[Federal Register Volume 66, Number 152 (Tuesday, August 7, 2001)]
[Rules and Regulations]
[Pages 41133-41137]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-19615]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 301

[TD 8961]
RIN 1545-BA04


Modification of Tax Shelter Rules II

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary regulations.

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SUMMARY: These temporary regulations modify the rules relating to the 
requirement that certain corporate taxpayers file a statement with 
their Federal corporate income tax returns under section 6011(a) and 
the registration of confidential corporate tax shelters under section 
6111(d). These regulations provide the public with additional guidance 
needed to comply with the disclosure rules under section 6011(a), the 
registration requirement under section 6111(d), and the list 
maintenance requirement under section 6112 applicable to tax shelters. 
The temporary regulations affect corporations participating in certain 
reportable transactions, persons responsible for registering 
confidential corporate tax shelters, and organizers of potentially 
abusive tax shelters. 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 the Proposed Rules section of 
this issue of the Federal Register.

DATES: Effective Date: These temporary regulations are effective August 
2, 2001.
    Applicability Date: For dates of applicability, see Sec. 1.6011-
4T(g) and Sec. 301.6111-2T(h).

FOR FURTHER INFORMATION CONTACT: Danielle M. Grimm (202) 622-3080 (not 
a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    This document amends 26 CFR parts 1 and 301 to provide modified 
rules relating to the disclosure of certain reportable transactions by 
corporate investors on their Federal corporate income tax returns under 
section 6011 and the registration of confidential corporate tax 
shelters under section 6111.
    On February 28, 2000, the IRS issued temporary and proposed 
regulations regarding section 6011 (TD 8877, REG-103735-00), section 
6111 (TD 8876, REG-110311-98), and section 6112 (TD 8875, REG-103736-
00) (collectively, the February regulations). The February

[[Page 41134]]

regulations were published in the Federal Register (65 FR 11205, 65 FR 
11215, 65 FR 11211) on March 2, 2000. On August 11, 2000, the IRS 
issued temporary and proposed regulations regarding sections 6011, 
6111, and 6112 (TD 8896, REG-103735-00, REG-110311-98, REG-103736-00) 
(collectively, the August regulations). The August regulations were 
published in the Federal Register (65 FR 49909) on August 16, 2000, 
modifying the February regulations.
    Based on comments that have been received, the IRS and Treasury 
have determined that certain additional interim changes to the 
temporary and proposed regulations are warranted. The changes in the 
proposed rules are published elsewhere in this issue of the Federal 
Register.
    These interim changes are intended to assist taxpayers and ease tax 
administration by simplifying and clarifying certain provisions of the 
regulations, addressing certain practical problems relating to 
compliance with the regulations, and making certain other changes 
relating to the scope of the regulations. The IRS and Treasury continue 
to evaluate all the comments and recommendations received, and other 
changes may be made in the final regulations.

Explanation of Provisions

1. Different Foreign Tax Treatment Characteristic in Sec. 1.6011-
4T(b)(3)(i)(F)

    Under section 6011, reportable transactions include listed 
transactions and transactions that have at least two of six specified 
characteristics. One of the characteristics is present if 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. Commentators have suggested that 
the inclusion of this characteristic causes the regulations to be 
overinclusive. Based on these comments and further review, the IRS and 
Treasury have removed this characteristic from the temporary and 
proposed regulations.

2. Clarification of Exceptions Under Sec. 1.6011-4T

a. ``Long-standing and generally accepted exception'' in Sec. 1.6011-
4T(b)(3)(ii)(B)
    The temporary regulations under section 6011 provide that a 
transaction, other than a listed transaction, is not a reportable 
transaction if one of four exceptions is satisfied. One exception 
applies if 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 (taking into account any 
combination of intended tax consequences) from the transaction are 
allowable under the Code for substantially similar transactions.
    Commentators have requested additional guidance on the meaning of 
the phrase ``long-standing and generally accepted'' that is contained 
in this exception. This exception is intended to apply to transactions 
the structure of which is customary and the intended tax treatment of 
which is widely known and generally accepted as properly allowable 
under the Internal Revenue Code. Ordinarily, a determination as to 
whether the intended tax treatment of a transaction has achieved such a 
level of general acceptance cannot be made unless information relating 
to the structure and tax treatment of substantially similar 
transactions has been in the public domain and widely known for a 
period of years. However, the applicability of this exception does not 
depend on such general acceptance having existed for any minimum period 
of time. Accordingly, the IRS and Treasury have eliminated the phrase 
``long-standing'' from the exception and have added language to clarify 
the scope of the exception. Corresponding changes have been made in 
Sec. 301.6111-2T.
b. ``No reasonable basis exception'' in Sec. 1.6011-4T(b)(3)(ii)(C)
    This exception generally provides that a transaction, other than a 
listed transaction, is not reportable if 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. Commentators have requested additional 
guidance on the no reasonable basis determination. Accordingly, the 
regulations clarify that for purposes of this exception, whether the 
IRS would have a reasonable basis for its position is to be determined 
by applying the same standard as that applicable to taxpayers under 
Sec. 1.6662-3(b)(3). Thus, the reasonable basis standard is not 
satisfied by an IRS position that would be merely arguable or that 
would constitute merely a colorable claim. The determination of whether 
the IRS would have such a reasonable basis is qualitative in nature and 
does not depend on any percentage or other quantitative assessment of 
the likelihood that the taxpayer would ultimately prevail if a 
significant portion of the expected tax benefits were disallowed by the 
IRS. Corresponding changes have been made to newly redesignated 
Sec. 301.6111-2T(b)(4)(i).

3. Economic Substance Test

    Commentators have suggested that the economic substance test, as 
articulated in Sec. 301.6111-2T(b)(3), may encompass transactions for 
which registration pursuant to section 6111(d) or list maintenance 
under section 6112 would not be appropriate. Further, the IRS and 
Treasury believe that substantially all transactions encompassed by the 
economic substance test for which registration and list maintenance are 
appropriate will constitute other tax structured transactions within 
the meaning of Sec. 301.6111-2T(b)(4). Accordingly, the economic 
substance test as described in Sec. 301.6111-2T(b)(3) is removed from 
the temporary and proposed regulations under section 6111.

4. Presumption Against Confidentiality

    Section 301.6111-2T(c)(3) contains a presumption that, unless facts 
and circumstances clearly indicate otherwise, an offer is not 
considered made under conditions of confidentiality if the tax shelter 
promoter provides express written authorization to each offeree 
permitting the offeree (and each employee, representative, or other 
agent of such offeree) to disclose the structure and tax aspects of the 
transaction to any and all persons, without limitation of any kind on 
such disclosure. There has been a request to clarify the phrase ``to 
disclose the structure and tax aspects of the transaction.'' 
Accordingly, the IRS and Treasury have added language to clarify that 
this phrase is to be construed broadly and includes all materials 
(including opinions or other tax analyses) that are provided to the 
offeree related to the structure and tax aspects of the transaction.

5. Tax Shelter Registration in Sec. 301.6111-2T(e)(2)(ii)(E)

    The August regulations provided that the Form 8264, ``Application 
for Registration of a Tax Shelter,'' was to be filed with the Kansas 
City Service Center. Recently, the Service issued Announcement 2001-62 
(2001-24 I.R.B. 1337), instructing taxpayers to file these forms with 
the Ogden Service Center. The instructions to Form 8264 will be revised 
to reflect the change in filing location. Accordingly, the regulations

[[Page 41135]]

are amended to provide that the Form 8264 is to be filed as prescribed 
in the instructions to the form.

6. Effective Date

    The regulations are applicable August 2, 2001. However, in general, 
taxpayers may rely on the regulations 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, and because 
these regulations impose no new collection of information on small 
entities, 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 Internal Revenue 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 author of these regulations is Danielle M. Grimm, 
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 301

    Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income 
taxes, Penalties, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR parts 1 and 301 are 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 1.6011-4T is amended as follows:
    1. Paragraph (b)(3)(i)(F) is removed.
    2. Paragraphs (b)(3)(ii)(B) and (C) are revised.
    3. Paragraph (b)(5) is amended by removing the language ``long-
standing and'' from the fifth sentence in Example 1 and the seventh 
sentence in Example 3. 
    4. Paragraph (g) is revised.
    The revisions and addition read as follows:


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

* * * * *
    (b) * * *
    (3) * * *
    (ii) * * *
    (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 generally accepted understanding that the taxpayer's intended tax 
treatment of the transaction (taking into account any combination of 
intended tax consequences) is properly allowable under the Internal 
Revenue Code for substantially similar transactions. There is no 
minimum period of time for which such a generally accepted 
understanding must exist. In general, however, a taxpayer cannot 
reasonably determine whether the intended tax treatment of a 
transaction has become generally accepted unless information relating 
to the structure and tax treatment of such transactions has been in the 
public domain (e.g., rulings, published articles, etc.) and widely 
known for a sufficient period of time (ordinarily a period of years) to 
provide knowledgeable tax practitioners and the IRS reasonable 
opportunity to evaluate the intended tax treatment. The mere fact that 
the taxpayer may have received an opinion or advice from one or more 
knowledgeable tax practitioners to the effect that the taxpayer's 
intended tax treatment of the transaction should or will be sustained, 
if challenged by the IRS, is not sufficient to satisfy the requirements 
of this paragraph (b)(3)(ii)(B).
    (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. This 
paragraph (b)(3)(ii)(C) applies only if the taxpayer reasonably 
determines that there is no basis that would meet the standard 
applicable to taxpayers under Sec. 1.6662-3(b)(3) under which the IRS 
could disallow any significant portion of the expected Federal income 
tax benefits of the transaction. Thus, the reasonable basis standard is 
not satisfied by an IRS position that would be merely arguable or that 
would constitute merely a colorable claim. However, the taxpayer's 
determination of whether the IRS would or would not have a reasonable 
basis for such a position 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, 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)). The 
determination of whether the IRS would or would not have such a 
reasonable basis is qualitative in nature and does not depend on any 
percentage or other quantitative assessment of the likelihood that the 
taxpayer would ultimately prevail if a significant portion of the 
expected tax benefits were disallowed by the IRS.
* * * * *
    (g) Effective date. This section applies to Federal corporate 
income tax returns filed after February 28, 2000. However, paragraphs 
(b)(3)(ii)(B), (b)(3)(ii)(C), and (b)(5) Examples 1 and 3, of this 
section apply to Federal corporate income tax returns filed after 
August 2, 2001. Taxpayers may rely on the rules in paragraphs 
(b)(3)(ii)(B), (b)(3)(ii)(C), and (b)(5) Examples 1 and 3, of this 
section for Federal corporate income tax returns filed after February 
28, 2000. Otherwise, the rules that apply with respect to Federal 
corporate income tax returns filed after February 28, 2000, and on or 
before August 2, 2001, are contained in Sec. 1.6011-4T in effect prior 
to August 2, 2001 (see 26 CFR part 1 revised as of April 1, 2001).

PART 301--PROCEDURE AND ADMINISTRATION

    Par. 3. The authority citation for part 301 continues to read in 
part as follows:

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

    Par. 4. Section 301.6111-2T is amended as follows:
    1. Paragraph (b)(1) is revised.
    2. Paragraph (b)(3) is removed.
    3. Paragraphs (b)(4), (b)(5), (b)(6) and (b)(7) are redesignated 
paragraphs (b)(3), (b)(4), (b)(5) and (b)(6), respectively.
    4. Newly redesignated paragraph (b)(3) introductory text is amended 
by revising the reference to ``(b)(4)'' to read ``(b)(3)''.
    5. Newly redesignated paragraph (b)(3)(ii) is revised.

[[Page 41136]]

    6. Newly redesignated paragraph (b)(4) introductory text is amended 
by removing the reference ``(b)(5)(i)'' and adding ``(b)(4)(i)'' in its 
place.
    7. Newly redesignated paragraph (b)(4)(i) is revised.
    8. Newly redesignated paragraph (b)(4)(ii) is amended by removing 
the reference ``(b)(6)'' and adding ``(b)(5)'' in its place.
    9. Newly redesignated paragraph (b)(6) is amended as follows:
    a. Paragraph (b)(6), introductory text, is revised.
    b. Example 1 is removed.
    c. ``Example 2.'' is redesignated as ``Example.''
    d. The language ``long-standing and'' is removed from paragraph (i) 
in the newly redesignated Example.
    e. The fourth sentence of paragraph (i) in the newly redesignated 
Example is removed.
    f. Paragraph (ii) in the newly redesignated ``Example'' is revised.
    10. Paragraphs (c)(3) and (e)(2)(ii)(E) are revised.
    11. Paragraph (h) is amended by adding 3 sentences at the end.
    The revisions and additions read as follows:


Sec. 301.6111-2T  Confidential corporate tax shelters (temporary).

* * * * *
    (b) * * * (1) In general. The avoidance or evasion of Federal 
income tax will be considered a significant purpose of the structure of 
a transaction if the transaction is described in paragraph (b)(2) or 
(3) of this section. However, a transaction described in paragraph 
(b)(3) of this section need not be registered if the transaction is 
described in paragraph (b)(4) of this section. For purposes of this 
section, Federal income tax benefits include 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 a taxpayer's Federal income tax liability 
by affecting the timing, character, or source of any item of income, 
gain, deduction, loss, or credit.
* * * * *
    (3) * * *
    (ii) There is a generally accepted understanding that the expected 
Federal income tax benefits from the transaction (taking into account 
any combination of intended tax consequences) are properly allowable 
under the Internal Revenue Code for substantially similar transactions. 
There is no minimum period of time for which such a generally accepted 
understanding must exist. In general, however, a tax shelter promoter 
(or other person who would be responsible for registration under this 
section) cannot reasonably determine whether the intended tax treatment 
of a transaction has become generally accepted unless information 
relating to the structure and tax treatment of such transactions has 
been in the public domain (e.g., rulings, published articles, etc.) and 
widely known for a sufficient period of time (ordinarily a period of 
years) to provide knowledgeable tax practitioners and the IRS 
reasonable opportunity to evaluate the intended tax treatment. The mere 
fact that one or more knowledgeable tax practitioners have provided an 
opinion or advice to the effect that the intended tax treatment of the 
transaction should or will be sustained, if challenged by the IRS, is 
not sufficient to satisfy the requirements of this paragraph 
(b)(3)(ii).
    (4) * * *
    (i) In the case of a transaction other than a transaction described 
in paragraph (b)(2) of this section, the tax shelter promoter (or other 
person who would be responsible for registration under this section) 
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. This paragraph (b)(4)(i) 
applies only if the tax shelter promoter (or other person who would be 
responsible for registration under this section) reasonably determines 
that there is no basis that would meet the standard applicable to 
taxpayers under Sec. 1.6662-3(b)(3) of this chapter under which the IRS 
could disallow any significant portion of the expected Federal income 
tax benefits of the transaction. Thus, the reasonable basis standard is 
not satisfied by an IRS position that would be merely arguable or that 
would constitute merely a colorable claim. However, the determination 
of whether the IRS would or would not have a reasonable basis for such 
a position 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, 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)). The 
determination of whether the IRS would or would not have such a 
reasonable basis is qualitative in nature and does not depend on any 
percentage or other quantitative assessment of the likelihood that the 
taxpayer would ultimately prevail if a significant portion of the 
expected tax benefits were disallowed by the IRS.
* * * * *
    (6) Example. The following example illustrates the application of 
paragraphs (b)(1) through (4) of this section. Assume, for purposes of 
the example, that the transaction is not the same as or substantially 
similar to any of the types of transactions that the IRS has identified 
as listed transactions under section 6111 and, thus, is not described 
in paragraph (b)(2) of this section. The example is as follows:

    Example.  * * *
    (ii) Analysis. The transaction represented by this combination 
of financial instruments is a transaction described in paragraph 
(b)(3) of this section. However, if Y is uncertain whether this 
transaction is described in paragraph (b)(3) of this section, or is 
otherwise uncertain whether registration is required, Y may apply 
for a ruling under paragraph (b)(5) of this section, and the 
transaction will not be required to be registered while the ruling 
is pending or for sixty days thereafter.

    (c) * * *
    (3) Presumption. Unless facts and circumstances clearly indicate 
otherwise, an offer is not considered made under conditions of 
confidentiality if the tax shelter promoter provides express written 
authorization to each offeree permitting the offeree (and each 
employee, representative, or other agent of such offeree) to disclose 
to any and all persons, without limitation of any kind, the structure 
and tax aspects of the transaction, and all materials of any kind 
(including opinions or other tax analyses) that are provided to the 
offeree related to such structure and tax aspects.
* * * * *
    (e) * * *
    (2) * * *
    (ii) * * *
    (E) Sign the Form 8264 and file the form as prescribed in the 
instructions to the form.
* * * * *
    (h) Effective date. * * * However, paragraphs (b)(1), (b)(3)(ii), 
(b)(4)(i), (b)(6) Example (i) and (ii), (c)(3), and (e)(2)(ii)(E) of 
this section apply to confidential corporate tax shelters in which any 
interests are offered for sale after August 2, 2001. The rules in 
paragraphs (b)(1), (b)(3)(ii), (b)(4)(i), (b)(6), (b)(6)Example(i) and 
(ii), (c)(3), and (e)(2)(ii)(E), of this section may be relied upon for 
confidential corporate tax shelters in which any interests are

[[Page 41137]]

offered for sale after February 28, 2000. Otherwise, the rules that 
apply to confidential corporate tax shelters in which any interests are 
offered for sale after February 28, 2000, and on or before August 2, 
2001 are contained in this Sec. 301.6111-2T in effect prior to August 
2, 2001 (See 26 CFR part 301 revised as of April 1, 2001).


Sec. 301.6112--1T  [Amended]

    Par. 5. Section 301.6112-1T is amended by removing the authority 
citation immediately following the section.

David A. Mader,
Acting Deputy Commissioner of Internal Revenue.
Mark Weinberger,
Assistant Secretary of the Treasury.
[FR Doc. 01-19615 Filed 8-2-01; 2:50 pm]
BILLING CODE 4830-01-P