The Internal Revenue Service (IRS) has identified four necessary components of an intermediary transaction tax shelter (ITTS) after concern from corporate taxpayers that identifying an ITTS to the tax authorities may result in over-disclosure or under-disclosure of the transaction.
An ITTS is a loophole which attempts to avoid corporate income tax from the sale of assets. It involves transactions in which shareholders of a corporation sell their stock and an intermediary, such as an individual or another company, purchases the corporation's assets to sell to another company. All or part of the tax that the corporation would have to pay on a sale of the assets is avoided through the use of the intermediary.
Taxpayers have commented that problems arise when identifying a transaction as an ITTS based on the role of the intermediary. The IRS has addressed these concerns by identifying four necessary components of an ITTS from the perspective of the target corporation, its shareholders, and purchasers of the target corporation's assets.
The four components are:
- A target corporation directly or indirectly owns assets and has insufficient tax benefits to eliminate or offset tax in whole or in part, also known as "the built-in tax".
- At least 50% of the target corporation's stock is disposed of by its shareholders, other than in a liquidation transaction within a 12 month period.
- Within the 12 months before or after the shareholders disposes of at least 50% of the target corporation's stock, its assets are sold to one or more buyers.
- The target corporation's built-in tax is purportedly offset, avoided or not paid.
According to the IRS notice a transaction must have all four components to be classified as an ITTS. The notice is effective as of January 17 2008.
