Disclosure of reportable transactions: tax shelter registration.

Prior to the AJCA, a tax shelter organizer had to register a shelter with the IRS no later than the day on which the shelter was first offered for sale. A tax shelter is any investment in which the shelter ratio for an 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 is:

1. Required to be registered under Federal or state securities law;

2. Sold under 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 involves at least five investors.

Other promoted arrangements must be registered if:

1. The significant purpose of the arrangement is Federal income tax evasion or avoidance by a corporate participant;

2. The arrangement is offered under confidentiality conditions; and

3. The promoter may receive fees that exceed $100,000.

Transactions have the significant purpose of avoiding or evading Federal income tax if they are (1) the same as or substantially similar to a listed transaction; or (2) structured to produce tax benefits that are an important part of the intended results and the promoter reasonably expects to present the transaction to more than one taxpayer. There are exceptions to the second category of transactions.

A transaction is offered under conditions of confidentiality if (1) an offeree has an understanding or agreement to limit the disclosure of the transaction or any of its significant features or (2) the promoter knows, or has reason to know, that an offeree's use or disclosure of the transaction is limited in any manner.

Failure to register a tax shelter: Before enactment of the AJCA, if a promoter failed to register a tax shelter, a penalty was imposed of the greater of 1% of the aggregate amount invested in the shelter or $500. If a corporation was involved and the arrangement was made under conditions of confidentiality, the penalty was the greater of $10,000 or 50% of the fees payable to the promoter for offerings before the date of late registration. A penalty of 75% of the fees was imposed if failure to register was due to intentionally disregarding the requirement.

Under Sec. 6707, a $100 penalty was imposed on the promoter for each failure to provide the investor with a tax shelter identification number; a $250 penalty was imposed for each time the number was not included on a return.

New Law

Disclosure of reportable transactions by material advisors: AJCA Sections 815 and 816, modifying Secs. 6111 and 6707, repeal the current rules requiring tax shelter registration. Under the AJCA, material advisors are required to file an information return for each reportable transaction. The information return has to include (1) a description of the transaction; (2) a description of the potential tax benefits expected to result from the transaction; and (3) other information prescribed by Treasury.

A "material advisor" is defined as a person who (1) provides material aid, assistance or advice in organizing, promoting, carrying out, insuring or selling a reportable transaction; and (2) directly or indirectly derives gross income in excess of $250,000 ($50,000 in cases involving a reportable transaction in which all of the tax benefits are provided to natural persons) or another amount as prescribed by Treasury.

Penalty for failing to provide information on reportable transactions:

The provision repeals the current penalty for failing to register tax shelters and, instead, imposes a $50,000 penalty on material advisors for failing to file an information return or filing a false or incomplete information return for a reportable transaction. If the penalty is for a listed transaction, the amount increases to the greater of $200,000 or 50% of the gross income of the person who provides aid, assistance or advice in connection with a transaction before the date the information return that includes the transaction is filed. A penalty of 75% of the gross income is imposed on material advisors for intentional disregard of the disclosure requirement.

Waiver of a penalty on a listed transaction is not allowed. The penalty can be rescinded or abated for reportable transactions in exceptional circumstances. The penalty is rescinded in whole or in part only if rescinding promotes compliance with the tax laws and effective tax administration. If the IRS refuses to rescind a penalty, that decision is not appealable. The IRS is required to submit a report to Congress each year describing the application of the disclosure penalties and the reasons for the rescission of each penalty.

Effective Date

The provision requiring disclosure of reportable transactions by a material advisor applies to transactions for which material aid, assistance or advice is provided after Oct. 22, 2004. The penalty provisions apply to returns for which the due date is after Oct. 22, 2004.

FROM PAUL MANNING, WASHINGTON, DC

Tax shelters

The AJCA includes numerous provisions affecting "reportable transactions." The legislation imposes significant penalties for failure to disclose these transactions, regardless of whether there is any underpayment of tax. It extends the statute of limitations on assessment for undisclosed listed transactions until at least one year after the required information is provided to the IRS by the taxpayer or in response to a list-maintenance request by the IRS. New provisions also increase accuracy-related penalties for certain undisclosed reportable transactions, and impose new limits on a taxpayer's ability to avoid such penalties by relying on reasonable cause.