Tax Shelters

IRS Market Segment Specialization Program Audit Technique Guide: Examination Guide --Abusive Tax Shelters and Transactions

June 10, 2005

IRS Audit Technique Guide: Examination guide: Abusive tax shelters and transactions: Market Segment Specialization Program.

Examination Guide --Abusive Tax Shelters and Transactions

March 2003

This guide was developed to support IRS field personnel in the identification and the consistent development of abusive tax shelter and transaction issues. The guuide covers transactions engaged in by all types of taxpayers, including "listed transactions" (known abusive), identified transactions that have not been listed, and emerging transactions.

Click on the hyperlinks indicated to access that section of the guide. All sections are in pdf format.

Table of Contents

(Note: Throughout the guide you will notice addresses, references and hyperlinks to the IRS Intranet site. These web locations are accessible only to IRS personnel. Additionally, no Internet web references indicated in this document are hyperlinked.)

Part I-Introduction

A. Purpose of Guide

B. Abusive Tax Shelter History

C. Characteristics of Abusive Tax Shelters

D. Known Abusive Tax Shelter Arrangements

1. Introduction to Listed Transactions

2. Listed Transactions

(Note: Transactions listed after publication of this document will be listed on the Abusive Tax Shelter and Transactions page of the irs.gov. web site.

3. Abusive Transactions Not Listed

Part II-Judicial Doctrines Used to Combat Abusive Tax Shelters

A. Introduction

B. Judicial Doctrines

C. Case Analysis

1. Gregory v. Helvering

2. ACM

3. SABA

4. Winn-Dixie

5. C.M. Holdings, Inc.

6. American Electric Power, Inc

7. Rice's Toyota World

8. UPS

Part III -Sources for Identification of Tax Shelters

A. OTSA Information Disclosure Statements

1. Tax Shelter Registrations

2. Tax Shelter Survey

3. Tax Shelter Hotline

4. Conclusion

B. Technical Advisors

C. Tax Return Information

1. Schedule M Analysis

2. Flow-through Entities

3. Return Line Items and Specific Tax Return Lines

D. Other Information Sources

1. Financial Statements

2. Board of Directors

3. SEC Reports

4. News and Magazine Articles

5. Web Sites

6. Comparison of Company Organizational Charts

7. Taxpayer Profile

E. Additional Tools

1. Mandatory IDR 's for Listed Transactions

2. Corporate Tax Shelter Check Sheet

Part IV-Case Development

1. Reserved

2. Business Purpose/Economic Substance

3. Transaction Costs

4. Exit Strategy

5. Accuracy Related and Fraud Penalties

A. Information Gathering

1. Formal Document Request

2. Summons

3. Attorney Client Privilege

B. Assistance

1. Field Specialists Assistance

2. Counsel

3. Use of Outside Experts

4. Reserved

5. Time Reporting

C. Appeals

1. Appeals Coordinated Issue Program ( ACI )

2. Fast Track Dispute Resolution Program

Part I - Purpose of Guide

I.A. Purpose

Purpose of Guide

This audit technique guide ( ATG ) was developed to support the field in the identification and the consistent development of abusive tax shelter issues. The ATG covers tax shelter transactions engaged in by all classes of taxpayers, including "listed transactions" (known abusive), identified transactions that have not been listed, and emerging transactions. The ATG will act as a central depository for Service-wide knowledge on examination of abusive tax shelters. The ATG will provide field personnel with one source to obtain the most current and pertinent information. The use of the ATG by field personnel will provide consistent treatment of similarly situated taxpayers.

In addition, development and use of the ATG will also reinforce the Service's commitment to dealing with abusive tax shelters.

This guide was created by various individuals that contributed information from their experience in dealing with tax shelters. The guide also includes information from existing position papers, technique guides, and CPE materials that deal with specific listed transactions and identified transactions that have not been listed. The ATG is not intended to replace any of these materials.

1.B. Abusive Tax Shelter History

The Legislative History of Abusive Tax Shelters

There have been extensive efforts in the attempt to curb Abusive Tax Shelters. Some of the historical highlights of these efforts follow.

 In the 1950's through the early 1980's the courts dealt with the tax shelters, disallowing tax benefits and imposing penalties, but it was not completely effective - so a legislative solution was sought.

Congress' first substantive response was the Tax Reform Act of 1976, which enacted the "at-risk" rules limiting individuals from claiming losses for certain investments for which they had limited economic risk.

In the Revenue Act of 1978, the at-risk rules were extended to a broader array of activities

The Economic Recovery Tax Act of 1981 extended the at-risk rules still further.

Congress then passed the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA). This Act primarily contained procedural and penalty type changes.

Congress then passed the Deficit Reduction Act of 1984 which contained numerous provisions aimed at tax shelters.

--For the first time, it became necessary to register tax shelters with the IRS , which was designed to help the IRS locate and evaluate tax shelters, IRC §6111.

--Organizers and sellers of "potentially abusive tax shelters" also were required to maintain a list of investors in registered shelters, IRC § 6112

--Certain penalties were significantly strengthened, IRC §§ 6700, 6701, & 7408

Congress passed the Tax Reform Act of 1986.

--This law enacted the "passive loss" rules which prevent an individual (but not a corporation) from claiming a loss from an activity, unless the individual materially participated in the activity.

--The Tax Reform Act of 1986 greatly reduced tax shelters for individuals.

--Because of these changes in the law, the focus of tax shelter activity moved to the corporate arena, where the passive loss rules do not apply and the tax law is more complex.

Uruguay Round Agreements Act of 1994

--The ability of corporations to avoid the substantial understatement penalty for tax shelter items based on substantial authority and reasonable belief under IRC § 6662 was eliminated. Instead, corporations could avoid the penalty for tax shelter items only if they established reasonable cause under IRC § 6664(c).

Abusive Tax Shelter History in Recent Years

In 1997, Congress added IRC § 6111 to require the registration of confidential corporate tax shelters (IRC § 6111(d)).

In 1998, as part of the IRS Restructuring and Reform Act, Congress instructed the Joint Committee on Taxation (JCT) and Treasury to conduct studies of the present-law and interest provisions and make legislative or administrative recommendations. These studies, designed in part to propose methods to curb the activities of corporate tax shelters, included the JCT Penalty Study, JCX-84-99 (July, 1999), and the Treasury Department's studies included in the Treasury White Paper (July, 1999) and Penalty Study (October, 1999).

In addition, the IRS

(1) took administrative action designed to "shut down" certain identified tax shelters in which both corporations and individual taxpayers had invested; and

(2) established the Office of Tax Shelter Analysis (OTSA) to serve as the focal point in the war on tax shelters.

The Treasury Department also proposed regulatory changes to the standards of practice for tax practitioners that would impact the way they are able to advise tax shelter investors, (i.e. Circular 230).

Curbing Abusive Tax Shelters

The following were set in place in an effort to curb abusive tax shelters:

 Regulations requiring that corporate taxpayers disclose on their tax returns investments in certain "reportable transactions" under IRC § 6011-4;

 Notice 2000-15, 2000-12 listing ten known abusive transactions, identified as "listed transactions".

 Rev. Rul. 2000-12, 2000-11 involving the IRS ' attempt to shut down debt straddle tax shelters; and

 Announcement 2000-12, which summarizes the new rules and announces the creation of OTSA to serve as the IRS ' focal point to gather and analyze information regarding the new registration, list maintenance and return reporting requirements for tax shelters, and to coordinate responses to the abusive tax shelter problem.

Chronology of Events in 2000

The following sections reflect the major activities in the corporate tax shelter area in 2000.

February 28, 2000

On this date, the IRS issued the following items of guidance in its efforts to regulate and curtail the use of abusive tax shelters:

 Temporary and proposed regulations requiring the registration of confidential corporate tax shelters under IRC § 6111 (d)

 Temporary and proposed regulations requiring the maintenance of lists of investors in investments in certain corporate tax shelters under IRC § 6112

 Temporary and proposed regulations requiring corporate taxpayers to disclose on their tax returns investments in certain "reportable transactions" under Treas. Reg. 1.6011-4T

 Notices 2000-15 which identifies ten different "listed transactions" for purposes of compliance with the above three sets of temporary and proposed regulations;

 Rev. Rul. 2000-12 involving the IRS ' attempt to shut down debt straddle tax shelters; and

 Announcement 2000-12, which provides a general description of the new rules and announces the creation of OTSA to serve as the focal point of the IRS ' efforts to combat abusive tax shelters.

May 11, 2000

The IRS issued a Notice of Proposed Rulemaking (NPRM) to amend Circular 230, which governs the standards of practice for all practitioners before the IRS (attorneys, accountants, and enrolled agents). One of the purposes behind this NPRM was to warn the law and accounting firms that put together tax shelter transactions, as well as the practitioners and chief financial officers who used them, that their professional reputations and fortunes might suffer if the rules were not followed. In the NPRM, which the IRS also published in the form of Announcement 2000-51, the IRS requested public comments on its intent to revise these standards, with particular focus on the proposals to amend the standards under which practitioners operated when preparing and issuing opinions on tax shelters.

May 24, 2000

The Senate Finance Committee released a bipartisan preliminary Staff Discussion Draft of legislative proposals designed to alter the cost-benefit analysis of corporations and other participants entering into corporate tax shelter transactions. This Discussion Draft also included proposals to amend the Circular 230 requirements concerning the provision of opinions on tax shelters. The proposals were incorporated into the Taxpayer Bill of Rights 2000 legislation, which was not enacted in 2000. However, since the general feeling in Congress is that there needs to be some statutory overhaul to accompany the executive and judicial branches' efforts in this area, these proposals still remain a first-order-of-business for Congress.

May 30, 2000

The IRS announced that the Office of Tax Shelter Analysis was up and running and ready to respond to questions, as well as to accept tips, "relating to potentially improper tax shelter activity by corporate and noncorporate taxpayers."

June 20, 2000

A hearing was held to air comments on the proposed and temporary regulations. Comments were received from a number of organizations, most notably the American Institute of Certified Public Accountants, the Tax Executives Institute, and the Chicago Bar Association, all of whom provided written comments and testified at the hearing. The common thread in all the comments was that the regulations had been drafted in a manner that was overly broad, and that they might lead to the targeting of individuals, businesses, and transactions that were merely involved in legitimate, everyday business transactions, and in permitted tax planning.

August , 2000

Notice 2000-44 was released which identified the "Son of Boss" transaction as a listed transaction.

October-November 2000

Another series of IRS rulings and Treasury warnings began. Included in this series of activities was:

 Notice 2000-60 was released attacking a series of transfers between a parent corporation and its subsidiary designed to create artificial losses for the parent by utilizing employee stock compensation arrangements. The IRS recharacterized the basis transfer from the subsidiary to the parent corporation as a dividend to the parent.

 Notice 2000-61 (along with a Treasury Department Press Release) disallowing an arrangement in which corporations and individuals had been marketed trusts in Guam on the premise that the trusts would be treated as individuals for tax purposes, and that income taxes would only be required to be paid in Guam (and not in the United States).

LMSB the IRS Administrative Action 2001

On September 6, 2001 the Large & Midsize Business Division (LMSB) of the IRS established a Tax Shelter Committee to serve as a sub-committee of its Compliance Strategy Council. The Tax Shelter Committee provides leadership in combating abusive tax shelters and is responsible for making key decisions in implementing LMSB's strategic initiative #5 dealing with tax shelters.

On December 10, 2001 LMSB established an IRC § 6700 Committee to serve as a sub-committee of the Tax Shelter Committee. This committee is charged with responsibility to approve all LMSB tax shelter promoter activities, including promoter contacts, investigations and penalties.

June 14, 2002

Temporary and Proposed regs. were issued modifying the rules on reporting and registering tax shelters under IRC §§6011, 6111, and 6112. The new regs. extend the disclosure requirements for listed transactions under §1.6011-4T to individuals, trusts, S corporations, and partnerships. The regs. also clarified the definition of "substantially similar" as taxpayers were construing the term in very narrow terms to avoid disclosure. The new regs. eliminated the "projected tax effect test", thereby requiring all corporations, individuals, trusts, partnerships and S corporations to disclose if they participate in a listed transaction.

Recent Information

A good way to keep up with recent tax shelter information is to research Tax Notes Today articles for recent "abusive tax shelter" articles. It is also important to check the "What's New" section of the OTSA web site.

1.C Characteristics of Corporate Tax Shelters

Introduction

Corporate tax shelters take many different forms and utilize many different structures. For this reason, a single comprehensive definition of corporate tax shelters is difficult to formulate. However, corporate tax shelters have the following characteristics:

 lack of meaningful economic risk of loss or potential for gain

 inconsistent financial and accounting treatment

 presence of tax-indifferent parties

 complexity

 unnecessary steps or novel investments

 promotion or marketing

 confidentiality

 high transaction costs

 risk reduction arrangements.

Lack of Meaningful Economic Risk or Potential for Gain

Professor Michael Graetz defined a tax shelter as "a deal done by very smart people that, absent tax considerations, would be very stupid." This definition highlights an important characteristic common to most corporate tax shelters, the lack of significant economic risk of loss or potential for gain to the taxpayer(s) seeking the tax benefit.

Often in corporate tax shelters, a corporate participant purportedly makes a significant investment. In most cases, however, the risk of loss or gain is illusory. Through hedges, circular cash flows, defeasances, and similar devices, the participant in a shelter is insulated from significant or all economic risk. Transactions with little or no economic risk typically generate little or no pre- tax profit. In light of the expectation of little or no pre-tax profit, no one rationally would participate in such transactions without significant tax benefits. After factoring in expected tax benefits, however, a negligible pre-tax profit is transformed into a significant after-tax return.

Corporate tax shelters can arise even in transactions that produce more than a negligible amount of pre-tax economic profit. For example, a taxpayer may attempt to disguise the tax avoidance nature of the transaction by placing high-grade, income-producing financial instruments in a corporate tax shelter.

Inconsistent Financial and Accounting Treatment

In recent corporate tax shelters involving public companies, the financial accounting treatment of a shelter item has been inconsistent with its federal income tax treatment.

A significant segment of corporate America has in recent years appeared to place a larger premium on tax savings, particularly tax savings in transactions where the tax treatment varies from the financial accounting treatment.

There is also a tendency for corporations to view their tax liability as just another cost of doing business that can be reduced through aggressive management. Shareholders expect corporate managers to keep the corporation's effective tax rate (i.e., the ratio of corporate tax liability to book income) low and in line with competitors.

A transaction that reduces both a corporation's taxable and book income lowers the corporation's tax liability, but does not affect its effective tax rate. More importantly, where there is a book loss the corporation could fail to meet the earnings expectations of investors. Executives will generally pass on an opportunity to reduce taxes if it also entails a reduction in reported earnings.

Although some disclosure of book-tax disparities is required for both federal income tax and GAAP purposes, the amount of detail required is limited and provides little evidence concerning the existence of corporate tax shelters. Financial statement disclosure is limited to items of materiality. Tax return disclosure is not limited to corporate tax shelters, but rather applies to all book-tax differences. Therefore, book-tax differences attributable to shelters often remain hidden and corporations have no incentive to voluntarily disclose the existence and nature of their shelters.

Presence of Tax-indifferent Parties

A significant characteristic found in many corporate tax shelters is the participation of tax-indifferent parties. Recent examples of shelter transactions that relied on the use of tax-indifferent parties include:

 fast-pay preferred stock transactions,

 LILO transactions, and

 contingent installment sales transactions.

Tax-indifferent parties are accommodation parties that are paid a fee or an above-market return on investment for absorbing taxable income or otherwise "leasing" their tax-advantaged status. Tax-indifferent parties may include:

 foreign persons,

 Native American tribal organizations,

 tax-exempt organizations (e.g., charitable organizations and pension plans), and

 domestic corporations with net operating losses or credit carry-forwards that they do not expect to use to offset their own income.

When taxpayers use different methods of accounting, the difference may be arbitraged to create a tax shelter. For example, taxpayers subject to mark-tomarket accounting have acted as accommodation parties in tax shelters because they are indifferent to the realization principle and can absorb the gains of taxpayers.

Complexity

Corporate tax shelters typically involve complex transactions and structures. This complexity arises from a number of sources. Corporate tax shelters often require the completion of certain formalistic steps to gain the desired tax result. The use of certain entities or structures may be necessary to achieve the desired tax result or to facilitate the use of tax-indifferent parties. Other steps may be added to establish or buttress a claim of business purpose or economic substance. Also, corporate tax shelters often use innovative financial instruments to facilitate the exploitation of tax law inconsistencies.

Financial innovation is growing rapidly and the tax law has not kept pace. Many of the rules governing financial instruments were developed in the early part of the 20^th century to deal with financial instruments common at the time, such as plain vanilla stock, debt, and short-term options. Modern-day sophisticated financial products do not fit neatly into the existing regimes. Consequently, taxpayers exploit the uncertainty regarding the taxation of these instruments, by creating the economic equivalent of a traditional investment without the unfavorable tax consequences. Once inconsistencies are identified, they frequently are manipulated.

The use of a complex structure may also be used as a device to cloak the tax shelter transaction from detection.

Unnecessary Steps or Novel Investments

Corporate tax shelters may involve:

 unnecessary steps implemented to achieve the corporation's purported business purpose, or

 property or transactions that the corporate participant either has little or no experience with, or

 transactions that lack a bona fide business purpose.

A taxpayer generally must demonstrate a business purpose for entering into a transaction (or series of transactions) in order to sustain the claimed tax results. In many cases, however, certain steps are undertaken solely to obtain the desired tax benefits and are not necessary for the taxpayer to achieve the purported business purpose.

Some corporate tax shelters may involve new activities that the corporation had not in the past been a party to or used, such as:

 leasing transactions,

 novel financing arrangements,

 tax-indifferent party transactions, or

 REIT transactions.

On the other hand, some corporate tax shelters involve activities that fall within the corporation's normal business operations. Many of the participants are publicly traded conglomerates involved in a host of diverse activities, including financing transactions. Many corporate tax shelters involve financing transactions. Tax-indifferent parties, particularly pension plans and foreign persons are a major source of corporate finance. Some corporations that are active in the trade or business of financial intermediation (e.g., banks or insurance companies) also participate in tax shelters involving financing transactions. The fact a transaction is not "novel" for the taxpayer is not necessarily determinative of whether it is a corporate tax shelter.

Promotion or Marketing

Tax advisors are no longer just devising specific strategies to deal with their client's tax needs as they arise. Today's tax shelter promoters capitalize on complexities in the tax law (statute, regulations, and rulings) to devise schemes that can be pitched to corporate prospects. Tax shelter promoters sell their schemes methodically and aggressively as "products," using a powerful distribution network.

Many tax shelters are designed today so that they can be used by different investors, rather than addressing the tax planning of a single taxpayer. This allows the shelter "product" to be marketed and sold to many different clients, thereby maximizing the promoter's return from its shelter idea.

There are various ways in which promoters become aware of corporations who have a need for shelter transactions. For example, promoters may work with corporations in other capacities, such as underwriters, legal advisors, consultants, or auditors and learn of events that give rise to tax planning. Using this knowledge, the advisor can communicate the needs of their clients to other members of their firm who have expertise in designing corporate tax shelters. In addition, some corporations that generate significant profits are known to have an interest in transactions that can reduce the tax liability on such profits. Frequently, promoters approach people that they know have realized large gains.

New technologies have greatly increased the distribution and marketing of shelters. In the past, it may have taken weeks or months to distribute a corporate tax shelter nationwide, now it takes a matter of minutes.

Confidentiality

Like marketing, maintaining the confidentiality of a tax shelter transaction helps to maximize the promoter's return from its shelter idea.

A promoter has no generally enforceable intellectual property rights in the tax shelter idea. The idea can be expropriated, not only by the company shown the shelter, but also by any other prospective purchaser that finds out about the shelter. Promoters attempt to limit expropriation by requiring confidentiality agreements from prospective purchasers and their advisors.

Before pitching tax shelter ideas to prospective participants, promoters may require non-disclosure agreements that provide for million dollar payments for any disclosure of their "proprietary" advice. These arrangements limit but do not preclude the expropriation of the idea by other promoters.

Confidentiality agreements serve another essential purpose for promoters. Confidentiality agreements protect the efficacy of the idea by preventing or delaying its discovery by the Treasury Department and the IRS . Congress was concerned that confidentiality agreements would hinder tax administration. Therefore, in 1997 Congress expanded the tax shelter registration requirements to cover "confidential" corporate tax shelters. One of three conditions for registration is that some one other than the taxpayer has a proprietary interest in the arrangement or can prohibit the taxpayer from disclosing the arrangement.

It is unlikely that limiting confidentiality agreements alone will greatly impact the corporate tax shelter market. In lieu of formal confidentiality agreements, many promoters already rely on tacit understandings or other arrangements requiring a prospective participant to use the law firm selected by the promoter to protect their proprietary interest and reduce the risk of detection.

High Transaction Costs

Corporate tax shelters carry unusually high transaction costs that are borne in whole or substantial part by the corporate beneficiary. For example, the reported transaction costs in ASA ($24,783,800) were approximately 26.5 percent of the purported tax savings (approximately $93,500,000). Transaction costs include:

 fees paid to the promoter,

 fees paid to the tax-indifferent party,

 fees for legal services (e.g., tax opinions and drafts of organizational documents and financial instruments,), and

 expenses incurred in connection with the shelter activity.

Risk Reduction Arrangements

Corporate tax shelters often involve contingent or refundable fees in order to reduce the cost and risk of the shelter to the participants. In a contingent fee arrangement, the promoter receive a portion (often as much as one-half) of any tax savings realized by the corporate participant. If no tax savings are realized, the promoter gets nothing. Although tax return preparers are precluded from charging contingent fees in connection with the preparation of a tax return, there is generally no prohibition on charging contingent fees in connection with providing tax-planning advice. Similarly, under a refundable fee arrangement, a promoter would agree to refund its fee to a client whose tax benefits are not realized because of IRS challenge or a change in the law.

Corporate tax shelters may also involve insurance or rescission arrangements. Like contingent or refundable fees, insurance or rescission arrangements reduce the cost and risk of the shelter to the participants. These arrangements provide the corporate participant with some measure of protection in the event the expected tax benefits do not materialize. In a claw back or rescission arrangement, the parties to the transaction agree to unwind the transaction if the purported tax benefits are not realized. Often there is a so-called "trigger" event, such as a change in law or an IRS audit that is determined by an independent third party to constitute a significant risk to the tax benefits of the transaction. If the trigger event occurs, the transaction is unwound. The unwinding may take the form of the liquidation of any entity formed for purposes of the tax shelter, the redemption of any securities issued pursuant to the shelter, or the termination of any contractual agreements. By utilizing a recession arrangement or claw back, the corporate participant is not burdened with any complex or costly financial or legal structures that were part of the design of the suddenly defunct tax shelter. An example of an unwound transaction is the fast-pay preferred stock transactions that provided for the tax-free unwind of the REIT structure through liquidation of the REIT.

1.D.1. Introduction to Listed Transactions

Introduction

A "listed transaction" is a transaction that is the same as or substantially similar to one of the types of transactions that the Internal Revenue Service has determined to be a tax avoidance transaction and identified by notice, regulation, or other form of published guidance as a listed transaction for purposes of IRC §6011. (Treas. Reg. 1.6011-4T(b)(2). )) See also §301.6111-2T(b)(2) of the Procedure and Administration Regulations.

Announcement 2000-12

Announcement 2000-12 publicized the three sets of temporary and proposed tax shelter regulations and it also announced the creation of the Office of Tax Shelter Analysis. These tax shelter regulations require promoters to register confidential corporate tax shelters (Treas. Reg. § 301.6111-2T) and maintain lists of investors (Treas. Reg. §301.6112-1T). In addition, the regulations require corporate taxpayers to disclose reportable transactions including listed transactions (Treas. Reg. §1.6011-4T). (NOTE: These temporary regulations were revised in August 2001 and again in June 2002.) These temporanry and proposed regulations were issued in conjunction with Notice 2000-15 which identified the first group of "listed transactions".

(See Announcement 2000-12)

http://Announcement 2000-12.irs.gov/hq/pftg/otsa/downloads/publications/Announcement%202000-12.pdf

Notice 2000-15 and Notice 2001-51

Notice 2000-15 identified 10 transactions as listed transactions. Notice 2001-51 provided a compilation of all listed transactions as of August 2001. This Notice supplemented and superceded Notice 2000-15.

For additional details, go to Notice 2000-15 and Notice 2001-51 http://lmsb.irs.gov/hq/pftg/otsa/downloads/publications/Notice%202000-15.pdf

http://hqnotes1.hq.irs.gov/tnt3.nsf/8525609e004b88e386255f8900485f65/6ed c439d3685093185256a9d000a9998?OpenDocument

Known Abusive Tax Shelter Arrangements

I.D.2. Listed Transactions

Notice 2001-51

Notice 2000-15, issued February 2000, published the first list of transactions that were determined to be tax avoidance transactions. Notice 2001-51 was issued in August, 2001. This Notice restated the list of transactions identified in Notice 2000-15 as "listed transactions" effective February 28, 2000, and updated the list by adding transactions identified in notices released subsequent to February 28, 2000. Notice 2001-51 follows:

"On February 28, 2000, the Internal Revenue Service issued Notice 2000-15, 2000-12 I.R.B. 826, identifying certain transactions as "listed transactions" for purposes of § 1.6011-4T(b)(2) of the temporary Income Tax Regulations and § 301.6111-2T(b)(2) of the temporary Procedure and Administration Regulations. This notice restates the list of transactions identified in Notice 2000-15 as "listed transactions" effective February 28, 2000, and updates the list by adding transactions identified in notices released subsequent to February 28, 2000. Transactions that are the same as or substantially similar to transactions de-scribed in the list below have been deter-mined by the Service to be tax avoidance transactions and are identified as "listed transactions" for purposes of § .6011-4T(b)(2) and § 301.6111-2T(b)(2). As a result, corporate taxpayers may need to disclose their participation in these listed transactions as prescribed in § 1.6011-4T, and promoters (or other persons responsible for registering tax shelter transactions) may need to register these transactions under § 301.6111-2T. In addition, promoters must maintain lists of investors and other information with respect to these listed transactions pursuant to § 301.6112-1T.

(1) Rev. Rul. 90-105, 1990-2 C.B. 69 (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 as "listed transactions" on February 28, 2000));

(2) Notice 95-34, 1995-1 C.B. 309 (certain trust arrangements purported to qualify as multiple employer welfare benefit funds exempt from the limits of § 419 and 419A of the Internal Revenue Code (identified as "listed transactions" on February 28, 2000));

(3) Notice 95-53, 1995-2 C.B. 334 (certain multiple-party transactions intended to allow one party to realize rental or other income from property or service contracts and to allow another party to re-port deductions related to that income (often referred to as "lease strips") (identified as "listed transactions" on February 28, 2000));

(4) Part II of Notice 98-5, 1998-1 C.B. 334 (transactions in which the reasonably expected economic profit is insubstantial in comparison to the value of the expected foreign tax credits (identified as "listed transactions" on February 28, 2000));

(5) Transactions substantially similar to those at issue in ASA Investerings Partnership v. Commissioner, 201 F.3d 505 (D.C. Cir. 2000), and ACM Partnership v. Commissioner, 157 F.3d 231 (3d Cir. 1998) (transactions involving contingent installment sales of securities by partner-ships in order to accelerate and allocate income to a tax-indifferent partner, such as a taxexempt entity or foreign person, and to allocate later losses to another partner (identified as "listed transactions" on February 28, 2000));

(6) Treas. Reg. § 1.643(a)-8 (transactions involving distributions described in §1.643(a)-8 from charitable remainder trusts (identified as "listed transactions" on February 28, 2000));

(7) Rev. Rul. 99-14, 1999-1 C.B. 835 (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 trans-actions) (identified as "listed transactions" on February 28, 2000));

(8) Notice 99-59, 1999-2 C.B. 761 (transactions involving the distribution of encumbered property in which taxpayers claim tax losses for capital outlays that they have in fact recovered (identified as "listed transactions" on February 28, 2000));

(9) Treas. Reg. § 1.7701(l)-3, (transactions involving fast-pay arrangements as defined in § 1.7701(l)-3(b) (identified as "listed transactions" on February 28,2000));

(10) Rev. Rul. 2000-12, 2000-11 I.R.B. 744 (certain transactions involving the acquisition of two debt instruments the values of which are expected to change significantly at about the same time in opposite directions (identified as "listed transactions" on February 28, 2000));

(11) Notice 2000-44, 2000-36 I.R.B. 255 (transactions generating losses resulting from artificially inflating the basis of partnership interests (identified as "listed transactions" on August 11, 2000));

(12) Notice 2000-60, 2000-49 I.R.B. 568 (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 or sale of the subsidiary (identified as "listed transactions" on November 16, 2000));

(13) Notice 2000-61, 2000-49 I.R.B. 569 (transactions purporting to apply § 935 to Guamanian trusts (identified as "listed transactions" on November 21, 2000));

(14) Notice 2001-16, 2001-9 I.R.B. 730 (transactions involving the use of an intermediary to sell the assets of a corporation (identified as "listed transactions" on January 18, 2001));

(15) Notice 2001-17, 2001-9 I.R.B. 730 (transactions involving a loss on the sale of stock acquired in a purported § 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 in-come tax purposes (identified as "listed transactions" on January 18, 2001)); and

(16) Notice 2001-45, 2001-33 I.R.B. 129 (certain redemptions of stock in transactions not subject to U.S. tax in which the basis of the redeemed stock is purported to shift to a U.S. taxpayer (identified as "listed transactions" on July 26, 2001)).

Power Point Presentations for all of the above can be found at http://lmsb.irs.gov/hq/pqi/quality/taxshelter_ppt.htm

(1) Rev. Rul. 90-105 (Deferred Contribution Plan)

Summary of the Transaction's Tax Consequences

This is a transaction based on the use of IRC § 401(k) and (m).

Summary of Transaction:

This is a transaction in which a taxpayer claims 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

Shelter Transaction Result:

Deductions were claimed for the entire amount of elective and matching contributions to the Plan even though a portion of the deduction related to Post-Year End Contributions.

Proper Tax Treatment:

The proper tax treatment shown below is the way IRS is treating this transaction as of the date this ATG was written. There may be new FSA's, TAM 's, court cases, etc. that may change our thinking on a particular issue. Also, the facts and circumstances of your case may warrant different treatment. Therefore, we strongly recommend that you contact the Technical Advisor (TA) for this transaction before developing the issue. A listing of the names of TA's assigned to each listed transaction can be found in Part III Section B of this ATG entitled Technical Advisors.

a. If the payment of the contributions is attributable to compensation earned after the end of the taxable year, under Treas. Reg. §1.404(a)-1(b), the Post-Year End Contributions could not be deductible.

b. If the taxpayer uses the accrual method of accounting, the requirements of IRC § 461(a) also have to be met.

Rev. Rul 2002-46 (which is discussed later in this ATG ) describes a transaction substantially similar to Rev. Rul. 90-105.

Link to Rev. Rul. 90-105

http://lmsb.irs.gov/hq/pftg/otsa/downloads/Listed Transactions/Rev Rul 90-105.pdf

Notice 95-34 (VEBA)

Summary of the Transaction's Tax Consequences

This is a transaction based on an improper interpretation of IRC § 419A(f)(6) for 10-or-more employer plans.

Summary of Transaction:

In general, contributions to a welfare benefit fund are deductible when paid, but only if they qualify as ordinary and necessary business expenses of the taxpayer and only to the extent allowable under IRC §§ 491 and 419A.

IRC § 491A(f)(6) provides an exemption from IRC §§ 419 and 419A for certain "10-or-more employer plans". For a plan to qualify for this exemption, each employer can contribute no more than 10 percent of the total contributions and the plan cannot be experience rated for individual employers.

Notice 95-34 applies to a variety of 10-or-more employer plan abuses. In some transactions, promoters create trusts that enroll at least 10 employers but which formally or informally are experience rated for each participating employer. Thus, some plans maintain separate accounting of the assets attributable to the contributions by each employer. In other situations, an employer's contributions to the plan are related to the claims experience of that employer's employees.

Shelter Transaction Result:

Deductions for the payments to these funds are improper, thereby reducing the employer and employee's income because only limited amounts contributed to the proper plans are includible in the employee's income.

Proper Tax Treatment:

The proper tax treatment shown below is the way IRS is treating this transaction as of the date this ATG was written. There may be new FSA's, TAM 's, court cases, etc. which may change our thinking on a particular issue. Also, the facts and circumstances of your case may warrant different treatment. Therefore, we strongly recommend that you contact the TA for the transaction before developing the issue. A listing of the names of TA's assigned to each listed transaction can be found in Part III Section B of this ATG entitled "Technical Advisors"

The IRS will challenge the plans for one or more of the following reasons:

a. The arrangements are actually providing deferred compensation.

b. The arrangements may be, in fact, separate plans maintained for each employer or may be experience rated with respect to individual employers in form or in operation. See e.g. Booth v. Commissioner, 108 T.C. 524 (1997) (concluding the plan at issue was an aggregation of separate welfare benefit plans, each of which had an experience rating arrangement with the contributing employer)

c. The employer contributions may represent prepaid expenses that are nondeductible under other sections of the Code

d. The employer's contributions are nondeductible because they are shareholder expenses. See e.g. Neonatology Assoc. P.A. v. Commissioner, 115 T.C. 43 (20002), aff'd. 2002 U.S. App. LEXIS 15236 (3d Cir. July 11, 2002) (the amounts contributed to the plan were not ordinary and necessary business expenses and the amounts were dividends of the plan participants rather than compensation).

Link to Notice 95-34

http://www.benefitslink.com/ IRS /notice95-34.shtml

(3) Notice 95-53 (Lease Strips)

Summary of the Transaction's Tax Consequences

This is a transaction based on the use of IRC §§ 269, 351, 382, 446, 482, 701, 704, 7701 and Treas. Reg. § 1.61-8(b).

Summary of Transaction:

These transactions are designed to improperly separate income from related deductions by allocating rental or other income from property or service contracts to a tax-neutral party (someone who is not subject to federal income tax or has available net operating losses) while allocating the deductions related to this income (such as depreciation or rental expenses) to someone who expects to have income subject to federal income tax.

As described in Notice 95-53, stripping transactions are multiple-party transactions that take a variety of forms. In one typical version, the tax neutral party purports to accelerate the income from a stream of future rents by selling the right to the rents to a bank. The tax-neutral party then transfers its interest in the leased asset to someone who expects to have income subject to federal income tax in a transaction in which the transferee receives the tax neutral's basis in the asset. The transferee then claims depreciation o the asset. In another typical version, the tax-neutral party transfers a leasehold interest consisting of an obligation to pay rent and the proceeds of a rent sale. In this version, the transferee uses the proceeds from the rent sale to pay the rent obligation and reports real deductions.

Shelter Transaction Result:

a. Tax-neutral party reports the income from property or service contracts.

b. Another party claims the rental expense or depreciation deductions related to that income to shelter income that would otherwise be subject to federal income tax.

Proper Tax Treatment:

The proper tax treatment shown below is the way IRS is treating this transaction as of the date this ATG was written. There may be new FSA's, TAM ,s, court cases, etc. that may change our thinking on a particular issue. Also, the facts and circumstances of your case may warrant different treatment. Therefore, we strongly recommend that you contact the TA for this transaction before developing the issue. A listing of the names of TA's as signed to each listed transaction can be found in Part III Section B of this ATG entitled Technical Advisors.

a. Depending on the circumstances, the following Code and Regulation sections may also be applied: §269, §382, §446(b), §701, or §704,

b. authorities that recharacterize certain assignments or accelerations of future payments as financings,

c. assignment-of-income principles;

d. the business-purpose doctrine,

e. the substance-over-form doctrines (including the step transaction and sham doctrines),

Link to Notice 95-53

http://lmsb.irs.gov/hq/pftg/otsa/downloads/Listed Transactions/Notice 95-53.pdf

f. The deductions are not allowable because the stripping transaction lacked economic substance and business purpose, because they are capital expenses, or because the transaction in which the other party obtained the asset did not qualify as a transaction in which the tax neutral party's basis transferred to the other party.

g. Andantch LLC v. Commissioner, T.C. Memo 2002-97 holding that lease strips lacked economic substance and Nicole Rose Corp. v. Commissioner, 117 T.C. 328 (2001) holding that intermediary transaction in which loss was created by a lease strip that lacked economic substance.

Transactions in Part II of Notice 98-5, 1998-1 (ADR & other types)

Summary of the Transaction's Tax Consequences

These are transactions based on the use of IRC §§ 901 through 907 and 960.

Summary of Transaction:

Used to generate foreign tax credits, the first class of transaction involves a transfer of tax liability through the acquisition of an asset that generates an income stream subject to foreign gross basis taxes such as withholding taxes. These transactions may include acquisitions of income streams through securities loans and acquisitions in combination with total return swaps.

The second class of transaction consists of cross-border tax arbitrage transactions that permit effective duplication of tax benefits. Duplicate benefits result when the U.S. grants benefits and, in addition, a foreign country grants benefits to separate persons with respect to the same taxes or income.

Shelter Transaction Result:

a. In this first class of transactions, foreign tax credits are effectively purchased by U.S. taxpayer in an arrangement where the expected economic profit is insubstantial compared to the foreign tax credits generated.

b. In this second class of transactions, the U.S. taxpayer exploits these inconsistencies where the expected economic profit is insubstantial compared to the foreign tax credits generated. These duplicate benefits generally can result where the U.S. and a foreign country treat all or part of a transaction or amount differently under their respective tax systems.

Transactions in Part II of Notice 98-5, 1998-1 (ADR & other types)

Proper Tax Treatment:

The proper tax treatment shown below is the way IRS is treating this transaction as of the date this ATG was written. There may be new FSA's, TAM ,s, court cases, etc. that may change our thinking on a particular issue. Also, the facts and circumstances of your case may warrant different treatment. Therefore, we strongly recommend that you contact the TA for this transaction before developing the issue. A listing of the names of TA's assigned to each listed transaction can be found in Part III Section B of this ATG entitled Technical Advisors.

a. Foreign tax credits will be disallowed under the authority of IRC §§ 901, 901(k)(4), 904, 864(e)(7), 7701(1), and 7805(a). See:

1. Compaq Computer Corp. v. Commissioner, 277 F.3d 778 (5^th Cir. 2001) rev'g. 113 T.C. 214 (1999)

2. IES Industries v. United States, 253 F.3d 350 (8^th Cir. 2001) reversing in part and affirming in part 1999 U.S. Dist. LEXIS 22610 (N.D. Iowa 1999)

Link to Notice 98-5

http://lmsb.irs.gov/hq/pftg/otsa/downloads/Listed Transactions/Notice 98-5.pdf

(5) ASA Investerings Partnership

Summary of the Transaction's Tax Consequences