Exempt Organizations Advisory - IRS & Treasury Issue Notices Regarding "Transactions of Interest"

By: Catherine W. Wilkinson (cwilkinson@steptoe.com)
Suzanne Ross McDowell (smcdowell@steptoe.com)

On August 14, the IRS and the Treasury Department issued two notices regarding transactions of interest: Notice 2007-72, Transaction of Interest – Contribution of Successor Member Interest and Notice 2007-73, Transaction of Interest – Toggling Grantor Trust.  This new “transaction of interest” category is one of the reportable transactions subject to disclosure, according to recently released final IRS regulations.  Both types of transactions of interest have been identified by the IRS as having “potential for abuse.”

According to the IRS, transactions involving contributions of a successor member interest are utilized by persons to claim charitable contributions that may be excessive.   These transactions arise when a taxpayer acquires a successor member interest, directly or indirectly, in real property, transfers the interest to a tax-exempt organization, and claims a charitable contribution deduction that is significantly higher than the amount that the taxpayer paid for the interest.

Toggling grantor trust transactions are utilized by grantors of these trusts in an 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. These grantor trust transactions usually occur within a short period of time (typically within 30 days).