Tax Law and Business Organization Strategy

Latest IRS Pronouncements on Tax Avoidance Transactions and Transactions of Interest

Notice 2009-59 updates the IRS' list of “listed transactions” published in Notice 2004-67, 2004-2 CB 600, by adding four transactions designated as listed transactions after the 2004 notice was issued. Notice 2009-55 carries a list of transactions designated as “transactions of interest” for various disclosure and penalty purposes.

Listed transactions update.

Promoting, advising taxpayers about, or participating in, a transaction that is the same as or substantially similar to a transactions determined by the IRS to be a tax avoidance transaction and a “listed transaction” triggers numerous disclosure and penalty rules. Taxpayers may need to disclose their participation in the listed transactions under Reg. § 1.6011-4, and material advisors may need to disclose these transactions under Reg. § 301.6111-3. Taxpayers who fail to disclose may be subject to penalties under Code Sec. 6662A and Code Sec. 6707A. Material advisors who fail to disclose may be subject to penalties under Code Sec. 6707. Material advisors also must maintain lists of advisees and other information with respect to these listed transactions under Reg. § 301.6112-1 or face penalties under Code Sec. 6708.

The last list of listed transactions issued in Notice 2004-67, 2004-2 CB 600, specified 30 transactions. Notice 2009-59, adds the following four transactions to the list of listed transactions:

  • Transactions in which a taxpayer enters into a purported sale-lease-back arrangement with a tax-indifferent person in which substantially all of the tax-indifferent person's payment obligations are economically defeased and the taxpayer's risk of loss from a decline, and opportunity for profit from an increase, in the value of the leased property are limited. These are often referred to as “sale-in/lease out” or “SILO” transactions.
  • Transactions in which a U.S. taxpayer uses offsetting positions with respect to foreign currency or other property for the purpose of importing a loss, but not the corresponding gain, in determining U.S. taxable income.
  • Certain arrangements involving a trust or other fund described in Code Sec. 419(e)(1), that is purportedly a welfare benefit fund and pays premiums on one or more life insurance policies with respect to which value is accumulated, where the employer has deducted contributions in excess of specified amounts.
  • Transactions in which a tax indifferent party contributes one or more distressed assets with a high basis and low fair market value to a trust or series of trusts and sub-trusts, and a U.S. taxpayer acquires an interest in the trust (and/or series of trusts and/or sub-trusts) in order to shift a built-in loss from the tax indifferent party to the U.S. taxpayer that has not incurred the economic loss.

New list of transactions of interest.

In 2007, the IRS added a new category of reportable transactions for purposes of Reg. § 1.6011-4(b)(6), Code Sec. 6111, Code Sec. 6112, Code Sec. 6662A, Code Sec. 6707, Code Sec. 6707A and Code Sec. 6708. The new category is called “transactions of interest,” which are so identified in published guidance. (Reg. § 1.6011-4(b)(6)) These are transactions that IRS believes have potential for tax avoidance or evasion, but for which it lacks enough information to determine whether they should be identified specifically as tax avoidance transactions. (Preamble to TD 9350) The change applies for transactions of interest entered into on or after Nov. 2, 2006.

Notice 2009-55 carries IRS's first list of identified transactions of interest, consisting of:

  • Transactions built on charitable contributions of successor member interests. In general, a taxpayer (1) directly or indirectly acquires certain rights in real property or in an entity that directly or indirectly holds real property, (2) transfers the rights more than one year after the acquisition to a charity described in Code Sec. 170(c), and (3) claims a charitable contribution deduction that is significantly higher than the amount that the taxpayer paid to acquire the rights.
  • Transactions that are “toggling” grantor trust transactions, in which grantors attempt to avoid recognizing gain or to claim a tax loss greater than any actual economic loss by purportedly terminating and then reestablishing the grantor status of trusts. These grantor trust transactions usually occur within a short period of time (typically within 30 days). One variation involves a trust funded with gain and loss options; another variation involves a trust funded with liquid assets such as cash or securities.
  • Transactions involving the sale or other disposition of all the interests in a charitable remainder trust (subsequent to the contribution of appreciated assets to and their reinvestment by the trust) resulting in the grantor or other noncharitable recipient receiving the value of that person's trust interest while claiming to recognize little or no taxable gain.
  • Transactions in which a U.S. taxpayer that owns controlled foreign corporations (CFCs) that hold stock of a lower-tier CFC through a domestic partnership takes the position that subpart F income of the lower-tier CFC or an amount determined under Code Sec. 956(a) related to holdings of U.S. property by the lower-tier CFC does not result in income inclusions under Code Sec. 951(a) for the U.S. taxpayer.
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