Tax Whistleblower Blog

IRS Publishes Notice on Intermediary Transaction Tax Shelters

Notice 2008-111 clarifies the IRS’s stance on a tax shelter known as Intermediary Transaction Tax Shelters (Intermediary Transaction).  This transaction is being reported here in the hopes that honorable persons who have knowledge of others involvement in such tax shelters, will report what they know under the Tax Whistleblower Reward Program.  A listed transaction is a reportable transaction which is the same as, or substantially similar to, a transaction specifically identified by IRS as a tax avoidance transaction.  Among transactions included as listed transactions are those dealing with the use of an intermediary to sell the assets of a corporation, i.e., an intermediary transaction tax shelter.  This shelter attempts to avoid the corporate income tax from a sale of assets.  Generally it involves transactions in which shareholders of a corporation dispose of their shares of stock of the corporation, one or more persons purchase the corporation’s assets in one or more taxable transactions, and all or a portion of the gain or tax that would otherwise result to the corporation from a sale of the assets is avoided.

Under Notice 2008-111, an Intermediary Transaction is defined in terms of its plan and in terms of more objective components.  A transaction is treated as an Intermediary Transaction with respect to a particular person only if that person engages in the transaction pursuant to the Plan as defined in Sections 2 & 4 of the Notice, the transaction contains the four objective components indicative of an Intermediary Transaction set forth in Section 3 of the Notice, and no safe harbor exception in Section 5 of the Notice applies to that person.  A transaction may be an Intermediary Transaction with respect to one person and not with respect to another person.

An Intermediary Transaction involves a corporation (T) that would have a Federal income tax obligation with respect to the disposition of assets the sale of which would result in taxable gain (Built-in Gain Assets) in a transaction that would afford the acquiror or acquirors (Y) a cost or fair market value basis in the assets.  An Intermediary Transaction is structured to cause the tax obligation for the taxable disposition of the Built-in Gain Assets to arise, in connection with the disposition by shareholders of T (X) of all or a controlling interest in T’s stock, under circumstances where the person or persons primarily liable for any Federal income tax obligation with respect to the disposition of the Built-in Gain Assets will not pay that tax (the Plan).