Exempt Organizations Advisory - IRS Issues Guidance on Section 4965 Excise Tax on Prohibited Tax Shelter Transactions

On February 7, the IRS issued Notice 2007-18, providing guidance relating to the Section 4965 excise tax that is imposed on certain tax-exempt entities and entity managers if they enter into transactions designated as prohibited tax shelter transactions. Section 4965 was enacted in May 2006 as part of the Tax Increase Prevention and Reconciliation Act of 2005 ("TIPRA").  Notice 2007-18 addresses two issues:

1. The meaning of the phrase "tax-exempt party to a prohibited tax shelter transaction" for purposes of IRC § 4965 and related disclosure requirements; and
2. The appropriate treatment of net income or proceeds received by entities described in IRC §§ 4965(c)(1), (2), and (3) (referred to as " Non-Plan Entities") before the effective date of the tax imposed under IRC § 4965(a).

The IRS has requested that comments on all aspects of the new provisions be submitted by March 23, 2007.

The notice can be accessed via: http://www.irs.gov/pub/irs-drop/n-07-18.pdf.