IRS Issues Reporting Requirement for Transactions of Interest

Why CPAs should consider the collateral state-level impact of TOIs.

March 2008
by James Emilian and Greg Jamouneau/The Tax Adviser

Transactions of interest (TOI) are a category of reportable transactions described in the regulations under Sec. 6011 (TD 9350). A transaction of interest is defined in the preamble to the regulations as a transaction that the IRS and Treasury believe has a potential for tax avoidance or evasion, but for which there isn’t  sufficient information to determine whether the transaction is specifically a tax avoidance transaction. The TOI category was designed to help the IRS to gather information about such transactions. The Service and Treasury will alert the public to their detailed concerns about particular TOIs by issuing notices, regulations or other forms of published guidance.

On August 14, 2007, for the first time, the IRS identified two TOIs (Notices 2007-72 and 2007-73). Notice 2007-72 identifies transactions involving charitable contributions of a "successor member interest" in a limited liability company (LLC). Notice 2007-73 identifies transactions in which the grantor status of a trust is turned on and off (i.e., toggled) to avoid income tax.

The regulations pertaining to TOIs were made effective August 3, 2007 and apply to transactions entered into on or after November 2, 2006.

Notice 2007-72: Contribution of Successor Member Interest

Notice 2007-72 identifies a type of transaction involving a contribution to a tax-exempt organization of a successor member interest in an LLC, the value of which is inflated to allow the taxpayer to claim a potentially excessive charitable contribution deduction for income tax purposes.

A Notice 2007-72 TOI arises when a taxpayer engages in a transaction that has the following general fact pattern:

  • The taxpayer acquires, directly or indirectly, a successor member interest in an LLC that directly or indirectly owns real property;
  • The taxpayer transfers the successor member interest to a tax-exempt organization more than one year after the acquisition; and
  • The taxpayer claims a charitable contribution deduction that is significantly higher than the amount that the taxpayer paid to acquire the successor member interest.

In addition, some variations of this transaction may have the charity agreeing not to transfer the successor member interest for a specified period of time and/or that any sale of the successor member interest will be to a party designated by the taxpayer.

Notice 2007-73: Toggling Grantor Trust Transaction

Notice 2007-73 identifies a type of transaction involving a grantor trust status that is "toggled" to generate an ordinary loss or avoid capital gain for income tax purposes. A Notice 2007-73 TOI arises when a taxpayer engages in a transaction that has the following general fact pattern:

  • A taxpayer contributes options (which are expected to move inversely to each other) to a grantor trust;
  • The taxpayer gives a short-term income interest in the trust to another person and retains the remainder (i.e., principal) interest;
  • The taxpayer sells the remainder interest to an unrelated third-party in which there is no gain recognized (at this point the trust is no longer a grantor trust because the grantor has no interest in or power over, the trust);
  • A delayed power to substitute assets by the taxpayer in the trust instrument again triggers the grantor status of the trust;
  • The loss options in the trust are closed out; and
  • The taxpayer claims a loss on the closed-out options due to the grantor status of the trust.

A second variation of this transaction involves contributing assets that have no gain position to the trust and, once the power to substitute assets has been triggered, substituting highly appreciated assets for the assets that have no gain position. In this variation, the taxpayer avoids capital gain on the sale of the highly appreciated assets. These transactions usually occur within a short period of time (typically within 30 days).

Effective Dates

The final regulations under Sec. 6011 require that taxpayers entering into TOIs on or after November 2, 2006, must attach a disclosure statement to the tax return for each tax year in which the taxpayer participates in the TOI (Regs. Sec. 1.6011-4(a)). Disclosure on Form 8886, Reportable Transaction Disclosure Statement, must be made on any tax return reporting tax benefits from transactions that are the same or substantially similar to the transactions described in Notice 2007-72, Notice 2007-73 and any future transactions identified as TOIs (Regs. Sec. 1.6011-4(d)). A copy of the disclosure statement must be sent to the Office of Tax Shelter Analysis (OTSA) at the same time any disclosure statement is first filed by the taxpayer with its tax return (Regs. Sec. 1.6011-4(e)(1)).

A special disclosure deadline applies when a transaction is identified as a TOI after the filing of a taxpayer’s tax return (including an amended return) reflecting tax benefits of the taxpayer’s participation in the transaction, but before the end of the statute of limitation for such tax return expires. In such cases, a Form 8886 disclosure must be filed with the OTSA within 90 days after the date on which the transaction became a TOI (Regs. Sec. 1.6011-4(e)(2)).

Material Adviser Obligations

An adviser who makes a tax statement about an identified TOI entered into on or after the November 2, 2006, effective date and who directly or indirectly derives gross income from that TOI in excess of thresholds defined in Regs. Sec. 301.6111-3(b)(3), has disclosure and list maintenance obligations under Secs. 6111 and 6112. Generally, TOI threshold amounts are $50,000 where substantially all of the tax benefits are provided to natural persons and $250,000 for all other entities. However, these amounts may be reduced in published guidance describing the transaction. Notices 2007-72 and 2007-73 do not reduce the standard threshold amounts.

The final regulations under Sec. 6111 provide that when published guidance identifies a TOI that previously was not a reportable transaction, any material advisers to the transaction will be treated as becoming material advisers on the date the transaction is identified as a TOI. Form 8918, Material Advisor Disclosure Statement, must be filed with the OTSA by the last day of the month that follows the end of the calendar quarter in which an adviser became a material adviser with respect to the TOI or in which the circumstances necessitating an amended disclosure occur (Regs. Sec. 301.6111-3(e)). For example, if a practitioner were a material adviser with respect to either of the TOIs described above, the practitioner would have been required to report such status and all other information required on Form 8918 to the IRS on or before October 31, 2007.


Practitioners should follow developments in the reportable transactions area closely in order to respond to the identification of new TOIs. As we discussed, the first two have been issued and others can be expected periodically at the discretion of the Service. When the IRS identifies a TOI, you should work with your clients to evaluate transactions that could be considered the same or substantially similar to the TOI.

It’s important that you closely review the published guidance identifying TOIs because it may contain special disclosure rules for taxpayers and material advisers. In particular, the published guidance may modify the material adviser gross income threshold amounts and provide special taxpayer disclosure rules -- especially for TOIs involving S corporations, trusts, trust beneficiaries, partnerships or matters involving loss carrybacks to prior years. Because TOIs require disclosures from both taxpayers and material advisers and failure to timely disclose a TOI may lead to the imposition of significant and non-waivable penalties, it is critical that both practitioners and taxpayers recognize their obligations related to newly identified TOIs.

As a further note, you should consider the collateral state-level impact of TOIs. With the increasing enactment of reportable transactions and material adviser statutes by states, the identification of a TOI (or other reportable transaction) or material adviser status may require state-level reporting obligations in addition to federal reporting requirements.

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James Emilian, CPA, Washington, DC and Greg Jamouneau, J.D., Chicago, IL, are contributing writers for The Tax Adviser. Their views as expressed in this article do not necessarily reflect the views of the AICPA or The Tax Adviser.