US Government Issues Fresh Guidance On Contested Liability Trusts

by Mike Godfrey, Tax-News.com, Washington

11 May 2004

The US Treasury Department and the Internal Revenue Service last week issued guidance on the accounting methods used for contested liability trusts that seek to accelerate deductions.

"In the interest of sound tax administration, the Service is exercising its discretion to modify the terms and conditions applicable to changes in method of accounting for these transactions," announced Acting Assistant Secretary for Tax Policy Gregory Jenner, adding:

"These modifications are appropriate given the nature of these transactions and the disclosure otherwise required for many of these transactions as a result of the recently issued listing notice."

The revenue procedure applies to transfers to contested liabilities trusts identified as listed transactions in Notice 2003-77, including transfers for which the transferor has retained control over the trust assets and transfers that do not satisfy the economic performance requirement.

Taxpayers that have entered into contested liability trust transactions which are required to be disclosed as listed transactions must file amended returns to change their method of accounting for these transactions.

Taxpayers that have entered into contested liability trust transactions that are not required to be disclosed as listed transactions may either file amended returns or request a change in method of accounting, according to the guidance.

Taxpayers requesting a change in the method of accounting for these transactions will be required to take the entire section 481(a) adjustment into account in the year of the change.

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