The IRS keeps a current listing of tax shelters that it has deemed to be tax avoidance transactions. Practitioners and taxpayers are not prohibited from participating in listed transactions—but civil and criminal career-ending consequences may be imposed on taxpayers, practitioners, and promoters that do not disclose their participation in a listed transaction where they are required to. Note: The IRS requires that all participation in any tax shelter that has the potential for tax evasion or avoidance, listed or unlisted, however the most draconian penalties surround non-disclosure of participation in listed transactions.
B. Is a listed transaction limited to those identified on the IRS’s website?
No. A listed transaction includes not only those transactions described on the IRS website but in addition any transaction that is deemed to be the same as or substantially similar to any of the transactions listed on their website. Moreover, reporting requirements exist for all transactions with the potential for tax evasion or avoidance.
C. What are some examples of listed transactions?
Below are a few examples from the most recent update to the IRS website of Listed Transactions. A cursory review of them shows how broad and of wide application a listed transaction can be.
Transactions include those involving:
distributions from charitable remainder trusts.
“loss importation” where foreign entities and offsetting positions with regard to foreign property or currency are utilized to imports losses but not the gains to offset U.S. taxable income.
distribution of encumbered property in which taxpayers claim tax losses for capital outlays that they have in fact recovered.
the purchase of a parent corporation’s stock by a subsidiary, a subsequent transfer of the purchased parent company stock from the subsidiary to the parent’s employees, and the eventual liquidation or sale of the subsidiary.
the acquisition of two debt instruments that have values that are expected to change significantly at about the same time in opposite directions.
distressed asset trust (DAT). A DAT is utilized to facilitate the contribution of distressed assets to a trust by a tax disinterested party. A U.S. taxpayer subsequently transfers either cash or a note to the DAT in exchange for becoming a beneficiary of the trust. The trustee of the DAT then creates a subtrust with the purchasing U.S. taxpayer as its sole beneficiary. Distressed property is the transferred to the subtrust. The U.S. taxpayer then claims direct ownership of the property under Code Sec. 678. The taxpayer then writes off the distressed assets as completely worthless under Code Sec. 166 as a bad debt, or the assets are sold and the taxpayer claims a casualty loss under Code Sec. 165.
the use of an intermediary to sell the assets of a corporation.
leasing companies that have been used to avoid or evade federal income tax and employment taxes.
a loss on the sale of stock acquired in a 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 income tax purposes.
one participant claims to realize rental or other income from property or service. contracts and another participant claims the deductions related to that income under a lease strip.
a taxpayer claims a loss upon the assignment of a contract to a charity but fails to report the recognition of gain when the taxpayer’s obligation under an offsetting transaction terminates.
a corporation claims inappropriate deductions for payments made through a partnership.
losses resulting from artificially inflating the basis of partnership interests.