Notice 2008-111: recent guidance on intermediary transactions.

• Author: Fiesta, Susan F.

On December 2, 2008, the IRS issued Notice 2008-111, which provides guidance on transactions it considers intermediary transaction tax shelters. The Service issued the notice to help clarify which transactions are considered intermediary transactions and who is considered a participant in an intermediary transaction. Notice 2008-111 clarifies Notice 200116 and supersedes Notice 2008-20.

What Is an Intermediary Transaction?

A common intermediary transaction involves a seller (Seller) who wants to sell the stock of a corporation (Target) and a buyer (Buyer) who wants to purchase assets (and not the stock) of Target. Under a plan, Seller sells the Target stock to an intermediary corporation (Midco). Midco then sells some or all of Target's assets to Buyer. Because of the asset sale, Buyer will have a basis in the assets equal to the fair market value of the assets. Typically, Midco either is an entity not subject to tax or has certain tax attributes that it believes would somehow offset any tax impact of the asset sale.

Previous IRS Guidance

Initially, the IRS issued Notice 200116, which identified these intermediary transactions as tax shelters. The notice stated that any transaction that is the same or substantially similar to the intermediary transaction as described in the notice is considered a listed transaction and would be subject to the necessary reporting requirements. The notice also warns of potential penalties that may result from participating in these transactions or from either promoting or reporting these transactions as a tax return preparer or a representative of an intermediary transaction participant.

Because Notice 2001-16 applies to transactions that are "the same or substantially similar to" an intermediary transaction as described in the notice, many practitioners wanted more guidance on what constitutes an intermediary transaction. Accordingly, the Service issued Notice 2008-20 on January 17, 2008. The notice identified four objective components of an intermediary transaction. All four components were necessary in order to meet the standard of "the same or substantially similar to" an intermediary transaction. As discussed below, these objective components identified by Notice 2008-20 have been superseded by four modified components in Notice 2008-111.

Notice 2008-20 also created a pair of safe harbors for potential participants in an intermediary transaction. Under Notice 2008-20, if a potential participant meets the...