The Internal Revenue Service and the Treasury Department recently released final regulations on the disclosure of reportable transactions (i.e., potentially tax avoidance transactions), and included the new “transaction of interest” category as one of the reportable transactions subject to disclosure.
In a quick follow-up, the Service named its first two “transactions of interest”: (1) “toggling” grantor trusts; and (2) transactions involving contributions of a successor member interest in a limited liability company (LLC).
Grantors use “toggling” grantor trust transactions to 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 the trust. Such transactions usually occur within a short period of time (e.g., within 30 days).
Taxpayers use transactions involving contributions of a successor member interest to claim charitable contributions that may be excessive. These transactions typically arise when a taxpayer: (1) Acquires a successor member interest (directly or indirectly) in real property; (2) transfers the interest to a tax-exempt organization; and (3) claims a charitable contribution deduction that is significantly higher than the amount that the taxpayer paid for the interest.
By designating transactions as “transactions of interest,” the Service and the Treasury Department are indicating they believe the identified transactions have the potential for abuse, but they lack sufficient information to determine whether the transactions should be specifically categorized as tax avoidance transactions.
The Service and the Treasury Department assert they may take one or more future actions with respect to transactions of interest, which might include designating such transactions as listed transactions or providing a new category of reportable transactions.
Persons entering into the above transactions on or after Nov. 2, 2006 must disclose the transactions as outlined in Treasury Regulation ?1.6011-4 (which, in general, means attaching Form 8886 to the appropriate year’s tax return and filing a copy of the disclosure statement with the Office of Tax Shelter Analysis (OTSA) at the same time that any disclosure statement is first filed).
Sonya E. King, J.D., LL.M., is an associate editor of Tax Facts, a publication of the National Underwriter Company. She can be reached via email at .