6694(c)(2)(A) as amended

Emergency Economic Stabilization Act of 2008, as Amended and Passed by the Senate on October 1 (legislative day, September 17), 2008, signed by the President October 3, 2008, includes the following as it pertains to “unreasonable positions” under section 6694(a):


6694(a)(2)(C) TAX SHELTERS AND REPORTABLE TRANSACTIONS- If the position is with respect to a tax shelter (as defined in section 6662(d)(2)(C)(ii)) or a reportable transaction to which section 6662A applies, the position is described in this paragraph unless it is reasonable to believe that the position would more likely than not be sustained on its merits.


Section 6662A is described below. The 6662A penalty applies to the clients of tax return preparers. The $1,000/50% penalty will apply to 6662A transactions as expressly noted under section 6694(a)(2)(C). However, it could be argued that IRS published positions on “reportable transactions” should be known by all return preparers, and the failure to know of the reportable transaction could be viewed as “reckless” under section 6662(b) and therefore result in the $5,000 penalty.

It is also the responsibility of return preparers to be aware of “reportable transactions” to assist their clients in avoiding that penalty. There is no defense for not knowing about a reportable transaction. For that reason the “more than likely” language in 6694(a)(3)(C) is arguably an understatement of the conduct expected of return preparers.

The problem with "reportable transactions" is that there is a huge penalty for not reporting a "reportable transaction" under section 6111. Section 6111 is listed as follows:

DISCLOSURE OF REPORTABLE TRANSACTIONS



6111(a) IN GENERAL. --Each material advisor with respect to any reportable transaction shall make a return (in such form as the Secretary may prescribe) setting forth --



6111(a)(1) information identifying and describing the transaction,



6111(a)(2) information describing any potential tax benefits expected to result from the transaction, and



6111(a)(3) such other information as the Secretary may prescribe.



Such return shall be filed not later than the date specified by the Secretary.



6111(b) DEFINITIONS. --For purposes of this section --



6111(b)(1) MATERIAL ADVISOR. --



6111(b)(1)(A) IN GENERAL. --The term "material advisor" means any person --



6111(b)(1)(A)(i) who provides any material aid, assistance, or advice with respect to organizing, managing, promoting, selling, implementing, insuring, or carrying out any reportable transaction, and



6111(b)(1)(A)(ii) who directly or indirectly derives gross income in excess of the threshold amount (or such other amount as may be prescribed by the Secretary) for such aid, assistance, or advice.



6111(b)(1)(B) THRESHOLD AMOUNT. --For purposes of subparagraph (A), the threshold amount is --



6111(b)(1)(B)(i) $50,000 in the case of a reportable transaction substantially all of the tax benefits from which are provided to natural persons, and



6111(b)(1)(B)(ii) $250,000 in any other case.



6111(b)(2) REPORTABLE TRANSACTION. --The term "reportable transaction" has the meaning given to such term by section 6707A(c).



6111(c) REGULATIONS. --The Secretary may prescribe regulations which provide --



6111(c)(1) that only 1 person shall be required to meet the requirements of subsection (a) in cases in which 2 or more persons would otherwise be required to meet such requirements,



6111(c)(2) exemptions from the requirements of this section, and



6111(c)(3) such rules as may be necessary or appropriate to carry out the purposes of this section.




If you need assistance in identifying a “reportable transaction,” you can contact us at ab@irstaxattorney.com.

Attached below is also an example of a “reportable transaction”
and the 6662A statute:

6662A(a) IMPOSITION OF PENALTY. --If a taxpayer has a reportable transaction understatement for any taxable year, there shall be added to the tax an amount equal to 20 percent of the amount of such understatement.

6662A(b) REPORTABLE TRANSACTION UNDERSTATEMENT. --For purposes of this section --

6662A(b)(1) IN GENERAL. --The term "reportable transaction understatement" means the sum of --

6662A(b)(1)(A) the product of --
6662A(b)(1)(A)(i) the amount of the increase (if any) in taxable income which results from a difference between the proper tax treatment of an item to which this section applies and the taxpayer's treatment of such item (as shown on the taxpayer's return of tax), and

6662A(b)(1)(A)(ii) the highest rate of tax imposed by section 1 (section 11 in the case of a taxpayer which is a corporation), and

6662A(b)(1)(B) the amount of the decrease (if any) in the aggregate amount of credits determined under subtitle A which results from a difference between the taxpayer's treatment of an item to which this section applies (as shown on the taxpayer's return of tax) and the proper tax treatment of such item.

For purposes of subparagraph (A), any reduction of the excess of deductions allowed for the taxable year over gross income for such year, and any reduction in the amount of capital losses which would (without regard to section 1211) be allowed for such year, shall be treated as an increase in taxable income.

6662A(b)(2) ITEMS TO WHICH SECTION APPLIES. --This section shall apply to any item which is attributable to --

6662A(b)(2)(A) any listed transaction, and

6662A(b)(2)(B) any reportable transaction (other than a listed transaction) if a significant purpose of such transaction is the avoidance or evasion of Federal income tax.

6662A(c) HIGHER PENALTY FOR NONDISCLOSED LISTED AND OTHER AVOIDANCE TRANSACTIONS. --Subsection (a) shall be applied by substituting "30 percent" for "20 percent" with respect to the portion of any reportable transaction understatement with respect to which the requirement of section 6664(d)(2)(A) is not met.

6662A(d) DEFINITIONS OF REPORTABLE AND LISTED TRANSACTIONS. --For purposes of this section, the terms "reportable transaction" and "listed transaction" have the respective meanings given to such terms by section 6707A(c).

6662A(e) SPECIAL RULES. --

6662A(e)(1) COORDINATION WITH PENALTIES, ETC., ON OTHER UNDERSTATEMENTS. --In the case of an understatement (as defined in section 6662(d)(2)) --

6662A(e)(1)(A) the amount of such understatement (determined without regard to this paragraph) shall be increased by the aggregate amount of reportable transaction understatements for purposes of determining whether such understatement is a substantial understatement under section 6662(d)(1), and

6662A(e)(1)(B) the addition to tax under section 6662(a) shall apply only to the excess of the amount of the substantial understatement (if any) after the application of subparagraph (A) over the aggregate amount of reportable transaction understatements.
6662A(e)(2) COORDINATION WITH OTHER PENALTIES. --

6662A(e)(2)(A) COORDINATION WITH FRAUD PENALTY. --This section shall not apply to any portion of an understatement on which a penalty is imposed under section 6663.

6662A(e)(2)(B) COORDINATION WITH GROSS VALUATION MISSTATEMENT PENALTY. --This section shall not apply to any portion of an understatement on which a penalty is imposed under section 6662 if the rate of the penalty is determined under section 6662(h).

6662A(e)(3) SPECIAL RULE FOR AMENDED RETURNS. --Except as provided in regulations, in no event shall any tax treatment included with an amendment or supplement to a return of tax be taken into account in determining the amount of any reportable transaction understatement if the amendment or supplement is filed after the earlier of the date the taxpayer is first contacted by the Secretary regarding the examination of the return or such other date as is specified by the Secretary.

Notice 2007-72 , I.R.B. 2007-36, August 14, 2007, is an example of a reportable transaction, as follows:



The Internal Revenue Service and the Treasury Department are aware of a type of transaction, described below, in which a taxpayer directly or indirectly acquires certain rights in real property or in an entity that directly or indirectly holds real property, transfers the rights more than one year after the acquisition to an organization described in §170(c) of the Internal Revenue Code, and claims a charitable contribution deduction under §170 that is significantly higher than the amount that the taxpayer paid to acquire the rights. The IRS and the Treasury Department believe this transaction has the potential for tax avoidance or evasion, but lack sufficient information to determine whether the transaction should be identified specifically as a tax avoidance transaction. This notice identifies this transaction, and substantially similar transactions, as transactions of interest for purposes of §1.6011-4(b)(6) of the Income Tax Regulations and §§6111 and 6112. This notice also alerts persons involved with these transactions to certain responsibilities that may arise from their involvement with these transactions.



FACTS

In a typical transaction, Advisor owns all of the membership interests in a limited liability company (LLC) that directly or indirectly owns real property (other than a personal residence as defined in §1.170A-7(b)(3)) that may be subject to a long-term lease. Advisor and Taxpayer enter into an agreement under the terms of which Advisor continues to own the membership interests in LLC for a term of years (the Initial Member Interest), and Taxpayer purchases the successor member interest in LLC (the Successor Member Interest), which entitles Taxpayer to own all of the membership interests in LLC upon the expiration of the term of years. In some variations of this transaction, Taxpayer may hold the Successor Member Interest through another entity, such as a single member limited liability company. Further, the agreement may refer to the Successor Member Interest as a remainder interest.

After holding the Successor Member Interest for more than one year (in order to treat the interest as long-term capital gain property), Taxpayer transfers the Successor Member Interest to an organization described in §170(c) (Charity).

Taxpayer claims the value of the Successor Member Interest to be an amount that is significantly higher than Taxpayer's purchase price (for example, an amount that is a multiple of Taxpayer's purchase price and exceeds normal appreciation). Taxpayer claims a charitable contribution deduction under §170 based on this higher amount. Taxpayer reaches this value by taking into account an appraisal obtained by or on behalf of Advisor or Taxpayer of the fee interest in the underlying real property and the §7520 valuation tables.

The Internal Revenue Service and the Treasury Department are concerned about apparent irregularities in this transaction. Specifically, the IRS and the Treasury Department are concerned with the large discrepancy between (1) the amount Taxpayer paid for the Successor Member Interest, and (2) the amount claimed by Taxpayer as a charitable contribution. The IRS and the Treasury Department also have the following additional concerns, which may be present in some variations of this transaction: (1) any mischaracterization of the ownership interests in LLC; (2) a Charity's agreement not to transfer the Successor Member Interest for a period of time (which may coincide with the expiration of the applicable period in §6050L(a)(1)); and (3) any sale by Charity of the Successor Member Interest to a party selected by or related to Advisor or Taxpayer.



TRANSACTION OF INTEREST



Effective Date

Transactions that are the same as, or substantially similar to, the transactions described in this notice are identified as transactions of interest for purposes of §1.6011-4(b)(6) and §§6111 and 6112 effective August 14, 2007, the date this notice was released to the public. Persons entering into these transactions on or after November 2, 2006, must disclose the transaction as described in §1.6011-4. Material advisors who make a tax statement on or after November 2, 2006, with respect to transactions entered into on or after November 2, 2006, have disclosure and list maintenance obligations under §§6111 and 6112. See §1.6011-4(h) and §§301.6111-3(i) and 301.6112-1(g) of the Procedure and Administration Regulations.

Independent of their classification as transactions of interest, transactions that are the same as, or substantially similar to, the transaction described in this notice already may be subject to the requirements of §6011, 6111, or 6112, or the regulations thereunder. When the IRS and the Treasury Department have gathered enough information to make an informed decision as to whether this transaction is a tax avoidance type of transaction, the IRS and the Treasury Department may take one or more actions, including removing the transaction from the transactions of interest category in published guidance, designating the transaction as a listed transaction, or providing a new category of reportable transaction.



Participation

Under §1.6011-4(c)(3)(i)(E), Advisor, LLC or any entity used in place of LLC, Taxpayer, and any members of Taxpayer if Taxpayer is a flow-through entity, are participants in this transaction for each year in which their respective tax returns reflect tax consequences or the tax strategy described in this notice.

Charity is not a participant if it received the Successor Member Interest described in this notice on or prior to August 14, 2007. For Successor Member Interests received after August 14, 2007, under §1.6011-4(c)(3)(i)(E) Charity is a participant in this transaction for the first year for which Charity's tax return reflects the Successor Member Interest described in this notice. In general, Charity is required to report the receipt of the Successor Member Interest described in this notice on its return for the year in which it is received. See §6033. Therefore, in general, Charity will be a participant for the year in which Charity received the Successor Member Interest.



Time for Disclosure

See §1.6011-4(e) and §301.6111-3(e).



Material Advisor Threshold Amount

The threshold amounts are the same as those for listed transactions. See §301.6111-3(b)(3)(i)(B).



Penalties

Persons required to disclose these transactions under §1.6011-4 who fail to do so may be subject to the penalty under §6707A. Persons required to disclose these transactions under §6111 who fail to do so may be subject to the penalty under §6707(a). Persons required to maintain lists of advisees under §6112 who fail to do so (or who fail to provide such lists when requested by the Service) may be subject to the penalty under §6708(a). In addition, the Service may impose other penalties on persons involved in these transactions or substantially similar transactions, including the accuracy-related penalty under §6662 or 6662A.



DRAFTING INFORMATION

The principal authors of this notice are Patricia M. Zweibel of the Office of Associate Chief Counsel (Income Tax and Accounting) and Leslie H. Finlow of the Office of Associate Chief Counsel (Passthroughs and Special Industries). For further information concerning this notice generally, contact Ms. Zweibel at (202) 622-7900 (not a toll-free call). For further information concerning the sections of this notice under the heading TRANSACTIONS OF INTEREST, contact Ms. Finlow at (202) 622-3070 (not a toll-free call).


Notice 2008-20 , I.R.B. 2008-6, January 17, 2008.




Listed transactions: Intermediary transaction tax shelter: Components and participants. --
The IRS has identified the four components identifying an intermediary transaction tax shelter (ITTS), which is a listed transaction under Reg. §1.6011-4(b)(2).





SECTION 1. PURPOSE

Notice 2001-16, 2001-1 C.B. 730, identified the Intermediary Transaction Tax Shelter as a listed transaction under §1.6011-4(b)(2) of the Income Tax Regulations. Since that notice was published, the Internal Revenue Service (Service) has received disclosure statements with respect to Notice 2001-16 transactions pursuant to §1.6011-4 and other information pursuant to §§6111 and 6112 of the Internal Revenue Code and through promoter audits. After reviewing the disclosure statements and other information, the Service and Treasury Department have decided to identify the components of an Intermediary Transaction Tax Shelter. A transaction that does not have all of the components identified herein is not the same as or substantially similar to the listed transaction described in Notice 2001-16. The Service and Treasury Department also are identifying the persons who are treated as participants in an Intermediary Transaction Tax Shelter under §1.6011-4(c)(3)(i)(A). This notice should not otherwise be construed as limiting the scope or application of Notice 2001-16 and should not otherwise create any inference as to whether or not a transaction was required to be disclosed or registered under §6011 or §6111 prior to January 17, 2008.



SECTION 2. BACKGROUND

An Intermediary Transaction Tax Shelter attempts to avoid the corporate income tax from a sale of assets. Generally it involves transactions in which shareholders of a corporation dispose of their shares of stock of the corporation, one or more persons purchase the corporation's assets in one or more taxable transactions, and all or a portion of the gain or tax that would otherwise result to the corporation from a sale of the assets is avoided.



SECTION 3. DISCUSSION

.01 Components of an Intermediary Transaction Tax Shelter

An Intermediary Transaction Tax Shelter involves the use of an intermediary (M) (which can be one or more persons) in facilitating the transaction. However, the Service has received information and comments from taxpayers suggesting that identifying the transaction based on the role of an entity that appears to be an intermediary may result in over-disclosure or under-disclosure of the transaction depending on the circumstances of the transaction. To address these concerns, this notice identifies the four necessary components in an Intermediary Transaction Tax Shelter from the perspective of the target corporation, its shareholders, and the purchasers of the target corporation's assets.

1. A corporation (T) directly or indirectly (e.g., through a pass-through entity or a member of a consolidated group of which T is a member) owns assets the sale of which would result in taxable gain and, as of the time of the stock disposition described in component two, T (or the consolidated group of which T is a member) has insufficient tax benefits to eliminate or offset such taxable gain (or the tax) in whole or in part. The tax that would result from such sale is hereinafter referred to as T's Built-in Tax. In determining whether T's (or the consolidated group's) tax benefits are insufficient for purposes of the first sentence, the following tax benefits shall be excluded: (i) any tax benefits attributable to a listed transaction under §1.6011-4(b)(2), and (ii) any tax benefits attributable to built-in loss property acquired within 12 months before the stock disposition described in component two, to the extent such built-in losses exceed built-in gains in property acquired in the same transaction(s). All references to T in this notice include successors to T.

2. At least 50 percent of the T stock (by vote or value) is disposed of by T's shareholder(s) (X), other than in liquidation of T, in one or more related transactions within a 12 month period.

3. Either within 12 months before, simultaneously, or within 12 months after the date on whichhas disposed of at least 50 percent of the T stock (by vote or value) (excluding any time T is protected or hedged against price fluctuations), all or most of T's assets are disposed of (Sold T Assets) to one or more buyers (Y) in one or more transactions in which gain is recognized with respect to the Sold T Assets. Where a disposition of Sold T Assets is an intercompany transaction between members of a consolidated group, the disposition will not be a "transaction in which gain is recognized with respect to the Sold T Assets" for purposes of the preceding sentence until such gain must be taken into account under the rules of §1.1502-13.

4. All or most of T's Built-in Tax described in component one that would otherwise result from the disposition of the Sold T Assets described in component three is purportedly offset or avoided or not paid.

.02 Participation in the Listed Transaction

A transaction must have all four of the components identified herein to be the same as or substantially similar to the listed transaction identified in Notice 2001-16 as the Intermediary Transaction Tax Shelter. In determining whether a person is a participant in a transaction identified in Notice 2001-16, the general rule in §1.6011-4(c)(3)(i)(A) applies, except the following rules apply with respect to persons in the position ofor Y as described below:
 In no event will anybe treated as a participant under §1.6011-4(c)(3)(i)(A) if the only T stockdisposes of is traded on an established securities market (within the meaning of §1.453-3(d)(4)) and prior to the disposition(including related persons described in section 267(b) or 707(b)) did not hold five percent (or more) by vote or value of any class of T stock disposed of by X.

 In no event will any Y be treated as a participant under §1.6011-4(c)(3)(i)(A) if the only Sold T Assets acquired by Y are either (i) securities (as defined in section 475(c)(2)) that are traded on an established securities market (within the meaning of §1.453-3(d)(4)) and represent a less-than-five-percent interest in that class of security, or (ii) assets that are not securities and do not include a trade or business as described in §1.1060-1(b)(2).

.03 Disclosure, List Maintenance, and Registration Requirements; Penalties; Other Considerations

Independent of their classification as "listed transactions," transactions that are the same as, or substantially similar to, the transaction described in Notice 2001-16 may already be subject to the requirements of §6011, §6111, or §6112, or the regulations thereunder.

Persons involved with these transactions are alerted to certain responsibilities that may arise from their involvement with these transactions. Persons required to disclose these transactions under §1.6011-4 and who fail to do so may be subject to the penalty under §6707A. Persons required to disclose or register these transactions under §6111 who have failed to do so may be subject to the penalty under §6707(a). Persons required to maintain lists of investors under §6112 who fail to provide such lists when requested by the Service may be subject to the penalty under §6708(a). A person that is a tax-exempt entity within the meaning of §4965(c), or an entity manager within the meaning of §4965(d), may be subject to excise tax, disclosure, filing or payment obligations under §4965, §6033(a)(2), §6011, and §6071. Some taxable entities may be subject to disclosure obligations under §6011(g) that apply to "prohibited tax shelter transactions" as defined by §4965(e) (including listed transactions).

In addition, the Service may impose other penalties on persons involved in this transaction or substantially similar transactions (including an accuracy-related penalty under §6662 or 6662A) and, as applicable, on persons who participate in the promotion or reporting of this transaction or substantially similar transactions (including the return preparer penalty under §6694, the promoter penalty under §6700, and the aiding and abetting penalty under §6701).

Further, under §6501(c)(10), the period of limitations on assessment may be extended beyond the general three-year period of limitations for persons required to disclose transactions under §1.6011-4 who fail to do so. See Rev. Proc. 2005-26, 2005-1 C.B. 965.

The Service and the Treasury Department recognize that some taxpayers may have filed tax returns taking the position that they were entitled to the purported tax benefits of the types of transactions described in Notice 2001-16. These taxpayers should consult with a tax advisor to ensure that their transactions are disclosed properly and to take appropriate corrective action.



SECTION 4. EFFECTIVE DATE

This notice is effective as of January 17, 2008. This notice is applicable to returns and statements due under §6011 or §6111 after January 17, 2008.



SECTION 5. EFFECT ON OTHER DOCUMENTS

Notice 2001-16 is modified with respect to the types of persons who may be treated as participants in an Intermediary Transaction Tax Shelter under §1.6011-4(c)(3)(i)(A).