6694(a)(2)(C) tax shelters in the news

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.


Treasury Representative Presents Future Tax Shelter Guidance at ABA Conference
Bryon Christensen, attorney-advisor in the Treasury's Office of Tax Policy, reported on new developments to the tax shelter community at the American Bar Association Section of Taxation May Meeting in Washington, D.C., on May 8. Christensen reported that the Treasury and the IRS plan to release regulations on prohibited tax shelter transaction penalties for tax-exempts and other issues of importance. However, he noted that guidance on the controversial Code Sec. 6707A penalties would require congressional efforts to put the issue to bed.

Prohibited Transactions
Christensen reported that the Treasury did not receive any comments on Code Sec. 4965 proposed regulations, governing the excise tax on tax-exempt entities that enter into prohibited tax shelter transactions (NPRM REG-142039-06, NPRM REG-139268-06, I.R.B. 2007-34, 415). The tax applies to tax-exempt entities who become parties to a prohibited tax shelter transaction and the manager knew or had reason to know of its abusive nature. Treasury is working on finalizing the regulations administering the rule and welcomes any comments.

Going back to comments the IRS and Treasury received when Code Sec. 4965 was first enacted into law, Christensen explained that commentators were of two opinions on the issue. One group thought the excise tax penalty was appropriate, given the fact that tax-exempt status is a privilege for certain organizations that should not be abused. Another camp asserted that the law had the unintended effect of punishing exempt organizations that others used to facilitate the transactions, rather than those actively seeking the transactions to obtain their own benefit.

As to why the proposed regulations did not receive any comments, however, Christensen could only hypothesize that there was a perception in the tax-exempt community that an exempt organization is highly unlikely to engage in a tax shelter on its own behalf. Additionally, he said that many believe that the penalty will likely not apply to situations in which the exempt organization was used by others to facilitate a prohibited transaction.

One practitioner observed that, other than the language of the Code Sec. 4965 regulations, there was no material upon which commentators could provide insight, due to the open-ended nature of listed transactions in general. Christensen reluctantly agreed, saying, "This is kind of a quirk in 4965. It gives the Treasury the ability to create a taxable transaction for tax-exempt entities...By listing that transaction, we impose an excise tax if the entity participates in it. Some of the reaction to the statute itself dealt with that issue, because you didn't know what a listed transaction will look like in the future, but it will always have its consequences under 4965."

No Guidance
Christensen acknowledged that the Treasury and the IRS have received many complaints about the Code Sec. 6707A penalty for failure to disclose a reportable transaction. Taxpayers are especially critical due to the provision's lack of a reasonable cause defense, he reported. Despite these remarks, however, Christensen pointed out that requires a legislative fix, and is not something the IRS and Treasury could add through regulatory guidance.

SEC. 6707A. PENALTY FOR FAILURE TO INCLUDE REPORTABLE TRANSACTION INFORMATION WITH RETURN.
6707A(a) IMPOSITION OF PENALTY. --Any person who fails to include on any return or statement any information with respect to a reportable transaction which is required under section 6011 to be included with such return or statement shall pay a penalty in the amount determined under subsection (b).

6707A(b) AMOUNT OF PENALTY. --

6707A(b)(1) IN GENERAL. --Except as provided in paragraph (2), the amount of the penalty under subsection (a) shall be --

6707A(b)(1)(A) $10,000 in the case of a natural person, and

6707A(b)(1)(B) $50,000 in any other case.

6707A(b)(2) LISTED TRANSACTION. --The amount of the penalty under subsection (a) with respect to a listed transaction shall be --

6707A(b)(2)(A) $100,000 in the case of a natural person, and

6707A(b)(2)(B) $200,000 in any other case.

6707A(c) DEFINITIONS. --For purposes of this section:

6707A(c)(1) REPORTABLE TRANSACTION. --The term "reportable transaction" means any transaction with respect to which information is required to be included with a return or statement because, as determined under regulations prescribed under section 6011, such transaction is of a type which the Secretary determines as having a potential for tax avoidance or evasion.

6707A(c)(2) LISTED TRANSACTION. --The term "listed transaction" means a reportable transaction which is the same as, or substantially similar to, a transaction specifically identified by the Secretary as a tax avoidance transaction for purposes of section 6011.

6707A(d) AUTHORITY TO RESCIND PENALTY. --

6707A(d)(1) IN GENERAL. --The Commissioner of Internal Revenue may rescind all or any portion of any penalty imposed by this section with respect to any violation if --

6707A(d)(1)(A) the violation is with respect to a reportable transaction other than a listed transaction, and

6707A(d)(1)(B) rescinding the penalty would promote compliance with the requirements of this title and effective tax administration.

6707A(d)(2) NO JUDICIAL APPEAL. --Notwithstanding any other provision of law, any determination under this subsection may not be reviewed in any judicial proceeding.

6707A(d)(3) RECORDS. --If a penalty is rescinded under paragraph (1), the Commissioner shall place in the file in the Office of the Commissioner the opinion of the Commissioner with respect to the determination, including --

6707A(d)(3)(A) a statement of the facts and circumstances relating to the violation,

6707A(d)(3)(B) the reasons for the rescission, and

6707A(d)(3)(C) the amount of the penalty rescinded.

6707A(e) PENALTY REPORTED TO SEC. --In the case of a person --

6707A(e)(1) which is required to file periodic reports under section 13 or 15(d) of the Securities Exchange Act of 1934 or is required to be consolidated with another person for purposes of such reports, and

6707A(e)(2) which --

6707A(e)(2)(A) is required to pay a penalty under this section with respect to a listed transaction,

6707A(e)(2)(B) is required to pay a penalty under section 6662A with respect to any reportable transaction at a rate prescribed under section 6662A(c), or

6707A(e)(2)(C) is required to pay a penalty under section 6662(h) with respect to any reportable transaction and would (but for section 6662A(e)(2)(B)) have been subject to penalty under section 6662A at a rate prescribed under section 6662A(c),

the requirement to pay such penalty shall be disclosed in such reports filed by such person for such periods as the Secretary shall specify. Failure to make a disclosure in accordance with the preceding sentence shall be treated as a failure to which the penalty under subsection (b)(2) applies.

6707A(f) COORDINATION WITH OTHER PENALTIES. --The penalty imposed by this section shall be in addition to any other penalty imposed by this title.