n-01-16.pdf

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# Part III - Administrative, Procedural, and Miscellaneous

## Intermediary Transactions Tax Shelter

Notice 2001-16

The Internal Revenue Service and the Treasury Department have become aware
of certain types of transactions, described below, that are being marketed to taxpayers
for the avoidance of federal income taxes. The Service and Treasury are issuing this
notice to alert taxpayers and their representatives of certain responsibilities that may
arise from participation in these transactions.

These transactions generally involve four parties: seller (X) who desires to sell
☒
stock of a corporation (T), an intermediary corporation (M), and buyer (Y) who desires
☒
to purchase the assets (and not the stock) of T. Pursuant to a plan, the parties
undertake the following steps. X purports to sell the stock of T to M. T then purports to
☒
sell some or all of its assets to Y. Y claims a basis in the T assets equal to Y's
purchase price. Under one version of this transaction, T is included as a member of the
affiliated group that includes M, which files a consolidated return, and the group reports
losses (or credits) to offset the gain (or tax) resulting from T's sale of assets. In another
form of the transaction, M may be an entity that is not subject to tax, and M liquidates T
(in a transaction that is not covered by § 337(b)(2) of the Internal Revenue Code or
§
1.337(d)-4) of the Income Tax Regulations, resulting in no reported gain on M's sale of
T's assets.

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Depending on the facts of the particular case, the Service may challenge the
purported tax results of these transactions on several grounds, including but not limited
to one of the following: (1) M is an agent for X, and consequently for tax purposes T has
sold assets while T is still owned by X, (2) M is an agent for Y, and consequently for tax
purposes Y has purchased the stock of T from X, or (3) the transaction is otherwise
properly recharacterized (e.g., to treat X as having sold assets or to treat T as having
sold assets while T is still owned by X). Alternatively, the Service may examine M's
consolidated group to determine whether it may properly offset losses (or credits)
against the gain (or tax) from the sale of assets.

The Service may impose penalties on participants in these transactions, or, as
applicable, on persons who participate in the promotion or reporting of these
transactions, including the accuracy-related penalty under § 6662, the return preparer
penalty under § 6694, the promoter penalty under § 6700, and the aiding and abetting
penalty under § 6701.

Transactions that are the same as or substantially similar to those described in
the Notice 2001-16 are identified as "listed transactions" for the purposes of
§ 1.6011-4T(b)(2) of the Temporary Income Tax Regulations and § 301.6111-2T(b)(2)
of the Temporary Procedure and Administration Regulations. See also § 301.6112-1T,
A-4. It should be noted that, independent of their classification as "listed transactions"
for purposes of §§ 1.6011-4T(b)(2) and 301.6111-2T(b)(2), such transactions may
already be subject to the tax shelter registration and list maintenance requirements of
§§ 6111 and 6112 under the regulations issued in February 2000 (§§ 301.6111-2T and

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301.6112-1T, A-4). Persons required to register these tax shelters who have failed to
register the shelters may be subject to the penalty under § 6707(a) and to the penalty
under § 6708(a) if the requirements of § 6112 are not satisfied.

For further information regarding this notice, contact Theresa Abell, of the Office
of Associate Chief Counsel (Corporate), on (202)622-7700 (not a toll-free call).