Daily Tax Update - December 2, 2008

THE DAILY TAX UPDATE WILL BE PUBLISHED ON A PERIODIC BASIS UNTIL CONGRESS RETURNS DECEMBER 8th

IRS AGAIN REVISES INTERMEDIARY LISTED TRANSACTION NOTICE: Yesterday, the IRS issued Notice 2008-111, which clarifies when transactions will be treated as Intermediary Transaction Tax Shelters (“Intermediary Transactions”). This Notice clarifies Notice 2001-16, which originally identified the Intermediary Transaction as a listed transaction, and supersedes Notice 2008-20, which identified four components of a transaction that, if present, would cause the transaction to be treated as an Intermediary Transaction.

  • The transactions at issue generally involve the disposition of target corporation stock by the seller, coupled with the disposition of the target’s assets in a transaction in which gain is recognized but is offset or otherwise avoided.
  • Unlike Notice 2008-20, Notice 2008-111 requires that requires that the transaction be engaged in pursuant to a “Plan” pursuant to which Built-in Gain Assets are disposed of in a taxable disposition giving rise to a fair market value basis under circumstances in which the person or persons primarily liable for any federal income tax obligation with respect to the disposition of such assets will not pay that tax. The Notice explains that a transaction will only be treated as an Intermediary Transaction with respect to a person who engages in the transaction knowing that it was structured as an Intermediary Transaction.
  • Notice 2008-111 changes the four components identified in Notice 2008-20 that cause the transaction to be treated as an Intermediary Transaction are as follows:
  • A de minimis rule was added that disregards the Built-in Tax on the target’s assets if that amount is less than 5% of the value of the target stock disposed of in the Stock Disposition.
  • The Stock Disposition threshold was raised from 50% to 80%.
  • The requirement that “all or most” of the target’s Built-in Gain Assets be disposed of within a 12 month period was quantified to require at at least 65%. In addition, the intercompany transaction exception to such a disposition was broadened to include controlled group dispositions.
  • The requirement that “all or most” of the target’s Built-in Tax be offset, avoided, or not paid was quantified to require at least half.
  • The Notice is generally effective January 19, 2001, the effective date of Notice 2001-16. 
  • For additional information, contact Mark J. Silverman - msilverman@steptoe.com, Matthew D. Lerner - mlerner@steptoe.com, or Lisa M. Zarlenga - lzarlenga@steptoe.com.

INTERNAL REVENUE SERVICE - CIRCULAR 230 DISCLOSURE:
As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

STEPTOE & JOHNSON LLP - TAX PRACTICE
Steptoe & Johnson LLP has one of the largest and most diverse law firm tax practices in the country. The practice covers the entire spectrum of federal taxation, including representation of businesses before the Congress, Treasury and the national office of the IRS; transactional planning for domestic and multinational corporations; complex audit and controversy work for corporations and other business interests contesting IRS adjustments; litigation before the Tax Court, Court of Federal Claims, district courts, courts of appeals and the Supreme Court. The firm's tax practice also encompasses all aspects of employee benefits (ERISA), executive compensation, tax-exempt organizations and charitable giving. Steptoe has an extensive state and local tax practice, representing an array of business clients on complex sales and use tax, corporate income tax and property tax matters, both advising those clients and handling audits, administrative appeals, and litigation for them. Read more information on Steptoe's tax practice.