Disclosure of reportable transactions: tax shelter registration.

• Author: Manning, Paul

Prior to the AJCA, a tax shelter organizer had to register a shelter with the IRS no later than the day on which the shelter was first offered for sale. A tax shelter is any investment in which the shelter ratio for an investor, as of the close of any of the first five years ending after the investment is offered for sale, may be greater than two to one and is:

1. Required to be registered under Federal or state securities law;

2. Sold under an exemption from registration requiring the filing of a notice with a Federal or state securities agency; or

3. A substantial investment greater than $250,000 and involves at least five investors.

   Other promoted arrangements must be registered if:

1. The significant purpose of the arrangement is Federal income tax evasion or avoidance by a corporate participant;

2. The arrangement is offered under confidentiality conditions; and

3. The promoter may receive fees that exceed $100,000.

   Transactions have the significant purpose of avoiding or evading Federal income tax if they are (1) the same as or substantially similar to a listed transaction; or (2) structured to produce tax benefits that are an important part of the intended results and the promoter reasonably expects to present the transaction to more than one taxpayer. There are exceptions to the second category of transactions.

   A transaction is offered under conditions of confidentiality if (1) an offeree has an understanding or agreement to limit the disclosure of the transaction or any of its significant features or (2) the promoter knows, or has reason to know, that an offeree's use or disclosure of the transaction is limited in any manner.

   Failure to register a tax shelter: Before enactment of the AJCA, if a promoter failed to register a tax shelter, a penalty was imposed of the greater of 1% of the aggregate amount invested in the shelter or $500. If a corporation was involved and the arrangement was made under conditions of confidentiality, the penalty was the greater of $10,000 or 50% of the fees payable to the promoter for offerings before the date of late registration. A penalty of 75% of the fees was imposed if failure to register was due to intentionally disregarding the requirement.

   Under Sec. 6707, a $100 penalty was imposed on the promoter for each failure to provide the investor with a tax shelter identification number; a $250 penalty was imposed for each time the number was not included on a return.

   New Law

   Disclosure of reportable...