On August 14, the IRS issued IRS Notice 2007-72, which identifies as transactions of interest for purposes of Treas. Reg. § 1.6011-4(b)(6) and IRC §§ 6111 and 6112 transactions that involve contributions of a successor member interest in an LLC used by taxpayers to claim charitable contributions that may be excessive.
"Transactions of interest" is a new category of reportable transactions created under recent final regulations (T.D. 9350) that is designed to provide the agency with flexibility in identifying transactions that have the potential for tax avoidance or evasion.
The text of IRS Notice 2007-72 follows.
Part III -- Administrative, Procedural, and Miscellaneous
The Internal Revenue Service and the Treasury Department are aware of a type of transaction, described below, in which a taxpayer directly or indirectly acquires certain rights in real property or in an entity that directly or indirectly holds real property, transfers the rights more than one year after the acquisition to an organization described in section 170(c) of the Internal Revenue Code, and claims a charitable contribution deduction under section 170 that is signifi-cantly higher than the amount that the taxpayer paid to acquire the rights. The IRS and the Treasury Department believe this transaction has the potential for tax avoidance or evasion, but lack sufficient information to determine whether the transaction should be identified specifically as a tax avoidance transaction. This notice identifies this transaction, and substantially similar transactions, as transactions of interest for purposes of section 1.6011-4(b)(6) of the Income Tax Regulations and sections 6111 and 6112. This notice also alerts persons involved with these transactions to certain re-sponsibilities that may arise from their involvement with these transactions.
FACTS
In a typical transaction, Advisor owns all of the membership interests in a limited liability company (LLC) that di-rectly or indirectly owns real property (other than a personal residence as defined in section 1.170A-7(b)(3)) that may be subject to a long-term lease. Advisor and Taxpayer enter into an agreement under the terms of which Advisor continues to own the membership interests in LLC for a term of years (the Initial Member Interest), and Taxpayer purchases the successor member interest in LLC (the Successor Member Interest), which entitles Taxpayer to own all of the member-ship interests in LLC upon the expiration of the term of years. In some variations of this transaction, Taxpayer may hold the Successor Member Interest through another entity, such as a single member limited liability company. Further, the agreement may refer to the Successor Member Interest as a remainder interest.
After holding the Successor Member Interest for more than one year (in order to treat the interest as long-term capi-tal gain property), Taxpayer transfers the Successor Member Interest to an organization described in section 170(c) (Charity).
Taxpayer claims the value of the Successor Member Interest to be an amount that is significantly higher than Tax-payer's purchase price (for example, an amount that is a multiple of Taxpayer's purchase price and exceeds normal ap-preciation). Taxpayer claims a charitable contribution deduction under section 170 based on this higher amount. Tax-payer reaches this value by taking into account an appraisal obtained by or on behalf of Advisor or Taxpayer of the fee interest in the underlying real property and the section 7520 valuation tables.
The Internal Revenue Service and the Treasury Department are concerned about apparent irregularities in this transaction. Specifically, the IRS and the Treasury Department are concerned with the large discrepancy between (1) the amount Taxpayer paid for the Successor Member Interest, and (2) the amount claimed by Taxpayer as a charitable con-tribution. The IRS and the Treasury Department also have the following additional concerns, which may be present in some variations of this transaction: (1) any mischaracterization of the ownership interests in LLC; (2) a Charity's agreement not to transfer the Successor Member Interest for a period of time (which may coincide with the expiration of the applicable period in section 6050L(a)(1)); and (3) any sale by Charity of the Successor Member Interest to a party selected by or related to Advisor or Taxpayer.
TRANSACTION OF INTEREST
Effective Date
Transactions that are the same as, or substantially similar to, the transactions described in this notice are identified as transactions of interest for purposes of section 1.6011-4(b)(6) and sections 6111 and 6112 effective August 14, 2007, the date this notice was released to the public. Persons entering into these transactions on or after November 2, 2006, must disclose the transaction as described in section 1.6011-4. Material advisors who make a tax statement on or after November 2, 2006, with respect to transactions entered into on or after November 2, 2006, have disclosure and list maintenance obligations under sections 6111 and 6112. See section 1.6011-4(h) and sections 301.6111-3(i) and 301.6112-1(g) of the Procedure and Administration Regulations.
Independent of their classification as transactions of interest, transactions that are the same as, or substantially simi-lar to, the transaction described in this notice already may be subject to the requirements of section 6011, 6111, or 6112, or the regulations thereunder. When the IRS and the Treasury Department have gathered enough information to make an informed decision as to whether this transaction is a tax avoidance type of transaction, the IRS and the Treasury De-partment may take one or more actions, including removing the transaction from the transactions of interest category in published guidance, designating the transaction as a listed transaction, or providing a new category of reportable trans-action.
Participation
Under section 1.6011-4(c)(3)(i)(E), Advisor, LLC or any entity used in place of LLC, Taxpayer, and any members of Taxpayer if Taxpayer is a flow-through entity, are participants in this transaction for each year in which their respec-tive tax returns reflect tax consequences or the tax strategy described in this notice.
Charity is not a participant if it received the Successor Member Interest described in this notice on or prior to August 14, 2007. For Successor Member Interests received after August 14, 2007, under section 1.6011-4(c)(3)(i)(E) Charity is a participant in this transaction for the first year for which Charity's tax return reflects the Successor Member Interest described in this notice. In general, Charity is required to report the receipt of the Successor Member Interest described in this notice on its return for the year in which it is received. See section 6033. Therefore, in general, Charity will be a participant for the year in which Charity received the Successor Member Interest.
Time for Disclosure
See section 1.6011-4(e) and section 301.6111-3(e).
Material Advisor Threshold Amount
The threshold amounts are the same as those for listed transactions. See section 301.6111-3(b)(3)(i)(B).
Penalties
Persons required to disclose these transactions under section 1.6011-4 who fail to do so may be subject to the pen-alty under section 6707A. Persons required to disclose these transactions under section 6111 who fail to do so may be subject to the penalty under section 6707(a). Persons required to maintain lists of advisees under section 6112 who fail to do so (or who fail to provide such lists when requested by the Service) may be subject to the penalty under section 6708(a). In addition, the Service may impose other penalties on persons involved in these transactions or substantially similar transactions, including the accuracy-related penalty under section 6662 or 6662A.
DRAFTING INFORMATION
The principal authors of this notice are Patricia M. Zweibel of the Office of Associate Chief Counsel (Income Tax and Accounting) and Leslie H. Finlow of the Office of Associate Chief Counsel (Passthroughs and Special Industries). For further information concerning this notice generally, contact Ms. Zweibel at (202) 622-7900 (not a toll-free call). For further information concerning the sections of this notice under the heading TRANSACTIONS OF INTEREST, contact Ms. Finlow at (202) 622-300 (not a toll-free call).
Posted by Lewis J. Saret, General Editor, Wealth Strategies Journal.
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