The Internal Revenue Service has issued a notice providing guidance on the effect of adding liquidity facilities to support auction rate preferred stock on the equity character of the stock.

Previously the IRS ruled that certain auction rate preferred stock qualified as equity for federal income tax purposes, but that ruling did not address the question of the effect of guarantees or liquidity facilities on the equity character.

Notice 2008-55 is intended to provide greater certainty and flexibility regarding federal tax issues that have arisen in connection with efforts to address liquidity needs in the auction rate securities market as a result of recent significant auction failures in this market.

The IRS said it will not challenge the equity characterization of auction rate preferred stock for federal income tax purposes as a result of adding a liquidity facility to support the stock if the conditions of the notice are met. The notice takes effect June 13.

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