[Federal Register Volume 65, Number 42 (Thursday, March 2, 2000)]
[Rules and Regulations]
[Pages 11205-11211]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-4842]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 8877]
RIN 1545-AX82


Tax Shelter Disclosure Statements

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary regulations.

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SUMMARY: This document contains temporary regulations requiring certain 
corporate taxpayers to file a statement with their Federal corporate 
income tax return under section 6011(a). The temporary regulations 
affect corporations participating in certain reportable transactions. 
The text of these temporary regulations also serves as the text of the 
proposed regulations set forth in the notice of proposed rulemaking on 
this subject in REG-103735-00 published elsewhere in this issue of the 
Federal Register.

DATES: Effective date. These temporary regulations are effective for 
Federal corporate income tax returns filed after February 28, 2000.
    Applicability date. For dates of applicability, see Sec. 1.6011-
4T(g) of these regulations.

FOR FURTHER INFORMATION CONTACT: Richard Castanon, (202) 622-3080, or 
Mary Beth Collins, (202) 622-3070, (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    These regulations are being issued without prior notice and public 
procedure pursuant to the Administrative Procedure Act (5 U.S.C. 553). 
For this reason, the collections of information contained in these 
regulations have been reviewed and, pending receipt and evaluation of 
public comments, approved by the Office of Management and Budget under 
control number 1545-1685. Responses to these collections of information 
are mandatory.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless the collection of 
information displays a valid OMB control number.
    For further information concerning these collections of 
information, and where to submit comments on the collections of 
information and the accuracy of the estimated burden, and suggestions 
for reducing this burden, please refer to the preamble to the cross-
referencing notice of proposed rulemaking published in the Proposed 
Rules section of this issue of the Federal Register.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background

    The Treasury Department and the IRS are concerned about the 
proliferation of corporate tax shelters. These temporary regulations 
are intended to provide the Service with early notification of large 
corporate transactions with characteristics that may be indicative of 
such tax shelter activity.
    Accordingly, this document amends 26 CFR part 1 regarding the 
general filing requirement for persons required to file a return for a 
taxable year with respect to a tax imposed under section 11. Section 
6011(a) provides that any person made liable for any tax imposed by the 
Internal Revenue Code (Code), or with respect to the collection 
thereof, shall make a return or statement according to the forms and 
regulations prescribed by the Secretary of the Treasury.

Explanation of Provisions

I. Disclosure Statement Required for Certain Corporate Taxpayers

    The temporary regulations provide that every person that is 
required to file a return for a taxable year with respect to any tax 
imposed under section 11 (corporate taxpayers) and that has 
participated in a reportable transaction shall attach a disclosure 
statement to its return for each taxable year for which the taxpayer's 
Federal income tax liability is affected by its participation

[[Page 11206]]

in the reportable transaction. In addition, a copy of the disclosure 
statement must be sent to the IRS in Washington, DC for the first 
taxable year for which the transaction is disclosed on the taxpayer's 
Federal income tax return. The temporary regulations outline the form 
and content of the disclosure statement and also provide an example of 
the statement.
    Where the temporary regulations require a taxpayer to attach a 
disclosure statement to its return, the information required to be set 
forth thereon is a required part of the return to the same extent as 
information required pursuant to prescribed forms. See Sec. 1.6011-1. 
Therefore, when a taxpayer verifies its return, which includes a 
declaration that the return is complete, a taxpayer affirms that it has 
accurately made all disclosures required by these temporary 
regulations.
    In the event of an underpayment attributable to a reportable 
transaction, a taxpayer's failure to satisfy the disclosure 
requirements of the temporary regulations may affect its exposure to 
penalties under sections 6662 and 6663 of the Code. Section 6664(c)(1) 
provides that such penalties may not be imposed with respect to any 
portion of a taxpayer's underpayment ``if it is shown that there was a 
reasonable cause for such portion and that the taxpayer acted in good 
faith with respect to such portion.'' (Emphasis added.) Whether a 
taxpayer is considered to have satisfied the requirements of section 
6664(c)(1) is determined on a case-by-case basis, taking into account 
all pertinent facts and circumstances. See Sec. 1.6664-4(b)(1).
    The fact that a professional tax advisor has advised a taxpayer 
that its return position is more likely than not the proper tax 
treatment is not necessarily sufficient to satisfy the requirements of 
section 6664(c)(1). If a taxpayer has an underpayment attributable to 
its participation in a reportable transaction that has not been 
properly disclosed on its return, the nondisclosure could indicate that 
the taxpayer has not acted in ``good faith'' with respect to the 
underpayment, even if the taxpayer's return position has sufficient 
legal justification to meet the minimum requirements of section 
6664(c)(1). In such a case, the determination of whether a taxpayer has 
acted in ``good faith'' will depend on all of the facts and 
circumstances, including the reason or reasons why the taxpayer failed 
to make the required disclosure.

II. Reportable Transactions

    The temporary regulations define two categories of reportable 
transactions. The first category includes certain types of transactions 
identified by the Treasury and the Service as tax avoidance 
transactions. The second category includes transactions that warrant 
further scrutiny because they possess certain identified 
characteristics that are common in corporate tax shelters.
    The regulations require disclosure only for large transactions that 
provide tax savings in excess of certain dollar thresholds (the 
projected tax effect test). In addition, the regulations contain 
exceptions to ensure that normal business transactions are not subject 
to disclosure. The fact that a transaction is reportable or not 
reportable under these regulations shall not affect the legal 
determination whether the tax benefits claimed with respect to the 
transaction are allowable.
    The first category of reportable transactions includes any 
transaction that is the same as or substantially similar to one of the 
specified types of tax avoidance transactions that the IRS has 
identified by published guidance as a listed transaction for purposes 
of section 6011 and that is expected to reduce the taxpayer's Federal 
income tax liability by more than $1 million in any single taxable year 
or by a total of more than $2 million for any combination of taxable 
years. However, a listed transaction is not treated as a reportable 
transaction if it has affected the taxpayer's Federal income tax 
liability as reported on any tax return filed on or before February 28, 
2000.
    The second category of reportable transactions includes 
transactions entered into after February 28, 2000 that are expected to 
reduce a taxpayer's Federal income tax liability by more than $5 
million in any single taxable year or by a total of more than $10 
million for any combination of taxable years and that have at least two 
of the following characteristics:
    (A) The taxpayer has participated in the transaction under 
conditions of confidentiality (as defined in Sec. 301.6111-2T(c)).
    (B) The taxpayer has obtained or been provided with contractual 
protection against the possibility that part or all of the intended tax 
benefits from the transaction will not be sustained, including, but not 
limited to, recission rights, the right to a full or partial refund of 
fees paid to any person, fees that are contingent on the taxpayer's 
realization of tax benefits from the transaction, insurance protection 
with respect to the tax treatment of the transaction, or a tax 
indemnity or similar agreement (other than a customary indemnity 
provided by a principal to the transaction that did not participate in 
the promotion of the transaction to the taxpayer).
    (C) The taxpayer's participation in the transaction was promoted, 
solicited, or recommended by one or more persons who have received or 
are expected to receive fees or other consideration with an aggregate 
value in excess of $100,000, and such person or persons' entitlement to 
such fees or other consideration was contingent on the taxpayer's 
participation in the transaction.
    (D) The expected treatment of the transaction for Federal income 
tax purposes in any taxable year differs or is expected to differ by 
more than $5 million from the treatment of the transaction for purposes 
of determining book income as taken into account on the schedule M-1 
(or comparable schedule) on the taxpayer's Federal corporate income tax 
return for the same period.
    (E) The transaction involves the participation of a person that the 
taxpayer knows or has reason to know is in a Federal income tax 
position that differs from that of the taxpayer (such as a tax exempt 
entity or a foreign person), and the taxpayer knows or has reason to 
know that such difference in tax position has permitted the transaction 
to be structured on terms that are intended to provide the taxpayer 
with more favorable Federal income tax treatment than it could have 
obtained without the participation of such person (or another person in 
a similar tax position).
    (F) The expected characterization of any significant aspect of the 
transaction for Federal income tax purposes differs from the expected 
characterization of such aspect of the transaction for purposes of 
taxation of any party to the transaction in another country.
    However, a transaction that has at least two of the foregoing 
characteristics is not a reportable transaction if any of the following 
conditions is satisfied--
    (A) The taxpayer has participated in the transaction in the 
ordinary course of its business in a form consistent with customary 
commercial practice, and the taxpayer reasonably determines that it 
would have participated in the same transaction on substantially the 
same terms irrespective of the expected Federal income tax benefits;
    (B) The taxpayer has participated in the transaction in the 
ordinary course of its business in a form consistent with customary 
commercial practice, and the taxpayer reasonably determines that

[[Page 11207]]

there is a long-standing and generally accepted understanding that the 
expected Federal income tax benefits from the transaction (taking into 
account any combination of intended tax consequences) are allowable 
under the Code for substantially similar transactions;
    (C) The taxpayer reasonably determines that there is no reasonable 
basis under Federal tax law for denial of any significant portion of 
the expected Federal income tax benefits from the transaction; or
    (D) The transaction is identified in published guidance as being 
excepted from disclosure.
    A transaction involving the acquisition, disposition, or 
restructuring of a business, including the acquisition, disposition, or 
other change in the ownership or control of an entity that is engaged 
in a business, or a transaction involving a recapitalization or an 
acquisition of capital for use in the taxpayer's business, shall be 
considered a transaction carried out in the ordinary course of a 
taxpayer's business.

III. Record Retention

    The taxpayer must retain all documents related to a transaction 
subject to disclosure under this section until the expiration of the 
statute of limitations for the first taxable year for which a 
disclosure statement is filed with its tax return. (This obligation is 
in addition to any document retention requirements that section 6001 
generally imposes on the taxpayer.) Such documents include, but are not 
limited to, the following: all marketing materials related to the 
transaction; all written analyses used in decision-making related to 
the transaction; all correspondence and agreements related to the 
transaction between the taxpayer and any promoter, advisor, lender, or 
other party to the reportable transaction; all documents discussing, 
referring to, or demonstrating the tax benefits arising from the 
reportable transaction; and all documents, if any, referring to the 
business purposes for the reportable transaction.

IV. Effective Date

    The temporary regulations apply to Federal corporate income tax 
returns filed after February 28, 2000.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. It has also been 
determined that section 553(b) of the Administrative Procedure Act (5 
U.S.C. chapter 5) does not apply to these regulations. It is hereby 
certified that the collection of information in these regulations will 
not have a significant economic impact on a substantial number of small 
entities. This certification is based upon the fact that the persons 
responsible for filing the statement required by these regulations are 
principally large publicly traded corporations, and the burden is not 
significant as described earlier in the preamble. Therefore, a 
Regulatory Flexibility Analysis under the Regulatory Flexibility Act (5 
U.S.C. chapter 6) is not required. Pursuant to section 7805(f) of the 
Code, these temporary regulations will be submitted to the Chief 
Counsel for Advocacy of the Small Business Administration for comment 
on their impact on small business.

Drafting Information

    The principal authors of these regulations are Mary Beth Collins 
and Richard Castanon, Office of Chief Counsel (Passthroughs and Special 
Industries). However, other personnel from the IRS and Treasury 
Department participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR parts 1 and 602 are amended as follows:

PART 1--INCOME TAXES

    1. The authority citation for part 1 is amended by adding an entry 
in numerical order to read in part as follows:

    Authority: 26 U.S.C. 7805  * * *

    Section 1.6011-4T also issued under 26 U.S.C. 6001 and 6011(a).* 
* *

    2. Section 1.6011-4T is added to read as follows:


Sec. 1.6011-4T  Requirement of statement disclosing participation in 
certain transactions by corporate taxpayers (Temporary)--

    (a) In general. Every taxpayer that is required to file a return 
for a taxable year with respect to a tax imposed under section 11 and 
that has participated, directly or indirectly, in a reportable 
transaction within the meaning of paragraph (b) of this section must 
attach to its return for the taxable year described in paragraph (d) of 
this section a disclosure statement in the form prescribed by paragraph 
(c) of this section. For this purpose, a taxpayer will have indirectly 
participated in a transaction if its Federal income tax liability is 
affected by the transaction even if it is not a direct party to the 
transaction (e.g., it participates through a partnership or through a 
controlled entity). A separate disclosure statement is required for 
each reportable transaction. The fact that a taxpayer files a 
disclosure statement for a reportable transaction shall not affect the 
legal determination whether the tax benefits claimed with respect to 
the transaction are allowable.
    (b) Definition of reportable transaction--(1) In general. A 
reportable transaction is a transaction that is described in either 
paragraph (b)(2) or (3) of this section and that meets the projected 
tax effect test in paragraph (b)(4) of this section. The term 
transaction includes all of the factual elements necessary to support 
the tax benefits that are expected to be claimed with respect to any 
entity, plan, or arrangement, and includes any series of related steps 
carried out as part of a prearranged plan and any series of 
substantially similar transactions entered into in the same taxable 
year.
    (2) Listed transactions. A transaction is described in this 
paragraph (b)(2) if the transaction 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 for purposes of section 6011. However, a listed 
transaction is not treated as a reportable transaction if it has 
affected the taxpayer's Federal income tax liability as reported on any 
tax return filed on or before February 28, 2000. The fact that a 
transaction becomes a listed transaction does not imply that the 
transaction was not otherwise a reportable transaction prior thereto.
    (3) Other reportable transactions--(i) In general. Except as 
provided in paragraph (b)(3)(ii) of this section, a transaction is 
described in this paragraph (b)(3) if it is entered into after February 
28, 2000 and has at least two of the following characteristics:
    (A) The taxpayer has participated in the transaction under 
conditions of confidentiality (as defined in Sec. 301.6111-2T(c)).
    (B) The taxpayer has obtained or been provided with contractual 
protection against the possibility that part or all of the intended tax 
benefits from the transaction will not be sustained, including, but not 
limited to, recission rights, the right to a full or partial refund of 
fees paid to any person, fees

[[Page 11208]]

that are contingent on the taxpayer's realization of tax benefits from 
the transaction, insurance protection with respect to the tax treatment 
of the transaction, or a tax indemnity or similar agreement (other than 
a customary indemnity provided by a principal to the transaction that 
did not participate in the promotion of the transaction to the 
taxpayer).
    (C) The taxpayer's participation in the transaction was promoted, 
solicited, or recommended by one or more persons who have received or 
are expected to receive fees or other consideration with an aggregate 
value in excess of $100,000, and such person or persons' entitlement to 
such fees or other consideration was contingent on the taxpayer's 
participation in the transaction.
    (D) The expected treatment of the transaction for Federal income 
tax purposes in any taxable year differs or is expected to differ by 
more than $5 million from the treatment of the transaction for purposes 
of determining book income as taken into account on the schedule M-1 
(or comparable schedule) on the taxpayer's Federal corporate income tax 
return for the same period.
    (E) The transaction involves the participation of a person that the 
taxpayer knows or has reason to know is in a Federal income tax 
position that differs from that of the taxpayer (such as a tax exempt 
entity or a foreign person), and the taxpayer knows or has reason to 
know that such difference in tax position has permitted the transaction 
to be structured on terms that are intended to provide the taxpayer 
with more favorable Federal income tax treatment than it could have 
obtained without the participation of such person (or another person in 
a similar tax position).
    (F) The expected characterization of any significant aspect of the 
transaction for Federal income tax purposes differs from the expected 
characterization of such aspect of the transaction for purposes of 
taxation of any party to the transaction in another country.
    (ii) Exceptions. A transaction is not a reportable transaction 
under paragraph (b)(3) of this section if paragraph (b)(3)(ii)(A), (B), 
(C), or (D) of this section is satisfied.
    (A) The taxpayer has participated in the transaction in the 
ordinary course of its business in a form consistent with customary 
commercial practice, and the taxpayer reasonably determines that it 
would have participated in the same transaction on substantially the 
same terms irrespective of the expected Federal income tax benefits.
    (B) The taxpayer has participated in the transaction in the 
ordinary course of its business in a form consistent with customary 
commercial practice, and the taxpayer reasonably determines that there 
is a long-standing and generally accepted understanding that the 
expected Federal income tax benefits from the transaction (taking into 
account any combination of intended tax consequences) are allowable 
under the Internal Revenue Code (Code) for substantially similar 
transactions.
    (C) The taxpayer reasonably determines that there is no reasonable 
basis under Federal tax law for denial of any significant portion of 
the expected Federal income tax benefits from the transaction. Such a 
determination must take into account the entirety of the transaction 
and any combination of tax consequences that are expected to result 
from any component steps of the transaction, must not be based on any 
unreasonable or unrealistic factual assumptions, and must take into 
account all relevant aspects of Federal tax law, including the statute 
and legislative history, treaties, authoritative administrative 
guidance, and judicial decisions that establish principles of general 
application in the tax law (e.g., Gregory v. Helvering, 293 U.S. 465 
(1935)).
    (D) The transaction is identified in published guidance as being 
excepted from disclosure under this section.
    (iii) Ordinary course of business. For purposes of paragraphs 
(b)(3)(ii)(A) and (B) of this section, a transaction involving the 
acquisition, disposition, or restructuring of a business, including the 
acquisition, disposition, or other change in the ownership or control 
of an entity that is engaged in a business, or a transaction involving 
a recapitalization or an acquisition of capital for use in the 
taxpayer's business, shall be considered a transaction carried out in 
the ordinary course of a taxpayer's business.
    (4) Projected tax effect--(i) In general. A transaction described 
in paragraph (b)(2) of this section meets the projected tax effect test 
if, at the time the taxpayer enters into the transaction or at any time 
thereafter, the taxpayer reasonably estimates that the transaction will 
reduce the taxpayer's Federal income tax liability by more than $1 
million in any single taxable year or by a total of more than $2 
million for any combination of taxable years in which the transaction 
is expected to have the effect of reducing the taxpayer's Federal 
income tax liability. A transaction described in paragraph (b)(3) of 
this section meets the projected tax effect test if, at the time the 
taxpayer enters into the transaction or at any time thereafter, the 
taxpayer reasonably estimates that the transaction will reduce the 
taxpayer's Federal income tax liability by more than $5 million in any 
single taxable year or by a total of more than $10 million for any 
combination of taxable years in which the transaction is expected to 
have the effect of reducing the taxpayer's Federal income tax 
liability. For purposes of this paragraph (b)(4), a transaction will be 
treated as reducing a taxpayer's Federal income tax liability for a 
taxable year if, and to the extent that, disallowance of the tax 
treatment claimed or expected to be claimed would result in an increase 
in the taxpayer's Federal income tax liability for that year. These 
dollar thresholds may be adjusted pursuant to forms prescribed for 
reporting under this section and the instructions to such forms.
    (ii) Estimation of projected tax effect. A taxpayer's estimate of 
the effect of a transaction on its Federal income tax liability shall 
take into account all projected Federal income tax consequences of the 
transaction, including all deductions, exclusions from gross income, 
nonrecognition of gain, tax credits, adjustments (or the absence of 
adjustments) to the basis of property, and any other tax consequences 
that may reduce the taxpayer's Federal income tax liability by 
affecting the timing, character, or source of any item of income, gain, 
deduction, loss, or credit. The estimate shall not take into account 
the potential Federal income tax effect of any other transaction or 
transactions that the taxpayer might have entered into if the taxpayer 
had not entered into the transaction in question. Gross income may not 
be taken into account if the elements of the transaction that result in 
the creation of the gross income are not necessary to achieve the 
intended tax results of the transaction, whether or not these elements 
are an integral part of the transaction. For example, gross income may 
not be taken into account to the extent that it would have been 
reasonably possible for the taxpayer to have participated in the 
transaction in a manner that would have been expected to produce less 
gross income without a commensurate effect on the other tax 
consequences of the transaction. In addition, gain on property that the 
taxpayer acquired independent of its participation in the transaction 
may not be taken into account.
    (5) Examples. The following examples illustrate the application of 
paragraph (b) of this section. Assume, for purposes of these examples, 
that the transactions are not the same as or substantially

[[Page 11209]]

similar to any of the types of transactions that the IRS has identified 
as listed transactions under section 6011 and, thus, are not described 
in paragraph (b)(2) of this section. The examples are as follows:

    Example 1. In March of 2000, C, a domestic corporation, invests 
$100 million to purchase certain financial instruments the terms of 
which have been structured to enable the holder to claim a 
deductible tax loss upon the disposition of one or more of the 
instruments a short time after acquisition while deferring gain on 
the retained instruments. C purchased the instruments on the 
recommendation of X, which is expected to receive direct or indirect 
compensation in excess of $100,000 contingent on C's purchase. C 
disposes of certain of the financial instruments in November of 
2000, and reports a loss from the disposition of those financial 
instruments on its 2000 Federal corporate income tax return which 
reduces its reported Federal income tax liability by more than $5 
million. That loss is not reflected on C's income statement for 
purposes of determining book income as taken into account on the 
schedule M-1 on C's Federal corporate income tax return. Further, C 
is unable to reasonably determine that it would have entered into 
the transaction irrespective of the Federal income tax benefits, or 
that the transaction is a customary form of transaction giving rise 
to tax consequences for which there is a long-standing and generally 
accepted understanding that such tax consequences are allowable 
under the Code for similar transactions, or that the Commissioner 
would have no reasonable basis to deny the claimed loss. The 
transaction involving C's purchase and disposition of the financial 
instruments has the characteristics described in paragraphs 
(b)(3)(i)(C) and (D) of this section. None of the exceptions in 
paragraph (b)(3)(ii) of this section applies. Therefore, the 
transaction involving C's purchase and disposition of the financial 
instruments is a reportable transaction because it is described in 
paragraph (b)(3) of this section.
    Example 2. In the year 2001, D, a domestic corporation, 
completes construction of an office building to be used in its 
business. After completion of the building but before D files its 
tax return for the year 2001, it is approached by Y, a professional 
services organization, which advises D that Y has developed a set of 
programs that will enable D to maximize its depreciation deductions 
with respect to the building and the related furniture and fixtures. 
Y allows D to review Y's programs subject to D's agreement that it 
will not use any portion of the programs in establishing its 
depreciation accounts for Federal tax purposes unless it pays Y a 
fee of $150,000. In addition, D makes a commitment to Y that it will 
not divulge any information relating to the programs to any person, 
whether or not D decides to use the programs. D agrees to use Y's 
programs for purposes of computing its depreciation allowances for 
2001 and later taxable years. D expects its use of the programs to 
reduce its Federal income tax liability by more than $10 million 
over the life of the building. However, D reasonably determines that 
it would have constructed and owned the office building in the same 
manner irrespective of the enhanced depreciation that it expects to 
derive from the use of Y's programs. Therefore, regardless of 
whether D's depreciation deductions on the building may be subject 
to disallowance, the transaction encompassing the construction of 
the building and the use of Y's programs is not a reportable 
transaction by reason of the exception under paragraph (b)(3)(ii)(A) 
of this section.
    Example 3. E is a domestic corporation, which is a calendar year 
taxpayer. E is engaged in the leasing business. In 2001, E enters 
into a large number of substantially similar arrangements described 
in paragraph (b)(3)(i) of this section under which it acquires and 
leases tangible personal property to U.S. persons who use such 
property in their businesses. E treats the leases as leases for 
Federal income tax purposes and as loans for financial accounting 
purposes. During the first three taxable years in which the leases 
are in effect, E reasonably expects that its reported taxable income 
will be more than $30 million lower than it would be if the leases 
were treated as loans for Federal income tax purposes, giving rise 
to a total expected reduction of E's Federal income tax liability 
for those years in excess of $10 million. E cannot conclude that it 
would have entered into the leases on substantially the same terms 
irrespective of the expected Federal income tax benefits, nor can it 
conclude that the Commissioner would have no reasonable basis to 
deny its tax treatment of the leases. However, E does reasonably 
determine that the terms of the leases are consistent with customary 
commercial form in the leasing industry, and that there is a long-
standing and generally accepted understanding that the combination 
of Federal income tax consequences it is claiming with respect to 
the leases are allowable under the Code for similar transactions. 
The substantially similar leases would be treated for purposes of 
this section as a single transaction that would satisfy the 
projected tax effect test described in paragraph (b)(4) of this 
section. However, the leases would not be a reportable transaction 
by reason of the exception under paragraph (b)(3)(ii)(B) of this 
section.

    (c) Form and content of disclosure statement. (1) The disclosure 
statement for each reportable transaction must include the information 
required by paragraph (c)(1)(i) through (c)(1)(vi) of this section and 
shall be presented in a format (preferably no longer than one page) 
similar to that shown in the Example in paragraph (c)(2) of this 
section or on such form as may be prescribed for use under this 
section.
    (i) The name, if any, by which the transaction is known or commonly 
referred to by the taxpayer; if no name exists, provide a short-hand 
designation of this transaction to distinguish it from other reportable 
transactions in which the taxpayer may have participated (or may 
participate in the future).
    (ii) A statement indicating whether, to the best knowledge of the 
taxpayer, the transaction has been registered as a tax shelter under 
section 6111. If the transaction has been registered as a tax shelter 
under section 6111, indicate whether Form 8271, ``Investor Reporting of 
Tax Shelter Registration Number'', has been filed with the taxpayer's 
return and provide the registration number, if any, that has been 
assigned to the tax shelter.
    (iii) A brief description of the principal elements of the 
transaction that give rise to the expected tax benefits.
    (iv) A brief description of the expected tax benefits of the 
transaction (e.g., loss deductions, interest deductions, rental 
deductions, foreign tax credits, etc.).
    (v) An identification of each taxable year (including prior taxable 
years) for which the transaction is expected to have the effect of 
reducing the taxpayer's Federal income tax liability and an estimate 
(which may be rounded to the nearest $1 million) of the amount by which 
the transaction is expected to reduce the taxpayer's Federal income tax 
liability for each such taxable year.
    (vi) The names and addresses of any parties who promoted, 
solicited, or recommended the taxpayer's participation in the 
transaction and who had a financial interest, including the receipt of 
fees, in the taxpayer's decision to participate.

    (2) Example. The following example illustrates the application 
of paragraph (c) of this section: In January of 1999, X, a domestic 
corporation which is a calendar year taxpayer, entered into an 
arrangement under which it purported to lease a building owned and 
occupied by the government of a municipality located in foreign 
country W and lease the building back to the municipal government. X 
determines that the transaction is a reportable transaction 
described in paragraph (b)(1) of this section because it is 
described in paragraph (b)(2) of this section and satisfies the 
projected tax effect test in paragraph (b)(4) of this section. As of 
February 28, 2000, X had not filed its 1999 Federal corporate income 
tax return. The following form of disclosure statement would satisfy 
the requirements described in paragraph (c)(1) of this section.

[[Page 11210]]



                                 Disclosure Statement for Reportable Transaction
----------------------------------------------------------------------------------------------------------------
 
-----------------------------------------------------------------------------------------------------------------
Corporation X                (EIN)
(address)
----------------------------------------------------------------------------------------------------------------
1. Identification of transaction: LILO--Country W.
----------------------------------------------------------------------------------------------------------------
2. Registration status under section 6111: Not registered.
----------------------------------------------------------------------------------------------------------------
3. Description of transaction: We leased a building from a municipality in W. We made an advance payment of rent
 of $89 million. The lease term is 34 years. The foreign municipality subleased the asset back from us for a
 term of 20 years. The foreign municipality has the option, at the end of the sublease term, to buy out our
 interest for $50 million. Our advance lease payment has been financed with a bank loan of $60 million. The
 foreign municipality placed $75 million of the advance rental payment in special accounts to satisfy the
 sublease and buyout obligations.
----------------------------------------------------------------------------------------------------------------
4. Principal tax benefits: Deductions for rental and interest payments in excess of income from leaseback rental
 payments.
----------------------------------------------------------------------------------------------------------------
5. Estimates of expected reduction of Federal income tax liability for affected taxable years: 1999-2002, $5
 million per year; 2003-2013, $4 million per year; and 2014-2017, $3 million per year.
----------------------------------------------------------------------------------------------------------------
6. Promoters:
      Financial Institution Y
      (address)
      (telephone number)
 
      Professional Service Firm Z
      (address)
      (telephone number)
----------------------------------------------------------------------------------------------------------------

    (d) Time of providing disclosure--(1) In general. The disclosure 
statement for a reportable transaction shall be attached to the 
taxpayer's Federal corporate income tax return for each taxable year 
for which the taxpayer's Federal income tax liability is affected by 
its participation in the transaction. In addition, at the same time 
that the disclosure statement is first attached to the taxpayer's 
Federal income tax return, a copy of that disclosure statement must be 
sent to: Internal Revenue Service LM:PF, Large & Mid-Size Business 
Division, 1111 Constitution Ave., N.W., Washington, DC 20224. If a 
transaction becomes a reportable transaction on or after the date the 
taxpayer has filed its return for the first taxable year for which the 
transaction affected the taxpayer's Federal income tax liability (e.g., 
there is a change in facts affecting the expected Federal income tax 
effect of the transaction, or the transaction subsequently becomes one 
identified in published guidance as a listed transaction described in 
(b)(2) of this section), the disclosure statement shall be filed as an 
attachment to the taxpayer's Federal corporate income tax return next 
filed after the date the transaction becomes a reportable transaction. 
If a disclosure statement is required as an attachment to a Federal 
corporate income tax return that is filed earlier than 180 days after 
February 28, 2000, the taxpayer may either attach the disclosure 
statement to the return, or file the disclosure statement as an 
amendment to the return no later than 180 days after February 28, 2000.

    (2) Example. The following example illustrates the application 
of this paragraph (d): In December of 2000, F, a domestic 
corporation which is a calendar year taxpayer, enters into a 
transaction described in paragraph (b)(3) of this section but not 
described in paragraph (b)(2) of this section. At the time F enters 
into the transaction and thereafter, F reasonably estimates that the 
transaction will reduce F's Federal income tax liability by $2 
million in any single taxable year and by a total of $8 million for 
any combination of taxable years in which the transaction is 
expected to have the effect of reducing F's Federal income tax 
liability. Consequently, the transaction does not meet the projected 
tax effect test described in paragraph (b)(4) of this section for 
transactions described in paragraph (b)(3) of this section. On March 
1, 2002, the IRS publishes a notice identifying the transaction as a 
listed transaction described in paragraph (b)(2) of this section. 
Thus, upon issuance of the notice, the transaction becomes a 
transaction described in paragraph (b)(2) of this section. As a 
result of the lower dollar thresholds of the projected tax effect 
test with respect to transactions described in (b)(2) of this 
section, the transaction meets the projected tax effect test in 
paragraph (b)(4) of this section. Consequently, the transaction 
becomes a reportable transaction described in paragraph (b)(1) of 
this section, and F is required to file a disclosure statement 
meeting the requirements of paragraph (c)(1) of this section for the 
transaction as an attachment to F's next filed Federal corporate 
income tax return. If F's 2001 return has not been filed on or 
before the date the Service identifies the transaction as a listed 
transaction, the disclosure statement must be attached to F's 2001 
return.

    (e) Retention of documents. The taxpayer must retain all documents 
related to a transaction subject to disclosure under this section until 
the expiration of the statute of limitations applicable to the first 
taxable year for which disclosure of the transaction was made in 
accordance with the requirements of this section. (This document 
retention requirement is in addition to any document retention 
requirements that section 6001 generally imposes on the taxpayer.) Such 
documents include, but are not limited to, the following: all marketing 
materials related to the transaction; all written analyses used in 
decision-making related to the transaction; all correspondence and 
agreements related to the transaction between the taxpayer and any 
promoter, advisor, lender, or other party to the reportable 
transaction; all documents discussing, referring to, or demonstrating 
the tax benefits arising from the reportable transaction; and all 
documents, if any, referring to the business purposes for the 
reportable transaction.
    (f) Affiliated groups. For purposes of this section, an affiliated 
group of corporations that joins in the filing of a consolidated return 
under section 1501 shall be considered a single taxpayer.
    (g) Effective date. This section applies to Federal corporate 
income tax returns

[[Page 11211]]

filed after February 28, 2000. However, paragraph (e) of this section 
applies to documents and other records that the taxpayer acquires, 
prepares, or has in its possession on or after February 28, 2000.

PART 602--[AMENDED]

    3. In Sec. 602.101, paragraph (b) is amended by adding the entry 
for Sec. 1.6011-4T to read in part as follows:


Sec. 602.101  OMB Control numbers.

* * * * *
    (b) * * *

------------------------------------------------------------------------
                                                            Current OMB
   CFR part or section where identified and described       control No.
------------------------------------------------------------------------
 
                          *    *    *    *    *
1.6011-4T...............................................       1545-1685
 
                          *    *    *    *    *
------------------------------------------------------------------------


    Approved: February 23, 2000.
Charles O. Rossotti,
Commissioner of Internal Revenue.
Jonathan Talisman,
Acting Assistant Secretary of the Treasury.
[FR Doc. 00-4842 Filed 2-28-00; 8:45 am]
BILLING CODE 4830-01-P