Abusive Section 351 Transfers
(Using Contingent, Unmatured Liabilities)
IRS Notice 2001-17

 

In this transaction, promoters suggest that the taxpayer can take back a high tax basis in the stock, and then upon the sale of the stock, take a significant loss. Unmatured liabilities are utilized in this transaction because of special provisions in the Internal Revenue Code (perceived loopholes) like Section 357(c). The newly formed corporation (“NEWCO”) may be a “liability management company” and quite often, the transaction is structured with the plan that the shares in NEWCO will be sold within a relatively short period. In ISP Materials issued on April 4, 2003, the IRS made it clear that penalties will be asserted, even when advice of counsel is obtained.

If you believe that you may have engaged in a transaction that is the same or substantially similar to the transaction described above, Federal law may require you to disclose your and other parties’ participation in any such “listed transaction” on IRS Form 8886. For more information about Federal law requirements, please contact us.

This particular transaction does not appear to have been included in a recent IRS settlement initiative.  For a case instructive of how the economic substance test may be applied to the transaction, see The Black & Decker Corp. v. U.S., 2006 U.S.App. LEXIS 2563 (4th Cir. 2/2/06), rev’g and remanding, No. WDQ-02-200 (DC Md. 10/20/04)(requiring lower court to adhere to economic substance test applied by the 4th Circuit in Rice’s Toyota).