Daily Tax Update - January 24, 2005

DEPARTMENT OF TREASURY AND IRS ISSUE INTERIM GUIDANCE ON APPLICATION OF PENALTIES FOR FAILURE TO DISCLOSURE REPORTABLE TRANSACTIONS IN NOTICE 2005-11
On January 19, the Department of Treasury and Internal Revenue Service issued interim guidance in Notice 2005-11 with respect to the application of penalties under new section 6707A, as enacted by the American Jobs Creation Act of 2004, with the intention of issuing regulations in the future. Section 6707A imposes penalties on taxpayers who fail to disclose "reportable transactions" according to the requirements of Treas. Reg. § 1.6011-4. Under section 6707A, the penalty for failure to disclose a "listed transaction" is $100,000 for natural persons and $200,000 in all other cases. For other reportable transactions, the penalty is $10,000 for natural persons and $50,000 in all other cases. The Commissioner is granted authority to rescind penalties for failure to disclose a reportable transaction other than a listed transaction. Notice 2005-11 provides guidance with respect to the application of section 6707A as follows:

  • The Service will impose a penalty under section 6707A with respect to each failure to disclose a reportable transaction within the time and in the form required by Treas. Reg. § 1.6011-4, including:
    • The failure to attach a reportable transaction disclosure statement (Form 8886) to an original or amended return, or
    • The failure to provide a copy of the disclosure statement to the Office of Tax Shelter Analysis (OTSA).
  • The penalty will apply to each return (original or amended) required to be filed after October 22, 2004, regardless of whether the original return was due on or before October 22, 2004.
  • The penalty will not be imposed if the proper disclosure statement is filed with a taxpayer’s return and with OTSA at the time the original or amended return is filed, even if the return is filed after the due date.
  • The Commissioner has authority to rescind penalties for failure to disclose a reportable transaction other than a listed transaction if it "would promote compliance with the requirements of the Code and effective tax administration." In determining whether rescission is appropriate, the Commissioner (or his delegate) will consider the following facts and circumstances:
    • Whether the taxpayer has a history of compliance;
    • Whether the violation results from an unintentional mistake of fact; and
    • Whether imposing the penalty would be against equity and good conscience.

The Department of Treasury and the Service have also requested written comments from practitioners (encouraged to be filed by February 28, 2005) on the following issues:

  • Factors that should be considered in exercising the rescission authority under section 6707A(d)
  • How voluntary, but untimely disclosures should be treated in applying the section 6707A penalty.

DEPARTMENT OF TREASURY AND IRS ISSUE TEMPORARY RULES ON APPLICATION OF SECTION 6662A AND AMENDMENTS TO SECTIONS 6662 AND 6664 IN NOTICE 2005-12:
On January 19, the Department of Treasury and Internal Revenue Service issued temporary rules in Notice 2005-12 with respect to the application of new section 6662A, as enacted by the American Jobs Creation Act of 2004, with the intention of issuing regulations in the future. Section 6662A imposes a 20 percent accuracy-related penalty with respect to reportable transaction understatements, which apply with respect to listed transactions and other reportable transactions where "a significant purpose of such transaction is the avoidance or evasion of Federal income tax.." The penalty is increased to 30 percent if a taxpayer does not adequately disclose, in accordance with Treas. Reg. § 1.6011-4, the listed or reportable transaction at issue. Notice 2005-12 provides temporary guidance with respect to the application of section 6662A, and related provisions under sections 6662 and 6664, as follows:

  • Adequate Disclosure: A taxpayer has satisfied the adequate disclosure requirement and thereby will not be subject to the 30 percent penalty if the taxpayer has filed a disclosure statement in the form and manner prescribed in Treas. Reg. § 1.6011-4 or the taxpayer has been deemed to have satisfied its disclosure requirements under Rev. Proc. 2004-45.
  • Disqualified Tax Advisor: Under section 6664(d), as amended, a taxpayer may not rely upon an opinion of a "disqualified tax advisor" to establish reasonable cause to avoid a penalty under section 6662A. A disqualified tax advisor is a material advisor (as defined by section 6111) who "participates in the organization, management, promotion or sale of the transaction," has a disqualified compensation arrangement, or has a disqualifying financial interest. Pursuant to Notice 2004-80, the definition of material advisor under Treas. Reg. § 301.6112-1(c) shall apply for purposes of section 6662A until further guidance is issued.
    • Notice 2005-12 discusses the meaning of the phrase "organization, management, promotion, or sale" of a transaction for purposes of the application of section 6664(d). A material advisor will not be treated as participating in the organization, management, promotion or sale of transaction if the tax advisor’s only involvement is rendering an opinion regarding the tax consequences of the transaction. In the course of preparing a tax opinion, a tax advisor is permitted to suggest modifications to the transaction, but the tax advisor not suggest "material" modifications to the transaction that assist the taxpayer in obtaining the anticipated tax benefits.
    • Notice 2005-12 also describes a "disqualified compensation arrangement" as an arrangement by which the advisor is compensation directly or indirectly by a material advisor with respect to the transaction or a fee arrangement with respect to the transaction that is contingent on all or part of the intended tax benefits for the transaction being sustained. In addition, an advisor will be treated as a disqualified advisor, even if not a material advisor, if the advisor has a referral fee or fee-sharing arrangement by which the advisor is compensated directly or indirectly by a material advisor.
  • The Department of Treasury and the Service have also requested written comments from practitioners (encouraged to be filed by February 28, 2005) with respect to section 6662A, including in particular the extent to which a tax advisor should be permitted to suggest modifications to a transaction without becoming a "disqualified tax advisor."
  • For additional information, contact Mark J. Silverman, Matthew D. Lerner or Brian P. Kaufman.
  • The notices can be accessed here

STEPTOE & JOHNSON LLP - TAX PRACTICE
Steptoe & Johnson LLP has one of the largest and most diverse law firm tax practices in the country. The practice covers the entire spectrum of federal taxation, including representation of businesses before the Congress, Treasury and the national office of the IRS; transactional planning for domestic and multinational corporations; complex audit and controversy work for corporations and other business interests contesting IRS adjustments; litigation before the Tax Court, Court of Federal Claims, district courts, courts of appeals and the Supreme Court. The firm's tax practice also encompasses all aspects of employee benefits (ERISA), executive compensation, tax-exempt organizations and charitable giving.  Steptoe has an extensive state and local tax practice, representing an array of business clients on complex sales and use tax, corporate income tax and property tax matters, both advising those clients and handling audits, administrative appeals, and litigation for them.  Read  more information on Steptoe's tax practice