Additional Guidance Provided for Corporations Whose Instruments Are Acquired by Treasury (Notice 2009-38)

The IRS has issued additional guidance on the application of Code Sec. 382 and other provisions of law to corporations whose instruments are acquired by the Treasury Department under the following programs established pursuant to the Emergency Economic Stabilization Act of 2008 (P.L. 110-343) (the EESA programs):

(1) the Capital Purchase Program for publicly traded issuers (Public CPP);

(2) the Capital Purchase Program for private issuers (Private CPP);

(3) the Capital Purchase Program for S corporations (S Corp CPP);

(4) the Targeted Investment Program (TARP TIP);

(5) the Asset Guarantee Program;

(6) the Systemically Significant Failing Institutions Program;

(7) the Automotive Industry Financing Program; and

(8) the Capital Assistance Program for publicly traded issuers (TARP CAP).

The guidance amplifies and supersedes Notice 2009-38, I.R.B. 2009-18, 901 (TAXDAY, 2009/04/14, I.4), to address the treatment under Code Sec. 382 of stock sold by the Treasury to public shareholders. Where the Treasury sells stock that was issued to it under one of the EESA programs, and the sale creates a public group, that public group's ownership in the corporation is not to be considered as having increased solely because of the sale. However, the public group's ownership in the corporation will be considered to have increased pursuant to any other transaction. The stock is considered outstanding for purposes of determining the percentage of stock owned by other five-percent shareholders on any testing date, and Code Sec. 382 applies to the public group in the same manner as any other public group.

The following guidance is retained from Notice 2009-38 without changes:

Generally, for all federal income tax purposes, any instrument issued to the Treasury under the EESA programs, other than TARP CAP, will be treated as an instrument of indebtedness if denominated as such, and as stock described in Code Sec. 1504(a)(4) if denominated as preferred stock. Such instruments will not be treated as stock for purposes of Code Sec. 382, except that Code Sec. 1504(a)(4) preferred stock will be treated as stock for purposes of Code Sec. 382(e)(1). The classification of any instrument issued to the Treasury pursuant to TARP CAP will be determined under general federal tax law principles.

In addition, any warrant to purchase stock issued to the Treasury under any of the EESA programs, except Private CPP and S Corp CPP, will be treated as an option (and not as stock). While held by the Treasury, such a warrant will not be deemed exercised under Reg. §1.382-4(d)(2). Any warrant to purchase stock issued under the Private CPP will be treated as an ownership interest in the underlying stock, which will be treated as Code Sec. 1504(a)(4) preferred stock. Any warrant issued pursuant to the S Corp CPP will be treated as an ownership interest in the underlying indebtedness.

For purposes of Code Sec. 382, the ownership represented by any stock (other than Code Sec. 1504(a)(4) preferred stock) issued to the Treasury under the EESA programs on any date on which it is held by the Treasury will not be considered to have caused the Treasury's ownership in the issuing corporation to have increased over its lowest percentage owned on any earlier date. Such stock will be generally considered outstanding for purposes of determining the percentage of stock owned by other five-percent shareholders on a testing date. However, any stock that was issued to the Treasury under the EESA programs and subsequently redeemed by the issuing corporation will be treated as if it had never been outstanding in measuring shifts in ownership by any five-percent shareholder on any testing date occurring on or after the redemption date.

Any capital contribution made by the Treasury pursuant to the EESA programs will be exempt from the Code Sec. 382(l)(1) anti-stuffing rule and will not be considered to have been made as part of a plan a principal purpose of which was to avoid or increase any Code Sec. 382 limitation. Also, any amount received by a corporate issuer in exchange for instruments issued to the Treasury under the EESA programs will be treated as received, in its entirety, as consideration for such instruments.

Finally, the above rules, except for the rules for the characterization of instruments and warrants for federal tax purposes, will also apply to "covered instruments" as though such instruments were acquired by the Treasury under the EESA programs. Covered instruments include any instruments acquired by the Treasury in exchange for instruments issued to the Treasury under the EESA programs. Any instruments acquired by the Treasury in exchange for covered instruments will also be treated as covered instruments.

The IRS intends to issue regulations implementing certain of the rules described in the new guidance. Pending the issuance of further guidance, taxpayers may rely on the new rules. However, any future contrary guidance will not apply to any instrument that was issued to the Treasury under the EESA programs, or acquired by the Treasury in an exchange for such an interest as provided in this guidance, prior to the publication of the contrary guidance or under a binding contract entered into prior to the publication of that guidance.

2010FED ¶46,201

Other References:

Code Sec. 382

CCH Reference - 2009FED ¶17,115.0225

CCH Reference - 2009FED ¶17,115.026

CCH Reference - 2009FED ¶17,115.40

CCH Reference - 2009FED ¶17,115.45

CCH Reference - 2009FED ¶17,115.73

Tax Research Consultant

CCH Reference - TRC NOL: 33,050

TRC NOL: 33,152

CCH Reference - TRC REORG: 33,202

CCH Reference - TRC REORG: 33,208

Smartcard, Debit Card Qualified Transportation Fringe Benefit Guidance Delayed (Notice 2009-95)

The IRS has delayed the effective date of Rev. Rul. 2006-57, 2006-2 CB 911, which provides guidance to employers on the use of smartcards, debit or credit cards, or other electronic media to provide qualified transportation fringe benefits under Code Sec. 132(a)(5) and (f). The guidance is intended to provide relief to mass transit providers that have been unable to update their present systems in order to comply with the revenue ruling guidelines prior to the current effective date of January 1, 2010. The effective date is delayed until January 1, 2011. However, employers and employees may rely on Rev. Rul. 2006-57 with respect to transactions occurring prior to January 1, 2011.

Notice 2009-95, 2010FED ¶46,202

Other References:

Code Sec. 132

CCH Reference - 2009FED ¶7438.054

CCH Reference - 2009FED ¶7438.75

Tax Research Consultant

CCH Reference - TRC COMPEN: 36,354

Stock Transferred to FLP for Full and Adequate Consideration (Black Est., TC)

Stock transferred by a decedent to a family limited partnership (FLP) was not includible in the decedent's gross estate under Code Sec. 2036(a) because the transfer was a bona fide sale for adequate and full consideration. The decedent and his advisors decided to create the FLP in order to consolidate and protect his stock holdings in an insurance company, namely by preventing his grandsons from selling their shares of stock and protecting his son's shares from potential claims incident to divorce. The protection from creditors and potential dissipation was a legitimate and significant nontax reason for the creation of the FLP. The creation of the FLP was the result of an arm's-length transaction. Furthermore, the decedent received an interest in the FLP that represented adequate and full consideration because: (1) the participants in the FLP received interests proportionate to the value of the property each contributed; (2) the respective contributed assets were properly credited to the transferors' capital accounts; (3) distributions required negative adjustments to distributee capital accounts; and (4) there was a legitimate and significant nontax reason for formation of the FLP. Consequently, the decedent's transfer of stock to the FLP satisfied the bona fide sale exception.

The decedent's surviving spouse died less than five months after the decedent, before the marital trust could be funded with shares of the FLP. Pursuant to the decedent's testamentary documents, a pecuniary marital trust was created for the spouse. Because the trust was to terminate on the her death, it was never funded. However, in order to calculate the spouse's gross estate, the value of the trust had to be established. The amount of the pecuniary bequest was not ascertainable until the after the determination of the decedent's estate tax liability, which was not calculated the spouse's death. The executor used the spouse's death as the date in which the trust was funded because that was the last possible date that the funding could occur, as it was not possible to fund the marital trust after the spouse's death. Moreover, if the spouse had survived and requested that the trust be funded with cash, the FLP shares would have been sold for their current fair market value. Accordingly, the executor use of the spouse's date of death when determining the date in which the marital trust was funded was proper.

The deduction of the interest paid by the spouse's estate to the FLP was not a necessary expense under Reg. §20.2053-3(a). In order to satisfy liabilities of the spouse's estate, which included federal and state estate taxes and a charitable bequest from the decedent's estate, without receiving a large distribution from the FLP, the executor obtained a $71-million loan from the FLP. It was noted that the repayment of the loan would require a sale of the insurance stock attributable to the spouse's interest in the FLP. Therefore, it was determined that the only difference between the redemption of the stock and the loan was that the loan created a $20-million interest deduction, which was offset by a smaller income tax expense to the other partners. Furthermore, the principal beneficiary of the estate was also the majority share holder. Thus, the beneficiary was making interest payments to himself. In addition, when the shares of the insurance stock were sold, only half of the expenses incurred were deductible. In order to repay the loan, a secondary offering of one-third of the insurance stock was made. The spouse's estate's indirect ownership of the stock through the FLP was sufficient to deduct the sale under Reg. §20.2053-3(d)(2). However, it was held that only a portion of the funds generated by the secondary offering were directly used by the spouse's estate. The attorney's fees, administrative costs, and other fees associated with the satisfaction of the decedent's charitable bequest were not deductible by the spouse's estate.

S.P. Black, Jr., Est., Dec. 58,018

Other References:

Code Sec. 2036

CCH Reference - FINH ¶4955.701

CCH Reference - FINH ¶4955.712

Code Sec. 2044

CCH Reference - FINH ¶5940.05

CCH Reference - FINH ¶5940.10

Code Sec. 2053

CCH Reference - FINH ¶6120.12

CCH Reference - FINH¶6140.65

CCH Reference - FINH ¶6160.53

Code Sec. 2056

CCH Reference - FINH ¶6120.12

CCH Reference - FINH¶6140.65

CCH Reference - FINH ¶6850.45

Tax Research Consultant

CCH Reference - TRC ESTGIFT: 18,100

CCH Reference - TRC ESTGIFT: 39,150

CCH Reference - TRC ESTGIFT: 42,350

New York --Multiple Taxes: Limited Amnesty Program Discussed

The New York Department of Taxation and Finance has issued a memorandum that discusses the Penalty and Interest Discount (PAID) Program, which encourages eligible taxpayers to pay off their eligible tax liabilities that are at least three years old. A taxpayer who participates in the program will receive a reduction in the accrued interest and penalty currently owed on eligible tax liabilities. The program period will begin on January 15, 2010, and end on March 15, 2010. However, if the taxpayer does not make full payment of an eligible liability by March 15, 2010, the taxpayer will not receive any savings on that liability.