Reportable Transactions
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Treasury regulations require taxpayers to file certain disclosure statements regarding tax strategies/transactions that the Internal Revenue Service ("IRS") identifies as Reportable Transactions. Reportable transactions include 1) Listed transactions, 2) Confidential transactions, 3) Transactions with contractual protection, 4) Loss transactions, 5) Transactions of interest, and 6) Patented transactions. The disclosure statements must be filed with the proper tax return and also sent separately to the IRS. Failure to properly disclose any of these transactions may result in the imposition of penalties.
Please read each of these Transaction summaries. If you want to receive a copy of the specific IRS published guidance (see the underlined reference at the end of each description) or have any questions regarding a specific transaction, please contact us at (703) 893-0600. Argy, Wiltse & Robinson, PC shall not be liable for any penalties resulting from your failure to accurately and timely inform us of your participation in any of these strategies.
A) Listed Transactions - The summaries of the Listed Transactions are as follows:
1) 401(k) Accelerator: Transactions in which taxpayers claim deductions for contributions to a qualified cash or deferred arrangement or matching contributions to a defined contribution plan where the contributions are attributable to compensation earned by plan participants after the end of the taxable year. Identified in Rev. Rul. 90-105.
2) Multiple Employer Plans: Trust arrangements purported to qualify as multiple employer welfare benefit funds exempt from the limits of sections 419 and 419A of the Internal Revenue Code. Identified in Notice 95-34.
3) Contingent Installment Sales: Transactions involving contingent sales of securities by partnerships in order to accelerate and allocate income to a tax-indifferent partner, such as a tax-exempt entity or foreign person, and to allocate later losses to another partner. Identified as ACM Transactions.
4) Distributions from Charitable Remainder Trusts: Transactions involving distributions described in Treas. Reg §1.643(a)-8 from charitable remainder trusts. This transaction uses a Section 664 charitable remainder trust to convert appreciated assets into cash, while avoiding the gain on the disposition of the assets. Identified in Treas. Reg §1.643(a)-8.
5) Distribution of Encumbered Property: Transactions involving the distribution of encumbered property in which taxpayers claim tax losses for capital outlays that they have in fact recovered: Identified in Notice 99-59.
6) Fast-pay Arrangements: Transactions involving fast pay arrangements as defined in Treas. Reg. § 1.7701(1)-3(b) in which a corporation's outstanding stock is structured (in whole or in part) to return the stockholder's investment by distributions treated as dividends. Identified as Fast-pay Arrangements.
7) Counterbalancing Debt Instruments: Transactions involving two debt instruments the values of which are expected to change significantly at about the same time in opposite directions. Identified in Rev. Rul. 2000-12.
8) Artificially Inflated Tax Basis: Transactions generating losses resulting from artificially inflating the tax basis of partnership interests. Identified in Notice 2000-44.
9) Employee Stock Transfer: Transactions involving the purchase of a parent corporation's stock by a subsidiary, a subsequent transfer of the purchased parent stock from the subsidiary to the parent's employees, and the eventual liquidation of sale of the subsidiary. Identified in Notice 2000-60.
10) Guamanian Trusts: Transactions purporting to apply section 935 to Guamanian trusts. Identified in Notice 2000-61.
11) Midco Transactions: Transactions where a taxpayer desires to sell stock of a corporation and a buyer desires to purchase the assets. These parties conduct the transaction through an intermediary, with the taxpayer selling the stock to the intermediary and the buyer then purchases the assets from it. The intermediary usually receives compensation for participating in the transaction. Identified in Notice 2001-16.
12) Contingent Liability Transactions: Transactions involving a loss on the sale of stock acquired in a purported section 351 transfer of a high basis asset to a corporation and the corporation's assumption of a liability that the transferor has not yet taken into account for federal income tax purposes. Identified in Notice 2001-17.
13) Basis Shifting on Stock Redemptions: Redemptions of stock in transactions not subject to
14) Inflated Tax Basis: Transactions in which the taxpayer as a part of an acquisition of assets also assumes debt exceeding their fair market value. The taxpayer claims a higher basis due to the debt assumption. Upon sale of the assets, the taxpayer claims a loss for basis in excess of the fair market value of the assets. Identified in Notice 2002-21.
15) Notional Principal Contract: Transactions using a notional principal contract to claim deductions for periodic payments made by the taxpayer while disregarding the accrual of a right to receive offsetting payments in the future. Identified in Notice 2002-35. Notice 2006-16 lists safe-harbor exceptions to the listed transaction rules regarding NPC’s.
16) Allocation of Straddle Gain or Loss: Transactions involving the creation of straddles in a pass thru entity, i.e., partnership, S-corporation, or grantor trust, with the allocation of gain to one party and loss to another party. Identified in Notice 2002-50 and Notice 2002-65.
17) LILOs: Transactions in which a taxpayer purports to lease property and then purports to immediately sublease it back to the lessor (that is, lease-in/lease out or LILO transactions). Identified in Rev. Rul. 2002-69.
18) Prohibited Ownership of S-Corp Securities by ESOP: Transaction in which an S corporation and an associated ESOP, which was formed on or before March 14, 2001, is subsequently transferred and the ESOP claims the benefit of a delayed effective date under IRC 409(p). As a result of the delayed effective date, the earnings of the S corporation are not currently taxed. Identified in Rev. Rul 2003-6.
19) Offshore Deferred Compensation Arrangements: Arrangements involving leasing companies to avoid or evade federal income and employment taxes. Identified in Notice 2003-22.
20) Collectively Bargained Welfare Benefit Funds: Arrangements set up through sham labor negotiations to take advantage of a special tax rule that allows deductions for contributions made to welfare benefit funds excepted from the account of §§ 419 and 419A. Identified in Notice 2003-24.
21) Deferred Gain on Compensatory Stock Options: Arrangements involving the transfer of compensatory stock options by executives to related parties in an attempt to avoid or evade federal income and employment taxes. Identified in Notice 2003-47.
22) Lease Strips and Other Stripping Transactions: Multiple-party transactions which allow one party to realize rental or other income from property or service contracts and to allow another party to report deductions related to that income. Identified in Notice 2003-55.
23) Contested Liability Trusts: Transactions using trusts improperly to accelerate deductions for contested liabilities under § 461(f). Identified in Notice 2003-77.
24) Charitable Donation of § 1256 Contracts: Transactions in which taxpayers dispose of a pair of offsetting options, claiming a loss on one of the options but contending that they do not have to recognize the corresponding gain on the other. The taxpayer assigns two offsetting options to a charity, claiming an immediate loss on one of the options and taking the position that it does not have to take into account the offsetting gain in the other assigned option. The result is a large tax benefit (the claimed tax loss on one assigned option) without recognition of the matching economic gain on the other assigned option. Identified in Notice 2003-81.
25) Roth IRA's: Transactions in which value is shifted into an individual's Roth IRA through transactions involving entities owned by the individual to avoid the limitations on contributions to Roth IRA's described in § 408A. Identified in Notice 2004-8.
26) ESOP Owned S-Corp: Transactions that move business profits of an S corporation owned by an ESOP away from the ESOP, so that "rank-and-file" employees do not benefit from the arrangement. Identified in Rev. Rul. 2004-4.
27) Pension Plan Life Insurance: Transactions in which an employer deducts contributions to a qualified pension plan for premiums on life insurance contracts that provide for death benefits in excess of the participant’s death benefit, where under the terms of the plan, the balance of the death benefit proceeds revert to the plan as a return on investment. Identified in Rev. Rul. 2004-20.
28) Foreign Tax Credit Maximizer: Transactions in which, pursuant to a prearranged plan, a domestic corporation purports to acquire stock in a foreign target corporation and to make an election under § 338 before selling all or substantially all of the target corporation’s assets in a preplanned transaction that generates a taxable gain for foreign tax purposes (but not for U.S. tax purposes). Identified in Notice 2004-20.
29) S-Corporation Stock Donations: Transactions in which S-corporation shareholders attempt to transfer the incidence of taxation on S-corporation income by purportedly donating S-corporation nonvoting stock to an exempt organization while retaining the economic benefits associated with that stock. Identified in Notice 2004-30.
30) Intercompany Financing Using Guaranteed Payments: Transactions in which corporations claim inappropriate deductions for payments made through a partnership. Identified in Notice 2004-31.
31) Sale-Leaseback Arrangement with a Tax-Indifferent Person: Transactions 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 lease property are limited. Identified in Notice 2005-13.
32) Offsetting Foreign Positions: Transactions in which a
33) Welfare Benefit Fund Contributions to pay Cash Value Life Insurance Premiums: Transactions involving certain trust arrangements that are being sold to business owners as welfare benefit funds. The arrangements typically involve a trust wherein cash-value life insurance policies on the lives of the owner and/or key employees are purchased with the owner's contribution. Other arrangements involve post-retirement medical or life insurance benefits to employees on a nondiscriminatory basis, but in operation, primarily benefit the owners or other key employees of the business. Identified in Notice 2007-83, Notice 2007-84 and Revenue Ruling 2007-65.
34) Distressed Asset Trust (DAT) Transaction: Transactions in which a tax-indifferent party contributes distressed assets to a trust for which it is considered to be the grantor and beneficiary. A
B) Confidential Transactions - For transactions entered into on or after December 29, 2003, a Confidential Transaction is a transaction that is offered to a taxpayer under conditions of confidentiality for which the taxpayer has paid a minimum fee to an advisor. A transaction is considered offered under conditions of confidentiality if the advisor (who is paid the minimum fee) limits disclosure by the taxpayer of the tax treatment of tax structure of the transaction and the limitation protects the confidentiality of the advisor's tax strategies. Even if the conditions are not legally binding on the taxpayer, the transaction is still treated as confidential. If the advisor confirms to the taxpayer that there is no limitation on disclosure, the fact that a transaction is considered proprietary or exclusive is not treated as a limitation under this rule.
A minimum fee is a fee of (a) $250,000 for a transaction if the taxpayer is a corporation, (b) $50,000 for all other transactions. If the taxpayer is a partnership or trust and all of the owners or beneficiaries are corporations (determined by looking through partners or beneficiaries that are themselves partnerships or trusts), the minimum fee is $250,000.
C) Transactions with Contractual Protection - This is a transaction where the taxpayer (or a related party) has the right to a full or partial refund of fees if all or part of the intended tax consequences of the transaction are not sustained. A transaction where fees are contingent on realization of the tax benefits is a transaction with contractual protection. In determining whether a fee is refundable or contingent, all the facts and circumstances relating to the transaction are considered. The determination would scrutinize a right to reimbursement of amounts not designated by the parties as fees. The determination would also scrutinize an agreement to provide services without reasonable compensation.
Only certain fees are relevant to the determination of whether a transaction has contractual protection. Fees paid to a person who makes a statement about the potential tax consequences of the transaction are relevant. The fees must be paid by or on behalf of the taxpayer or a related party. The statement must be made or provided to the taxpayer or a related party. The statement can be oral or written.
D) Loss Transactions - Any transaction that results in a taxpayer claiming a Section 165 loss above certain threshold amounts is a loss transaction. The threshold amount is a claim of loss of at least:
· For corporations, $10 million in any single tax year or $20 million in any combination of tax years;
· For partnerships that have only corporations as partners, $10 million in any single tax year or $20 million in any combination of tax years, whether or not any losses flow through to one or more partners. If a partner is itself a partnership, any of its partners that are corporations will be treated as partners of the loss transaction partnership;
· For other partnerships, $2 million in any single tax year or $4 million in any combination of tax years, whether or not any losses flow through to one or more partners;
· For individuals, S-corporations, or trusts, $2 million in any single tax year or $4 million in any combination of tax years, whether or not any losses flow through to one or more shareholders or beneficiaries; or
· For individuals or trusts in a loss arising with respect to a section 988 transaction, $50,000 in any single tax year, whether or not the loss flows through from an S-corporation or partnership.
In determining whether the threshold amount is met for any combination of tax years, the loss in the tax year of the transaction is combined with losses in the five succeeding tax years.
E) Transactions of Interest - A transaction of interest is a transaction that is the same as or substantially similar to one of the types of transactions that the IRS has identified by notice, regulation, or other form of published guidance as a transaction of interest.
1) Contribution of Successor Member Interest: Transactions in which a taxpayer directly or indirectly holds real property, transfers the rights more than one year after acquisition to an organization described in §170(c) of the Internal Revenue Code, and claims a charitable contribution deduction under §170 that is significantly higher than the amount that the taxpayer paid to acquire the rights. Identified in Notice 2007-72.
2) Toggling Grantor Trust: Transactions that use a grantor trust, and the purported termination and subsequent re-creation of the trust’s grantor status, for the purpose of allowing the grantor to claim a tax loss greater than any actual economic loss sustained by the taxpayer to avoid inappropriately the recognition of gain.” Identified in Notice 2007-73.
4) Charitable Remainder Trusts - Transactions involving the coordinated sale or other disposition of the respective interests of the taxpayer (or other noncharitable recipient) and the charity in the trust where the taxpayer takes the position that the transaction is described in Code Section 1001(e)(3) and the taxpayer claims an increased basis in the interest in the trust together with the termination of the trust in a coordinated transaction to avoid tax on the sale of appreciated assets. Identified in Notice 2008-99.
F) Patented Transactions - Transactions where a taxpayer pays a fee to a patent holder or agent for the legal right to use a tax planning method that the taxpayer knows or has reason to know is the subject of the patent. Patented transactions also include transactions for which the patent holder or agent has the right to payment for another person's use of a tax planning method that is the subject of the patent.
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