IRS List of Interest

IRS Releases List of Transactions of Interest (Notice 2009-55)

The IRS has provided a list of transactions that have been identified by the Service as “transactions of interest.” The IRS will consider transactions similar to any of the transactions on the list to be transactions of interest for purposes of Code Secs. 6111, 6112, 6662A, 6707, 6707A and 6708, and Reg. §1.6011-4(b)(6).

One transaction of interest (initially identified in Notice 2007-72, 2007-2 CB 544) involves taxpayers who purchase a remainder interest or similar successor member interest directly or indirectly in real property and then transfer such interest to a tax-exempt organization, claiming a charitable contribution deduction significantly higher than the amount paid for the interest. The Treasury and the IRS are concerned that taxpayers may be utilizing the contribution of such successor member interests to generate an excessive deduction.

Another transaction of interest (Notice 2007-73, 2007-2 CB 545) involves certain transactions in which trust grantors attempt to avoid recognizing gain or claiming a tax loss greater than the actual economic loss by purportedly terminating (“toggling off”) and then reestablishing (“toggling on”) the grantor status of the trust. These terminations and reestablishments usually occur within a brief period of time.

A third transaction (Notice 2008-99, I.R.B. 2008-47, 1194) involves the creation of a charitable remainder trust, contribution of appreciated assets to the trust by the taxpayer and subsequent sale of the assets by the trust and reinvestment of the proceeds of the sale in different assets such as money market funds or marketable securities. The taxpayer and the charity then sell or dispose of their respective interests in the trust to an unrelated third party for an amount equal to the value of the trust’s assets. The trust then terminates, with its assets being distributed to the third party. The taxpayer typically takes the position that this set of transactions results in little or no taxable gain. The IRS believes the transaction improperly manipulates the uniform basis rules to avoid tax on gain from the sale of the appreciated assets in this transaction.

The last transaction (Notice 2009-7, I.R.B. 2009-3, 312) involves a U.S. taxpayer who owns a controlled foreign corporation (CFC) that holds stock of a lower tier CFC through a domestic partnership that takes a position that subpart F income of a lower tier CFC does not result in income inclusion. The U.S. taxpayer takes the position that the subpart F income of a lower tier CFC was already included in the domestic partnership’s income, which is not subject to U.S. tax and, thus, should not be included in the income of the U.S. taxpayer. Without the interposition of the domestic partnership, the subpart F income of the lower tier CFC would be taxable to the U.S. taxpayer. The IRS is concerned that taxpayers are taking the position that the structures described result in no income inclusion under Code Sec. 951. Therefore, the IRS has identified these structures and other substantially similar transactions as transactions of interest that are contrary to the purpose and intent of the provisions of subpart F.

Generally, persons entering into these transactions on or after November 2, 2006, must disclose their participation in the transaction. Taxpayers who fail to disclose may be subject to civil penalties. Material advisors who make tax statements with respect to transactions of interest may have disclosure and list maintenance obligations.