The Internal Revenue Service (IRS) has disputed the tax consequences for holders of barrier call options for at least five years. Recently, however, Congress and the IRS have sought to use the court of public opinion and the rules for accounting method changes to influence the outcome in tax audits of hedge funds that entered these transactions and financial institutions that offered barrier options. These developments offer a cautionary tale for users and sellers of financial products that have advantageous federal income tax consequences. The attached article, prepared by Mark Leeds of our New York office, explores these developments.
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