Corporation A owns debt instruments and contributes them to a FASIT. A then retains the ownership interest and sells the regular interests to Bank or the public, this transaction clearly achieves the stated intent behind the FASIT legislation. The more substantial the public participation, the more effective the distribution of risk and the likely it is that transaction will be respected. Of the 4 Scenarios presented above, it appears that Scenarios 3 and 4 are the most likely to be respected by the Service and achieve the desired tax results since they involve a real shift of economic risk in the securitized assets. The following recommendations should also be considered when designing such a transaction in order to maximize the chance of being respected by the Service.
- Maximize the level of public involvement. The percentage of regular interest sold to the public should be more than de minimus. There should be a substantial change in ownership and economic risk after the creation of the FASIT.
- Corporation A’s contribution of debt instruments of assets to a FASIT should include a mix of assets not “traded on an established securities market” as well as those whose fair market value is easily ascertainable by reference to such market.
- Gain recognized on contribution of assets to the FASIT should exceed the amount necessary to offset the expiring losses.
- The corporate business plan should discuss at length non-tax reasons for utilizing a FASIT, (e.g reduce corporate exposure in case of default, reduce percentage of risk in investment portfolio, increase cash flow, etc.0.
Due to the proposed regulation’s inclusion of a broad anti-abuse rule, there can be no certainty that the transaction described in Scenarios 3 and 4 will be respected. If the final regulations include the same languages as the proposed regulations, the intended tax results in the contemplated scenarios are not guaranteed and could in fact be reversed retroactively. However, Scenarios 3 and 4, if designed and carefully implemented, have the potential for succeeding. Therefore an analysis of the tax consequences of having a particular scenario found abusive should be weighed against the benefits resulting from a respected transaction. In cases where a client has significant expiring losses, the potential tax benefit may be well worth the risk.