The final tax shelter disclosure rules: reporting, registration, and list maintenance requirements.

• Author: Vogelsang, Stephen G.

On February 28, 2003, the IRS issued final regulations under [subsection]6011, 6111, and 6112 of the Internal Revenue Code of 1986, as amended, in an effort to curb the well-publicized growth of aggressive tax avoidance strategies. The final regulations modify temporary and proposed regulations originally issued on February 28, 2000, as amended in August 2000, August 2001, June 2002, and October 2003 (collectively, the "2000 regulations"). The final regulations prescribe reporting requirements for taxpayers participating in potentially abusive transactions, expand existing rules governing the registration of "tax shelters," and set forth list maintenance requirements for advisors rendering tax advice with respect to "potentially abusive tax shelters."

Broad Reporting Requirements for Final Tax Shelter Disclosure

Section 6011 of the Code grants the Secretary of the Treasury broad authority to issue regulations requiring taxpayers to prepare returns or otherwise furnish information to the IRS. The final regulations, promulgated in accordance with this broad grant of rulemaking authority, provide generally that any taxpayer that has participated in a "reportable transaction" must file a disclosure statement with the IRS describing the transaction and the extent of the taxpayer's participation in the transaction. (1) The final regulations depart substantially from the 2000 regulations that they replace. Under the 2000 regulations, disclosure was required when a taxpayer participated in a "listed transaction" or a transaction that contained at least two of five characteristics which the IRS believed to be indicative of potential abuse. The 2000 regulations required a threshold tax benefit prior to triggering disclosure and included four exceptions to disclosure which applied to transactions other than listed transactions. The IRS was not satisfied with the response to the 2000 regulations, however, finding that "the apparent willingness of certain taxpayers and their advisors to parse words in a manner that narrows requirements and expands exceptions has been disappointing." Accordingly, the IRS eliminated the tax benefit test and the general exceptions set forth in the 2000 regulations. Subject to significantly narrowed exceptions, the final regulations require disclosure of participation in any of six varieties of "reportable transactions": 1) "listed transactions," 2) "confidential transactions," 3) transactions with contractual protection, 4) loss transactions, 5) transactions with a significant book-tax difference, and 6) transactions involving a brief asset holding period.

1) Listed Transactions. A listed transaction is a transaction that is the same or "substantially similar" to transactions that the IRS has determined to be tax avoidance transactions and identified by notice, regulation, or other form of published advice. (2) A complete inventory of listed transactions can be found at www.irs.gov/businesses/ corporations/article/ 0,,id=97384,00.html. Some of the more infamous listed transactions include the "BOSS transaction" described in Notice 99-59, the Son-of-BOSS, BLIPS and COBRA transactions described in Notice 2000-44, the FLIPS transaction described in Notice 2001-45, and the CARDS transaction described in Notice 2002-21. The foregoing transactions gained substantial notoriety through headlines in national periodicals and high profile enforcement actions against national accounting firms and law firms engaged in the promotion of the transactions. More recently, in Notice 2004-8, (3) the IRS added the "Roth IRA shelter" as a listed transaction. The Roth IRA shelter, also referred to as the "GIFT" transaction (generating income free of tax), involves the transfer of assets owned by a taxpayer's closely held business to a corporation owned by the same taxpayer's Roth IRA...