Tax shelters.

• Author: Laffie, Lesli S.
• Position: IRS regulations

The IRS has issued final, temporary and proposed regulations (TD 9000; NPRM REG-103735-00, NPRM REG-110311-98) modifying the rules on (1) certain taxpayers' filing of a statement with their Federal income tax returns under Sec. 6011 (a), (2) registration of confidential corporate tax shelters under Sec. 6111 (d) and (3) the Sec. 6112 list maintenance requirement. The temporary regulations, which were effective June 18, 2002, affect taxpayers participating in certain reportable transactions, persons responsible for registering confidential corporate tax shelters and those responsible for maintaining lists of investors in potentially abusive tax shelters.

Existing Temp. Regs. Sec. 1.6011-4T requires certain corporate taxpayers to disclose their participation in listed and other reportable transactions that meet the "projected tax effect test," by attaching a written statement to their returns. To obtain information on potentially abusive transactions entered into by noncorporate taxpayers, the disclosure requirement has been extended to individuals, trusts, partnerships and S corporations that participate (directly or indirectly) in listed transactions.

The IRS has clarified the regulations on indirect participation in a reportable transaction. A taxpayer indirectly participated in such a transaction if he knew (or had reason to know) that the tax benefits claimed from the transaction were derived from a reportable transaction.

Existing Temp. Regs. Secs. 1.6011-4T and 301.6111-2T refer to "substantially similar" transactions. The IRS has noted that some taxpayers and promoters have applied this standard overly narrowly to avoid disclosure. Modifications to the regulations clarify that "substantially similar" includes any transaction expected to obtain the same or similar types of tax benefits and that is either factually similar or based on the same or a similar tax strategy. Further, the term must be broadly construed in favor of disclosure.

Under existing Temp. Regs. Sec. 1.6011-4T, a reportable transaction is one that meets the projected-tax-effect test and is either a listed transaction or a transaction that has at least two of five specified characteristics. The projected-tax-effect test for listed transactions is met if the taxpayer reasonably estimates that the transaction will reduce its tax liability by more than $1 million in a single tax year or by more than $2 million for any combination of tax years in which the transaction is...