi Dinar. There are Internet forums where people gather to exchange information relating to the developments within the countries and the potential for appreciation of the currency's value. One such forum, don't promote other sites, lists membership of 21,973. Another site, Dinar Vets, lists 29,503 current members. While these may be the most notable sites, there are many less known sites. One of the newest that I have been made aware of is called People's Talk Radio. Since its creation in or about January 2011, it has gathered 9,472 registered members. These numbers, however, pale in comparison to what is reported by one of the Exchange houses.

Ali Agha, president of a currency exchange house located in California (Dinar Trade), reported on CNBC on the 28TH of October 2009 that they had over 100,000 customers purchasing dinar. He further reported that there were approximately 1,000 orders placed per day and between 500 and 600 Million IQD sold per day at the rate of $1,060 per million. The same segment also reported that Dinar Trade had over 175,000 individual sales from the four years following their inception in 2004. The video can be viewed at the following link. (http://video.cnbc.com/gallery/?video=1311362126). I spoke with Mr. Agha on the 2ND day of May 2011 and requested an update which he was unwilling to give. However, we know that through Dinar Trade alone, over 100,000 taxpayers may be affected. I will give an example later of how this number may have grown exponentially through gifting.

Upon the release of UNSC restrictions upon Iraq, the currency will either be revalued or will be allowed to float in response to markets. In either case, the release of the UNSC restrictions will act as a triggering event causing a super majority of the speculators who have purchased IQD to have tax consequences in the same year. They and their professional advisers will all need guidance at the same time. If there is no revaluation and the currency is allowed to float and respond to market pressures it may continue to appreciate significantly over time, speculation will continue to drive the price up and there is the likelihood that this will be an issue for a significant number of taxpayers for several years to come.

2.02 Significance

(a) Potential Income

Taking the numbers reported on the CNBC segment discussed above we see that Dinar Trade, one of the currency exchange houses, was selling at least 500 million dinar per day. Dinar Trade was established in 2004. If we assume this average daily rate for only three of the years since there inception, no sales any other year, and no sales through any other currency exchange house or bank; there would be 390 billion dinar sold to speculators. If the currency moves only $0.03, the income generated will be $11.7 billion. If there is a revaluation of the currency to a rate approximating the Iraqi dinar's former value (over $3.00), the income generated will be over $1.17 trillion.

Though these numbers are significant, adding the remaining years of sales for Dinar Trade, the multiple sales through other currency exchange houses, and the sales through banks would most likely have the affect of making these numbers truly staggering. Even if there is never a revaluation, the move of the currency just a few cents is significant.

(B ) Nature of Tax

The core question is, “With regard to individuals who have invested in physical nonfunctional currency, will the transaction be treated as a personal transaction under Section 988(e)(2) providing for capital gains treatment for income and unreported loss OR will these transactions be excepted from “Personal Transaction” due to Section 988(e)(3) and require that all income is reported as interest income while allowing the full deduction of all losses?

This issue did not arise when Kuwait reinstated its currency value. The time between the devaluation of their currency and the reinstatement was short enough that those who profited were obliged to pay the same marginal rates. Whether they were claimed as short-term capital gains or were classified as ordinary income was immaterial to the speculators. The case of the Iraqi Dinar (IQD) is much different.

While some speculators have only held IQD for a few months, this currency became an investment target as soon as it devalued significantly. Based on the numbers given above, it is safe to say that the vast majority of speculators will have held at least some IQD for over 12 months. Most people who have seen fit to invest in IQD have continued to invest more over time and have a mixture of short-term and long-term holdings. Further, the difference in the amount of tax due upon a currency exchange income event involving a revaluation of the IQD would make it worth holding the currency for the necessary amount of time to qualify for long-term treatment if the income is to be treated as capital gains. This makes determining the appropriate nature of the taxes essential.

Part III

The Recommended Guidance Promotes Sound Tax Administration

3.01 Clarity

Sound tax administration requires clarity. The code and regulations dictating treatment of gains by an individual speculating on foreign currency lack clarity.

(a) Resources Available to Taxpayers

Thousands of individuals have been seeking information on the taxation of their prospective investment for years. One of the earliest examples I found was a post on an Iraqi dinar investment forum dating back to 2006 listing revenue ruling 74-7 as authority that the income should be claimed as capital gains. End note 1 of the ruling explains that travelers were attempting to claim 1031 exchange treatment for their currency conversions. The ruling established that they should instead pay capital gains. I have seen this posting repeated on several forums (though listing the ruling number incorrectly).

Often individuals speculating in physical currencies avail themselves of easily accessible resources provided by the Service. They have regularly gone to the Service's website themselves or relied upon those who have reported what they have found there. In almost every case, research on the Service's web site produces Pub. 525 pg. 33 which tells the reader that for personal transactions with foreign currency, capital gains treatment applies. Many others call the Service and the Service Customer Care employees quote the same information from publication 525. A variation on this information that I saw came from a gentleman who used the Service's email guidance system. The answer he received dealt with claiming his income under section 1256 with a split between long-term and short-term capital gains. Invariably, an individual contacting the Service for guidance is told to claim capital gains treatment in one form or another. The only time there is variance on the issue is when tax professionals are employed.

(B ) Disagreement Among Professionals

I have had the opportunity to communicate with currency speculators regularly for several months. I often hear assertions like, “I talked to my CPA and tax attorney and they both agree it will be taxed as . . . .” The last part vacillates back and forth between “ordinary income” and “capital gains.” From these communications, it appears that the world of professional advisers either 1) are not equally aware of the issues involved in currency speculation OR 2) the issues lack clarity to the extent that well studied professionals are coming to differing conclusions. After communicating with some of the professionals involved, it has become apparent that both problems exist.

(1) Lack of Awareness

CPAs and attorneys are both trained that appreciated capital assets receive capital gains treatment. Therefore, when asked by a currency speculator how their income should be taxed, it is easy to give an answer with complete confidence that all income associated with speculating in physical foreign currency should be taxed as capital gains. Most professionals do not feel the need for any further research on the matter. However, some professionals have done the research and still arrive at different conclusions.

(2) Differing Conclusions

Section 988(e)(2) plainly states that gains on disposition of foreign currency by an individual performing a personal transaction are treated as capital gains for income over $200 and any losses are unreportable. However, section 988(e)(3) seeks to narrow the definition of “personal transaction” by eliminating any transactions in which “expenses properly allocable to such transaction meet the requirements of” sections 212 or 162. For the professional who has researched, this is where the guidance is lacking.

The professional community is in disagreement on how to apply the phrase, “expenses properly allocable to such transaction meet the requirements of” to this situation. Some professionals are of the opinion that according to textual reading of section 988, there must be expenses already incurred that would qualify to be deducted under section 212 or section 162. Others believe that the deductions must not only have occurred, but that the deductions must also have been claimed. Others believe that the reason for section 988(e)(3) is to capture the nature and intent of the exchange transaction (profit production vs. personal use). This last group believes that no measurable expenses need have been created and it is enough that, due to the nature of the transaction, any foreseeable expenses “could” be deducted under section 212 or section 162.

Turning to the regulations for section 988 offers little assistance. Instead of offering guidance on the application of the above quoted phrase, the examples listed in the underlying regulations simply repeat the phrase, “Assume that all expenses properly allocable to these transactions would meet the requirements of section 212.” The only “expense” associated with the speculation in physical nonfunctional currency for the majority of individuals is a transportation expense which is included in purchase price of the currency. Instead of qualifying for a deduction under section 212 or 162, this expense is properly included in basis as part of the cost of acquisition. There are no investment counsel fees, clerical support fees, custodial fees, etc... which might typically be incurred by a taxpayer for the production or collection of income or for the management, conservation, or maintenance of investments. The speculators simply buy the dinar notes and hide them in a mattress (figuratively speaking). The waters become even more muddied by the fact that many speculators have received dinar, yuan, and dong as gifts and many more who have been working either as military personnel or civilian contractors in Iraq have acquired some of their dinar as currency for daily living and then have decided to keep the currency not spent to speculate on its appreciation. Therefore, for these individuals, even if there were potential expenses, they would not be allowable under section 212.

Guidance is needed to determine if the Service is simply saying that if you have taken deductions for investment or business purposes you can no longer claim a “personal transaction” or if it is the Service's design to attempt to divine the “intent” of an individual's actions and allocate foreseeable expenses to the transaction whether or not incurred.

If it is the Service's intent to apply the standard that a person similarly situated could foreseeably create and deduct expenses, the next question becomes, “When is this standard to be applied?” A person receiving dinar as a gift certainly has no section 212 deductions at the time of receipt. However, if the individual holds the currency for several years, it is foreseeable that a similarly situated person might be able to create deductible expenses based on an investment intent that was created sometime after the acquisition of the nonfunctional currency took place. The inverse should be considered as well. If an individual acquires a nonfunctional currency through exchange for functional currency and does so for the purpose of investment and then determines to give a portion of that currency to a charitable organization, does the fact of gifting to charity negate any previously perceived investment intent? (There will be more discussed on charitable issues later.)

Taxpayers are in need of clear guidance that will make it simple to determine whether or not the “personal transaction” exception from 988 (e)(2) can be applied to individuals who have speculated on physical nonfunctional currency.

3.02 Continuity

It is in the interests of sound tax administration to have continuity in the treatment of circumstances which affect a large number of taxpayers across multiple regions. Due to the lack of clarity in section 988 as applied to speculation in physical nonfunctional currency, there is the potential for multiple private letter ruling requests from every region across the country. With so many requests there is potential for disparate treatment of taxpayers with identical or similar circumstances. Further, since the letter ruling requests would come due to a triggering event (release from United Nations Security Counsel restrictions and International Monetary Fund restrictions), it is likely that many (if not most) of the letter ruling requests would be considered by different Service offices at the same time. None of the Service offices considering the letter ruling requests would have the advantage of the other offices' rulings to assist in providing a uniform response to the public.

3.03 Consistency

(a) Type of Transaction

It is in the interests of sound tax administration to have similar activities treated similarly across the various parts of the code that relate to them. Exchange gains and losses are typically similar to (and reported as) interest income for section 988 transactions. Exchange gains and losses under section 988 are typically realized either 1) as business units in foreign jurisdictions use the currency to operate or 2) as investment vehicles are purchased and sold (either denominated in or with reference to a nonfunctional currency). In either of these circumstances, the exchange gains and losses are ancillary to the income generation activity. This is analogous to interest earned on funds held in a US bank account because interest earnings on the cash are ancillary to the purposes for which the cash is being applied.

In the instant case, however, earnings on the currency are not ancillary to other business activity. The currency is the investment. Therefore, the currency no longer reflects the nature of interest but is more analogous to securities purchased and held with the specific intent to profit on speculated appreciation thereon. In this circumstance, a country's currency becomes analogous to shares of stock in that country's value on the open market.

(B ) Charitable Planning

Potential inconsistencies are quite a bit more apparent when applied to charitable planning. The more I dwelt on the topic, the more I realized that to have guidance that could be applied consistently across the code, it would be necessary to address some of the issues that arise when applied to charitable planning. It may be important to note that at least ninety percent (90%) of the people I have counseled regarding currency speculation income are planning on some type of charitable gifting and a large portion of those are planning on using structured charitable gifting tools. It is important to keep the charitable gifting implications in mind because whatever guidance the Service gives in regards to taxation will most likely have an affect on treatment of charitable gifts as well.

(1) Current Process

Typically when a charity receives a gift of nonfunctional currency, they do not look at it either as tangible personal property or capital gains property. Following the logic of Revenue Ruling 69-63, charities view currency without numismatic value simply as cash. In the case of a gift of cash, the charity simply issues a receipt for the cash donation based on the exchange rates on the date of receipt. This seems to be an appropriate procedure that is in keeping with the Service's guidance and rulings. However, when gifting appreciated currency through charitable gifting tools, problems start to appear. To review these problems let us examine the result of each of the three ways that the nonfunctional currency may be viewed when placed in a charitable remainder trust (CRT).

(2) Cash (Potential for Abuse)

If the nonfunctional currency is considered to be cash by the CRT, placing the appreciated “cash” into the CRT would have the effect of qualifying the entire gift as principle and eliminating all of the gains. Therefore, any time a CRT would be required to return a portion of the original gift, the Trustee or administrator would report it as a return of principle. The potential for abuse is obvious. Example: Assume B purchases Swiss francs for $100,000 and they have now appreciated to $400,000. B sets up a CRT with a term of two years and a 45% payment each year which would leave a little over 10% for charity (including growth at the discount rate). In two years B would receive a little over $360,000 from the CRT. Almost all of this would have been improperly characterized as return of principle. This would have the effect of avoiding almost all federal and state income taxes by gifting ten percent (10%) to your favorite charity.

Though it is appropriate, following the logic of Rev. Rul. 69-63, to allow a full deduction based on the cash actually going to charity, it is apparent that it is inappropriate to continue to ignore the potential income in any gift of foreign cash to a CRT, Charitable Gift Annuity (CGA), or similar planning tool.

In my research I have enlisted the help of charities and charitable trust administrators as well as other professionals. One charity I spoke with would have followed what is typical among charities and treated the appreciated nonfunctional currency as a cash gift until I spoke with them about the dangers of doing so in a circumstance where the appreciation is high. After further research and eventually contacting their national support organization, this charity determined that, to avoid the potential for being accused of fraud, they would have to “list” the currency received as they would any other property and take basis into account while figuring the nature of any gains upon exchange of the “property” and thereby retain the gains. The charity was not certain, however, what the appropriate nature of the gains would be.

(3) Tangible Personal Property

Revenue ruling 69-63 rightly points out that currency that has numismatic value ceases to be classified as cash and becomes Tangible Personal Property with basis and value completely separated from the exchange rate of the currency. However, currency with no numismatic value retains its nature as cash and is not appropriately classified as tangible personal property. The question then remains. How will gains in the currency exchange be treated when gifted to charitable planning instruments?

(4) Capital Gains

If it is not appropriate to classify currency with no numismatic value as tangible personal property and continuing to treat currency as principle in a gift could lead to the non-recognition of large amounts of gains. It seems that the only appropriate place to capture the gains would be as a Capital Gains property of some sort.

In order to promote sound tax administration, there must be consistency. To provide consistency there must be correlation between how appreciated cash is treated for income tax purposes and for charitable gifting purposes.

Part IV

The recommended guidance can be drafted in a manner that will enable taxpayers to easily understand and apply the guidance

Once the Service makes a determination on the nature of the transaction and appropriate tax treatment, the results should be able to be simply stated with an example or examples on point.

Part V

The recommended guidance involves regulations that are outmoded, ineffective, insufficient or excessively burdensome and that should be modified, streamlined, expanded, or repealed

The point of this section is dealt with in the subsection 3.01 Clarity of the Part III. The code and regulations are unclear. Further, the need for multiple letter rulings would create an undue burden on the Service to answer the questions of the nature of the tax individually. Additionally, the way charitable gifts using charitable planning tools has historically dealt with currency has now been shown to be insufficient and additional regulation must be promulgated.

Historically there has not been a time where large numbers of taxpayers owned foreign currency as an investment vehicle. However, since the time of the speculators in the Kuwaiti currency, that number has been steadily growing. Now there is a need to address issues dealing with investment in physical nonfunctional currency directly and clearly.

Part VI

The Service can administer the recommended guidance on a uniform basis

6.01 Differences in Character of Transaction

The dinar has been acquired in many ways. While many speculators have obtained dinar through a currency exchange house, many (perhaps even most) of the people who will profit from any significant move in the value of these currencies have received currency as a gift from a speculator. Others have received nonfunctional currency while working oversees and upon returning to the United States have determined to hold the currency instead of immediately exchanging it.

The first speculator I became aware of had a telephone conversation with me. I learned that he gifted Iraqi dinar to at least six individuals on the day of our conversation. In my conversations with speculators, I have found that is an oft repeated scenario. In an effort to share with friends, family, and neighbors, most of the speculators I have spoken with have either already gifted currency to others or have plans to do so. In fact, on their internet boards, gifting is often discussed and speculators encourage one another to gift while the value of the currency is low to avoid gift tax consequences.

For every taxpayer who has actively speculated on nonfunctional currency, there may be several more who have received currency by gift. Whether this distinction is important will depend upon the Service’s determination of the application of section 988(e)(3) with regards to the interpretation of the phrase, “expenses properly allocable to such transaction meet the requirements of” section 212 or section 162. If the Service will try to capture subjective intent, these circumstances will make that determination all the more difficult.

6.02 Potential for Disparity

If the Service's interpretation of the purpose of 988(e)(3), which qualifies the definition of “personal transaction,” is to capture the intent behind the transaction, it would seem correct that those who speculated on the dinar had to pay taxes as standard section 988 ordinary income while those who received the dinar as gifts are able to claim capital gains treatment under the “personal transaction” exception found in section 988(e)(2). However, that is too simplistic. Those who hold or continue to hold currency that they received either as a gift or in the course of their work in a foreign country may develop the same investment intent as those who obtained a nonfunctional currency as an investment vehicle from the start. Conversely, one who has had investment intent may turn to charitable intent over a part of their funds. It seems inadvisable to use section 988(e)(3) in such a way as to capture the intent of the taxpayer. To do so requires taxation based on what is foreseeable or theoretical instead of what has actually occurred. To do so would require not only the ability to measure an individual's subjective intent, but to determine different appropriate times at which the intent should be measured. This attempt would lead to apparent, if not real, disparate treatment among similarly situated taxpayers. For uniform treatment of taxpayers it is essential that the Service give guidance which allows an objective measure that is applicable to all circumstances of an individual taxpayer speculating on foreign currency that may be applied regardless of any argument as to the intent of the individual based on evidentiary facts and circumstances surrounding the acquisition, reason for acquisition, length of time the currency was held, or the reason for holding the currency.

6.03 Necessity for Quantitative Measure

One gentleman I communicated with, who was working in Iraq at the time, had 1,500,000 dinar in his residence in Iraq for living expenses, 20,000,000 dinar located in the United States, and 5,000,000 dinar in electronic bank accounts in two Iraqi banks. Is it appropriate for the Service to attempt to determine what his intent was behind each dinar he obtained? Evaluating intent would be impossible without some sort of quantitative measure. However, by the very nature of its use, currency is impossible to track for the purposes of devising that measure. If uniformity is sought in tax administration, it seems that section 988(e)(3) must refer to a measurable event in relation to section 212 or 162. It must be a measurable event that is easily ascertainable.

Part VII

The recommended guidance reduces controversy and lessens the burden on taxpayers or the Service

Currently there is a schism between currency speculators as to how they will pay taxes. Some are convinced they will be required to pay taxes as ordinary income. Others are equally convinced that they will be paying capital gains rates. The one thing that most agree on is that once the money comes in, they will have to seek professional guidance to be sure. The problem, as stated initially, is that the professional community is divided in its opinions about the nature of the taxes. This will lead to one group of professionals advising their clients to pay capital gains and another group of professionals telling their clients that they must pay ordinary income. A section of each group will seek Service approval of their plans through requests for private letter rulings. Without a clear statement from the Service about how the nature of the tax is to be determined, it will have to be decided after the fact, on an individual basis, through private letter rulings, audits, litigation. This type of controversy may be avoided by appropriate guidance to taxpayers and the professional community.

Part VIII

Suggested Solution

This recommendation for guidance has discussed three potential interpretations of the phrase in Section 988(e)(3) “expenses properly allocable to such transaction meet the requirements of” in relation to Sections 212 or 162. They are either 1) any possible, foreseeable expenses could be allocable, 2) Actual expenses incurred have been allocated (deduction claimed), or 3) Actual expenses have been incurred which could be allocated but may not have been.

8.01 Foreseeable Expenses are Allocable

It is not in the interests of sound tax administration to tax someone based on what is subjective, foreseeable, or potential. It would be extremely burdensome, if not impossible, to measure what is foreseeable. Further, using this measure would require the ability to divine subjective intent and require the ability to specify a period in time for which the intent must be measured. The arbitrary nature of any such attempt would lead to much controversy and create a large burden on the Service and on the taxpayer.

8.02 Actual Expenses have been Allocated

Given the need for clarity, consistency, and uniformity, it seems that the most appropriate course would be to interpret section 988 (e)(3) as meaning that if there have been deductions taken under section 212 or section 162 relating to a currency transaction on an individual's tax return(s) either in that year or prior years, then the individual is barred from claiming a “Personal Transaction” as defined in section 988(e)(2). Otherwise, an individual making an exchange of nonfunctional currency has a personal transaction under section 988(e)(2) and is allowed capital gains treatment for any gains above $200 and is disallowed any losses. This interpretation is measurable, simple to understand, consistent with the application of the code, may be uniformly applied, and would take very minimal drafting of supporting regulations.

However, this solution would lead to the potential for a currency speculator who has taken deductions to simply amend a return or returns to remove those deductions and obtain more favorable treatment of their gains. This retrospective ability to manipulate returns to gain the greatest advantage is not within the realm of sound tax administration policy.

8.03 Actual Expenses have been incurred, may be allocable, and qualify for deduction under section 212 or 162

A way to keep the good points of the above solution without having the problem of amending returns based on comparative value (deduction vs. different tax nature) would be to interpret the language as meaning that any expenses actually incurred are of such nature that a deduction under section 212 or 162 could be obtained by the individual due to the nature of the expense and the nature of the transaction. Following this methodology, a deduction applied for and allowed is evidence that section 988(e)(3) applies and excepts the transaction from capital gains treatment. Any amendment after the fact would not change the fact of the deduction being available (whether or not taken).

This solution seems to be in keeping with both the spirit and letter of the law and supporting regulations. It would still have the advantages of being objectively measurable and have uniform application just as though the solution in the above subsection (8.02) were to be used.

8.04 Consistent Application to Charitable Planning

To avoid abuses of the tax code (whether intentional or unintentional), instructions must be given that it is inappropriate for stewards of charitable planning instruments to simply give a receipt for a cash donation when receiving nonfunctional currency. There is potential for profit built into any gift of nonfunctional currency and it is essential that the charitable entity to maintain the nature of the underlying transaction in accounting for any profit realized. If the disposition of the nonfunctional currency qualifies as a “Personal Transaction” under 988(e)(2), the currency is to be viewed as a capital gains property which would apply both for purposes of capturing the nature of income given to the lifetime beneficiary of a planning instrument as well as supporting the nature of any deduction allowable for a charitable gift. This would allow for the gift passing to the charity to maintain the nature of a cash gift and be completely deductible as historically viewed by the Service while still preserving gains for any significant appreciation of the cash that the Grantor gifts to a charitable remainder trust, charitable gift annuity, or other similar planning instrument.

8.05 Conclusion

Using the simple measurable solutions laid out in subsections 8.03 and 8.04 of this document would allow simple drafting of regulations, would make the application of 988(e)(3) clear, would be consistent across the code, could be uniformly applied and would minimize the burden both on the Service and on the taxpayer.

It is the only solution that I see that meets the requirements of sound tax administration while maintaining the law as written.

Edited June 21, 2011 by ExecConsult

[fnbplanet]

What a capital effort! THAT was a LOT of work! Please keep us informed of any replies/decisions. In fact, I wouldn't mind having a printable copy of that. Thank you!

[earjockey]

Excellent work Mark. From your argument to the IRS's ears.

[Adam Montana]

EXCELLENT POST exec!

Thanks for sharing with us!

[goldengoose]

I sincerely thank you for you efforts and diligence relating to your post.

Much appreciated!!!!!

GG

[Butifldrm]

ExecConsult, Thank you so much for this post. Wow amazing effort. I hope all thing are well with you and your family. You definitely have the lawyering down pact. Hopefully we will be paying capital gains.

[Trac y S]

Holy God!! This is incredible -- the diligence, focus and work on behalf of us all is very much appreciated.

I have a question / scenario that I'd like to run by someone with a tax background as this may very well also affect many of us.

Scenario: I own 500,000 Dinar outright. Half of the Dinar has been in my possession for three or more years now. I also have a pending Reserve Order for 10M Dinar, with a 30-day window to complete my payment of the 90% balance. On day 22 of the 30-day window, the RV occurs. I take the 250,000 Dinar in my possession, convert the currency to USD and pay off my reserve order. I know own 10,250,000 Dinar that is less than a year old. However, I didn't take physical possession of the 10M Dinar until post RV.

My tax question is: when does the tax event occur to appropriately assess either income tax/capital gains tax -- is the tax not assessed until the tax payer has physical custody of the taxable item? Is the tax, then, based on the value of the item at the time of acquisition? How is this different from my placing on offer and good fait deposit on a house -- in this case, my 10% down payment on my reserve order -- and the loan getting funded at the close of escrow. Taxes do not accrue to the buyer until legal possession of the property has occurred.

As you can see, I had an epiphany a while ago (I sure hope so!!) and I am glad that you posted this messsage so I could ask this question. Hoping you might have some insight.

Regards, TracyS

[tommyboy]

Wow, Mark. I remember when you said you had to do some more research because of questions you still had but here it seems you are trying to help the IRS as well. I suppose when you find something that isn't clearly spelled out, that is the best way to approach them and your recommendations may be more gratefully accepted. And, what with the amount of reseach you have obviously done seemingly covering all aspects of this venture, it seems they would realize that and seriously consider your position and conceivably follow all you recommendations. Let's hope so and we all thank you so much for bring this to the attention of the IRS so that we may all be treated fair and equal.

Edited June 22, 2011 by tommyboy

[buildingafortune]

Holy God!! This is incredible -- the diligence, focus and work on behalf of us all is very much appreciated.

I have a question / scenario that I'd like to run by someone with a tax background as this may very well also affect many of us.

Scenario: I own 500,000 Dinar outright. Half of the Dinar has been in my possession for three or more years now. I also have a pending Reserve Order for 10M Dinar, with a 30-day window to complete my payment of the 90% balance. On day 22 of the 30-day window, the RV occurs. I take the 250,000 Dinar in my possession, convert the currency to USD and pay off my reserve order. I know own 10,250,000 Dinar that is less than a year old. However, I didn't take physical possession of the 10M Dinar until post RV.

My tax question is: when does the tax event occur to appropriately assess either income tax/capital gains tax -- is the tax not assessed until the tax payer has physical custody of the taxable item? Is the tax, then, based on the value of the item at the time of acquisition? How is this different from my placing on offer and good fait deposit on a house -- in this case, my 10% down payment on my reserve order -- and the loan getting funded at the close of escrow. Taxes do not accrue to the buyer until legal possession of the property has occurred.

As you can see, I had an epiphany a while ago (I sure hope so!!) and I am glad that you posted this messsage so I could ask this question. Hoping you might have some insight.

Regards, TracyS

Great question, when does the tax event occur? I am a financial planner and have been for over 15 years. It appears to me that in this scenario it would be taxed like exercising an option on a stock trade. The taxable nature is determined by date you take possession of the actual stock, in this case currency. Ultimately leading to ordinary income tax.

[Kanga]

What amazes me the most Mark is your ablity to keep on digging and digging and digging.

Thank-you for what definitly appears to be well over one hundred hours of work! WOW Thank-You. :)

[rvb4jan1]

Mark, this is an excellent post. Thank you for your hard work.

[ExecConsult]

What a capital effort! THAT was a LOT of work! Please keep us informed of any replies/decisions. In fact, I wouldn't mind having a printable copy of that. Thank you!

I have attached a PDF of the document or you can find and download it here:

http://cid-7df30d726eef249f.office.live.com/browse.aspx/.Documents?Bsrc=EMSHOO&Bpub=SN.Notifications

Best of Blessings,

Mark

Recommendation for Guidance Priority List.pdf

[ExecConsult]

Holy God!! This is incredible -- the diligence, focus and work on behalf of us all is very much appreciated.

I have a question / scenario that I'd like to run by someone with a tax background as this may very well also affect many of us.

Scenario: I own 500,000 Dinar outright. Half of the Dinar has been in my possession for three or more years now. I also have a pending Reserve Order for 10M Dinar, with a 30-day window to complete my payment of the 90% balance. On day 22 of the 30-day window, the RV occurs. I take the 250,000 Dinar in my possession, convert the currency to USD and pay off my reserve order. I know own 10,250,000 Dinar that is less than a year old. However, I didn't take physical possession of the 10M Dinar until post RV.

My tax question is: when does the tax event occur to appropriately assess either income tax/capital gains tax -- is the tax not assessed until the tax payer has physical custody of the taxable item? Is the tax, then, based on the value of the item at the time of acquisition? How is this different from my placing on offer and good fait deposit on a house -- in this case, my 10% down payment on my reserve order -- and the loan getting funded at the close of escrow. Taxes do not accrue to the buyer until legal possession of the property has occurred.

As you can see, I had an epiphany a while ago (I sure hope so!!) and I am glad that you posted this message so I could ask this question. Hoping you might have some insight.

Regards, TracyS

To understand this clearly you must focus on only a couple of simple concepts: basis and income recognition. First lets talk basis.

The "basis" you have in any asset is the amount you spent to get the asset. You also add in costs of getting the asset (i.e. deliver costs) and any costs of improvements to the asset. For your situation the application is simple. Your basis is the total amount you spent to get the dinar. The market value of the dinar does not matter.

For income recognition we need an event that will determine the value to be received. For you that will be the event of exchanging the dinar for USD. When the RV takes place does not matter at all. What matters is when you have an income recognition event.

So this is how it works - your basis is whatever you paid for the dinar - your income is determined at time of exchange (what you get for the dinar less your basis). When you can determine the income is when you recognize the income.

As an example, lets say that when the RV takes place you exchange 100,000 dinar for $300,000. (Assume you have a basis of $3,000.) You decide to hold the rest of your dinar into March of 2012. For 2011 you have income of $297,000. The rest of the income is recognized in March of 2012 when you do the exchange.

Simply restated. You have income recognition when you do the exchange. That is it - period.

So if it is really that simple, why do people talk about timing of the RV with their dinar so much? Typically there are two reasons to discuss this. One is for assets that will be "capital gains assets" if held for more than 12 months. However, the timing of the RV is not important here. Only the timing of the income recognition (exchange) is important to determine the holding period.

The other reason to discuss timing is for "Gift Tax" purposes. When making a gift you must take into account the value of the asset at the time of the gift. That is all. If the value is too high, the person making the gift will have gift tax consequences. For income tax purposes, the person receiving the gift generally takes the basis (and holding period) of the person giving the gift.

I hope that is helpful.

Best of Blessings,

Mark

Thank you all for your kind words. I don't expect to hear anything back from the IRS directly, but if I do I'll be sure to pass it along. What I expect is that we will have to wait for the IRS to issue their annual guidance statements. Either they will give guidance or they won't. We can only wait, hope, and pray.

Best of Blessings,

Mark

[lechesuerte]

Thanks Mark for your endless pursuit of the truth. Naturally we all hope for the lower number. More importantly I hope that I have to worry about this......soon!!!!!!! On another thought I think we all you a drink, thought, toast , some expression of gratitude for you time on this subject and your willingness to share. If and when it happens, I will add you to the short, now becoming longer, list of people I owe a drink and more. Thanks.

Edited June 24, 2011 by lechesuerte

[blknblu4evr]

Outstanding post. Thank you so much for all the hard work you have provided for all of us here. I certainly appreciate it...

[gregg450]

Really impressive. Thanks Mark, you are the man.

[ExecConsult]

It was gently pointed out to me that I had my numbers off in the background section. The number reads $0.008 but should have been $0.0008. My apologies.

Best of Blessings,

Mark

[Trac y S]

Mark, Bless you too and thanks for being so sincere and giving so much back to all of us. Appreciate finally getting a definitive response on my tax question. Makes total sense to me now. Cheers!!

[ExecConsult]

Mark, Bless you too and thanks for being so sincere and giving so much back to all of us. Appreciate finally getting a definitive response on my tax question. Makes total sense to me now. Cheers!!

Tracy - thank you for the kind words. I wish this was a definitive response but it isn't. These are my arguments to the IRS about the way things "should be." My belief about current law is just the opposite. My analysis of current law and regulations leads me to believe that right now the IRS is looking for "intent." I believe that under the current system if you or I are audited, since our intent in purchasing dinar was for investment, the IRS will assess ordinary income treatment to any gains we have.

What I am doing with this submission is pointing out why I believe it should be otherwise and trying to get the IRS to do something to formally and publicly agree that it should be long-term capital gains. Now we have to see if they bite or they just ignore me.

My suggestion is that you discuss this with your CPA and/or attorney and have them advise you on your options.

Best of Blessings,

Mark

[Danan]

Wonderful work and lots of good information on this site. Thank you all

[wpsmit]

Wow, Mark. I remember when you said you had to do some more research because of questions you still had but here it seems you are trying to help the IRS as well. I suppose when you find something that isn't clearly spelled out, that is the best way to approach them and your recommendations may be more gratefully accepted. And, what with the amount of reseach you have obviously done seemingly covering all aspects of this venture, it seems they would realize that and seriously consider your position and conceivably follow all you recommendations. Let's hope so and we all thank you so much for bring this to the attention of the IRS so that we may all be treated fair and equal.

I'm afraid this solution is too logical for the IRS, but good luck anyway.

[cruzin']

Question: If i go overseas and buy coins ie old coins or gold coins, you get the pic. and bring them back to sell maybe on ebay some to coin collectors and stuff. would i have to claim that?? It might be a silly question to some, but i don't know.

[Adam Montana]

If you made a profit, yes.

Technically, you are supposed to report a $20 bill you find on the ground - the IRS considers it taxable income.

Does it make sense? NO! I don't make the rules.

[jaman]

hi Adam one question I was told that there was a small window to re-invest the gains to defer the taxes any comment ?

[Adam Montana]

hi Adam one question I was told that there was a small window to re-invest the gains to defer the taxes any comment ?

There is talk, and this actually makes sense, that if we roll our investment into another investment within 60 days, we will be able to defer paying taxes. In fact, this is exactly what I've been paying very talented advisers and attorneys to help me set up for the VIP members. (Kind of like rolling a 401k into an IRA - if you do it within 60 days, you can do so with no penalty.)

To take it a step further, we have worked out investment strategies that allow us to reinvest in ways that not only defer our tax liability - but turn great gains into even greater gains.

Here's some more info: http://dinarnews.net/benefits

Hope that helps!