Some contested liability trusts now listed transactions.

The IRS's and Treasury's recent actions have shown their dedication to combating perceived abusive tax-avoidance transactions. In November 2003, the IRS issued Notice 2003-77 (later revised), identifying as listed transaction certain trusts created to accelerate deductions for contested liabilities. In conjunction, Treasury and the IRS issued temporary and proposed regulations limiting a taxpayer's ability to deduct contested liabilities under Sec. 461(f) before the resolution of the contest.

Overview

The Service issued Notice 2003-77 after discovering transactions in which taxpayers created trusts claiming to qualify under Sec. 461(f). The notice states that transactions that are the same as, or substantially similar to, the following five transactions are "listed transactions" for purposes of Regs. Sees. 1.6011-4(b)(2) (disclosure requirements), 301.6111-2(b)(2) (registration requirements) and 301.6112-1(b)(2) (list maintenance requirements):

1. Transactions in which a taxpayer transfers money or other property to a trust that purportedly satisfies Sec. 461(f), to provide for the satisfaction of an asserted liability, and retains certain powers over the money or other property transferred;

2. Transactions in which a taxpayer transfers its debt or promise to provide services or property in the future to a trust that supposedly satisfies Sec. 461(f), to provide for the satisfaction of an asserted liability;

3. Transactions in which an accrual-method taxpayer transfers money or other property to a trust that purportedly satisfies Sec. 461(f), to provide for the satisfaction of a workers' compensation or tort liability;

4. Transactions in which an accrual-method taxpayer transfers money or other property in tax years beginning after 1991 to a mist that supposedly satisfies Sec. 461(f), to provide for the satisfaction of a liability for which payment is economic performance under Regs. Sec. 1.461-4(g), other than a liability for workers' compensation or tort; and

5. Transactions in which a taxpayer transfers its stock, or stock or debt of a related party (as defined in Sec. 267(b)), after Nov. 18, 2003, to a trust that purportedly satisfies Sec. 461 (f), to provide for the satisfaction of any asserted liability.

For items 3 and 4 above, the notice provides exceptions (1) for trusts to which the liability is owed or (2) when payment to the trust discharges the taxpayer's liability to the claimant.

Sec. 461(f) allows a taxpayer to deduct a contested liability in a year before resolution of the contest if:

1. The taxpayer disputes a claimed liability;

2. It transfers money or other property to satisfy the claimed liability;

3. The dispute exists after the transfer; and

4. But for the fact that the claimed liability is disputed, a deduction would be allowed for the tax year of the transfer (or for an earlier tax year) determined after the application of Sec. 461(h) (the economic performance rules).

A taxpayer meeting these requirements can take a deduction for the liability in the tax year of the transfer. The previous version of Kegs. Sec. 1.461-1(c)(1) included conditions required to meet Sec. 461(f). In the temporary regulations, the IRS and Treasury have removed Regs. Sec. 1.461-1(c)(1) and replaced it with clearer guidelines; see Temp. Regs. Sec. 1.461-2T(c)(1)(i) and (ii). Temp. Regs. Sec. 1.461-2T(c)(1)(iii)(D) and (E) exclude as a "transfer to provide for the satisfaction of an asserted liability" a transfer of a taxpayer's debt or promise to provide services or property in the future and a transfer (other than to the person asserting the liability) of a taxpayer's stock, or a related-party's debt or stock (as defined in Sec. 267(b)).

Conclusion

The IRS's and Treasury's actions clearly show their intent to focus on transactions they deem abusive. Tax advisers can undoubtedly anticipate additional transactions attaining listed stares in the near future.

FROM KIMBERLY GILL, VICE PRESIDENT, WASHINGTON MUTUAL BANK, SEATTLE, WA