IRS Issues Reporting Requirement for Transactions of Interest

By James Emilian, CPA, Washington, DC, and Greg Jamouneau, J.D., Chicago, IL

Editor: Greg A. Fairbanks, J.D., LL.M.

Transactions of interest are a category of reportable trans action described in the regulations under Sec. 6011 (TD 9350). A transaction of interest (TOI) 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 is insufficient information to determine whether the transaction should be identified specifically as a tax avoidance transaction. The stated purpose underlying the creation of the TOI category is to enable 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 are 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 in directly, 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 con tribution 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 in come 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)).

Example: T entered into a TOI described in Notice 2007-72 after November 2, 2006, and filed its tax return reporting tax benefits from the TOI before August 14, 2007 (the date on which the TOI was identified). Under the final regulations, T is required to file Form 8886 with OTSA within 90 days (i.e., by November 12, 2007) from the date on which the TOI was identified in Notice 2007-72.

There are no disclosure requirements related to TOIs that were entered into before November 2, 2006, because such transactions are not reportable transactions. Therefore, even if a tax payer reports tax benefits related to a TOI on its tax returns filed after November 2, 2006, disclosure is not required if the TOI was entered into before November 2, 2006.

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, Mate rial 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 closely follow developments in the reportable transactions area to effectively respond to the identification of new TOIs. The first two have been issued, and others can be expected from time to time as the Service feels is necessary. When the IRS identifies a TOI, practitioners should work with their clients in evaluating transactions that could be considered the same or substantially similar to the TOI.

It is important for practitioners to closely review the published guidance identifying a TOI 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 nonwaivable penalties, it is critical that both practitioners and taxpayers recognize their obligations related to newly identified TOIs.

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


Greg A. Fairbanks, J.D., LL.M., works for Grant Thornton LLPWashington, DC

Unless otherwise indicated, contributors are members of or associated with Grant Thornton LLP.

If you would like additional information about these items, contact Mr. Fairbanks at (202) 521-1503 or

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