IRS Chief Counsel - Tax treatment of gains, losses on sales of securities by qualified settlement fund 

December 10: The IRS publicly posted a field advice memorandum* (prepared by attorneys in the IRS Office of Chief Counsel) concerning the characterization of gain or loss from the sale of securities reported by a qualified settlement fund on Form 1120-SF, U.S. Income Tax Return for Settlement Funds (Under Section 468B). 20134901F (release date December 6, 2013, and dated October 10, 2013).

Read the field advice memo [PDF 139 KB]


The redacted field advice memo reveals that the qualified settlement fund (referred to as a trust) reported on its original Form 1120-SF, capital gain from the sale of securities. On a second Form 1120-SF, the trust treated losses from the sale of securities as ordinary losses and included them in its calculation of its net operating loss (NOL).

Subsequently, the trust filed an amended Form 1120-SF to treat the capital gains as ordinary income and to claim the NOL carryback.

The field advice memo concludes that:

  • Reg. section 1.468B-2(b) does not permit a qualified settlement fund to deduct any ordinary losses and does not permit ordinary losses to be included in the NOL of a qualified settlement fund. Thus, if the trust treated the sales of its securities as sales producing ordinary losses, it could not include those losses in the calculation of its NOL on Form 1120-SF.

  • The trust was to have treated the sales of its securities as producing capital losses or gains—instead of ordinary losses or income.

*Field advice memo documents are prepared by IRS field attorneys in the Office of Chief Counsel, are reviewed by an Associate Office, and are subsequently issued to IRS field or service center employees. The memo cannot be used or cited as precedent.

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