Page 2 - A Crash Course On Reportable Transaction Penalties For Material Advisors

these particular rules simply do not apply. Section 6011 broadly defines “reportable transaction” as any trans- action that “is of a type which the Sec- retary determines as having a poten- tial for tax avoidance or tax evasion.” The Regulations include five types of transactions: (i) listed transactions; (ii) transactions of interest; (iii) loss trans- actions; (iv) confidential transactions; and (v) transactions with contractual protection.4
The first type of reportable trans- action, the listed transaction, is any transaction that is the same as or sub- stantially similar to one of the types of transactions that the Service has identified as a tax avoidance transac- tion in a notice, regulation, or other form of published guidance.5 In No- tice 2009-59, the IRS summarizes the 34 transactions that had been listed as of the 8/3/09 release of the notice. Since then, the IRS has listed two ad- ditional transactions.6
Second, a transaction of interest is a transaction that the IRS or Treasury believes has a potential for tax avoid- ance or evasion, but for which it lacks sufficient information to make a de- termination.7 In Notice 2009-55, the IRS identified four transactions of in- terest, and since then, has identified two additional transactions.8
A transaction is “substantially sim- ilar” to a listed transaction or a trans- action of interest if it “is expected to obtain the same or similar types of tax consequences and is either factu- ally similar or based on the same or similar tax strategy.”9 The term “sub- stantially similar” is broadly inter- preted in favor of disclosure.
The third category of reportable transaction, the “loss transaction,” is the category that generates the most reporting.10 This category covers any transaction resulting in a Section 165 loss that exceeds: (i) at least $10 mil- lion in any single taxable year, or $20 million in any combination of tax- able years for corporations; (ii) $2 million in any single taxable year, or $4 million in any combination of
Megan l. brackney, J.D., ll.M., Kostelanetz & fink, lP, new York, new York.
taxable years for individuals, part- nerships, S corporations, or trusts; or (iii) $50,000 in a single taxable year for losses to individuals or trusts re- lating to certain foreign currency transactions.11 There are numerous transactions excluded from the loss transaction category. Treasury peri- odically updates a list of excluded transactions. The current version is Rev. Proc. 2013-11.12
The final two categories of re- portable transactions have become less common in recent years. Confi- dential transactions are those that are offered to a taxpayer under “condi- tions of confidentiality,” and for which the taxpayer has paid an advisor a minimum fee.13 Transactions with contractual protection are transac- tions for which a taxpayer or a related party has the right to a refund of fees if all or part of the intended tax con- sequences are not sustained.14
Has the Threshold Amount
of Gross Income Been Met?
The next step in deciding whether one is a material advisor is whether he or she has received the “threshold amount” of gross income. The thresh- old amount is $50,000 in the case of a reportable transaction where substan- tially all of the tax benefits are pro- vided to natural persons (looking through any partnerships, S corpora- tions, or trusts), and $250,000 for all other transactions.15 The threshold amounts are reduced from $50,000 to $10,000, and from $250,000 to $100,000, if the transaction is a listed
NOTES
1 There was an approximately six-year gap in which the iRS did not identify any new reportable transactions. See notices 2009-55, 2009-31 iRb 170 and 2009-59, 2009-31 iRb 170.
2 notice 2017-10, 2017-4 iRb 544 (listing notice—Syndi- cated Conservation easement Transactions); notice 2015-74, 2015-46 iRb 663 (Transaction of interest— basket Contracts); notice 2016-66, 2016-47 iRb 745 (Transaction of interest—Section 831(b) Micro-Captive Transactions); notice 2015-73, 2015-46 iRb 660 (list- ing notice—basket Option Contracts).
3
transaction or transaction of interest.16 All fees for services related to advice, analysis, and implementation of the transaction are taken into account.17 Fees that the material advisor expects to receive in the future also are in- cluded.18
Has the Advisor Provided Material Aid, Assistance, or Advice?
A person provides “material aid, as- sistance, or advice” if he or she makes or provides a “tax statement” to or for the benefit of a taxpayer or other ma- terial advisor.19 A “tax statement,” in turn, is defined as “any statement (in- cluding another person’s statement), oral or written, that relates to a tax as- pect of a transaction that causes the transaction to be a reportable trans- action.”20
A person who makes tax state- ments solely in the capacity as an em- ployee, shareholder, partner, or agent of another person is not a material advisor.21 However, a person will be treated as a material advisor if he or she forms an entity in an attempt to avoid the reporting rules.22
OBLIGATIONS OF A
MATERIAL ADVISOR
Material advisors have two primary obligations: (1) to properly disclose the reportable transaction, and (2) to maintain information about the re- portable transaction to produce on request of the IRS. Failure to perform either of these tasks subjects the ma- terial advisor to onerous penalties.
10 Government Accountability O ice, “Abusive Tax Avoidance Transactions: iRS needs better Data to in- form Decisions about Transactions,” GAO-11-493, at 18 (May 2011).
11 Reg. 1.6011-4(b)(5).
12 2013-2 iRb 269.
13 Reg. 1.6011-4(b)(3).
14 Reg. 1.6011-4(b)(4)(i).
15 Section 6111(b)(1)(b); Reg. 301.6111-3(b)(3)(i)(A). 16 Reg. 301.6111-3(b)(3)(i)(b).
17 Reg. 301.6111-3(b)(3)(ii).
18 Regs. 301.6111-3(c)(2) and (3); CCA 201021021. 19 Reg. 301.6111-3(b)(2)(i).
20 Reg. 301.6111-3(b)(2)(ii)(A).
21 Reg. 301.6111-3(b)(2)(iii)(A).
22 Id.
Section 6111(b)(1)(A).
4 Reg. 1.6011-4(b).
5 Section 6707A(c)(2); Reg. 1.6011-4(b)(2). 6 See note 2, supra.
7 71 fed. Reg. 64491-64492 (11/2/06).
8 See note 2, supra.
9 Reg. 1.6011-4(c)(4).
fRAuD & neGliGenCe
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