In March, the IRS released proposed and temporary regulations (REG-110311-98) requiring registration of confidential corporate tax shelters pursuant to IRC section 6111(d). Failure to comply with these requirements may result in penalties under IRC section 6707. The proposed and temporary regulations do not affect the definition of "tax shelter" in IRC section 6662. A tax shelter promoter can ask that the IRS rule on whether a particular transaction is subject to the registration requirements.
The IRS defines "confidential corporate tax shelter" as an entity, plan, arrangement, or transaction that meets the following requirements:
* A significant purpose is the avoidance or evasion of Federal income tax by a direct or indirect corporate participant;
* The transaction is offered under conditions of confidentiality; and
* The promoter may receive fees in excess of $100,000 in the aggregate (including contingent fees).
Any of the following factors meet the criteria for "significant purpose":
* The transaction is the same as or substantially similar to one of the specified types of tax avoidance transactions identified by the IRS in published guidance (Notice 2000-15);
* The present value of the reasonably expected pretax profit is insignificant relative to the expected Federal income tax savings; or
* The Federal income tax benefits are an important part of the transaction and the tax shelter promoter reasonably expects the transaction to be presented to more than one potential participant.
The second and third tests do not apply if the promoter determines that there is no reasonable basis for the denial of any significant portion of the expected Federal income tax benefits. Also, the third test will not apply if the promoter expects the potential participant to participate in the transaction in the ordinary course of business in a form consistent with customary commercial practice and the promoter determines that there is a long-standing and generally accepted understanding that the expected Federal income tax benefits are allowable for substantially similar transactions.
Conditions of Confidentiality. Confidentiality is determined by facts and circumstances. The "conditions of confidentiality" test is met if the offeree's disclosure of the structure or tax aspects of the transaction is limited in any way by an express or implied understanding or agreement with the promoter. There is an exception if the promoter enters into a written agreement with each participant (or potential participant) expressly authorizing disclosure of every aspect of the transaction to any and all persons, without limitation of any kind.
Effective Date of the Registration Requirements. Registration is required for confidential corporate tax shelters offered for sale after February 28, 2000. If these shelters were first offered before this date, the first offer made after February 28, 2000, will be treated as the first offer for sale. A shelter in which offers are made after this date must be made no later than 180 days after February 28, 2000. A transaction that becomes a confidential corporate tax shelter after a first offering for sale after this date must be registered by the next offering for sale or 180 days after February 28, 2000, whichever is later.
Who Must Register? The term "tax shelter promoter" includes a tax shelter organizer (under IRC section 6111(e)(1) and Treasury Regulations section 301.6111-1T, Q&A 26-32) and any other person who participates in the organization, management, or sale of a tax shelter (or related person).
If all of the promoters are foreign persons and none of them registers the shelter, any person who discusses participation in the shelter must register the shelter. Registration must be made within 90 days of the beginning of such discussions unless--
* the person adoes not participate and notifies the promoters within 90 days; or
* within the 90-day period, the person obtains and reasonably relies on a written statement from the promoters that the shelter has been registered and receives a copy of the registration.
Additional Requirements. The IRS also issued temporary and proposed regulations (REG-103736-00) under IRC section 6112, which use a modified form of the definition of confidential corporate tax shelter under IRC section 6111(d).
For purposes of IRC section 6112 (relating to maintaining lists of investors in potentially abusive tax shelters), the definition of tax shelter is the same as that for IRC section 6111(d), with two modifications:
* The "conditions of confidentiality" requirement does not apply and
* The requirement that the promoters may receive fees in excess of $100,000 does not apply.
AICPA Position
The AICPA has endorsed the proposed changes but cautions Congress to include protections for America's "Main Street" businesses.
"The entire tax community is alarmed by the increasing litany of corporate tax shelter abuse cases where overreaching tax savings have been generated from an overly literal reading of the tax law," said David A. Lifson, chair of the AICPA's Tax Executive Committee, in testimony before the Senate Finance Committee. Lifson is also a past vice president and director of the NYSSCPA.
The system is working to identify and punish those who cross the line," he added. "However, changes to the rules would help, and countless possible solutions exist."
"We believe that Treasury's proposed penalty structure is much too broad and will adversely affect too many innocent taxpayers.
"Codification [of the economic doctrine] would invariably entrap millions of innocent 'Main Street' taxpayers. Instead, we believe the government's 'action plan' should include enhanced IRS enforcement."
Lifson said penalties and interest in general should be designed to encourage compliance, not to raise money.
Request for Comment. The IRS will hold a public hearing on these regulations on June 20. Written comments are due within 90 days of the date of publication of the regulations. *
The CPA Journal is broadly recognized as an outstanding, technical-refereed publication aimed at public practitioners, management, educators, and other accounting professionals. It is edited by CPAs for CPAs. Our goal is to provide CPAs and other accounting professionals with the information and news to enable them to be successful accountants, managers, and executives in today's practice environments.
©2006 CPA Journal.
Legal
Notices
Visit the new cpajournal.com.