SECTION 5. FIXED — Internal Revenue Bulletin 2002-43

PROCEDURE

.01 The Fixed Concession Procedure is available to Eligible Taxpayers who have engaged in a Contingent Liability Transaction and meet the requirements set forth in Section 3.02 as well as the following additional requirements:

The Taxpayer filed a disclosure statement under the provisions set forth in Announcement 2002–2, 2002–2 I.R.B. 304; or
The Contingent Liability Transaction was already raised during an examination and, as a result, the Taxpayer was unable to make a disclosure as outlined in Announcement 2002–2. A Taxpayer qualifying under this provision must agree to provide the information required by Announcement 2002–2 and certify under penalties of perjury that the person signing the disclosure has examined the disclosure and that to the best of that person’s knowledge and belief, the information provided contains all relevant facts and is true, correct and complete.

.02 Under the Fixed Concession Procedure, an Electing Taxpayer is permitted a capital loss deduction equal to 25% of the amount of the capital loss reported for the sale of the transferee stock received in the Contingent Liability Transaction. In order to prevent a duplication of the tax ben

efits associated with the Contingent Liability Transaction, the Electing Taxpayer must include an amount equal to the permitted capital loss as ordinary income in equal amounts per year over a period of 15 years beginning with the 2003 taxable year, unless no member of the Electing Taxpayer’s consolidated group (including any successor to such group) is at any time entitled to any tax benefits associated with the deduction resulting from the liability assumed in the Contingent Liability Transaction. The Electing Taxpayer has the option of an alternative method to achieve the same economic result as the 15-year recovery based on a discount rate of ten percent. The closing agreement referenced in Section 5.07 shall ensure that no entity that was a member of the Electing Taxpayer’s consolidated group (including any successor to such group) at any time will be entitled to both the permitted capital loss deduction and the tax benefits associated with the deduction resulting from the liability assumed in the Contingent Liability Transaction.

.03 No adjustment will be made to transactional cost deductions taken in connection with the Contingent Liability Transaction.

.04 When the assumed liability is ultimately taken into account for tax purposes, the tax benefits associated with it will be allowed, as appropriate, under applicable legal principles in accordance with the method of accounting of the corporation entitled to those benefits.

.05 No penalties under section 6662 will be imposed for any deficiency attributable to the resolution of the Contingent Liability Transaction under this Fixed Concession Procedure.

.06 The following conditions apply to any stock or property held on or after October 4, 2002. The tax basis of any unsold stock shall be equal to the average selling price per share of the stock that was sold that generated the reported capital losses (“Sold Stock”). Also, if the basis of any property other than the stock received in the purported section 351 exchanges was determined directly or indirectly by reference to the basis of the stock received in the purported section 351 exchanges, then the basis of such property as of the date of the Contingent Liability Transaction shall be computed as if the basis of the stock received in the purported section 351 ex

.02 The following issues will be con sale of the transferee stock received in the the Contingent Liability Transaction shall

sidered in the Fast Track Dispute Resolu Contingent Liability Transaction. In order be computed as if the basis of the stock re tion Procedure - Contingent Liability

to prevent a duplication of the tax ben- ceived in the purported section 351 ex Cases: 2002–43 I.R.B. 735 October 28, 2002

ure to provide all of the information and documents specified in Exhibit 3 constitutes grounds for elimination from the Fast Track Dispute Resolution Procedure Contingent Liability Cases and Binding Arbitration Procedure as set forth in Section 6.09. In cases not governed by this settlement initiative, the Service and the Department of Justice will not be limited to seeking the information set forth, described or requested in Exhibit 3.

.07 Within 120 days from receipt of the Electing Taxpayer’s information and documents, LMSB will complete its review of the submission, issue additional document requests to the Electing Taxpayer, if necessary, and conduct any necessary interviews.

.08 Within 20 days after any supplemental requests for information by LMSB, the Electing Taxpayer will respond to the outstanding requests for information. Electing Taxpayers may request an extension of this period; however, the Service will grant extensions only in exceptional circumstances and subject to its sole discretion.

.09 If the Electing Taxpayer fails to provide the requested information that is in its possession or control, LMSB may elect to eliminate the Electing Taxpayer from the Fast Track Dispute Resolution Procedure — Contingent Liability Cases and Binding Arbitration Procedure and the case will be subject to the full range of Service audit and deficiency procedures. In addition, the Contingent Liability Transaction issue will not be considered under the settlement, mediation or arbitration procedures under Notice 2001–67 (LMSB/Appeals Fast Track Dispute Resolution Program), 2001–2 C.B. 544; Announcement 2002–60 (Extension of Test of Arbitration Procedure for Appeals), 2002–26 I.R.B. 28; and Rev. Proc. 2002–44 (Mediation Procedure for Appeals), 2002–26 I.R.B. 10. Elimination from the Fast Track Dispute Resolution Procedure - Contingent Liability Cases and Binding Arbitration Procedure will be reviewed and approved by the applicable LMSB Director of Field Operations. Such decision shall be final and not subject to judicial review.

.10 Within 30 days after the end of the period for examination (see Sections 6.07 and 6.08 above), the Electing Taxpayer and LMSB will exchange a written summary of the facts, law and argument applicable to the issues being considered under the Fast Track Dispute Resolution Procedure

The amount of capital loss permitted for the sale of stock received in the Contingent Liability Transaction;
The identity of the corporation that is entitled to the tax benefits associated with the deduction resulting from the assumed liability and whether that corporation is or has been a member of the Electing Taxpayer’s consolidated group (including any successor to that group);
With respect to the Electing Taxpayer or any member of the Electing Taxpayer’s consolidated group (including any successor to such group), the manner and timing of the reduction in the tax benefits necessary to eliminate any duplication in the tax benefits associated with the Contingent Liability Transaction in amounts that in the aggregate equal the capital loss permitted; and
The penalties under section 6662 applicable to any deficiency attributable to the resolution of the Contingent Liability Transaction under this Fast Track Dispute Resolution Procedure - Contingent Liability Cases, except that no penalties will be asserted if the Electing Taxpayer previously disclosed the Contingent Liability Transaction in accordance with Announcement 2002–2, or if the Electing Taxpayer did not disclose solely because the Contingent Liability Transaction was already raised during an examination and, as a result, the Electing Taxpayer was unable to make a disclosure as outlined in Announcement 2002-2. An Electing Taxpayer that qualifies for a waiver of penalties under this provision must agree to provide the information required by Announcement 2002-2 and certify under penalties of perjury that the person signing the disclosure has examined the disclosure and that to the best of that person’s knowledge and belief, the information provided contains all relevant facts and is true, correct and complete.

.03 Under the Fast Track Dispute Resolution Procedure - Contingent Liability Cases, an Electing Taxpayer must concede between 50% and 90% of the amount of the capital loss reported for the sale of the stock, depending on the merits of the case. Electing Taxpayers may negotiate or arbitrate the identity of the corporation that is entitled to the tax benefits associated with the deduction resulting from the assumed liability, and the manner and timing of the reduction in the tax benefits associated with the Contingent Liability Transaction; pro

vided that no reduction of such tax benefits is required unless the tax benefits associated with the deduction resulting from the assumed liability are taken into account by the Electing Taxpayer or an entity that was a member of its consolidated group (including any successor to such group) at any time. No adjustment will be made to transactional cost deductions taken in connection with the Contingent Liability Transaction. In addition, Electing Taxpayers may negotiate or arbitrate the applicability of any penalty proposed by the Service under section 6662 associated with the capital loss deduction. The tax basis of any unsold stock (or property the basis of which was determined directly or indirectly by reference to the basis in the hands of the Electing Taxpayer of the stock received in the purported section 351 exchanges), as of October 4, 2002, will be adjusted in the same manner as described in Section 5.06.

.04 When the assumed liability is ultimately taken into account for tax purposes, the tax benefits associated with it will be allowed, as appropriate under applicable legal principles in accordance with the method of accounting of the corporation entitled to those benefits.

.05 To the extent that the tax benefits associated with the deduction resulting from the liability assumed in the Contingent Liability Transaction are taken into account by the transferor or an entity that was a member of the transferor’s consolidated group (including any successor to such group) at any time, the Electing Taxpayer must negotiate or arbitrate to eliminate any duplication in the tax benefits associated with the Contingent Liability Transaction using one of the following options: 1) reduce the amount of the deduction resulting from the liability assumed in connection with the Contingent Liability Transaction; or 2) recoup an amount equal to the permitted capital loss by including the amount of the permitted capital loss as ordinary income. The manner and time period over which such reduction or recoupment will occur is also subject to negotiation or arbitration.

.06 Within 90 days from the date of the notification to the Electing Taxpayer of its acceptance into the procedure, the Electing Taxpayer will provide to LMSB all of the information and documents specified in Exhibit 3. The Electing Taxpayer’s fail

October 28, 2002 736 2002–43 I.R.B.

of the date that the Service notifies the Electing Taxpayer that the Service has determined that the Fast Track Dispute Resolution Procedure - Contingent Liability Cases was unsuccessful, the Electing Taxpayer must select three names from the Qualified List and rank them in order of preference. The Administrator will arrange for the hiring of the Arbitrator, subject to applicable rules and regulations for Government procurement. If the first candidate is unavailable, the Administrator will contact the other candidates in the order indicated by the Electing Taxpayer.

.06 The Arbitrator shall have no official, financial, or personal conflict of interest with respect to the parties, unless such interest is fully disclosed in writing to the parties and the Administrator, and the parties agree to the continued participation of the Arbitrator. A selected arbitrator who has represented or currently represents a promoter or investor in a Contingent Liability Transaction, or whose firm has done so, is not neutral and, therefore, will be ineligible to serve as an arbitrator in a proceeding under this revenue procedure. Each party will pay one half of the Arbitrator’s compensation, expenses, and related fees and costs.

.07 The Arbitrator will be disqualified from representing the Electing Taxpayer in any pending or future action that involves the transactions or issues that are the particular subject matter of the arbitration. This disqualification extends to representing any other parties involved in the transactions or issues that are the particular subject matter of the arbitration. Members or employees of the Arbitrator’s firm will also be disqualified from representing the Electing Taxpayer or any other parties involved in the transactions or issues that are the particular subject matter of the arbitration in an action that involves the transactions or issues that are the particular subject matter of the arbitration, unless: (i) the Arbitrator disclosed the potential of such representation prior to the parties’ acceptance of the Arbitrator; (ii) such action relates to a taxable year that is different from the taxable year(s) under arbitration; (iii) the firm’s internal controls preclude the Arbitrator from any form of participation in the matter; and (iv) the firm does not allocate to the Arbitrator any part of the fee therefrom.

Contingent Liability Cases. After all the facts and circumstances have been evaluated, LMSB will determine whether penalties should be proposed.

.11 LMSB will promptly submit the administrative file related to the Contingent Liability Transaction and the written summaries to Appeals. Appeals and the Electing Taxpayer will schedule an initial meeting for the purpose of starting settlement discussions. Such meeting will be held on a date agreeable to the parties, but no later than 30 days from the receipt by Appeals of the administrative file and the summaries. A representative of the Electing Taxpayer with decision-making authority must participate in the settlement negotiation session or sessions.

.12 Appeals will attempt to facilitate an agreement between LMSB and the Electing Taxpayer regarding the Fast Track Dispute Resolution Procedure - Contingent Liability Cases issues, including penalties, if applicable. Under the Fast Track Dispute Resolution Procedure - Contingent Liability Cases, Appeals will evaluate the penalties based on the merits inherent in the penalty issue. Appeals may make a recommendation regarding the settlement of any or all issues. The parties have 60 days from the date of the first meeting to reach an agreed settlement on all disputed issues identified in Section 6.02.

.13 Any proposed settlement is subject to review and concurrence by an Appeals Coordinator. If the parties reach a basis of settlement, Appeals will effectuate the settlement of agreed issues using established issue or case closing procedures, including the preparation of a Form 906, Closing Agreement on Final Determination Cov- ering Specific Matters.