Thursday, February 28, 2008

It's not all DAT! Beware of Distressed Asset Trusts

The Internal Revenue Service indicated that distressed asset trust transactions would be treated as tax avoidance transactions and would require additional disclousre and be at higher risk for penalties. The IRS sees this type of trust as attempting to do an end-run around limitations on partner losses on property contributed to a partnership which has a lower fair value than cost basis. These rules, instituted by the Jobs Creation Act of 2004, accomplish the same goal as related party loss limitations. The IRS Notice backdates potential review of DATs to any transaction occurring after October 22, 2004. The IRS recommends amending prior returns if DAT-related losses in prior years.

On the surface, a fairly harsh ruling, though I can see the consistency argument that the IRS is making. Courts will probably agree with the IRS going forward; I wonder if they will accept the retroactive facet of the ruling.


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