Client Alert

IRS Issues Interim Rules Implementing Anti-Tax Shelter Provisions of American Jobs Creation Act of 2004

11/23/2004

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.

Highlights

  • Scope of interim guidance. The interim guidance is targeted primarily at the return filing and list maintenance requirements (and related penalties) applicable to material advisors with respect to reportable transactions, but also includes provisions that will affect taxpayers participating in reportable transactions. Notice 2004-80 announces that the IRS will issue regulations under Code Sections 6111 (new return filing requirement), 6112 (amended list maintenance requirement), and 6708 (increased penalties related to list maintenance requirement), as amended by the Act. Because these Code amendments were effective on the Enactment Date, the IRS is providing interim guidance pending issuance of regulations. The interim guidance does the following:
    • preserves the definition of material advisor in existing Code Section 6112 regulations instead of adopted the broader definition in the Act;
    • narrows the definition of reportable transactions applicable both to material advisors and to taxpayers participating in reportable transactions;
    • reduces significantly obligations of material advisors with respect to "transactions with significant book-tax differences;"
    • specifies the content and due dates for returns under Code Section 6111;
    • applies provisions of existing Code Section 6111 regulations permitting one of a group of multiple material advisors to be designated to file the required return;
    • appears to require a material advisor to (i) inform advisees of transactions reported by the material advisor to the IRS, and (ii) disclaim to advisees any IRS review or approval of reported transactions, and appears to require advisees to report on their returns transactions disclosed to the IRS by a material advisor;
    • applies existing regulations for purposes of list maintenance requirements of Code Section 6112 applicable to material advisors; and
    • provides guidance on calculating the 20-day period for supplying required lists after an IRS request.
  • Effective dates. The effective dates of Notice 2004-80 mirror the applicable effective dates of the Act, that is, it is effective for transactions with respect to which material aid, assistance, or advice is provided after the Enactment Date, and for written requests made by the IRS after the Enactment Date for lists required to be maintained under Code Section 6112. However, Revenue Procedures 2004-65, 2005-66, 2004-67 and 2004-68, which narrow the definition of reportable transactions, apply to transactions that are entered into on or after January 1, 2003 (the original effective date of the anti-tax shelter regulations applicable to material advisors).

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:

  • Transactions with contractual protection. Rev. Proc. 2004-65 provides that certain transactions with contractual protection are not reportable transactions for purposes of the disclosure rules under Treasury Regulations Section 1.6011-4(b)(4), including transactions in which the refundable or contingent fee is related to credits under Code Sections 45A(a), 51 or 51A.
  • Loss transactions. Rev. Proc. 2004-66 refines and expands somewhat the list of losses not taken into account in determining whether a transaction is a reportable transaction for purposes of the disclosure rules under Treasury Regulations Section 1.6011-4(b)(5). This list modifies and supersedes the list originally provided by Rev. Proc. 2003-24, 2003-11 I.R.B. 599.
  • Transactions with a significant book-tax difference. Rev. Proc. 2004-67 refines and expands somewhat the list of book-tax differences that are not taken into account in determining whether a transaction is a reportable transaction for purposes of the disclosure rules under Treasury Regulations Section 1.6011-4(b)(6). This list modifies and supersedes the list originally provided by Rev. Proc. 2003-25, 2003-11 I.R.B. 601.
  • Transactions involving a brief asset holding period. Rev. Proc. 2004-68 provides that certain transactions with brief asset holding periods are not reportable transactions for purposes of the disclosure rules under Treasury Regulations Section 1.6011-4(b)(7).

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:

  • A material advisor is required to complete only Parts I (except item 1(b)), IV, and V of Form 8264.
  • In completing Form 8264, the form and instructions are to be read by substituting: (1) "reportable transaction" each place "tax shelter" or "confidential corporate tax shelter" appears; (2) "material advisor" each place "organizer" or "principal organizer" appears; and (3) "Date the material advisor became a material advisor with respect to the reportable transaction" in place of "Date an interest in the tax shelter was first offered for sale" in Part I, line 7, of the form.
  • In Part IV, fees must be determined by applying the rules in Treasury Regulations Section 301.6112-1(c)(3)(iii) instead of the instructions.
  • In Part V, the material advisor must identify the type of reportable transaction under Treasury Regulations Section 1.6011-4(b) that is being disclosed, and describe the facts of the transaction and the potential tax benefits expected to result from the transaction.
  • Form 8264 must be signed under penalties of perjury. The form must be sent to the Internal Revenue Service Center, Ogden, UT 84201.
  • A material advisor may file a single Form 8264 for substantially similar transactions. A material advisor is required to supplement information disclosed on Form 8264 if the information provided is no longer accurate, or if additional information that was not disclosed on Form 8264 becomes available.

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:

  • Q&A-3 and Q&A 50 regarding representations made to investors about disclosures under Code Section 6111. Thus, a material advisor must inform advisees that compliance with the return filing requirements does not imply IRS review, examination or approval of the transaction or its benefits.
  • Q&A-38 and Q&A 39 regarding designation agreements. As a result, subject to certain limitations, a group of potential material advisors may designate one as responsible for satisfying the filing requirement.
  • Q&A 49 regarding timely mailing. Accordingly, the rules of timely mailing as timely filing apply to the new returns.
  • Q&A-51 through Q&A 57 regarding the furnishing of registration numbers and the reporting requirement on Form 8271, Investor Reporting of Tax Shelter Registration Number, or any successor form. While Notice 2004-80 does not explain the manner in which these provisions of the existing Code Section 6111 regulations are to apply to the new return-filing requirement, it would appear that material advisors must notify advisees that the transaction is being reported under Code Section 6111 and that advisees must attach Form 8271 to their returns so indicating. Further, it appears that provisions regarding issuance of a registration number, furnishing of the number to advisees and reporting of registration numbers on advisees' returns are also intended to apply.

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.

  • A material advisor, as defined in Treasury Regulations Section 301.6112-1(c)(2), who is required to file a return under Code Section 6111 must file the return within 30 days after the date on which the person becomes a material advisor.
  • However, if a person becomes a material advisor after October 22, 2004, and on or before December 31, 2004, that material advisor must file the return before February 1, 2005.
  • If a person is required to disclose a reportable transaction under the provisions of Code Section 6111, as amended, and the person has registered the transaction under former Code Section 6111 prior to October 22, 2004, that registration will satisfy the disclosure requirements for the new provisions in Code Section 6111, provided that the material advisor amends the previous registration to reflect any information required under Notice 2004-80.

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.

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