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Tax shelters.

The AICPA has written to Treasury on the confidential transactions category contained in TD 9046 (2/27/03)--the firm regulations involving disclosure (Sec. 6011), registration (See. 6111) and list maintenance (Sec. 6112) for reportable transactions. (For background, see Mendelson and Emilian, "Tax Shelter Final Regs.," TTA, June 2003, p. 338.)

In general, transactions are reportable under the final regulations if they fall into one or more of the following categories: (1) listed transactions, (2) confidential transactions, (3) transactions with contractual protection, (4) loss transactions, (5) transactions with a significant book-tax difference or (6) transactions involving a brief asset holding period. Rev. Procs. 2003-24 and 2003-25 (released simultaneously with TD 9046) provide exceptions to the loss-transaction and book-tax difference categories, respectively.

The AICPA requested further clarification as to which transactions should be excepted from the confidential transactions category, and made specific recommendations.

Confidential transactions: The AICPA urged Treasury and the IRS to issue a revenue procedure detailing exceptions to the confidential transactions categories, consistent with Rev. Procs. 2003-24 and 2003-25.

Regs. Sec. 1.6011-4(b)(3)(i) generally defines a confidential transaction as a "transaction that is offered to a taxpayer under conditions of confidentiality ... All the facts and circumstances relating to the transaction will be considered when determining whether a transaction is offered to a taxpayer under conditions of confidentiality, including the prior conduct of the parties."

Exceptions: Generally, Regs. Sec. 1.6011-4(b)(3)(ii) provides exceptions to the confidential transactions category involving (1) securities laws and (2) mergers and acquisitions. The AICPA recommended extending this list of exceptions to cover the following:

1. To clarify that statements in engagement letters, opinions, valuations and other communications between practitioners and their clients prohibiting parties other than the client from relying on the practitioner's advice or work product without the practitioner's consent are not "conditions of confidentiality." These statements are needed to protect a practitioner against claims by third parties not in legal privity with the practitioner and who are not supposed to be relying on the advice or work product. Similarly, a requirement that a client indemnify a practitioner against all claims asserted against the practitioner in connection with a third-party claim resulting from such inappropriate reliance should not constitute a condition of confidentiality.

2. Warnings on spreadsheets, software licenses, copyrights and emails as to reliance and disposition by unauthorized recipients should not constitute conditions of confidentiality.

3. There should be an exception for confidentiality provision imposed under alternative dispute resolution and administrative, litigative and other forms of legal settlements.

4. The disclosure of factual information not material or necessary to an explanation or understanding of a transaction should not constitute a condition of confidentiality:.

5. Small, routine commercial transactions (involving $1 million or less in consideration) should be excepted from the scope of the confidential transactions category.

6. An exception should be provided for information supplied for purposes of personal loans, such as those involving qualified or nondeductible personal interest.

Under Regs. Sec. 1.6011-4(b)(3)(iii), a presumption exists that a transaction is not offered under conditions of confidentiality if every person who makes a statement to the taxpayer about the transaction's potential tax consequences provides express written authorization to the taxpayer that he or she may disclose the tax structure of the transaction to any person without limit of any kind, "immediately upon commencement of the discussions." The AICPA thinks that this latter phrase is inappropriate to the extent the written authorization is communicated in the first or a subsequent writing after dicussions, and a party uses the communication as an opportunity to cure an unintended or inadvertent limit on disclosure or use. Further, if a transaction falls within the ambit of confidentiality as defined in the regulations, it is not clear whether the parties can correct, amend or remove the confidentiality factor.The regulations should be amended to provide (or the proposed revenue procedure should allow) for rescission of (1) inadvertent confidentiality agreements or (2) confidentiality restrictions before the taxpayer enters into the transaction.

Disclosure: "Taxpayers may have entered into confidentiality agreements before 2003 and not been required to disclose under Sec. 6011 for those years. Taxpayers may enter into transactions after 2002 and receive tax benefits that may be subject to a confidentiality agreement entered into before 2003. It may not be readily apparent to taxpayers that they have a disclosure obligation under Sec. 6011 for years after 2003 because of the confidentiality agreement. The regulation should be amended to provide (or the revenue procedure should provide) either that the Secs. 6011 and 6112 regulations do not apply to confidentiality agreements entered into before 2003 or that the promoter or material advisor that imposed the confidentiality provision may waive or rescind the confidentiality provisions within a safe harbor established by the IRS.

The text of the AICPA's letter is available at www.cpa2biz.com/ ResourceCenters/Tax/Confidential Transactions.htm.

The AICPA also wrote to the chairmen and ranking minority members of the Senate Finance and House Ways and Means Committees, on the tax shelter subtitles in Chairman Bill Thomas's (RCA) job creation bill (HR 2896, the American Jobs Creation Act of 2003) and Chairman Charles Grassley's (R-IA) reported intent to offer an amendment to the Senate-passed energy bill (HR 6, the Energy Policy Act of 2003) when it goes to conference with the Home.

The AICPA said it strongly supported their approach to curtailing abuse and urged expeditious action on the legislation.

The AICPA also noted that it strongly supports the apparent elimination of language (1) codifying the economic substance doctrine and (2) raising the tax return standard (for both taxpayers and preparers) to"more likely than not" for all return positions.The AICPA's letter also includes two suggestions for improving the legislation. For more information, see "DC Currents," p. 693, this issue.
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Author:Laffie, Lesli S.
Publication:The Tax Adviser
Date:Nov 1, 2003
Words:970
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