Coordinated Issue for All Industries: Distressed Asset Trust (DAT) Transaction
April 16, 2008
MEMORANDUM FOR COMMISSIONER, SMALL BUSINESS/SELF-EMPLOYED
LMSB INDUSTRY AND FIELD SPECIALISTS DIRECTORS
DIRECTOR, INTERNATIONAL COMPLIANCE, STRATEGY
FROM: Frank Y. Ng /s/ Frank Y. Ng
Commissioner, Large and Mid-Size Business Division
SUBJECT: Coordinated Issue for All Industries: Distressed Asset Trust (DAT) Transaction
Pursuant to IRM 22.214.171.124, the transaction described in Notice 2008-34 (Distressed Asset Trust Transaction) should be treated as a coordinated issue effective
February 27, 2008.
Notice 2008-34 (attached) describes a transaction in which a tax indifferent party, directly or indirectly, contributes one or more distressed assets (for example, a creditor’s interests in debt) with a high basis and low fair market value to a trust (Main Trust) and/or series of trusts and/or sub-trusts, and a U.S. taxpayer (Taxpayer) acquires an interest in the trust (and/or series of trusts and/or sub-trusts) for the purpose of shifting a built-in loss from the tax indifferent party to the Taxpayer that has not incurred the economic loss.
- The notice alerts taxpayers and their representatives that these transactions are tax avoidance transactions and identifies these transactions, and substantially similar transactions, as listed transactions for purposes of Treas. Reg. § 1.6011-4(b)(2) and IRC §§ 6111 and 6112, effective February 27, 2008.
- The notice also alerts persons involved with these transactions to certain responsibilities that may arise from their involvement with these transactions.
- The notice provides that the Service may assert one or more arguments that may include, but are not limited to the following:
(1) The Taxpayer’s transfer of cash or a note to Main-Trust (and/or series of trusts and/or sub-trusts) in exchange for certificates of beneficial interest is a transfer of the distressed assets under IRC § 1001;
(2) The Main-Trust does not meet the trust requirements of Treas. Reg. § 301.7701-4;
(3) The Main-Trust is not a taxable trust;
(4) One or more of the entities is properly classified for Federal tax purposes as a partnership subject to IRC §§ 704(c)(1)(C), 734(b) and 743;
(5) The claimed loss deduction under IRC § 165 was not incurred in a transaction undertaken for profit;
(6) The judicial doctrines, including substance over form, lack of economic substance, and step transaction, and
(7) In the case of distressed debt, the distressed debt was worthless under IRC § 166 at the time of contribution to Main-Trust (and/or any series of trust and/or sub-trusts).
If this transaction surfaces during an examination, it must be raised as an issue following the guidance position set forth in the listing notice. Examiners should contact the Technical Advisor listed below and provide the name of the taxpayer, taxable period(s) involved, type of listed transaction, and the name of the promoter, if known. LMSB examiners should include the names and phone numbers of the Team Manager and Team Coordinator. SB/SE examiners should include the name and phone number of their Group Manager. The initial contact may be via e-mail (utilizing secure messaging), fax or telephone.
In addition, examiners should consult with the Technical Advisor and local assigned DAT Counsel on the development of the issue. Examiners must secure the concurrence of the Technical Advisor if their examination deviates from any mandated specific examination techniques proposed for issue development, or their proposal for adjustment deviates from any stated legal positions. Examiners must also consult with and secure the concurrence of the Technical Advisor and Counsel before proposing any resolution other than full concession of the issue by the taxpayer. No proposals can be made without the concurrence of the Issue Champion listed below.
The Issue Champion and technical contacts for this issue are:
- Issue Champion: Larry Barnes
Director Field Operations (East)
Heavy Manufacturing & Transportation
- Technical Advisor: Patricia Ugorowski
Phone: (517) 324-7909
FAX: (517) 324-7910
- Associate Area Counsel: John Guarnieri
This memorandum is not a Coordinated Issue Paper within the meaning of IRM 126.96.36.199 and should not be cited as such.
If you have any questions, please contact me, or a member of your staff may contact Patricia Ugorowski, Partnership Technical Advisor, at (517) 324-7909.