Reg 103038-05

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Federal Register / Vol. 71, No. 212 / Thursday, November 2, 2006 / Proposed Rules

Issued in Fort Worth, Texas, on October 26,
2006.
Mark R. Schilling,
Acting Manager, Rotorcraft Directorate,
Aircraft Certification Service.
[FR Doc. E6–18462 Filed 11–1–06; 8:45 am]
BILLING CODE 4910–13–P

DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1, 20, 25, 31, 53, 54, and
56
[REG–103038–05]
RIN 1545–BE24

AJCA Modifications to the Section
6011 Regulations
Internal Revenue Service (IRS),
Treasury.
ACTION: Notice of proposed rulemaking
by cross-reference to temporary
regulations.

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AGENCY:

SUMMARY: This document contains
proposed regulations under section
6011 of the Internal Revenue Code that
modify the rules relating to the
disclosure of reportable transactions
under section 6011. These regulations
affect taxpayers participating in
reportable transactions under section
6011, material advisors responsible for
disclosing reportable transactions under
section 6111, and material advisors
responsible for keeping lists under
section 6112.
DATES: Written or electronic comments
and requests for a public hearing must
be received by January 31, 2007.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG–103038–05), room
5203, Internal Revenue Service, PO Box
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 (REG–103038–05),
Courier’s Desk, Internal Revenue
Service, Crystal Mall 4 Building, 1901
S. Bell St., Arlington, VA, or sent
electronically, via the IRS Internet site
at http://www.irs.gov/regs or via the
Federal eRulemaking Portal at
www.regulations.gov (indicate IRS and
REG–103038–05).
FOR FURTHER INFORMATION CONTACT:
Concerning the proposed regulations,
Tara P. Volungis or Charles Wien, 202–
622–3070; concerning the submissions
of comments and requests for hearing,
Kelly Banks, 202–622–0392 (not tollfree numbers).
SUPPLEMENTARY INFORMATION:

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Background

Explanation of Provisions

This document proposes to amend 26
CFR part 1 by modifying and clarifying
the rules relating to the disclosure of
reportable transactions under section
6011. This document also proposes to
amend 26 CFR parts 20, 25, 31, 53, 54,
and 56 by modifying the rules for
purposes of estate, gift, employment,
and pension and exempt organizations
excise taxes that require the disclosure
of listed transactions by certain
taxpayers on their Federal tax returns
under section 6011.
On February 28, 2003, the IRS issued
final regulations under sections 6011,
6111, and 6112 (TD 9046) (the February
2003 regulations). The February 2003
regulations were published in the
Federal Register (68 FR 10161) on
March 4, 2003. On December 29, 2003,
the IRS issued final regulations under
section 6011 and 6112 (TD 9108) (the
December 2003 regulations). The
December 2003 regulations were
published in the Federal Register (68
FR 75128) on December 30, 2003.
Since the publication of the February
2003 regulations and the December 2003
regulations, the American Jobs Creation
Act of 2004, Public Law 108–357, 118
Stat. 1418, (AJCA) was enacted on
October 22, 2004. The AJCA revised
sections 6111 and 6112, thereby
necessitating changes to the rules under
section 6011. The IRS and Treasury
Department also have received various
comments and questions regarding the
rules under § 1.6011–4. Consequently,
the IRS and Treasury Department are
proposing modifications to the rules
regarding the disclosure of reportable
transactions under § 1.6011–4.
It should be noted that section 516 of
the Tax Increase Prevention and
Reconciliation Act of 2005, Public Law
109–222, 120 Stat. 345, (TIPRA),
enacted on May 17, 2006, includes new
excise taxes that target prohibited tax
shelter transactions to which a taxexempt entity is a party. Prohibited tax
shelter transactions consist of listed
transactions, confidential transactions,
and transactions with contractual
protection under section 6011. TIPRA
also contains new disclosure
requirements, which apply not only to
tax-exempt entities but also to taxable
entities that are parties to prohibited tax
shelter transactions involving taxexempt entities, and makes penalties
applicable for failure to comply with
each new disclosure requirement. The
IRS and Treasury Department will issue
separate guidance regarding the
disclosure provision in TIPRA.

A. Removal of Transactions With a
Significant Book-Tax Difference

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Under the current regulations in
§ 1.6011–4, there are six categories of
reportable transactions. In accordance
with the interim guidance provided in
Notice 2006–6, 2006–5 I.R.B. 385, these
proposed regulations eliminate the
transactions with a significant book-tax
difference category of reportable
transaction that is in § 1.6011–4(b)(6).
The IRS and Treasury Department have
determined that this category of
reportable transaction is no longer
necessary due to the issuance of the
Schedule M–3, ‘‘Net Income (Loss)
Reconciliation for Corporations With
Total Assets of $10 Million or More’’,
which now provides the IRS a more
complete disclosure of book-tax
differences for corporations. The
Schedule M–3 reporting requirements
will be extended to partnerships and S
corporations. The removal of the booktax difference category applies to
transactions that otherwise would have
to have been disclosed on or after
January 6, 2006 (regardless of when the
transaction was entered into).
B. Transactions of Interest
The IRS and Treasury Department are
proposing as a new category of
reportable transaction the transactions
of interest reportable transaction. A
transaction of interest is a transaction
that the IRS and Treasury Department
believe has a potential for tax avoidance
or evasion, but for which the IRS and
Treasury Department lack enough
information to determine whether the
transaction should be identified
specifically as a tax avoidance
transaction. Transactions of interest will
be identified in published guidance.
When the IRS and Treasury Department
have gathered enough information to
make an informed decision as to
whether the transaction of interest is a
tax avoidance type of transaction, the
IRS and Treasury Department may take
one or more actions, including removing
the transaction from the transactions of
interest category in published guidance,
designating the transaction as a listed
transaction, or providing a new category
of reportable transaction. Listed
transactions do not have to be identified
as transactions of interest before the
transactions are identified as listed
transactions. It is anticipated that, upon
finalization of these proposed
regulations, the transactions of interest
category of reportable transaction will
apply to transactions entered into on or
after November 2, 2006.

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Federal Register / Vol. 71, No. 212 / Thursday, November 2, 2006 / Proposed Rules
C. Lease Transactions
These proposed regulations also
eliminate the special rule for lease
transactions. Under the current
regulations this special rule provides
that certain customary commercial
leases of tangible personal property
described in Notice 2001–18, 2001–1
C.B. 731, are excluded from all of the
reportable transaction categories except
listed transactions. Notice 2001–18
originally was published prior to the
AJCA to provide exceptions from the
confidential corporate tax shelter
registration requirements under section
6111(d) and the list maintenance
requirements under section 6112. The
special rule for lease transactions that
cross-references Notice 2001–18 was
added to § 1.6011–4 in TD 9046 in
February 2003. At that time, the IRS and
Treasury Department were concerned
that customary commercial lease
transactions routinely would fall under
the significant book-tax difference
category of reportable transaction. The
public also expressed concern that
many customary leasing transactions
would trigger the confidential
transaction category of reportable
transaction that was published in the
temporary regulations under § 1.6011–
4T in TD 9017 in October 2002 (and in
the February 2003 regulations). Since
the publication of the February 2003
regulations, the IRS and Treasury
Department amended the confidential
transaction category of reportable
transaction in the December 2003
regulations, the AJCA removed the
confidential corporate tax shelter
provision in section 6111(d) in October
2004, and Notice 2006–6 signaled the
removal of the significant book-tax
difference transaction category of
reportable transaction.
Because the confidential transaction
category has been narrowed and the
significant book-tax difference
transaction category is being removed,
the IRS and Treasury Department
believe that leasing transactions should
be subject to the same disclosure rules
as other transactions. While the IRS and
Treasury Department do believe the
disclosure rules should apply to all
leasing transactions, the IRS and
Treasury Department also believe that
most customary commercial leasing
transactions will not meet the reportable
transaction requirements and will not be
subject to disclosure. The IRS and
Treasury Department intend to obsolete
Notice 2001–18 when these proposed
regulations are finalized. Comments
regarding the removal of this exception,
the transactions that will have to be
disclosed as a consequence, if any, and

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the possibility of exceptions for specific
types of leasing transactions as to each
category of reportable transaction are
requested.
D. Transactions Involving a Brief Asset
Holding Period
These proposed regulations also
modify the transactions involving a brief
asset holding period category of
reportable transaction in § 1.6011–
4(b)(7). Section 901(l), added to the
Code by the AJCA, and section 901(k)
operate to disallow foreign tax credits
for withholding and certain other
foreign taxes imposed on dividends or
other income or gain with respect to
property if the taxpayer does not meet
a minimum holding period. In light of
the enactment of section 901(l), the
proposed regulations amend the brief
asset holding period category to exclude
transactions resulting in a claimed
foreign tax credit.
E. Protective Disclosures
The IRS receives disclosures that
taxpayers file on a protective basis,
claiming that the transactions are not
subject to disclosure under section
6011. Some of those taxpayers fail to
provide the IRS with the information
requested under section 6011 and the
regulations thereunder that would
enable the IRS to make a determination
as to whether the transaction is subject
to disclosure. Consequently, the IRS and
Treasury Department have added
clarifying language in the proposed
regulations that allows protective
disclosures to be filed in situations
where a taxpayer is unsure of whether
the transaction should be disclosed
under section 6011 if the taxpayer
complies with the rules of § 1.6011–4 as
if the transaction is subject to disclosure
and the person furnishes the IRS the
information requested under these
regulations.
F. Partners, Shareholders, and
Beneficiaries
The IRS and Treasury Department are
aware of situations in which partners,
shareholders, and beneficiaries have
filed their Federal tax returns before
receiving Schedule K–1s from the
partnership, S corporation or trust that
participated in a reportable transaction.
The proposed regulations address this
problem by providing that if a taxpayer
in a partnership, S corporation, or trust
receives a timely Schedule K–1 less
than 10 calendar days before the due
date of the taxpayer’s return (including
extensions) and, based on receipt of the
timely Schedule K–1, the taxpayer
determines that the taxpayer
participated in a reportable transaction,

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the disclosure statement will not be
considered late if the taxpayer discloses
the reportable transaction by filing a
disclosure statement with OTSA within
45 calendar days after the due date of
the taxpayer’s return (including
extensions). A taxpayer filing a
disclosure statement in accordance with
this provision need only file the
statement with OTSA and need not file
an amended return to make the
disclosure. This provision is proposed
to be applicable for transactions entered
into on or after the date these
regulations are published as final
regulations in the Federal Register.
However, taxpayers currently may rely
on this provision in the proposed
regulations, and taxpayers who have
filed a disclosure statement with OTSA
within 45 calendar days after the due
date of the taxpayer’s return (including
extensions) as provided in this
provision have satisfied the disclosure
requirements under § 1.6011–4. The IRS
and Treasury Department solicit
comments on whether there may be
other situations in which a taxpayer
may not know or have reason to know
of its participation in a reportable
transaction at the time the return is filed
and ways in which the disclosure rules
could address these situations.
G. Tolling Provision
Other proposed changes relate to the
provisions for obtaining a private letter
ruling and the tolling of the time for
providing disclosure during the time the
request for a ruling is pending. Because
the IRS and Treasury Department
believe that the removal of the tolling
provision will promote effective tax
administration, these proposed
regulations eliminate the tolling of the
time for providing disclosure when a
taxpayer requests a private letter ruling.
Temporary regulations removing the
tolling provision are being issued
concurrently with these proposed
regulations. Taxpayers may still request
a ruling on a transaction under the
regular procedures for requesting a
ruling, provided the ruling request is
not factual or hypothetical, but the time
for providing disclosure will not be
tolled. The removal of the tolling
provision is effective for all ruling
requests received on or after November
1, 2006.
H. Other Clarifications and
Modifications
These proposed regulations also
clarify and/or modify other provisions
under § 1.6011–4. The regulations for
estate, gift, employment, and pension
and exempt organizations excise taxes
are proposed to be modified by making

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them applicable to transactions of
interest.
I. Comments
The IRS and Treasury Department are
aware of concerns expressed by
commentators regarding the patenting of
tax advice or tax strategies. The IRS and
Treasury Department share these
concerns and are exploring ways in
which they could be addressed,
including through the creation of a new
category of reportable transaction.
Comments are requested regarding the
creation of such a category of reportable
transaction. Comments also are
requested on all proposed changes to
the regulations.
J. Effective Date
Generally, when these proposed
regulations become final, they will
apply to transactions entered into on or
after the date these regulations are
published as final regulations in the
Federal Register. However, upon
publication the final regulations will
apply to transactions of interest entered
into on or after November 2, 2006.

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Special Analyses
It has been determined that this notice
of proposed rulemaking is not a
significant regulatory action as defined
in Executive Order 12866. Therefore, a
regulatory assessment is not required. It
also has been determined that section
553(b) of the Administrative Procedure
Act (5 U.S.C. chapter 5) does not apply
to these regulations, and because these
regulations do not impose a collection
of information on small entities, the
provisions of the Regulatory Flexibility
Act (5 U.S.C. chapter 6) do not apply.
The disclosure statement referenced in
these regulations will be made available
for public comment in accordance with
the Paperwork Reduction Act of 1995
(44 U.S.C. chapter 35). Pursuant to
section 7805(f) of the Internal Revenue
Code, this notice of proposed
rulemaking will be submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment
on its impact on small business.
Comments and Requests for a Public
Hearing
Before these proposed regulations are
adopted as final regulations,
consideration will be given to any
written comments (a signed original and
eight (8) copies) or electronic comments
that are submitted timely to the IRS. The
IRS and Treasury Department request
comments on the clarity of the proposed
rules, how they can be made easier to
understand, and the administrability of
the rules in the proposed regulations.

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All comments will be available for
public inspection and copying. A public
hearing will be scheduled if requested
in writing by any person that submits
timely written or electronic comments.
If a public hearing is scheduled, notice
of the date, time, and place for the
public hearing will be published in the
Federal Register.
Drafting Information
The principal authors of these
regulations are Tara P. Volungis and
Charles Wien, Office of the Associate
Chief Counsel (Passthroughs and
Special Industries). However, other
personnel from the IRS and Treasury
Department participated in their
development.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.
26 CFR Part 20
Estate taxes, Reporting and
recordkeeping requirements.
26 CFR Part 25
Gift taxes, Reporting and
recordkeeping requirements.
26 CFR Part 31
Employment taxes, Income taxes,
Penalties, Pensions, Railroad retirement,
Reporting and recordkeeping
requirements, Social security,
Unemployment compensation.
26 CFR Part 53
Excise taxes, Foundations,
Investments, Lobbying, Reporting and
recordkeeping requirements.
26 CFR Part 54
Excise taxes, Pensions, Reporting and
recordkeeping requirements.
26 CFR Part 56
Excise taxes, Lobbying, Nonprofit
organizations, Reporting and
recordkeeping requirements.
Proposed Amendments to the
Regulations
Accordingly, 26 CFR parts 1, 20, 25,
31, 53, 54, and 56 are proposed to be
amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation
for part 1 continues to read, in part, as
follows:
Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 1.6011–4 is revised to
read as follows:

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§ 1.6011–4 Requirement of statement
disclosing participation in certain
transactions by taxpayers.

(a) In general. Every taxpayer that has
participated, as described in paragraph
(c)(3) of this section, in a reportable
transaction within the meaning of
paragraph (b) of this section and who is
required to file a tax return must attach
to its return for the taxable year
described in paragraph (e) of this
section a disclosure statement in the
form prescribed by paragraph (d) of this
section. The fact that a transaction is a
reportable transaction shall not affect
the legal determination of whether the
taxpayer’s treatment of the transaction is
proper.
(b) Reportable transactions—(1) In
general. A reportable transaction is a
transaction described in any of the
paragraphs (b)(2) through (7) of this
section. The term transaction includes
all of the factual elements relevant to
the expected tax treatment of any
investment, entity, plan, or
arrangement, and includes any series of
steps carried out as part of a plan. There
are six categories of reportable
transactions: listed transactions,
confidential transactions, transactions
with contractual protection, loss
transactions, transactions of interest,
and transactions involving a brief asset
holding period.
(2) Listed transactions. A listed
transaction is a transaction that is the
same as or substantially similar to one
of the types of transactions that the
Internal Revenue Service (IRS) has
determined to be a tax avoidance
transaction and identified by notice,
regulation, or other form of published
guidance as a listed transaction.
(3) Confidential transactions—(i) In
general. A confidential transaction is a
transaction that is offered to a taxpayer
under conditions of confidentiality and
for which the taxpayer has paid an
advisor a minimum fee.
(ii) Conditions of confidentiality. A
transaction is considered to be offered to
a taxpayer under conditions of
confidentiality if the advisor who is
paid the minimum fee places a
limitation on disclosure by the taxpayer
of the tax treatment or tax structure of
the transaction and the limitation on
disclosure protects the confidentiality of
that advisor’s tax strategies. A
transaction is treated as confidential
even if the conditions of confidentiality
are not legally binding on the taxpayer.
A claim that a transaction is proprietary
or exclusive is not treated as a limitation
on disclosure if the advisor confirms to
the taxpayer that there is no limitation
on disclosure of the tax treatment or tax
structure of the transaction.

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(iii) Minimum fee. For purposes of
this paragraph (b)(3), the minimum fee
is:
(A) $250,000 for a transaction if the
taxpayer is a corporation.
(B) $50,000 for all other transactions
unless the taxpayer is a partnership or
trust, all of the owners or beneficiaries
of which are corporations (looking
through any partners or beneficiaries
that are themselves partnerships or
trusts), in which case the minimum fee
is $250,000.
(iv) Determination of minimum fee.
For purposes of this paragraph (b)(3), in
determining the minimum fee, all fees
for a tax strategy or for services for
advice (whether or not tax advice) or for
the implementation of a transaction are
taken into account. Fees include
consideration in whatever form paid,
whether in cash or in kind, for services
to analyze the transaction (whether or
not related to the tax consequences of
the transaction), for services to
implement the transaction, for services
to document the transaction, and for
services to prepare tax returns to the
extent return preparation fees are
unreasonable in light of the facts and
circumstances. For purposes of this
paragraph (b)(3), a taxpayer also is
treated as paying fees to an advisor if
the taxpayer knows or should know that
the amount it pays will be paid
indirectly to the advisor, such as
through a referral fee or fee-sharing
arrangement. A fee does not include
amounts paid to a person, including an
advisor, in that person’s capacity as a
party to the transaction. For example, a
fee does not include reasonable charges
for the use of capital or the sale or use
of property. The IRS will scrutinize
carefully all of the facts and
circumstances in determining whether
consideration received in connection
with a confidential transaction
constitutes fees.
(v) Related parties. For purposes of
this paragraph (b)(3), persons who bear
a relationship to each other as described
in section 267(b) or 707(b) will be
treated as the same person.
(4) Transactions with contractual
protection—(i) In general. A transaction
with contractual protection is a
transaction for which the taxpayer or a
related party (as described in section
267(b) or 707(b)) has the right to a full
or partial refund of fees (as described in
paragraph (b)(4)(ii) of this section) if all
or part of the intended tax consequences
from the transaction are not sustained.
A transaction with contractual
protection also is a transaction for
which fees (as described in paragraph
(b)(4)(ii) of this section) are contingent

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on the taxpayer’s realization of tax
benefits from the transaction. All the
facts and circumstances relating to the
transaction will be considered when
determining whether a fee is refundable
or contingent, including the right to
reimbursements of amounts that the
parties to the transaction have not
designated as fees or any agreement to
provide services without reasonable
compensation.
(ii) Fees. Paragraph (b)(4)(i) of this
section only applies with respect to fees
paid by or on behalf of the taxpayer or
a related party to any person who makes
or provides a statement, oral or written,
to the taxpayer or related party (or for
whose benefit a statement is made or
provided to the taxpayer or related
party) as to the potential tax
consequences that may result from the
transaction.
(iii) Exceptions—(A) Termination of
transaction. A transaction is not
considered to have contractual
protection solely because a party to the
transaction has the right to terminate the
transaction upon the happening of an
event affecting the taxation of one or
more parties to the transaction.
(B) Previously reported transaction. If
a person makes or provides a statement
to a taxpayer as to the potential tax
consequences that may result from a
transaction only after the taxpayer has
entered into the transaction and
reported the consequences of the
transaction on a filed tax return, and the
person has not previously received fees
from the taxpayer relating to the
transaction, then any refundable or
contingent fees are not taken into
account in determining whether the
transaction has contractual protection.
This paragraph (b)(4) does not provide
any substantive rules regarding when a
person may charge refundable or
contingent fees with respect to a
transaction. See Circular 230, 31 CFR
part 10, for the regulations governing
practice before the IRS.
(5) Loss transactions—(i) In general. A
loss transaction is any transaction
resulting in the taxpayer claiming a loss
under section 165 of at least—
(A) $10 million in any single taxable
year or $20 million in any combination
of taxable years for corporations;
(B) $10 million in any single taxable
year or $20 million in any combination
of taxable years for partnerships that
have only corporations as partners
(looking through any partners that are
themselves partnerships), whether or
not any losses flow through to one or
more partners; or $2 million in any
single taxable year or $4 million in any
combination of taxable years for all
other partnerships, whether or not any

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losses flow through to one or more
partners;
(C) $2 million in any single taxable
year or $4 million in any combination
of taxable years for individuals, S
corporations, or trusts, whether or not
any losses flow through to one or more
shareholders or beneficiaries; or
(D) $50,000 in any single taxable year
for individuals or trusts, whether or not
the loss flows through from an S
corporation or partnership, if the loss
arises with respect to a section 988
transaction (as defined in section
988(c)(1) relating to foreign currency
transactions).
(ii) Cumulative losses. In determining
whether a transaction results in a
taxpayer claiming a loss that meets the
threshold amounts over a combination
of taxable years as described in
paragraph (b)(5)(i) of this section, only
losses claimed in the taxable year that
the transaction is entered into and the
five succeeding taxable years are
combined.
(iii) Section 165 loss. (A) For purposes
of this section, in determining the
thresholds in paragraph (b)(5)(i) of this
section, the amount of a section 165 loss
is adjusted for any salvage value and for
any insurance or other compensation
received. See § 1.165–1(c)(4). However,
a section 165 loss does not take into
account offsetting gains, or other income
or limitations. For example, a section
165 loss does not take into account the
limitation in section 165(d) (relating to
wagering losses) or the limitations in
sections 165(f), 1211, and 1212 (relating
to capital losses). The full amount of a
section 165 loss is taken into account for
the year in which the loss is sustained,
regardless of whether all or part of the
loss enters into the computation of a net
operating loss under section 172 or a net
capital loss under section 1212 that is a
carryback or carryover to another year.
A section 165 loss does not include any
portion of a loss, attributable to a capital
loss carryback or carryover from another
year, that is treated as a deemed capital
loss under section 1212.
(B) For purposes of this section, a
section 165 loss includes an amount
deductible pursuant to a provision that
treats a transaction as a sale or other
disposition, or otherwise results in a
deduction under section 165. A section
165 loss includes, for example, a loss
resulting from a sale or exchange of a
partnership interest under section 741
and a loss resulting from a section 988
transaction.
(6) Transactions of interest. A
transaction of interest is a transaction
that is the same as or substantially
similar to one of the types of
transactions that the IRS has identified

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by notice, regulation, or other form of
published guidance as a transaction of
interest.
(7) Transactions involving a brief
asset holding period. A transaction
involving a brief asset holding period is
any transaction resulting in the taxpayer
claiming a tax credit (other than a
foreign tax credit) exceeding $250,000 if
the underlying asset giving rise to the
credit is held by the taxpayer for 45
days or less. For purposes of
determining the holding period, the
principles of section 246(c)(3) and (c)(4)
apply.
(8) Exceptions—(i) In general. A
transaction will not be considered a
reportable transaction, or will be
excluded from any individual category
of reportable transaction under
paragraphs (b)(3) through (7) of this
section, if the Commissioner makes a
determination by published guidance
that the transaction is not subject to the
reporting requirements of this section.
The Commissioner may make a
determination by individual letter
ruling under paragraph (f) of this section
that an individual letter ruling request
on a specific transaction satisfies the
reporting requirements of this section
with regard to that transaction for the
taxpayer who requests the individual
letter ruling.
(ii) Special rule for RICs. For purposes
of this section, a regulated investment
company (RIC) as defined in section 851
or an investment vehicle that is owned
95 percent or more by one or more RICs
at all times during the course of the
transaction are not required to disclose
a transaction that is described in any of
paragraphs (b)(3) through (5) and (b)(7)
of this section unless the transaction is
also a listed transaction or a transaction
of interest.
(c) Definitions. For purposes of this
section, the following definitions apply:
(1) Taxpayer. The term taxpayer
means any person described in section
7701(a)(1), including S corporations.
Except as otherwise specifically
provided in this section, the term
taxpayer also includes an affiliated
group of corporations that joins in the
filing of a consolidated return under
section 1501.
(2) Corporation. When used
specifically in this section, the term
corporation means an entity that is
required to file a return for a taxable
year on any 1120 series form, or
successor form, excluding S
corporations.
(3) Participation—(i) In general—(A)
Listed transactions. A taxpayer has
participated in a listed transaction if the
taxpayer’s tax return reflects tax
consequences or a tax strategy described

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in the published guidance that lists the
transaction under paragraph (b)(2) of
this section. A taxpayer also has
participated in a listed transaction if the
taxpayer knows or has reason to know
that the taxpayer’s tax benefits are
derived directly or indirectly from tax
consequences or a tax strategy described
in published guidance that lists a
transaction under paragraph (b)(2) of
this section. Published guidance may
identify other types or classes of persons
that will be treated as participants in a
listed transaction. Published guidance
also may identify types or classes of
persons that will not be treated as
participants in a listed transaction.
(B) Confidential transactions. A
taxpayer has participated in a
confidential transaction if the taxpayer’s
tax return reflects a tax benefit from the
transaction and the taxpayer’s
disclosure of the tax treatment or tax
structure of the transaction is limited in
the manner described in paragraph
(b)(3) of this section. If a partnership’s,
S corporation’s or trust’s disclosure is
limited, and the partner’s, shareholder’s,
or beneficiary’s disclosure is not
limited, then the partnership, S
corporation, or trust, and not the
partner, shareholder, or beneficiary, has
participated in the confidential
transaction.
(C) Transactions with contractual
protection. A taxpayer has participated
in a transaction with contractual
protection if the taxpayer’s tax return
reflects a tax benefit from the
transaction and, as described in
paragraph (b)(4) of this section, the
taxpayer has the right to the full or
partial refund of fees or the fees are
contingent. If a partnership, S
corporation, or trust has the right to a
full or partial refund of fees or has a
contingent fee arrangement, and the
partner, shareholder, or beneficiary does
not individually have the right to the
refund of fees or a contingent fee
arrangement, then the partnership, S
corporation, or trust, and not the
partner, shareholder, or beneficiary, has
participated in the transaction with
contractual protection.
(D) Loss transactions. A taxpayer has
participated in a loss transaction if the
taxpayer’s tax return reflects a section
165 loss and the amount of the section
165 loss equals or exceeds the threshold
amount applicable to the taxpayer as
described in paragraph (b)(5)(i) of this
section. If a taxpayer is a partner in a
partnership, shareholder in an S
corporation, or beneficiary of a trust and
a section 165 loss as described in
paragraph (b)(5) of this section flows
through the entity to the taxpayer
(disregarding netting at the entity level),

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the taxpayer has participated in a loss
transaction if the taxpayer’s tax return
reflects a section 165 loss and the
amount of the section 165 loss that
flows through to the taxpayer equals or
exceeds the threshold amounts
applicable to the taxpayer as described
in paragraph (b)(5)(i) of this section. For
this purpose, a tax return is deemed to
reflect the full amount of a section 165
loss described in paragraph (b)(5) of this
section allocable to the taxpayer under
this paragraph (c)(3)(i)(D), regardless of
whether all or part of the loss enters into
the computation of a net operating loss
under section 172 or net capital loss
under section 1212 that the taxpayer
may carry back or carry over to another
year.
(E) Transactions of interest. A
taxpayer has participated in a
transaction of interest if the taxpayer is
one of the types or classes of persons
identified as participants in the
transaction in the published guidance
describing the transaction of interest.
(F) Transactions involving a brief
asset holding period. A taxpayer has
participated in a transaction involving a
brief asset holding period if the
taxpayer’s tax return reflects items
giving rise to a tax credit described in
paragraph (b)(7) of this section. If a
taxpayer is a partner in a partnership,
shareholder in an S corporation, or
beneficiary of a trust and the items
giving rise to a tax credit described in
paragraph (b)(7) of this section flow
through the entity to the taxpayer
(disregarding netting at the entity level),
the taxpayer has participated in a
transaction involving a brief asset
holding period if the taxpayer’s tax
return reflects the tax credit and the
amount of the tax credit claimed by the
taxpayer exceeds $250,000.
(G) Shareholders of foreign
corporations—(1) In general. A
reporting shareholder of a foreign
corporation participates in a transaction
described in paragraphs (b)(2) through
(5) and (b)(7) of this section if the
foreign corporation would be
considered to participate in the
transaction under the rules of this
paragraph (c)(3) if it were a domestic
corporation filing a tax return that
reflects the items from the transaction.
A reporting shareholder of a foreign
corporation participates in a transaction
described in paragraph (b)(6) of this
section only if the published guidance
identifying the transaction includes the
reporting shareholder among the types
or classes of persons identified as
participants. A reporting shareholder
(and any successor in interest) is
considered to participate in a
transaction under this paragraph

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(c)(3)(i)(G) only for its first taxable year
with or within which ends the first
taxable year of the foreign corporation
in which the foreign corporation
participates in the transaction, and for
the reporting shareholder’s five
succeeding taxable years.
(2) Reporting shareholder. The term
reporting shareholder means a United
States shareholder (as defined in section
951(b)) in a controlled foreign
corporation (as defined in section 957)
or a 10 percent shareholder (by vote or
value) of a qualified electing fund (as
defined in section 1295).
(ii) Examples. The following
examples illustrate the provisions of
paragraph (c)(3)(i) of this section:
Example 1. Notice 2003–55 (2003–2 C.B.
395), which modified and superseded Notice
95–53 (1995–2 C.B. 334) (see § 601.601(d)(2)
of this chapter), describes a lease stripping
transaction in which one party (the
transferor) assigns the right to receive future
payments under a lease of tangible property
and treats the amount realized from the
assignment as its current income. The
transferor later transfers the property subject
to the lease in a transaction intended to
qualify as a transferred basis transaction, for
example, a transaction described in section
351. The transferee corporation claims the
deductions associated with the high basis
property subject to the lease. The transferor’s
and transferee corporation’s tax returns
reflect tax positions described in Notice
2003–55. Therefore, the transferor and
transferee corporation have participated in
the listed transaction. In the section 351
transaction, the transferor will have received
stock with low value and high basis from the
transferee corporation. If the transferor
subsequently transfers the high basis/low
value stock to a taxpayer in another
transaction intended to qualify as a
transferred basis transaction and the taxpayer
uses the stock to generate a loss, and if the
taxpayer knows or has reason to know that
the tax loss claimed was derived indirectly
from the lease stripping transaction, then the
taxpayer has participated in the listed
transaction. Accordingly, the taxpayer must
disclose the transaction and the manner of
the taxpayer’s participation in the transaction
under the rules of this section. For purposes
of this example, if a bank lends money to the
transferor, transferee corporation, or taxpayer
for use in their transactions, the bank has not
participated in the listed transaction because
the bank’s tax return does not reflect tax
consequences or a tax strategy described in
the listing notice (nor does the bank’s tax
return reflect a tax benefit derived from tax
consequences or a tax strategy described in
the listing notice) nor is the bank described
as a participant in the listing notice.
Example 2. XYZ is a limited liability
company treated as a partnership for tax
purposes. X, Y, and Z are members of XYZ.
X is an individual, Y is an S corporation, and
Z is a partnership. XYZ enters into a
confidential transaction under paragraph
(b)(3) of this section. XYZ and X are bound
by the confidentiality agreement, but Y and

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Z are not bound by the agreement. As a result
of the transaction, XYZ, X, Y, and Z all
reflect a tax benefit on their tax returns.
Because XYZ’s and X’s disclosure of the tax
treatment and tax structure are limited in the
manner described in paragraph (b)(3) of this
section and their tax returns reflect a tax
benefit from the transaction, both XYZ and
X have participated in the confidential
transaction. Neither Y nor Z has participated
in the confidential transaction because they
are not subject to the confidentiality
agreement.
Example 3. P, a corporation, has an 80%
partnership interest in PS, and S, an
individual, has a 20% partnership interest in
PS. P, S, and PS are calendar year taxpayers.
In 2006, PS enters into a transaction and
incurs a section 165 loss (that does not meet
any of the exceptions to a section 165 loss
identified in published guidance) of $12
million and offsetting gain of $3 million. On
PS’ 2006 tax return, PS includes the section
165 loss and the corresponding gain. PS must
disclose the transaction under this section
because PS’ section 165 loss of $12 million
is equal to or greater than $2 million. P is
allocated $9.6 million of the section 165 loss
and $2.4 million of the offsetting gain. P does
not have to disclose the transaction under
this section because P’s section 165 loss of
$9.6 million is not equal to or greater than
$10 million. S is allocated $2.4 million of the
section 165 loss and $600,000 of the
offsetting gain. S must disclose the
transaction under this section because S’s
section 165 loss of $2.4 million is equal to
or greater than $2 million.

(4) Substantially similar. The term
substantially similar includes any
transaction that is expected to obtain the
same or similar types of tax
consequences and that is either factually
similar or based on the same or similar
tax strategy. Receipt of an opinion
regarding the tax consequences of the
transaction is not relevant to the
determination of whether the
transaction is the same as or
substantially similar to another
transaction. Further, the term
substantially similar must be broadly
construed in favor of disclosure. For
example, a transaction may be
substantially similar to a listed
transaction even though it involves
different entities or uses different Code
provisions. (See e.g., Notice 2003–54,
2003–2 C.B. 363, describing a
transaction substantially similar to the
transactions in Notice 2002–50, 2002–2
C.B. 98, and Notice 2002–65, 2002–2
C.B. 690.) The following examples
illustrate situations where a transaction
is the same as or substantially similar to
a listed transaction under paragraph
(b)(2) of this section. (Such transactions
may also be reportable transactions
under paragraphs (b)(3) through (7) of
this section.) The following examples
illustrate the provisions of this
paragraph (c)(4):

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64493

Example 1. Notice 2000–44 (2000–2 C.B.
255) (see § 601.601(d)(2) of this chapter), sets
forth a listed transaction involving offsetting
options transferred to a partnership where
the taxpayer claims basis in the partnership
for the cost of the purchased options but does
not adjust basis under section 752 as a result
of the partnership’s assumption of the
taxpayer’s obligation with respect to the
options. Transactions using short sales,
futures, derivatives or any other type of
offsetting obligations to inflate basis in a
partnership interest would be the same as or
substantially similar to the transaction
described in Notice 2000–44. Moreover, use
of the inflated basis in the partnership
interest to diminish gain that would
otherwise be recognized on the transfer of a
partnership asset would also be the same as
or substantially similar to the transaction
described in Notice 2000–44.
Example 2. Notice 2001–16 (2001–1 C.B.
730) (see § 601.601(d)(2) of this chapter), sets
forth a listed transaction involving a seller
(X) who desires to sell stock of a corporation
(T), an intermediary corporation (M), and a
buyer (Y) who desires to purchase the assets
(and not the stock) of T. M agrees to facilitate
the sale to prevent the recognition of the gain
that T would otherwise report. Notice 2001–
16 describes M as a member of a consolidated
group that has a loss within the group or as
a party not subject to tax. Transactions
utilizing different intermediaries to prevent
the recognition of gain would be the same as
or substantially similar to the transaction
described in Notice 2001–16. An example is
a transaction in which M is a corporation that
does not file a consolidated return but which
buys T stock, liquidates T, sells assets of T
to Y, and offsets the gain recognized on the
sale of those assets with currently generated
losses.

(5) Tax. For purposes of this section,
the term tax means Federal income tax.
(6) Tax benefit. A tax benefit includes
deductions, exclusions from gross
income, nonrecognition of gain, tax
credits, adjustments (or the absence of
adjustments) to the basis of property,
status as an entity exempt from Federal
income taxation, and any other tax
consequences that may reduce a
taxpayer’s Federal income tax liability
by affecting the amount, timing,
character, or source of any item of
income, gain, expense, loss, or credit.
(7) Tax return. For purposes of this
section, the term tax return means a
Federal income tax return and a Federal
information return.
(8) Tax treatment. The tax treatment
of a transaction is the purported or
claimed Federal income tax treatment of
the transaction.
(9) Tax structure. The tax structure of
a transaction is any fact that may be
relevant to understanding the purported
or claimed Federal income tax treatment
of the transaction.
(d) Form and content of disclosure
statement. A taxpayer required to file a
disclosure statement under this section

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Federal Register / Vol. 71, No. 212 / Thursday, November 2, 2006 / Proposed Rules

must file a completed Form 8886,
‘‘Reportable Transaction Disclosure
Statement’’ (or a successor form), in
accordance with this paragraph (d) and
the instructions to the form. The Form
8886 (or a successor form) is the
disclosure statement required under this
section. The form must be attached to
the appropriate tax return(s) as provided
in paragraph (e) of this section. If a copy
of a disclosure statement is required to
be sent to the Office of Tax Shelter
Analysis (OTSA) under paragraph (e) of
this section, it must be sent in
accordance with the instructions to the
form. To be considered complete, the
information provided on the form must
describe the expected tax treatment and
all potential tax benefits expected to
result from the transaction, describe any
tax result protection (as defined in
§ 301.6111–3(c)(12) of this chapter) with
respect to the transaction, and identify
and describe the transaction in
sufficient detail for the IRS to be able to
understand the tax structure of the
reportable transaction and the identity
of all parties involved in the transaction.
An incomplete Form 8886 (or a
successor form) containing a statement
that information will be provided upon
request is not considered a complete
disclosure statement. If the form is not
completed in accordance with the
provisions in this paragraph (d) and the
instructions to the form, the taxpayer
will not be considered to have complied
with the disclosure requirements of this
section. If a taxpayer receives one or
more reportable transaction numbers for
a reportable transaction, the taxpayer
must include the reportable transaction
number(s) on the Form 8886 (or a
successor form). See § 301.6111–3(d)(2)
of this chapter.
(e) Time of providing disclosure—(1)
In general. The disclosure statement for
a reportable transaction must be
attached to the taxpayer’s tax return for
each taxable year for which a taxpayer
participates in a reportable transaction.
In addition, a disclosure statement for a
reportable transaction must be attached
to each amended return that reflects a
taxpayer’s participation in a reportable
transaction. A copy of the disclosure
statement must be sent to OTSA at the
same time that any disclosure statement
is first filed by the taxpayer pertaining
to a particular reportable transaction. If
a reportable transaction results in a loss
which is carried back to a prior year, the
disclosure statement for the reportable
transaction must be attached to the
taxpayer’s application for tentative
refund or amended tax return for that
prior year. In the case of a taxpayer that
is a partnership, S corporation, or trust,

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the disclosure statement for a reportable
transaction must be attached to the
partnership, S corporation, or trust’s tax
return for each taxable year in which the
partnership, S corporation, or trust
participates in the transaction under the
rules of paragraph (c)(3)(i) of this
section. If a taxpayer in a partnership,
S corporation, or trust receives a timely
Schedule K–1 less than 10 calendar
days before the due date of the
taxpayer’s return (including extensions)
and, based on receipt of the timely
Schedule K–1, the taxpayer determines
that the taxpayer participated in a
reportable transaction within the
meaning of paragraph (c)(3) of this
section, the disclosure statement will
not be considered late if the taxpayer
discloses the reportable transaction by
filing a disclosure statement with OTSA
within 45 calendar days after the due
date of the taxpayer’s return (including
extensions).
(2) Special rules—(i) Listed
transactions and transactions of
interest. In general, if a transaction
becomes a listed transaction or a
transaction of interest after the filing of
a taxpayer’s tax return (including an
amended return) reflecting the
taxpayer’s participation in the listed
transaction or transaction of interest and
before the end of the period of
limitations for assessment of tax for any
taxable year in which the taxpayer
participated in the listed transaction or
transaction of interest, then a disclosure
statement must be filed, regardless of
whether the taxpayer participated in the
transaction in the year the transaction
became a listed transaction or a
transaction of interest, with OTSA
within 60 calendar days after the date
on which the transaction became a
listed transaction or a transaction of
interest. The Commissioner also may
determine the time for disclosure of
listed transactions and transactions of
interest in the published guidance
identifying the transaction.
(ii) Loss transactions. If a transaction
becomes a loss transaction because the
losses equal or exceed the threshold
amounts as described in paragraph
(b)(5)(i) of this section, a disclosure
statement must be filed as an
attachment to the taxpayer’s tax return
for the first taxable year in which the
threshold amount is reached and to any
subsequent tax return that reflects any
amount of section 165 loss from the
transaction.
(3) Multiple disclosures. The taxpayer
must disclose the transaction in the time
and manner provided for under the
provisions of this section regardless of
whether the taxpayer also plans to
disclose the transaction under other

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published guidance, for example,
§ 1.6662–3(c)(2).
(4) Example. The following example
illustrates the application of this
paragraph (e):
Example. In January of 2006, F, a calendar
year taxpayer, enters into a transaction that
at the time is not a listed transaction and is
not a transaction described in any of the
paragraphs (b)(3) through (7) of this section.
All the tax benefits from the transaction are
reported on F’s 2006 tax return filed timely
in April 2007. On May 1, 2009, the IRS
publishes a notice identifying the transaction
as a listed transaction described in paragraph
(b)(2) of this section. Upon issuance of the
May 1, 2009 notice, the transaction becomes
a reportable transaction described in
paragraph (b) of this section. The period of
limitations on assessment for F’s 2006
taxable year is still open. F is required to file
Form 8886 for the transaction with OTSA
within 60 calendar days after May 1, 2009.

(f) [The text of the proposed
amendment to § 1.6011–4(f)(1) is the
same as the text for § 1.6011–4T(f)(1)
published elsewhere in this issue of the
Federal Register].
(2) Protective disclosures. If a taxpayer
is uncertain whether a transaction must
be disclosed under this section, the
taxpayer may disclose the transaction in
accordance with the requirements of
this section and comply with all the
provisions of this section, and indicate
on the disclosure statement that the
disclosure statement is being filed on a
protective basis. The IRS will not treat
disclosure statements filed on a
protective basis any differently than
other disclosure statements filed under
this section. For a protective disclosure
to be effective, the taxpayer must
comply with these disclosure
regulations by providing to the IRS all
information requested by the IRS under
this section.
(g) Retention of documents. In
accordance with the instructions to
Form 8886 (or a successor form), the
taxpayer must retain a copy of all
documents and other records related to
a transaction subject to disclosure under
this section that are material to an
understanding of the tax treatment or
tax structure of the transaction. The
documents must be retained until the
expiration of the statute of limitations
applicable to the final taxable year for
which disclosure of the transaction was
required under this section. (This
document retention requirement is in
addition to any document retention
requirements that section 6001 generally
imposes on the taxpayer.) The
documents may include the following:
marketing materials related to the
transaction; written analyses used in
decision-making related to the
transaction; correspondence and

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Federal Register / Vol. 71, No. 212 / Thursday, November 2, 2006 / Proposed Rules
agreements between the taxpayer and
any advisor, lender, or other party to the
reportable transaction that relate to the
transaction; documents discussing,
referring to, or demonstrating the
purported or claimed tax benefits
arising from the reportable transaction;
and documents, if any, referring to the
business purposes for the reportable
transaction. A taxpayer is not required
to retain earlier drafts of a document if
the taxpayer retains a copy of the final
document (or, if there is no final
document, the most recent draft of the
document) and the final document (or
most recent draft) contains all the
information in the earlier drafts of the
document that is material to an
understanding of the purported tax
treatment or tax structure of the
transaction.
(h) Effective date—(1) In general. In
general, this section applies to
transactions entered into on or after the
date these regulations are published as
final regulations in the Federal Register.
However, upon the publication of final
regulations, this section will apply to
transactions of interest entered into on
or after November 2, 2006.
(2) [The text of the proposed
amendment to § 1.6011–4(h)(2) is the
same as the text for § 1.6011–4T(h)(2)
published elsewhere in this issue of the
Federal Register].

PART 25—GIFT TAX; GIFTS MADE
AFTER DECEMBER 31, 1954
Par. 5. The authority citation for part
25 continues to read, in part, as follows:
Authority: 26 U.S.C. 7805 * * *

Par. 6. Section 25.6011–4 is amended
as follows:
1. Paragraph (a) is amended by adding
the language ‘‘or a transaction of
interest’’ after the first occurrence of
‘‘listed transaction’’ and by adding the
language ‘‘or transaction of interest’’
after the second occurrence of ‘‘listed
transaction’’.
2. Paragraph (b) is revised.
The revision reads as follows:
§ 25.6011–4 Requirement of statement
disclosing participation in certain
transactions by taxpayers.

*

*
*
*
*
(b) Effective date. This section applies
to listed transactions entered into on or
after January 1, 2003. Upon the
publication of final regulations, this
section will apply to transactions of
interest entered into on or after
November 2, 2006.
PART 31—EMPLOYMENT TAXES AND
COLLECTION OF INCOME TAX AT
SOURCE
Par. 7. The authority citation for part
31 continues to read, in part, as follows:
Authority: 26 U.S.C. 7805 * * *

PART 20—ESTATE TAX; ESTATES OF
DECEDENTS DYING AFTER AUGUST
16, 1954
Par. 3. The authority citation for part
20 continues to read, in part, as follows:
Authority: 26 U.S.C. 7805 * * *

Par. 4. Section 20.6011–4 is amended
as follows:
1. Paragraph (a) is amended by adding
the language ‘‘or a transaction of
interest’’ after the first occurrence of
‘‘listed transaction’’ and by adding the
language ‘‘or transaction of interest’’
after the second occurrence of ‘‘listed
transaction’’.
2. Paragraph (b) is revised.
The revision reads as follows:
§ 20.6011–4 Requirement of statement
disclosing participation in certain
transactions by taxpayers.
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*

*
*
*
*
(b) Effective date. This section applies
to listed transactions entered into on or
after January 1, 2003. Upon the
publication of final regulations, this
section will apply to transactions of
interest entered into on or after
November 2, 2006.

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Par. 8. Section 31.6011–4 is amended
as follows:
1. Paragraph (a) is amended by adding
the language ‘‘or a transaction of
interest’’ after the first occurrence of
‘‘listed transaction’’ and by adding the
language ‘‘or transaction of interest’’
after the second occurrence of ‘‘listed
transaction’’.
2. Paragraph (b) is revised.
The revision reads as follows:
§ 31.6011–4 Requirement of statement
disclosing participation in certain
transactions by taxpayers.

*

*
*
*
*
(b) Effective date. This section applies
to listed transactions entered into on or
after January 1, 2003. Upon the
publication of final regulations, this
section will apply to transactions of
interest entered into on or after
November 2, 2006.
PART 53—FOUNDATION AND SIMILAR
EXCISE TAXES
Par. 9. The authority citation for part
53 continues to read, in part, as follows:
Authority: 26 U.S.C. 7805 * * *

Par. 10. Section 53.6011–4 is
amended as follows:

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64495

1. Paragraph (a) is amended by adding
the language ‘‘or a transaction of
interest’’ after the first occurrence of
‘‘listed transaction’’ and by adding the
language ‘‘or transaction of interest’’
after the second occurrence of ‘‘listed
transaction’’.
2. Paragraph (b) is revised.
The revision reads as follows:
§ 53.6011–4 Requirement of statement
disclosing participation in certain
transactions by taxpayers.

*

*
*
*
*
(b) Effective date. This section applies
to listed transactions entered into on or
after January 1, 2003. Upon the
publication of final regulations, this
section will apply to transactions of
interest entered into on or after
November 2, 2006.
PART 54—PENSION EXCISE TAXES
Par. 11. The authority citation for part
54 continues to read, in part, as follows:
Authority: 26 U.S.C. 7805 * * *

Par. 12. Section 54.6011–4 is
amended as follows:
1. Paragraph (a) is amended by adding
the language ‘‘or a transaction of
interest’’ after the first occurrence of
‘‘listed transaction’’ and by adding the
language ‘‘or transaction of interest’’
after the second occurrence of ‘‘listed
transaction’’.
2. Paragraph (b) is revised.
The revision reads as follows:
§ 54.6011–4 Requirement of statement
disclosing participation in certain
transactions by taxpayers.

*

*
*
*
*
(b) Effective date. This section applies
to listed transactions entered into on or
after January 1, 2003. Upon the
publication of final regulations, this
section will apply to transactions of
interest entered into on or after
November 2, 2006.
PART 56—PUBLIC CHARITY EXCISE
TAXES
Par. 13. The authority citation for part
56 continues to read, in part, as follows:
Authority: 26 U.S.C. 7805 * * *

Par. 14. Section 56.6011–4 is
amended as follows:
1. Paragraph (a) is amended by adding
the language ‘‘or a transaction of
interest’’ after the first occurrence of
‘‘listed transaction’’ and by adding the
language ‘‘or transaction of interest’’
after the second occurrence of ‘‘listed
transaction’’.
2. Paragraph (b) is revised.
The revision reads as follows:

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64496

Federal Register / Vol. 71, No. 212 / Thursday, November 2, 2006 / Proposed Rules

§ 56.6011–4 Requirement of statement
disclosing participation in certain
transactions by taxpayers.

*

*
*
*
*
(b) Effective date. This section applies
to listed transactions entered into on or
after January 1, 2003. Upon the
publication of final regulations, this
section will apply to transactions of
interest entered into on or after
November 2, 2006.

Mark E. Matthews,
Deputy Commissioner for Services and
Enforcement.
[FR Doc. E6–18319 Filed 11–1–06; 8:45 am]
BILLING CODE 4830–01–P

DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 301
[REG–103039–05]
RIN 1545–BE26

AJCA Modifications to the Section
6111 Regulations
Internal Revenue Service (IRS),
Treasury.
ACTION: Notice of proposed rulemaking
by cross-reference to temporary
regulations.

mstockstill on PROD1PC61 with PROPOSALS

AGENCY:

SUMMARY: This document contains
proposed regulations under section
6111 of the Internal Revenue Code
which provide the rules relating to the
disclosure of reportable transactions by
material advisors. These regulations
affect material advisors responsible for
disclosing reportable transactions under
section 6111 and material advisors
responsible for keeping lists under
section 6112.
DATES: Written or electronic comments
and requests for a public hearing must
be received by January 31, 2007.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG–103039–05), room
5203, Internal Revenue Service, PO Box
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 (REG–103039–05),
Courier’s Desk, Internal Revenue
Service, Crystal Mall 4 Building, 1901 S.
Bell St., Arlington, VA, or sent
electronically, via the IRS Internet site
at http://www.irs.gov/regs or via the
Federal eRulemaking Portal at http://
www.regulations.gov (indicate IRS and
REG–103039–05).
FOR FURTHER INFORMATION CONTACT:

Concerning the proposed regulations,

VerDate Aug<31>2005

14:48 Nov 01, 2006

Jkt 211001

Tara P. Volungis or Charles Wien, 202–
622–3070; concerning the submissions
of comments and requests for hearing,
Kelly Banks, 202–622–0392 (not tollfree numbers).
SUPPLEMENTARY INFORMATION:
Background
This document proposes to amend 26
CFR part 301 by providing rules relating
to the disclosure of reportable
transactions by material advisors under
section 6111.
The American Jobs Creation Act of
2004, Public Law 108–357, 118 Stat.
1418, (AJCA) was enacted on October
22, 2004. Section 815 of the AJCA
amended section 6111 to require each
material advisor with respect to any
reportable transaction to make a return
(in such form as the Secretary may
prescribe) setting forth: (1) Information
identifying and describing the
transaction; (2) information describing
any potential tax benefits expected to
result from the transaction; and (3) such
other information as the Secretary may
prescribe. Section 6111(a), as amended,
also provides that the return must be
filed not later than the date specified by
the Secretary. Section 6111(b)(1), as
amended, provides a definition for the
term material advisor and includes as
part of that definition a requirement that
the material advisor derive certain
threshold amounts of gross income that
the Secretary may prescribe. The AJCA
amendments to section 6111 also
authorize the Secretary to prescribe
regulations that provide: (1) That only
one person shall be required to meet the
requirements of section 6111(a) in cases
in which two or more persons would
otherwise be required to meet such
requirements; (2) exemptions from the
requirements of section 6111; and (3)
rules as may be necessary or appropriate
to carry out the purposes of section
6111. Section 815 of the AJCA is
effective for transactions with respect to
which material aid, assistance, or advice
is provided after October 22, 2004.
Prior to these amendments, section
6111(a) required an organizer of a tax
shelter to register the tax shelter with
the Secretary not later than the day on
which interests in the tax shelter were
first offered for sale. Under former
section 6111(c), the term tax shelter was
defined as any investment with respect
to which any person could reasonably
infer from the representations made or
to be made, in connection with the
offering for sale of interests in the
investments that the tax shelter ratio for
any investor as of the close of any of the
first five years ending after the date on
which the investment was offered for
sale may have been greater than two to

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one and which was: (1) Required to be
registered under a Federal or State law
regulating securities; (2) sold pursuant
to an exemption from registration
requiring the filing of a notice with a
Federal or State agency regulating the
offering or sale of securities; or (3) a
substantial investment (the aggregate
amount which may have been offered
for sale exceeded $250,000 and the
expected involvement of five or more
investors). Under former section
6111(d), for purposes of section 6111(a),
the term tax shelter included any entity,
plan, arrangement or transaction; (1) A
significant purpose of the structure of
which is the avoidance or evasion of
Federal income tax for a direct or
indirect participant which is a
corporation; (2) which is offered to any
potential participant under conditions
of confidentiality; and (3) for which the
tax shelter promoters may receive fees
in excess of $100,000 in the aggregate.
In response to the AJCA, the IRS and
Treasury Department issued interim
guidance on section 6111 in Notice
2004–80, 2004–2 C.B. 963; Notice 2005–
17, 2005–1 C.B. 606; Notice 2005–22,
2005–1 C.B. 756; and Notice 2006–6,
2006–5 I.R.B. 385 (see § 601.601(d)(2)).
The IRS and Treasury Department have
received various comments and
questions regarding the application of
section 6111. Consequently, the IRS and
Treasury Department propose new rules
relating to the disclosure of reportable
transactions by material advisors under
section 6111.
Explanation of Provisions
A. In General
These proposed regulations are being
issued concurrently with proposed
regulations under § 301.6112–1 and
§ 1.6011–4 published elsewhere in the
Federal Register. Under these proposed
regulations, each material advisor with
respect to any reportable transaction (as
defined in § 1.6011–4(b)(1)) must file a
return by the date prescribed in the
regulations. For this purpose, a person
is a material advisor with respect to a
transaction if the person provides any
material aid, assistance, or advice with
respect to organizing, managing,
promoting, selling, implementing,
insuring, or carrying out any reportable
transaction, and directly or indirectly
derives gross income in excess of the
threshold amount for the material aid,
assistance, or advice. A person provides
material aid, assistance, or advice with
respect to organizing, managing,
promoting, selling, implementing,
insuring, or carrying out any transaction
if the person makes or provides a tax
statement to or for the benefit of certain

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