Transactions of Interest

Contribution of Successor Member Interest to Charity
(IRS Notice 2007-72)

The IRS and the Treasury Department are aware of a type of transaction in which a taxpayer directly (or indirectly) acquires certain rights in real property (or in an entity that directly or indirectly holds real property), transfers the rights more than one year after the acquisition to tax-exempt charity, and then claims a charitable deduction that is significantly higher than the amount that the taxpayer actually paid to acquire the rights.  The IRS and the Treasury Department believe that this transaction has the potential for tax avoidance or evasion, but lack sufficient information to determine whether the transaction should be “listed” (i.e., as a tax avoidance transaction).

The IRS and the Treasury Department are concerned about apparent irregularities evidenced in this transaction, and in particular, the large discrepancy between (1) the amount the taxpayer actually pays for the “Successor Member Interest”; and (2) the amount the taxpayer then claims as a charitable deduction.  The IRS is also concerned about variations in which there may be mischaracterization of the ownership interests in the LLC, or a charity’s agreement NOT to transfer the Successor Member interest for a period of time, coinciding with the expiration of an applicable period under IRC § 6050L(a)(1), and any sale by Charity of the Successor Member interest to a party selected by or related to either the Advisor or the taxpayer.

When the IRS has gathered enough information to make an informed decision as to whether this transaction is a tax avoidance type transaction, the IRS will either: (a) remove the transaction from the transactions of interest category; (b) designate the transaction as a “listed transaction”; or (c) provide a new category of reportable transaction.

Participants in this transaction, for purposes of reporting this transaction include: (1) the Advisor; (2) the LLC or any entity used in place of LLC; (3) the taxpayer; and (4) any members of taxpayer if taxpayer is a flow-through entity.  The charity is a participant if it received the “Successor Member interest” after August 14, 2007, and is required to report its receipt of this interest on its return for the year in which it is received.

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 this “transaction of interest”on IRS Form 8886. For more information about Federal law requirements, please contact us.

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