Exempt Organizations Advisory - IRS Explains New Tax and Disclosure Provisions Targeting Tax Shelter Transactions

On July 11, the IRS and the Treasury Department published Notice 2006-65 to explain the new provisions of TIPRA (Tax Increase Prevention and Reconciliation Act of 2005). New Section 4965, which was added to the Code by TIPRA, imposes penalty excise taxes on certain tax-exempt entities that are parties to "prohibited tax shelter transactions" and also adopts new disclosure requirements. These penalties apply without regard to whether the entity is aware that it is participating in a prohibited tax shelter transaction.

Entities that may be affected by the new provisions include, but are not limited to, charities, churches, state and local governments, Indian tribal governments, qualified pension plans, individual retirement accounts, and similar tax-favored savings arrangements. Managers of these entities that knowingly approve the entity’s participation in a prohibited tax shelter transaction may also be subject to excise taxes.

Prohibited tax shelter transactions include two types of transactions: (1) those identified by the IRS as "listed" tax avoidance transactions or a transaction which is substantially similar, and (2) "reportable" transactions that are confidential transactions or transactions with contractual protection. The newly enacted provisions also contain new disclosure requirements (which apply not only to tax-exempt entities but also to taxable entities that are parties to prohibited tax shelter transaction involving tax-exempt entities) and impose penalties for the failure to comply with the new disclosure requirements.

The IRS and Treasury are requesting public comments on the new provisions in anticipation of the publication of additional guidance. Written comments on all aspects of the new excise tax and disclosure requirements created by the provisions should be submitted by August 11, 2006. Send submissions to: CC:PA:LPD:PR (Notice 2006-65), room 5203, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (Notice 2006-65), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW., Washington, DC. Alternatively, taxpayers may submit comments electronically. (Notice 2006-65).

The Exempt Organization Advisory is a general summary of the law and is not intended as specific legal advice for any organization.

Internal Revenue Service - Circular 230 Disclosure: As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

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