New disclosure rules require serious attention: a tax attorney reviews new regulations on 'reportable transactions' and their obligations on corporate taxpayers.

• Author: Beller, Herbert N.
• Position: Corporate taxes

Spawned in reaction to the proliferation of heavily marketed "corporate tax shelters" and other "tax products," recently finalized Treasury regulations impose extensive disclosure and information retention obligations upon taxpayers and outside tax advisers in connection with so-called "reportable transactions." These rules are likely to have a significant impact upon the tax compliance function at most large corporations and other substantial business entities.

First proposed in early 2000, the disclosure regulations responded to the tax shelters' promise of very favorable tax results, based on often-strained readings of complex Internal Revenue Code provisions. The asserted tax treatment of some of these transactions is clearly improper under applicable law. But others can reasonably be viewed as falling in a gray area, and the courts have indeed sided with taxpayers in several tax shelter cases.

The Treasury Department and the Internal Revenue Service (IRS) believe that the most effective way to curb inappropriate tax shelter behavior is to shine an early spotlight on potentially abusive transactions by requiring detailed tax return disclosures. The cornerstone of the taxpayer disclosure regulations (promulgated under I.R.C. section 6011) is the reportable transaction" concept A companion set of "list maintenance" regulations keys off the same concept. It requires out-side promoters and tax advisers who receive fees prescribed thresh-olds (generally $250,000 for corporate taxpayers) to turn over to the IRS, upon request, substantial information regarding that tax structure and benefits of reportable transactions in which they are involved, including information on actual and prospective taxpayer-participants.

The final disclosure and listing regulations are significantly tighter than earlier versions, which applied only to corporate taxpayers, required the existence of at least two tax shelter characteristics and provided subjective-type exceptions that taxpayers and their advisers were prone to rely upon. Any one of six prescribed types of reportable transactions will now trigger disclosure, and the subjective exceptions are no longer available. What's more, the regulations now extend to all types of taxpayers, and also to taxes other than the income tax (including employment taxes, pension excise taxes and wealth transfer taxes).

The required disclosure of a reportable transaction is not an admission by the taxpayer that the claimed tax treatment is or may be incorrect. Nor will disclosure necessarily result in an audit, though the IRS does say that it expects to review all disclosures.

Listed Transactions

Only one of the "reportable transaction" categories targets transactions clearly perceived by the IRS as yielding "too good to be true" tax results--namely, "listed transactions" specifically identified as abusive tax shelters in published Treasury or IRS notices. Some 25 of these notices have been issued to date. (A...