Tax shelters.

The IRS has issued final, temporary and proposed regulations (TD 9000; NPRM REG-103735-00, NPRM REG-110311-98) modifying the rules on (1) certain taxpayers' filing of a statement with their Federal income tax returns under Sec. 6011 (a), (2) registration of confidential corporate tax shelters under Sec. 6111 (d) and (3) the Sec. 6112 list maintenance requirement. The temporary regulations, which were effective June 18, 2002, affect taxpayers participating in certain reportable transactions, persons responsible for registering confidential corporate tax shelters and those responsible for maintaining lists of investors in potentially abusive tax shelters.

Existing Temp. Regs. Sec. 1.6011-4T requires certain corporate taxpayers to disclose their participation in listed and other reportable transactions that meet the "projected tax effect test," by attaching a written statement to their returns. To obtain information on potentially abusive transactions entered into by noncorporate taxpayers, the disclosure requirement has been extended to individuals, trusts, partnerships and S corporations that participate (directly or indirectly) in listed transactions.

The IRS has clarified the regulations on indirect participation in a reportable transaction. A taxpayer indirectly participated in such a transaction if he knew (or had reason to know) that the tax benefits claimed from the transaction were derived from a reportable transaction.

Existing Temp. Regs. Secs. 1.6011-4T and 301.6111-2T refer to "substantially similar" transactions. The IRS has noted that some taxpayers and promoters have applied this standard overly narrowly to avoid disclosure. Modifications to the regulations clarify that "substantially similar" includes any transaction expected to obtain the same or similar types of tax benefits and that is either factually similar or based on the same or a similar tax strategy. Further, the term must be broadly construed in favor of disclosure.

Under existing Temp. Regs. Sec. 1.6011-4T, a reportable transaction is one that meets the projected-tax-effect test and is either a listed transaction or a transaction that has at least two of five specified characteristics. The projected-tax-effect test for listed transactions is met if the taxpayer reasonably estimates that the transaction will reduce its tax liability by more than $1 million in a single tax year or by more than $2 million for any combination of tax years in which the transaction is expected to reduce the taxpayer's liability. The IRS has determined that the projected-tax-effect test results in inadequate disclosure and, thus, will no longer apply it to listed transactions. Any individual, trust, partnership, S corporation or other corporation participating in a listed transaction must report it under the temporary regulations.

Generally, the disclosure statement for a reportable transaction must be attached to the taxpayer's return for each tax year for which the taxpayer's tax liability is affected by its participation in the transaction. In the case of a partnership or S corporation, the disclosure statement must be attached to the return for each tax year ending with or within the tax year of any partner or shareholder whose income tax liability is affected (or is reasonably expected to be affected) by the partnership's or S corporation's participation in the transaction.

Additionally, at the same time that the disclosure statement is first attached to the taxpayer's return, the taxpayer must file a copy of the statement with the Office of Tax Shelter Analysis (OTSA).

If a transaction becomes a reportable transaction on or after the date the taxpayer has filed the return for the first tax year for which the transaction affected a taxpayer's, partner's or shareholder's tax liability, the disclosure statement must be filed as an attachment to the return next filed after the date the transaction becomes a reportable transaction; a copy of the disclosure statement must also be filed with the OTSA. Notwithstanding the new regulations' effective date, under existing Temp. Regs. Sec. 1.6011-4T, corporations must disclose transactions that later became reportable on the next filed return, even if the transactions did not affect the entities' tax liability for that year.

The text of the temporary regulations also serves as the text for two notices of proposed rulemaking. Interested parties have until Sept. 16, 2002, to submit comments and requests for a public hearing to:

Internal Revenue Service
P.O. Box 7604
Ben Franklin Station
Room 5226
Attn: CC:ITA:RU
(REG-103735-00;
REG-110311-98)
Washington, DC 20044

Comments may also be submitted electronically, by selecting "The Newsroom" option on the IRS Website at www.irs.gov, clicking on "IRS Guidance," then selecting "Tax Regulations."