On November 16, 2004, the IRS issued a package of interim guidance on the expanded anti-tax shelter reporting rules and penalties added to the Internal Revenue Code of 1986 (the "Code") as part of the American Jobs Creation Act of 2004 (the "Act"), which was signed into law by President Bush on October 22, 2004 (the "Enactment Date"). These reporting and penalty provisions of the Act are described in an earlier legal update dated 11/03/04 entitled "Anti-Tax Shelter Provisions of American Jobs Creation Act of 2004...". The interim guidance is contained in Notice 2004-80 and Revenue Procedures 2004-65, 2004-66, 2004-67 and 2004-68. Each of these items is scheduled to appear in Internal Revenue Bulletin 2004-50, dated Dec. 13, 2004.
Disclosure by material advisors under Code Section 6111
Amended Code Section 6111 requires each material advisor with respect to any reportable transaction to make a return setting forth information identifying and describing the transaction and any potential tax benefits expected to result from the transaction no later than the date specified by the IRS. Notice 2004-80 provides the definitions of reportable transaction and material advisor, and the requirements for filing a return under Code Section 6111, that will apply until further guidance is issued.
Definition of reportable transaction
Notice 2004-80 provides that, for purposes of the new material advisor return filing requirement, the existing definition of reportable transaction in Treasury Regulations Section 1.6011-4(b) will apply. Further, the existing Code Section 6112 regulations (Treasury Regulations Section 301.6112-1(b)(2) and (c)(2))--except for the portions dealing with the now repealed tax shelter registration rules of former Code Section 6111--will apply for purposes of determining whether a transaction is a reportable transaction with respect to a material advisor. The definition of reportable transaction under the existing regulations is discussed in detail in two prior legal updates, one dated 02/28/03 and entitled "IRS Finalizes Anti-Tax Shelter Regulations," and another dated 02/04/04 and entitled "IRS Amends Anti-Tax Shelter Regulations; Narrows Definition of Confidential Transactions." Revenue Procedures 2004-65, 2004-66, 2004-67 and 2004-68 narrow the definition of reportable transactions in certain respects. These changes will apply for purposes of the new return filing requirement (Code Section 6111) and the revised list maintenance requirement (Code Section 6112) applicable to material advisors, and also for purposes of taxpayer reporting under Code Section 6011 and Treasury Regulations Section 1.6011-4. In a helpful step, these Revenue Procedures will apply retroactively to transactions that are entered into on or after January 1, 2003. The highlights of the Revenue Procedures are as follows:
Definition of material advisor
For purposes of the new Code Section 6111 material advisor return filing requirement, the provisions of the existing Code Section 6112 regulations will apply to determine whether a person is a material advisor. These provisions include Treasury Regulations Section 301.6112-1(c)(2), (c)(3), and (d)--except for the portions dealing with the now repealed tax shelter registration rules of former Code Section 6111. The existing Code Section 6112 regulations provide lower minimum fee thresholds for listed transactions than are specified under amended Code Section 6112 and these lower thresholds will continue to apply under the interim guidance. The existing regulations are discussed in detail in two prior legal updates, one dated 02/28/03 and entitled "IRS Finalizes Anti-Tax Shelter Regulations," and another dated 02/04/04 and entitled "IRS Amends Anti-Tax Shelter Regulations; Narrows Definition of Confidential Transactions."
Reduced obligations for transactions with a significant book-tax difference
In an important change for potential material advisors, in the case of a transaction with a significant book-tax difference (described in existing Treasury Regulations Section 1.6011-4(b)(6)), a person will be considered a material advisor with regard to the transaction for purposes of amended Code Sections 6111 and 6112 only if the person who makes a "tax statement" (as described in Treasury Regulations Section 301.6112-1(c)(2)(iii)(E)) also makes a statement, oral or written, that relates to the financial accounting treatment of the item(s) that gives rise to a significant book-tax difference described in Treasury Regulations Section 1.6011-4(b)(6). This change will make the rules significantly easier to administer for law firms and other advisors who do not advise regarding (and likely are unaware of) the financial accounting treatment of items giving rise to a significant book-tax difference. Unfortunately, it appears that this change is effective only for transactions with respect to which material aid, assistance, or advice is provided after the Enactment Date.
Contents of returns under Code Section 6111
Form 8264, Application for Registration of a Tax Shelter, is the form used for registering tax shelters under the old version of Code Section 6111. Until Form 8264 is revised, or a successor form is issued, Notice 2004-80 provides instructions for completing existing Form 8264 for purposes of complying with the new return filing requirements of amended Code Section 6111(a). Notice 2004-80 specifies that a material advisor required to file a return with respect to a reportable transaction must complete Form 8264 in the following manner:
Certain rules of existing Code Section 6111 regulations apply under interim guidance
Notice 2004-80 provides that certain rules contained in the existing Treasury Regulations Section 301.6111-1T, issued under old Code Section 6111 (regarding registration of certain tax shelters), will apply for purposes of the new return filing requirement:
Due date of returns under Code Section 6111
Code Section 6111(a), as amended, provides that the Secretary may specify the date the return must be filed by a material advisor.
Maintenance of lists by material advisors under Code Section 6112
The Act amended Code Section 6112 to provide that each material advisor (as defined in new Code Section 6111(b)) with respect to any reportable transaction is required to maintain a list identifying each person with respect to whom the advisor acted as a material advisor with respect to the transaction.
For purposes of new Code Section 6112, the existing rules under Treasury Regulations Section 301.6112-1 (without regard to the provisions relating to a transaction required to be registered under former Code Section 6111) relating to the preparation, maintenance, retention, and furnishing of lists will apply to material advisors required to maintain lists with respect to a reportable transaction.
For purposes of former Code Section 6112, Treasury Regulations Section 301.6112-1 will continue to apply to organizers and sellers (defined as material advisors in Treasury Regulations Section 301.6112-1(c)(2)) who are required to maintain lists under former Code Section 6112. As a result, an organizer or seller as defined for purposes of former Code Section 6112 must continue to maintain any list described in Treasury Regulations 301.6112-1(e) for the seven-year period described in Treasury Regulations 301.6112-1(f) even if such period expires after October 22, 2004.
Penalty for failure to comply with list maintenance requirements
The Act amended Code Section 6708 to impose a penalty on a material advisor who fails to make a list available upon written request within 20 business days after the date of the request.
Calculation of 20-day period for complying with IRS request to provide list
Notice 2004-80 provides that, for purposes of Code Section 6708, the 20 business-day period within which a person must provide the list required to be maintained under Code Section 6112 begins on the first business day following the earlier of the date that the IRS: (1) mails a request for the list by certified or registered mail to the last known address of the material advisor required to maintain the list or (2) hand-delivers the written request in person. For this purpose, business days include every calendar day other than Saturdays, Sundays, or legal holidays. Under Notice 2004-80, "legal holiday" has the same meaning provided in Code Section 7503.