Tax shelter Temp. Regs.

• Author: Mendelson, Dan L.
• Position: Part 2

EXECUTIVE SUMMARY

* The new material advisor rules substantially expand the parties responsible for maintaining investor lists.

* The existing corporate registration regulations will likely be expanded to cover transactions entered into by individuals, partnerships, S corporations and trusts.

* Treasury and IRS are evaluating amendments to Circular 230 for tax shelter opinions.

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On Oct. 22, 2002,Treasury released temporary Regulations (32) on tax return disclosure statements and maintenance of investor lists for "reportable transactions." Part I of this two-part article examined the reportable transactions subject to the taxpayer return disclosure and the advisor list-maintenance rules under the modified temporary regulations. Part II, below, discusses key provisions in the temporary regulations that place the list-maintenance obligation on a newly defined category of "material advisors" Under the prior temporary regulations, list maintenance of investors in potentially abusive tax shelters applied only to promoters, organizers and sellers. (33)

Part II also discusses expected changes to the rules (34) on registration of confidential corporate tax shelters. Proposed legislation would require material advisors to register "reportable transactions" (not just confidential corporate tax shelters) with the IRS; Treasury indicated that it will amend the Sec. 6111 regulations when such legislation is enacted. (35) Finally, Part II also addresses expected amendments to the Circular 230 regulations on tax shelter opinions.

Revised Effective Dates

When published in October 2002, the temporary taxpayer disclosure and advisor list-maintenance regulations were to be effective for transactions entered into after Dec. 31,2002. On Jan. 17, 2003, however, the IRS issued a notice (36) amending certain effective dates and stating that it intends to publish revised final regulations in 2003.

Although the October 2002 temporary disclosure regulations under Sec. 6011 will continue to apply to transactions entered into after 2002, the revised final regulations will permit taxpayers who entered into transactions after Dec. 31, 2002, and before the filing date of the revised final regulations, to elect to apply the revised final regulations instead.

The effective date of the October 2002 temporary list-maintenance regulations under Sec. 6112 will be changed to the filing date of the revised final regulations. In general, the temporary list-maintenance requirements will not apply to transactions entered into after 2002 and before the filing date of the revised final regulations. The delayed effective date, however, will not apply to listed transactions and transactions required to be registered under Sec. 6111.

Material Advisor

The definition of a "material advisor" is critical to the application of the list-maintenance regulations. Under Temp. Regs. Sec. 301.6112-1T(c)(2), a "material advisor" is any person who (1) receives (or expects to receive) at least a "minimum fee" in connection with a reportable transaction and (2) makes or provides any statement (oral or written) to any personas to the potential tax consequences of that transaction. A material advisor is required to list each person to whom the material advisor makes or provides a statement (oral or written) as to the potential tax consequences of a transaction that is a potentially abusive tax shelter, if the material advisor knows (or has reason to know) that the person (or any related party) participated in (or will participate in) the transaction (or a substantially similar transaction).

A potentially abusive tax shelter is any transaction subject to registration for purposes of Sec. 6111 and any reportable transaction for purposes of Sec. 6011. The IRS and Treasury are considering whether the minimum-fee requirement (discussed below) should be eliminated as to listed transactions. (37)

Under the new rules, if the minimum-fee threshold is exceeded, a material advisor's obligation to prepare and maintain a list as to a particular reportable transaction should coincide in almost every case with the taxpayer's obligation to disclose it. (38) The one exception would be when the material advisor is required to maintain a list as to a transaction that is not a reportable transaction, but is otherwise required to be registered with the IRS as a Sec. 6111 tax shelter (until the Code and existing registration regulations are amended to conform to the new taxpayer disclosure and advisor list-maintenance regulations).

Conversely, if the minimum-free threshold is not exceeded as to a reportable transaction, the taxpayer discloses the transaction without a corresponding list-maintenance obligation for the advisor. Further, advisors making a statement about tax consequences after a transaction is entered into may become material advisors, thus blurring the line between material advisors and tax preparers. (39)

A material advisor is presently required to maintain lists for 10 years after he or she last made an oral or written statement as to the potential tax consequences of a transaction. Temp. Regs. Sec. 301.6112-1T(f) is unadministerable in firms...