AJCA penalties for noncompliance with reportable transaction regs.

• Author: Chassman, Nancy
• Position: American Jobs Creation Act of 2004

On Oct. 22, 2004, President Bush signed into law the American Jobs Creation Act of 2004 (AJCA), a $138 billion tax package with a wide-ranging effect on foreign and domestic tax planning. Besides the AJCA's numerous tax planning opportunities, it alerts taxpayers to their obligation to disclose certain transactions the IRS deems reportable transactions. Prior to the AJCA, Regs. Sec. 1.6011-4, which required all taxpayers to disclose certain transactions that fell into one of six broad categories, prescribed no penalties for failing to disclose a "reportable transaction"

The AJCA added and modified numerous provisions to the reportable transaction roles. First, it imposed significant penalties for failing to disclose reportable transactions, regardless of a tax underpayment. There are strict-liability penalties in the case of listed transactions (i.e., transactions specifically identified by the Service as falling into one of the six categories). For other reportable transactions, the penalty can be rescinded only by IRS authority (which cannot be reviewed by a court).

Also, the AJCA extended the statute of limitations (SOL) on assessment for undisclosed listed transactions, until the taxpayer provides the required information to the IRS or responds to a list-maintenance request. In addition, it increased accuracy-related penalties for certain undisclosed reportable transactions and imposed new limits on avoiding such penalties via reasonable cause (e.g., relying on disqualified opinions and disqualified advisors).

Reportable Transactions

The IRS issued the reportable transaction final regulations in February 2003; they apply to transactions entered into on or after Feb. 28, 2003 (although the regulations may apply to transactions entered into on or after Jan. 1, 2003, at the taxpayer's election). The final regulations set forth six categories of reportable transactions; see the exhibit on p. 233. (For a discussion of the final regulations, see Mendelson and Emilian, "Tax Shelter Final Regs." TTA, June 2003, p. 338.)

Exhibit: Categories of reportable transactions (Regs. Sec. 1.6011-4(b))

* Listed transactions

* Transactions offered under conditions of confidentiality

* Transactions with contractual protection

* Transactions generating certain losses under Sec. 165

* Transactions resulting in a book/tax difference in excess of $10 million for any tax year

* Transactions generating a tax credit exceeding $250,000 if the underlying asset giving rise to the credit is held by the taxpayer for 45 days or less (i.e., "brief asset holding period" transactions)

Penalty for Failing to Disclose Reportable Transactions

Pre-AJCA: Prior to the AJCA, taxpayers were required to disclose on their returns certain information about "reportable transactions" (including listed transactions) in which they participated. They were not, however, subject to a specific penalty for failing to do so. Rather, the failure to disclose jeopardized the taxpayer's ability to claim that an income tax understatement resulting from...