FROM THE OFFICE OF PUBLIC AFFAIRS

The Treasury Department and the Internal Revenue Service today issued a Notice to shut down another abusive tax shelter transaction. The shelter involves the use of a loan assumption agreement to claim an inflated basis in assets acquired from another party.

"The Notice is another step in Treasury's efforts to address attempts to evade tax. This Notice warns all taxpayers that engage in the transaction that the IRS intends to challenge the asserted tax benefits," stated Treasury Assistant Secretary for Tax Policy Mark Weinberger.

The Notice informs corporate taxpayers of their obligations to disclose their participation in the transaction and informs promoters of their obligations to register the transaction and keep lists of customers that engage in the transaction.

Description of the transaction in the Notice:

In the type of transaction described in the Notice, a third party ("transferor") borrows money from a lender and uses the proceeds to purchase assets. The transferor sells a portion of the assets to a U.S. taxpayer in consideration for the taxpayer's agreement to become liable on the entire loan. The transferor agrees to pay all interest on the loan, and the taxpayer agrees to pay the principal at maturity. As a matter of economic reality, the taxpayer will bear responsibility for the repayment of the loan only to the extent of the assets it purchased from the transferor. Nevertheless, the taxpayer claims that, as a result of its assumption of liability on the entire loan, the entire principal amount of the loan is included in taxpayer's basis in the conveyed assets. The taxpayer sells the conveyed assets and claims a loss.

The text of the Notice is attached.

Other recent actions taken by the Treasury Department to address specific tax avoidance transactions include the publication of a notice warning taxpayers that the IRS will challenge transactions improperly shifting basis from one party to another, the publication of a notice announcing Treasury's intention to promulgate regulations that prevent the duplication of losses within a consolidated group, and the promulgation of final regulations on hedging transactions that prevent employers from getting full tax deferral on deferred executive compensation.