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B.
Provisions Relating to Tax Shelters
1. Penalty for failure to disclose reportable
transactions (sec. 611 of the House bill, sec. 402
of the Senate amendment, and new sec. 6707A of the
Code)
Present
Law
Regulations under section 6011 require a taxpayer to
disclose with its tax return certain information
with respect to each "reportable
transaction" in which the taxpayer
participates.452
There are six categories of reportable transactions.
The first category is any transaction that is the
same as (or substantially similar to)453
a transaction that is specified by the Treasury
Department as a tax avoidance transaction whose tax
benefits are subject to disallowance under present
law (referred to as a "listed
transaction").454
The second category is any transaction that is
offered under conditions of confidentiality. In
general, a transaction is considered to be offered
to a taxpayer under conditions of confidentiality if
the advisor who is paid a minimum fee places a
limitation on disclosure by the taxpayer of the tax
treatment or tax structure of the transaction and
the limitation on disclosure protects the
confidentiality of that advisor's tax strategies
(irrespective if such terms are legally binding).455
The third category of reportable transactions is any
transaction for which (1) the taxpayer has the right
to a full or partial refund of fees if the intended
tax consequences from the transaction are not
sustained or, (2) the fees are contingent on the
intended tax consequences from the transaction being
sustained.456
The fourth category of reportable transactions
relates to any transaction resulting in a taxpayer
claiming a loss (under section 165) of at least (1)
$10 million in any single year or $20 million in any
combination of years by a corporate taxpayer or a
partnership with only corporate partners; (2) $2
million in any single year or $4 million in any
combination of years by all other partnerships, S
corporations, trusts, and individuals; or (3)
$50,000 in any single year for individuals or trusts
if the loss arises with respect to foreign currency
translation losses.457
The fifth category of reportable transactions refers
to any transaction done by certain taxpayers458
in which the tax treatment of the transaction
differs (or is expected to differ) by more than $10
million from its treatment for book purposes (using
generally accepted accounting principles) in any
year.459
The final category of reportable transactions is any
transaction that results in a tax credit exceeding
$250,000 (including a foreign tax credit) if the
taxpayer holds the underlying asset for less than 45
days.460
Under present law, there is no specific penalty for
failing to disclose a reportable transaction;
however, such a failure can jeopardize a taxpayer's
ability to claim that any income tax understatement
attributable to such undisclosed transaction is due
to reasonable cause, and that the taxpayer acted in
good faith.461
House
Bill
In general
The House bill creates a new penalty for any person
who fails to include with any return or statement
any required information with respect to a
reportable transaction. The new penalty applies
without regard to whether the transaction ultimately
results in an understatement of tax, and applies in
addition to any accuracy-related penalty that may be
imposed.
Transactions to be disclosed
The House bill does not define the terms
"listed transaction"462
or "reportable transaction," nor does it
explain the type of information that must be
disclosed in order to avoid the imposition of a
penalty. Rather, the House bill authorizes the
Treasury Department to define a "listed
transaction" and a "reportable
transaction" under section 6011.
Penalty rate
The penalty for failing to disclose a reportable
transaction is $10,000 in the case of a natural
person and $50,000 in any other case. The amount is
increased to $100,000 and $200,000, respectively, if
the failure is with respect to a listed transaction.
The penalty cannot be waived with respect to a
listed transaction. As to reportable transactions,
the
IRS
Commissioner or his delegate can rescind (or abate)
the penalty only if rescinding the penalty would
promote compliance with the tax laws and effective
tax administration. The decision to rescind a
penalty must be accompanied by a record describing
the facts and reasons for the action and the amount
rescinded. There will be no taxpayer right to
judicially appeal a refusal to rescind a penalty.463
The
IRS
also is required to submit an annual report to
Congress summarizing the application of the
disclosure penalties and providing a description of
each penalty rescinded under this provision and the
reasons for the rescission.
Effective date
The House bill provision is effective for returns
and statements the due date for which is after the
date of enactment.
Senate
Amendment
In general
The Senate amendment is the same as the House bill,
with certain modifications.
Transactions to be disclosed
Like the House bill, the Senate amendment does not
define the terms "listed transaction" or
"reportable transaction" but, rather,
authorizes the Treasury Department to define a
"listed transaction" and a
"reportable transaction" under section
6011.
Penalty rate
Under the Senate amendment, the penalty for failing
to disclose a reportable transaction generally is
$50,000. The amount is increased to $100,000 if the
failure is with respect to a listed transaction. For
large entities and high net worth individuals, the
penalty amount is doubled (i.e., $100,000 for a
reportable transaction and $200,000 for a listed
transaction).
The penalty cannot be waived with respect to a
listed transaction. As to reportable transactions,
the penalty can be rescinded (or abated) only if:
(1) the taxpayer on whom the penalty is imposed has
a history of complying with the Federal tax laws,
(2) it is shown that the violation is due to an
unintentional mistake of fact, (3) imposing the
penalty would be against equity and good conscience,
and (4) rescinding the penalty would promote
compliance with the tax laws and effective tax
administration. The authority to rescind the penalty
can only be exercised by the
IRS
Commissioner personally or the head of the Office of
Tax Shelter Analysis. Thus, the penalty cannot be
rescinded by a revenue agent, an Appeals officer, or
any other
IRS
personnel. The decision to rescind a penalty must be
accompanied by a record describing the facts and
reasons for the action and the amount rescinded.
There will be no taxpayer right to appeal a refusal
to rescind a penalty. The
IRS
also is required to submit an annual report to
Congress summarizing the application of the
disclosure penalties and providing a description of
each penalty rescinded under this provision and the
reasons for the rescission.
A "large entity" is defined as any entity
with gross receipts in excess of $10 million in the
year of the transaction or in the preceding year. A
"high net worth individual" is defined as
any individual whose net worth exceeds $2 million,
based on the fair market value of the individual's
assets and liabilities immediately before entering
into the transaction.
A public entity that is required to pay a penalty
for failing to disclose a listed transaction (or is
subject to an understatement penalty attributable to
a non-disclosed listed transaction, a non-disclosed
reportable avoidance transaction,464
or a transaction that lacks economic substance) must
disclose the imposition of the penalty in reports to
the Securities and Exchange Commission for such
period as the Secretary shall specify. The provision
applies without regard to whether the taxpayer
determines the amount of the penalty to be material
to the reports in which the penalty must appear, and
treats any failure to disclose a transaction in such
reports as a failure to disclose a listed
transaction. A taxpayer must disclose a penalty in
reports to the Securities and Exchange Commission
once the taxpayer has exhausted its administrative
and judicial remedies with respect to the penalty
(or if earlier, when paid). In addition, the
Secretary is required to make public the name of any
person that is required to pay a penalty for failing
to disclose a listed transaction (or is subject to
an understatement penalty attributable to a
nondisclosed listed transaction, a non-disclosed
reportable avoidance transaction, or a transaction
that lacks economic substance), as well as the
amount of such penalty.
Effective date
The Senate amendment provision is effective for
returns and statements the due date for which is
after the date of enactment.
Conference Agreement
The conference agreement follows the House bill,
with the following modifications.
In determining whether to rescind (or abate) the
penalty for failing to disclose a reportable
transaction on the grounds that doing so would
promote compliance with the tax laws and effective
tax administration, the conferees intend that the
IRS
Commissioner take into account whether: (1) the
person on whom the penalty is imposed has a history
of complying with the tax laws; (2) the violation is
due to an unintentional mistake of fact; and (3)
imposing the penalty would be against equity and
good conscience.
In addition, the conference agreement provides that
a public entity that is required to pay a penalty
for failing to disclose a listed transaction (or is
subject to an understatement penalty attributable to
a non-disclosed listed transaction or a
non-disclosed reportable avoidance transaction) must
disclose the imposition of the penalty in reports to
the Securities and Exchange Commission for such
period as the Secretary shall specify. This
requirement applies without regard to whether the
taxpayer determines the amount of the penalty to be
material to the reports in which the penalty must
appear, and treats any failure to disclose a
transaction in such reports as a failure to disclose
a listed transaction. A taxpayer must disclose a
penalty in reports to the Securities and Exchange
Commission once the taxpayer has exhausted its
administrative and judicial remedies with respect to
the penalty (or if earlier, when paid). However, the
taxpayer is only required to report the penalty one
time. The conference agreement further provides that
this requirement also applies to a public entity
that is subject to a gross valuation misstatement
penalty under section 6662(h) attributable to a
non-disclosed listed transaction or non-disclosed
reportable avoidance transaction.
2. Modifications to the accuracy-related
penalties for listed transactions and reportable
transactions having a significant tax avoidance
purpose (sec. 612 of the House bill, sec. 403 of the
Senate amendment, and new sec. 6662A of the Code)
Present
Law
The accuracy-related penalty applies to the portion
of any underpayment that is attributable to (1)
negligence, (2) any substantial understatement of
income tax, (3) any substantial valuation
misstatement, (4) any substantial overstatement of
pension liabilities, or (5) any substantial estate
or gift tax valuation understatement. If the correct
income tax liability exceeds that reported by the
taxpayer by the greater of 10 percent of the correct
tax or $5,000 ($10,000 in the case of corporations),
then a substantial understatement exists and a
penalty may be imposed equal to 20 percent of the
underpayment of tax attributable to the
understatement.465
The amount of any understatement generally is
reduced by any portion attributable to an item if
(1) the treatment of the item is or was supported by
substantial authority, or (2) facts relevant to the
tax treatment of the item were adequately disclosed
and there was a reasonable basis for its tax
treatment.466
Special rules apply with respect to tax shelters.467
For understatements by non-corporate taxpayers
attributable to tax shelters, the penalty may be
avoided only if the taxpayer establishes that, in
addition to having substantial authority for the
position, the taxpayer reasonably believed that the
treatment claimed was more likely than not the
proper treatment of the item. This reduction in the
penalty is unavailable to corporate tax shelters.
The understatement penalty generally is abated (even
with respect to tax shelters) in cases in which the
taxpayer can demonstrate that there was
"reasonable cause" for the underpayment
and that the taxpayer acted in good faith.468
The relevant regulations provide that reasonable
cause exists where the taxpayer "reasonably
relies in good faith on an opinion based on a
professional tax advisor's analysis of the pertinent
facts and authorities [that] ... unambiguously
concludes that there is a greater than 50-percent
likelihood that the tax treatment of the item will
be upheld if challenged" by the
IRS
.469
House
Bill
In general
The House bill modifies the present-law accuracy
related penalty by replacing the rules applicable to
tax shelters with a new accuracy-related penalty
that applies to listed transactions and reportable
transactions with a significant tax avoidance
purpose (hereinafter referred to as a
"reportable avoidance transaction").470
The penalty rate and defenses available to avoid the
penalty vary depending on whether the transaction
was adequately disclosed.
Disclosed transactions
In general, a 20-percent accuracy-related penalty is
imposed on any understatement attributable to an
adequately disclosed listed transaction or
reportable avoidance transaction. The only exception
to the penalty is if the taxpayer satisfies a more
stringent reasonable cause and good faith exception
(hereinafter referred to as the "strengthened
reasonable cause exception"), which is
described below. The strengthened reasonable cause
exception is available only if the relevant facts
affecting the tax treatment are adequately
disclosed, there is or was substantial authority for
the claimed tax treatment, and the taxpayer
reasonably believed that the claimed tax treatment
was more likely than not the proper treatment.
Undisclosed transactions
If the taxpayer does not adequately disclose the
transaction, the strengthened reasonable cause
exception is not available (i.e., a strict-liability
penalty applies), and the taxpayer is subject to an
increased penalty equal to 30 percent of the
understatement.
Determination of the understatement amount
The penalty is applied to the amount of any
understatement attributable to the listed or
reportable avoidance transaction without regard to
other items on the tax return. For purposes of this
provision, the amount of the understatement is
determined as the sum of (1) the product of the
highest corporate or individual tax rate (as
appropriate) and the increase in taxable income
resulting from the difference between the taxpayer's
treatment of the item and the proper treatment of
the item (without regard to other items on the tax
return),471
and (2) the amount of any decrease in the aggregate
amount of credits which results from a difference
between the taxpayer's treatment of an item and the
proper tax treatment of such item.
Except as provided in regulations, a taxpayer's
treatment of an item shall not take into account any
amendment or supplement to a return if the amendment
or supplement is filed after the earlier of when the
taxpayer is first contacted regarding an examination
of the return or such other date as specified by the
Secretary.
Strengthened reasonable cause exception
A penalty is not imposed under the provision with
respect to any portion of an understatement if it
shown that there was reasonable cause for such
portion and the taxpayer acted in good faith. Such a
showing requires (1) adequate disclosure of the
facts affecting the transaction in accordance with
the regulations under section 6011,472
(2) that there is or was substantial authority for
such treatment, and (3) that the taxpayer reasonably
believed that such treatment was more likely than
not the proper treatment. For this purpose, a
taxpayer will be treated as having a reasonable
belief with respect to the tax treatment of an item
only if such belief (1) is based on the facts and
law that exist at the time the tax return (that
includes the item) is filed, and (2) relates solely
to the taxpayer's chances of success on the merits
and does not take into account the possibility that
(a) a return will not be audited, (b) the treatment
will not be raised on audit, or (c) the treatment
will be resolved through settlement if raised.
A taxpayer may (but is not required to) rely on an
opinion of a tax advisor in establishing its
reasonable belief with respect to the tax treatment
of the item. However, a taxpayer may not rely on an
opinion of a tax advisor for this purpose if the
opinion (1) is provided by a "disqualified tax
advisor," or (2) is a "disqualified
opinion."
Disqualified tax advisor
A disqualified tax advisor is any advisor who (1) is
a material advisor473
and who participates in the organization,
management, promotion or sale of the transaction or
is related (within the meaning of section 267(b) or
707(b)(1)) to any person who so participates, (2) is
compensated directly or indirectly474
by a material advisor with respect to the
transaction, (3) has a fee arrangement with respect
to the transaction that is contingent on all or part
of the intended tax benefits from the transaction
being sustained, or (4) as determined under
regulations prescribed by the Secretary, has a
disqualifying financial interest with respect to the
transaction.
Organization, management, promotion or sale of a
transaction. --A material advisor is considered
as participating in the "organization" of
a transaction if the advisor performs acts relating
to the development of the transaction. This may
include, for example, preparing documents (1)
establishing a structure used in connection with the
transaction (such as a partnership agreement), (2)
describing the transaction (such as an offering
memorandum or other statement describing the
transaction), or (3) relating to the registration of
the transaction with any federal, state or local
government body.475
Participation in the "management" of a
transaction means involvement in the decision-making
process regarding any business activity with respect
to the transaction. Participation in the
"promotion or sale" of a transaction means
involvement in the marketing or solicitation of the
transaction to others. Thus, an advisor who provides
information about the transaction to a potential
participant is involved in the promotion or sale of
a transaction, as is any advisor who recommends the
transaction to a potential participant.
Disqualified opinion
An opinion may not be relied upon if the opinion (1)
is based on unreasonable factual or legal
assumptions (including assumptions as to future
events), (2) unreasonably relies upon
representations, statements, finding or agreements
of the taxpayer or any other person, (3) does not
identify and consider all relevant facts, or (4)
fails to meet any other requirement prescribed by
the Secretary.
Coordination with other penalties
Any understatement upon which a penalty is imposed
under the House bill is not subject to the
accuracy-related penalty under section 6662.
However, such understatement is included for
purposes of determining whether any understatement
(as defined in sec. 6662(d)(2)) is a substantial
understatement as defined under section 6662(d)(1).
The penalty imposed under the House bill shall not
apply to any portion of an understatement to which a
fraud penalty is applied under section 6663.
Effective date
The House bill provision is effective for taxable
years ending after the date of enactment.
Senate
Amendment
In general
The Senate amendment is the same as the House bill,
with certain modifications.
Disclosed transactions
The Senate amendment is the same as the House bill
with regard to accuracy-related penalties for
understatements attributable to an adequately
disclosed listed transaction or reportable avoidance
transaction.
Undisclosed transactions
Like the House bill, the Senate amendment provides
that a taxpayer is subject to an increased
accuracy-related penalty equal to 30 percent of the
understatement, and the strengthened reasonable
cause exception is not available (i.e., a
strict-liability penalty applies), if the taxpayer
does not adequately disclose the transaction.
Under the Senate amendment, a public entity that is
required to pay the 30-percent penalty also must
disclose the imposition of the penalty in reports to
the
SEC
for such periods as the Secretary shall specify. The
disclosure to the
SEC
applies without regard to whether the taxpayer
determines the amount of the penalty to be material
to the reports in which the penalty must appear, and
any failure to disclose such penalty in the reports
is treated as a failure to disclose a listed
transaction. A taxpayer must disclose a penalty in
reports to the
SEC
once the taxpayer has exhausted its administrative
and judicial remedies with respect to the penalty
(or if earlier, when paid).
The Senate amendment also provides that, once the
30-percent penalty has been included in the Revenue
Agent Report, the penalty cannot be compromised for
purposes of a settlement without approval of the
Commissioner personally or the head of the Office of
Tax Shelter Analysis. Furthermore, the
IRS
is required to submit an annual report to Congress
summarizing the application of this penalty and
providing a description of each penalty compromised
under this provision and the reasons for the
compromise.
Disqualified tax advisor
The Senate amendment provides that a disqualified
tax advisor also includes ad advisor who has an
arrangement with respect to the transaction which
provides that contractual disputes between the
taxpayer and the advisor are to be settled by
arbitration or which limits damages by reference to
fees paid to the advisor for such transaction.
Determination of the understatement amount
The Senate amendment is the same as the House bill
with regard to determining the amount of an
understatement that is subject to this provision.
Strengthened reasonable cause exception
The Senate amendment is the same as the House bill
with regard to the reasonable cause exception to
accuracy-related penalties under this provision.476
Coordination with other penalties
The Senate amendment is the same as the House bill
with regard to coordination between the penalty
imposed under this provision and other penalties.
Effective date
The Senate amendment provision is effective for
taxable years ending after the date of enactment.
Conference
Agreement
The conference agreement follows the House bill,
except the conference agreement also provides that
any understatement upon which a penalty is imposed
under the conference agreement is not subject to the
valuation misstatement penalties under sections
6662(e) or 6662(h).
3. Tax shelter exception to confidentiality
privileges relating to taxpayer communications (sec.
613 of the House bill, sec. 406 of the Senate
amendment, and sec. 7525 of the Code)
Present
Law
In general, a common law privilege of
confidentiality exists for communications between an
attorney and client with respect to the legal advice
the attorney gives the client. The Code provides
that, with respect to tax advice, the same common
law protections of confidentiality that apply to a
communication between a taxpayer and an attorney
also apply to a communication between a taxpayer and
a federally authorized tax practitioner to the
extent the communication would be considered a
privileged communication if it were between a
taxpayer and an attorney. This rule is inapplicable
to communications regarding corporate tax shelters.
House
Bill
The House bill modifies the rule relating to
corporate tax shelters by making it applicable to
all tax shelters, whether entered into by
corporations, individuals, partnerships, tax-exempt
entities, or any other entity. Accordingly,
communications with respect to tax shelters are not
subject to the confidentiality provision of the Code
that otherwise applies to a communication between a
taxpayer and a federally authorized tax
practitioner.
Effective date. --The House bill provision is
effective with respect to communications made on or
after the date of enactment.
Senate
Amendment
The Senate amendment is the same as the House bill.
Conference
Agreement
The conference agreement follows the House bill and
the Senate amendment.
4. Statute of limitations for unreported listed
transactions (sec. 614 of the House bill, sec. 416
of the Senate amendment, and sec. 6501 of the Code)
Present
Law
In general, the Code requires that taxes be assessed
within three years477
after the date a return is filed.478
If there has been a substantial omission of items of
gross income that totals more than 25 percent of the
amount of gross income shown on the return, the
period during which an assessment must be made is
extended to six years.479
If an assessment is not made within the required
time periods, the tax generally cannot be assessed
or collected at any future time. Tax may be assessed
at any time if the taxpayer files a false or
fraudulent return with the intent to evade tax or if
the taxpayer does not file a tax return at all.480
House
Bill
The House bill extends the statute of limitations
with respect to a listed transaction if a taxpayer
fails to include on any return or statement for any
taxable year any information with respect to a
listed transaction481
which is required to be included (under section
6011) with such return or statement. The statute of
limitations with respect to such a transaction will
not expire before the date which is one year after
the earlier of (1) the date on which the Secretary
is furnished the information so required, or (2) the
date that a material advisor (as defined in 6111)
satisfies the list maintenance requirements (as
defined by section 6112) with respect to a request
by the Secretary. For example, if a taxpayer engaged
in a transaction in 2005 that becomes a listed
transaction in 2007 and the taxpayer fails to
disclose such transaction in the manner required by
Treasury regulations, then the transaction is
subject to the extended statute of limitations.482
Effective date. --The House bill provision is
effective for taxable years with respect to which
the period for assessing a deficiency did not expire
before the date of enactment.
Senate
Amendment
The Senate amendment is the same as the House bill.
Conference
Agreement
The conference agreement follows the House bill and
the Senate amendment.
5. Disclosure of reportable transactions by
material advisors (secs. 615 and 616 of the House
bill, secs. 407 and 408 of the Senate amendment, and
secs. 6111 and 6707 of the Code)
Present
Law
Registration of tax shelter arrangements
An organizer of a tax shelter is required to
register the shelter with the Secretary not later
than the day on which the shelter is first offered
for sale.483
A "tax shelter" means any investment with
respect to which the tax shelter ratio484
for any investor as of the close of any of the first
five years ending after the investment is offered
for sale may be greater than two to one and which
is: (1) required to be registered under Federal or
State securities laws, (2) sold pursuant to an
exemption from registration requiring the filing of
a notice with a Federal or State securities agency,
or (3) a substantial investment (greater than
$250,000 and involving at least five investors).485
Other promoted arrangements are treated as tax
shelters for purposes of the registration
requirement if: (1) a significant purpose of the
arrangement is the avoidance or evasion of Federal
income tax by a corporate participant; (2) the
arrangement is offered under conditions of
confidentiality; and (3) the promoter may receive
fees in excess of $100,000 in the aggregate.486
In general, a transaction has a "significant
purpose of avoiding or evading Federal income
tax" if the transaction: (1) is the same as or
substantially similar to a "listed
transaction,"487
or (2) is structured to produce tax benefits that
constitute an important part of the intended results
of the arrangement and the promoter reasonably
expects to present the arrangement to more than one
taxpayer.488
Certain exceptions are provided with respect to the
second category of transactions.489
An arrangement is offered under conditions of
confidentiality if: (1) an offeree has an
understanding or agreement to limit the disclosure
of the transaction or any significant tax features
of the transaction; or (2) the promoter knows, or
has reason to know, that the offeree's use or
disclosure of information relating to the
transaction is limited in any other manner.490
Failure to register tax shelter
The penalty for failing to timely register a tax
shelter (or for filing false or incomplete
information with respect to the tax shelter
registration) generally is the greater of one
percent of the aggregate amount invested in the
shelter or $500.491
However, if the tax shelter involves an arrangement
offered to a corporation under conditions of
confidentiality, the penalty is the greater of
$10,000 or 50 percent of the fees payable to any
promoter with respect to offerings prior to the date
of late registration. Intentional disregard of the
requirement to register increases the penalty to 75
percent of the applicable fees.
Section 6707 also imposes (1) a $100 penalty on the
promoter for each failure to furnish the investor
with the required tax shelter identification number,
and (2) a $250 penalty on the investor for each
failure to include the tax shelter identification
number on a return.
House
Bill
Disclosure of reportable transactions by
material advisors
The House bill repeals the present law rules with
respect to registration of tax shelters. Instead,
the House bill requires each material advisor with
respect to any reportable transaction (including any
listed transaction)492
to timely file an information return with the
Secretary (in such form and manner as the Secretary
may prescribe). The return must be filed on such
date as specified by the Secretary.
The information return will include (1) information
identifying and describing the transaction, (2)
information describing any potential tax benefits
expected to result from the transaction, and (3)
such other information as the Secretary may
prescribe. It is expected that the Secretary may
seek from the material advisor the same type of
information that the Secretary may request from a
taxpayer in connection with a reportable
transaction.493
A "material advisor" means any person (1)
who provides material aid, assistance, or advice
with respect to organizing, managing, promoting,
selling, implementing, or carrying out any
reportable transaction, and (2) who directly or
indirectly derives gross income for such assistance
or advice in excess of $250,000 ($50,000 in the case
of a reportable transaction substantially all of the
tax benefits from which are provided to natural
persons) or such other amount as may be prescribed
by the Secretary.
The Secretary may prescribe regulations which
provide (1) that only one material advisor has to
file an information return in cases in which two or
more material advisors would otherwise be required
to file information returns with respect to a
particular reportable transaction, (2) exemptions
from the requirements of this section, and (3) other
rules as may be necessary or appropriate to carry
out the purposes of this section (including, for
example, rules regarding the aggregation of fees in
appropriate circumstances).
Penalty for failing to furnish information
regarding reportable transactions
The House bill repeals the present-law penalty for
failure to register tax shelters. Instead, the House
bill imposes a penalty on any material advisor who
fails to file an information return, or who files a
false or incomplete information return, with respect
to a reportable transaction (including a listed
transaction).494
The amount of the penalty is $50,000. If the penalty
is with respect to a listed transaction, the amount
of the penalty is increased to the greater of (1)
$200,000, or (2) 50 percent of the gross income of
such person with respect to aid, assistance, or
advice which is provided with respect to the
transaction before the date the information return
that includes the transaction is filed. Intentional
disregard by a material advisor of the requirement
to disclose a listed transaction increases the
penalty to 75 percent of the gross income.
The penalty cannot be waived with respect to a
listed transaction. As to reportable transactions,
the penalty can be rescinded (or abated) only in
exceptional circumstances.495
All or part of the penalty may be rescinded only if
rescinding the penalty would promote compliance with
the tax laws and effective tax administration. The
decision to rescind a penalty must be accompanied by
a record describing the facts and reasons for the
action and the amount rescinded. There will be no
right to judicially appeal a refusal to rescind a
penalty. The
IRS
also is required to submit an annual report to
Congress summarizing the application of the
disclosure penalties and providing a description of
each penalty rescinded under this provision and the
reasons for the rescission.
Effective date
The House bill provision requiring disclosure of
reportable transactions by material advisors applies
to transactions with respect to which material aid,
assistance or advice is provided after the date of
enactment.
The House bill provision imposing a penalty for
failing to disclose reportable transactions applies
to returns the due date for which is after the date
of enactment.
Senate
Amendment
The Senate amendment is the same as the House bill,
except the Senate amendment also includes in the
definition of a "material advisor" any
person who provides material aid, assistance, or
advice with respect to insuring any reportable
transaction (and who derives gross income for such
assistance or advice in excess of the amounts
specified in the House bill).
COM-
RPT
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HIST
, HRRepNo 108-755, Conference Committee Report
on the American Jobs Creation Act of 2004, HR
4520, (October 8, 2004), Part 06 of 08
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Conference
Agreement
The conference agreement follows the Senate
amendment.
6. Investor lists and modification of penalty for
failure to maintain investor lists (secs. 615 and
617 of the House bill, secs. 407 and 409 of the
Senate amendment, and secs. 6112 and 6708 of the
Code)
Present
Law
Investor lists
Any organizer or seller of a potentially abusive tax
shelter must maintain a list identifying each person
who was sold an interest in any such tax shelter
with respect to which registration was required
under section 6111 (even though the particular party
may not have been subject to confidentiality
restrictions).496
Recently issued regulations under section 6112
contain rules regarding the list maintenance
requirements.497
In general, the regulations apply to transactions
that are potentially abusive tax shelters entered
into, or acquired after, February 28, 2003.498
The regulations provide that a person is an
organizer or seller of a potentially abusive tax
shelter if the person is a material advisor with
respect to that transaction.499
A material advisor is defined as any person who is
required to register the transaction under section
6111, or expects to receive a minimum fee of (1)
$250,000 for a transaction that is a potentially
abusive tax shelter if all participants are
corporations, or (2) $50,000 for any other
transaction that is a potentially abusive tax
shelter.500
For listed transactions (as defined in the
regulations under section 6011), the minimum fees
are reduced to $25,000 and $10,000, respectively.
A potentially abusive tax shelter is any transaction
that (1) is required to be registered under section
6111, (2) is a listed transaction (as defined under
the regulations under section 6011), or (3) any
transaction that a potential material advisor, at
the time the transaction is entered into, knows is
or reasonably expects will become a reportable
transaction (as defined under the new regulations
under section 6011).501
The Secretary is required to prescribe regulations
which provide that, in cases in which two or more
persons are required to maintain the same list, only
one person would be required to maintain the list.502
Penalty for failing to maintain investor lists
Under section 6708, the penalty for failing to
maintain the list required under section 6112 is $50
for each name omitted from the list (with a maximum
penalty of $100,000 per year).
House
Bill
Investor lists
Each material advisor503
with respect to a reportable transaction (including
a listed transaction)504
is required to maintain a list that (1) identifies
each person with respect to whom the advisor acted
as a material advisor with respect to the reportable
transaction, and (2) contains other information as
may be required by the Secretary. In addition, the
provision authorizes (but does not require) the
Secretary to prescribe regulations which provide
that, in cases in which two or more persons are
required to maintain the same list, only one person
would be required to maintain the list.
Penalty for failing to maintain investor lists
The provision modifies the penalty for failing to
maintain the required list by making it a
time-sensitive penalty. Thus, a material advisor who
is required to maintain an investor list and who
fails to make the list available upon written
request by the Secretary within 20 business days
after the request will be subject to a $10,000 per
day penalty. The penalty applies to a person who
fails to maintain a list, maintains an incomplete
list, or has in fact maintained a list but does not
make the list available to the Secretary. The
penalty can be waived if the failure to make the
list available is due to reasonable cause.505
Effective date
The House bill provision requiring a material
advisor to maintain an investor list applies to
transactions with respect to which material aid,
assistance or advice is provided after the date of
enactment. The House bill provision imposing a
penalty for failing to maintain investor lists
applies to requests made after the date of
enactment.
Senate
Amendment
The Senate amendment is the same as the House bill.
In addition, the Senate amendment clarifies that,
for purposes of section 6112, the identity of any
person is not privileged under the common law
attorney-client privilege (or, consequently, the
section 7525 federally authorized tax practitioner
confidentiality provision).
Effective date. --The Senate amendment
provision clarifying that the identity of any person
is not privileged for purposes of section 6112 is
effective as if included in the amendments made by
section 142 of the Deficit Reduction Act of 1984.
Conference
Agreement
The conference agreement follows the House bill.
7. Penalty on promoters of tax shelters (sec. 618
of the House bill, sec. 415 of the Senate amendment,
and sec. 6700 of the Code)
Present
Law
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