What is a Notice 99-59 transaction?
A.1 A Notice 99-59 transaction can take a variety of forms, all of which involve the use of distributions of encumbered property for the purpose of either generating large capital losses or excluding a distribution of property from income. A typical arrangement involves a taxpayer acting through a partnership to contribute cash to a foreign corporation formed for the purpose of carrying out the transaction, in exchange for the common stock of that corporation. Another party contributes additional capital to the corporation in exchange for the preferred stock of that corporation. The foreign corporation then acquires additional capital by borrowing from a bank and grants the bank a security interest in securities acquired by the foreign corporation that have a value equal to the amount of the borrowing. Thereafter, the foreign corporation distributes the encumbered securities to the partnership that holds its common stock. The foreign corporation nonetheless remains primarily liable for
