n-07-72.pdf

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Part III - Administrative, Procedural, and Miscellaneous

Transaction of Interest – Contribution of Successor Member Interest

Notice 2007-72

The Internal Revenue Service and the Treasury Department are aware of a type
of transaction, described below, 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 an organization
described in § 170(c) of the Internal Revenue Code, and claims a charitable contribution
deduction under § 170 that is significantly higher than the amount that the taxpayer paid
to acquire the rights. The IRS and the Treasury Department believe this transaction has
the potential for tax avoidance or evasion, but lack sufficient information to determine
whether the transaction should be identified specifically as a tax avoidance transaction.
This notice identifies this transaction, and substantially similar transactions, as
transactions of interest for purposes of § 1.6011-4(b)(6) of the Income Tax Regulations
and §§ 6111 and 6112. This notice also alerts persons involved with these transactions
to certain responsibilities that may arise from their involvement with these transactions.
FACTS
In a typical transaction, Advisor owns all of the membership interests in a limited

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liability company (LLC) that directly or indirectly owns real property (other than a
personal residence as defined in § 1.170A-7(b)(3)) that may be subject to a long-term
lease. Advisor and Taxpayer enter into an agreement under the terms of which Advisor
continues to own the membership interests in LLC for a term of years (the Initial
Member Interest), and Taxpayer purchases the successor member interest in LLC (the
Successor Member Interest), which entitles Taxpayer to own all of the membership
interests in LLC upon the expiration of the term of years. In some variations of this
transaction, Taxpayer may hold the Successor Member Interest through another entity,
such as a single member limited liability company. Further, the agreement may refer to
the Successor Member Interest as a remainder interest.
After holding the Successor Member Interest for more than one year (in order to
treat the interest as long-term capital gain property), Taxpayer transfers the Successor
Member Interest to an organization described in § 170(c) (Charity).
Taxpayer claims the value of the Successor Member Interest to be an amount
that is significantly higher than Taxpayer’s purchase price (for example, an amount that
is a multiple of Taxpayer’s purchase price and exceeds normal appreciation). Taxpayer
claims a charitable contribution deduction under § 170 based on this higher amount.
Taxpayer reaches this value by taking into account an appraisal obtained by or on
behalf of Advisor or Taxpayer of the fee interest in the underlying real property and the
§ 7520 valuation tables.
The Internal Revenue Service and the Treasury Department are concerned
about apparent irregularities in this transaction. Specifically, the IRS and the Treasury

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Department are concerned with the large discrepancy between (1) the amount
Taxpayer paid for the Successor Member Interest, and (2) the amount claimed by
Taxpayer as a charitable contribution. The IRS and the Treasury Department also have
the following additional concerns, which may be present in some variations of this
transaction: (1) any mischaracterization of the ownership interests in LLC; (2) a
Charity’s agreement not to transfer the Successor Member Interest for a period of time
(which may coincide with the expiration of the applicable period in §6050L(a)(1)); and
(3) any sale by Charity of the Successor Member Interest to a party selected by or
related to Advisor or Taxpayer.
TRANSACTION OF INTEREST
Effective Date

Transactions that are the same as, or substantially similar to, the transactions
described in this notice are identified as transactions of interest for purposes of
§ 1.6011-4(b)(6) and §§ 6111 and 6112 effective August 14, 2007, the date this notice
was released to the public. Persons entering into these transactions on or after
November 2, 2006, must disclose the transaction as described in § 1.6011-4. Material
advisors who make a tax statement on or after November 2, 2006, with respect to
transactions entered into on or after November 2, 2006, have disclosure and list
maintenance obligations under §§ 6111 and 6112. See § 1.6011-4(h) and §§ 301.6111-
3(i) and 301.6112-1(g) of the Procedure and Administration Regulations.
Independent of their classification as transactions of interest, transactions that
are the same as, or substantially similar to, the transaction described in this notice

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already may be subject to the requirements of § 6011, 6111, or 6112, or the regulations
thereunder. When the IRS and the Treasury Department have gathered enough
information to make an informed decision as to whether this transaction is a tax
avoidance type of transaction, the IRS and the Treasury Department may take one or
more actions, including removing the transaction from the transactions of interest
category in published guidance, designating the transaction as a listed transaction, or
providing a new category of reportable transaction.
Participation

Under § 1.6011-4(c)(3)(i)(E), Advisor, LLC or any entity used in place of LLC,
Taxpayer, and any members of Taxpayer if Taxpayer is a flow-through entity, are
participants in this transaction for each year in which their respective tax returns reflect
tax consequences or the tax strategy described in this notice.
Charity is not a participant if it received the Successor Member Interest described
in this notice on or prior to August 14, 2007. For Successor Member Interests received
after August 14, 2007, under § 1.6011-4(c)(3)(i)(E) Charity is a participant in this
transaction for the first year for which Charity's tax return reflects the Successor
Member Interest described in this notice. In general, Charity is required to report the
receipt of the Successor Member Interest described in this notice on its return for the
year in which it is received. See § 6033. Therefore, in general, Charity will be a
participant for the year in which Charity received the Successor Member Interest.
Time for Disclosure

See § 1.6011-4(e) and § 301.6111-3(e).

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Material Advisor Threshold Amount
The threshold amounts are the same as those for listed transactions. See
§ 301.6111-3(b)(3)(i)(B).
Penalties
Persons required to disclose these transactions under § 1.6011-4 who fail to do
so may be subject to the penalty under § 6707A. Persons required to disclose these
transactions under § 6111 who fail to do so may be subject to the penalty under
§ 6707(a). Persons required to maintain lists of advisees under § 6112 who fail to do so
(or who fail to provide such lists when requested by the Service) may be subject to the
penalty under § 6708(a). In addition, the Service may impose other penalties on
persons involved in these transactions or substantially similar transactions, including the
accuracy-related penalty under § 6662 or 6662A.
DRAFTING INFORMATION
The principal authors of this notice are Patricia M. Zweibel of the Office of
Associate Chief Counsel (Income Tax and Accounting) and Leslie H. Finlow of the
Office of Associate Chief Counsel (Passthroughs and Special Industries). For further
information concerning this notice generally, contact Ms. Zweibel at (202) 622-7900 (not
a toll-free call). For further information concerning the sections of this notice under the
heading TRANSACTIONS OF INTEREST, contact Ms. Finlow at (202) 622-3070 (not a
toll-free call).