The IRS released today (July 31, 2007) a set of three final "reportable transaction" regulations on tax shelter disclosure and registration: TD 9350; TD 9351 (section 6111 material advisor rules); TD 9352 ( list maintenance rules) (all available on BNA's service). The regulations are generally effective August 3, 2007, except that the "transactions of interest" reporting requirements apply to transactions entered into on or after November 2, 2006.
The transactions of interest regulations retain the fairly broad defining language of the proposed regulations:
"A transaction of interest is a transaction that is the same as or substantially similar to one of the types of transactions that the IRS has identified by notice, regulation, or other form of published guidance as a transaction of interest."
The preamble notes that commentators asked for "clear" language and complained that the category appeared overbroad.
"The IRS and Treasury Department believe that providing a specific definition for the transactions of interest category in the regulations would unduly limit the IRS and Treasury Department’s ability to identify transactions that have the potential for tax avoidance or evasion. In order to maintain flexibility in identifying a transaction of interest, the description of a transaction of interest will be provided in the published guidance that identifies the transaction of interest. The published guidance identifying a transaction of interest will provide taxpayers with the information necessary to determine whether a particular transaction is the same as or substantially similar to the transaction described in the published guidance and to determine who participated in the transaction." TD 9350
Similarly, the government rejected a comment suggesting that the transactions of interest designation should be viable for only 24 months. Commentators had also argued that owners of pass-through entities should not be required to disclose, at least in the case that they were unaware of the reportable transaction. The government amended the regulations to provide some flexibility in dealing with pass-through entity reporting. The time for filing a disclosure statement after a transaction has been identified as a reportable transaction or a transaction of interest was also lengthened from 60 days to 90 days in response to commentary.
The regulations eliminate the brief asset holding period category of reportable transactions.
The material advisor regulations in TD 9351 lower the gross income threshold for reporting when a reportable transaction provides "substantially all of the tax benefits" to natural persons. The regulations indicate in 301.6111-3(b)(3)(i)(D) that this is a "facts and circumstances" test that will generally be satisfied if 70 percent or more of the benefits go to natural persons. The gross income includes all fees for a tax strategy or for services for advice or implementation of the transation--including services not related to tax advice (documentation, analysis, preparation of tax returns). But the regulations provide that the fees taken into account do not include amounts paid to the advisor in his capacity as a party to the transaction (e.g., reasonable charges for use of capital). The regulation provides a broad definition of tax benefit, including deductions, exclusions, adjustments to basis, nonrecognition, and "any other tax consequences that may reduce a taxpayer's Federal tax liability by affecting the amount, timing, character, or source of any item of income, gain, expense, loss or credit."
When a material advisor reports a transaction to the IRS, the IRS will issue a "reportable transaction number" and the material advisor must provide that number to anyone to whom the material advisor acted as a material advisor in respect of the transaction.
The final regulations permit various material advisors to contractually agree that a particular advisor will be the one to disclose the transaction to the IRS. The preamble notes that a commentator's suggestion that a "good faith" participation in a designation agreement should be enough to relieve a material advisor of any reporting obligation. The IRS did not accept that comment.
"Inherent in the language is the assumption that the designated material advisor will comply with the requirements. Absolving the non-designated material advisors from the obligations... for good faith designation agreements would require the IRS to determine whether the designation agreement was entered into in good faith and would increase the burdens on tax administration." TD 9351
The list maintenance proposed regulations required that a material advisor furnish information on the list to the IRS within 20 business days of a request for such information. Commentators suggested that this was too rigid, and that the RIS should permit a phased disclosure or give advisors an opportunityh to gather the required information. The preamble of TD 9352 indicates that the idea of an alternative schedule would be developed in separate guidance under Section 6708 and thus the final regulations remove the 20-day period for providing the list information.