[Federal Register Volume 67, Number 204 (Tuesday, October 22, 2002)]
[Rules and Regulations]
[Pages 64799-64807]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-26724]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1, 20, 25, 31, 53, 54, 56, and 301

[TD 9017]
RIN 1545-BB32


Tax Shelter Disclosure Statements

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary regulations.

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SUMMARY: These temporary regulations modify the rules relating to the 
filing by certain taxpayers of a disclosure statement with their 
Federal tax returns under section 6011(a) and include conforming 
changes to the rules relating to the registration of confidential 
corporate tax shelters under section 6111(d). These regulations affect 
taxpayers participating in reportable transactions and persons 
responsible for registering confidential corporate 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 
January 1, 2003.
    Applicability Date: For dates of applicability, see Sec.  1.6011-
4T(h), Sec.  20.6011-4T(b), Sec.  25.6011-4T(b), Sec.  31.6011-4T(b), 
Sec.  53.6011-4T(b), Sec.  54.6011-4T(b), Sec.  56.6011-4T(b), and 
Sec.  301.6111-2T(h).

FOR FURTHER INFORMATION CONTACT: Tara P. Volungis, Danielle M. Grimm, 
or Charlotte Chyr, 202-622-3070 (not a toll-free number).

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 numbers 1545-1685 and 1545-1687. 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 and 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.

[[Page 64800]]

Background

    This document amends 26 CFR parts 1 and 301 to provide modified 
rules relating to the disclosure of reportable transactions by certain 
taxpayers on their Federal income tax returns under section 6011 and 
includes conforming changes to the rules regarding the registration of 
confidential corporate tax shelters under section 6111. This document 
also amends 26 CFR parts 20, 25, 31, 53, 54, and 56 to provide rules 
for purposes of estate, gift, employment, and pension and exempt 
organizations excise taxes requiring the disclosure of listed 
transactions by certain taxpayers on their Federal tax returns under 
section 6011.
    On February 28, 2000, the IRS issued temporary and proposed 
regulations regarding sections 6011 and 6111 (TD 8877, REG-103735-00; 
TD 8876, REG-110311-98)) (the February 2000 regulations). The February 
2000 regulations were published in the Federal Register (65 FR 11205, 
65 FR 11269; 65 FR 11215, 65 FR 11272) on March 2, 2000. On August 11, 
2000, the IRS issued temporary and proposed regulations modifying the 
rules under sections 6011 and 6111 (TD 8896, REG-103735-00, REG-110311-
98) (the August 2000 regulations). The August 2000 regulations were 
published in the Federal Register (65 FR 49909, 65 FR 49955) on August 
16, 2000. On August 2, 2001, the IRS issued temporary and proposed 
regulations modifying the rules under sections 6011 and 6111 (TD 8961, 
REG-103735-00, REG-110311-98) (the August 2001 regulations). The August 
2001 regulations were published in the Federal Register (66 FR 41133, 
66 FR 41169) on August 7, 2001. On June 14, 2002, the IRS issued 
temporary and proposed regulations modifying the rules under sections 
6011 and 6111 (TD 9000, REG-103735-00, REG-110311-98) (the June 2002 
regulations). The June 2002 regulations were published in the Federal 
Register (67 FR 41324, 67 FR 41362) on June 18, 2002.
    The rules under sections 6011, 6111, and 6112 for disclosure, 
registration, and list maintenance are intended to provide the IRS and 
Treasury with information needed to evaluate potentially abusive 
transactions. The IRS and Treasury have considered and evaluated 
compliance with those rules, and have determined that certain 
additional changes to the current temporary and proposed regulations 
are necessary to improve compliance and to carry out the purposes of 
sections 6011, 6111, and 6112. On March 20, 2002, Treasury released its 
Plan to Combat Abusive Tax Avoidance Transactions (PO-2018), which 
describes changes to the rules under sections 6011, 6111, and 6112 that 
will establish a more effective disclosure regime and improve 
compliance. See http://www.treas.gov/press/releases/po2018.htm.
    The amended temporary regulations under section 6011 revise the 
categories of transactions that must be disclosed on returns. Certain 
conforming changes are being made to the temporary regulations under 
section 6111. Concurrent with these amended temporary regulations under 
sections 6011 and 6111, the IRS and Treasury are publishing elsewhere 
in this issue of the Federal Register amended temporary regulations 
under section 6112. The amendments to the temporary regulations under 
section 6112 generally require organizers and sellers (``material 
advisors'') to maintain lists of persons for transactions required to 
be registered under section 6111 and for reportable transactions 
subject to disclosure under Sec.  1.6011-4T, Sec.  20.6011-4T, Sec.  
25.6011-4T, Sec.  31.6011-4T, Sec.  53.6011-4T, Sec.  54.6011-4T, or 
Sec.  56.6011-4T.
    Pending legislation would modify section 6111 to require 
registration of transactions that are required to be disclosed under 
section 6011. The IRS and Treasury intend to revise the regulations 
under section 6111 when such legislation is enacted.

Explanation of Provisions

1. In General

    Section 1.6011-4T generally provides that certain taxpayers must 
disclose their direct or indirect participation in reportable 
transactions when they file their Federal income tax returns. Under the 
current temporary regulations, in the case of a partnership or an S 
corporation that participates in a listed transaction, that partnership 
or S corporation must disclose its participation and the partners and 
shareholders also must disclose their participation in the listed 
transaction. A reportable transaction is either: (1) A listed 
transaction, or (2) a transaction that meets two of five 
characteristics, satisfies a projected tax effect test, and does not 
satisfy any of the exceptions provided in the regulations. The IRS and 
Treasury have found that taxpayers are interpreting the five 
characteristics in an overly narrow manner and are interpreting the 
exceptions in an overly broad manner.
    These new temporary regulations provide more objective rules. The 
regulations redefine a reportable transaction as a transaction that 
satisfies any one of six categories of transactions. The regulations 
also eliminate the projected tax effect test and the general 
exceptions. The six categories of reportable transactions are: listed 
transactions, confidential transactions, transactions with contractual 
protection, loss transactions, transactions with a significant book-tax 
difference, and transactions involving a brief asset holding period. 
Further, the new temporary regulations require disclosure of 
participation in reportable transactions by all direct and indirect 
participants. Disclosure must be made on Form 8886, ``Reportable 
Transaction Disclosure Statement'', which will be available when these 
regulations become effective.
    A provision has been added to Sec.  1.6011-4T allowing taxpayers to 
request a ruling as to whether a transaction must be disclosed under 
Sec.  1.6011-4T. A transaction will not be considered a reportable 
transaction, or will be excluded from any individual category of 
reportable transaction, if the Commissioner makes a determination, by 
published guidance, individual ruling under Sec.  1.6011-4T, or 
otherwise, that the transaction is not subject to the disclosure 
requirements of Sec.  1.6011-4T. While some exceptions to the 
disclosure requirements are included in these regulations, the IRS and 
Treasury specifically request comments on particular types of 
transactions that should be either treated as not subject to the 
disclosure requirements of Sec.  1.6011-4T or excluded from an 
individual category of reportable transaction.
    The major changes to the categories of reportable transactions are 
discussed below.

2. Confidential Transactions

    A confidential transaction is a transaction that is offered under 
conditions of confidentiality, unless the presumption in the 
regulations regarding written authorization to disclose the structure 
and tax aspects of the transaction is satisfied. These regulations 
clarify, however, that the presumption is available only in cases in 
which the written authorization to disclose is effective without 
limitation of any kind from the commencement of discussions.

3. Loss Transactions

    A loss transaction is any transaction resulting in, or that is 
reasonably expected to result in, a loss under section 165 of at least: 
$10 million in any single taxable year or $20 million in any 
combination of taxable years for corporations; $5 million in any single 
taxable year or $10 million in any combination of taxable years for 
partnerships or S corporations, whether

[[Page 64801]]

or not any losses flow through to one or more partners or shareholders; 
$2 million in any single taxable year or $4 million in any combination 
of taxable years for individuals or trusts, whether or not any losses 
flow through to one or more beneficiaries; and $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). In determining the monetary 
thresholds, the amount of a section 165 loss is adjusted for any 
salvage value and for any insurance or other compensation received. 
However, a section 165 loss does not take into account offsetting gains 
or other income or limitations.
    A section 165 loss includes an amount deductible by virtue of 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. Under these regulations, casualty losses and 
losses resulting from involuntary conversions are not subject to the 
disclosure requirements under Sec.  1.6011-4T.
    The IRS and Treasury also are considering adding two other 
exceptions. One exception would be for losses resulting from a sale of 
securities on an established securities market within the meaning of 
Sec.  1.7701-1(b), but only if the amount of basis used in computing 
the amount of the loss is equal to the amount of cash paid by the 
taxpayer for the securities. The other potential exception would be for 
losses claimed under section 475(a) or section 1296(a). The IRS and 
Treasury specifically request comments on whether these or other 
exceptions should be added to the regulations.

4. Transactions With a Significant Book-Tax Difference

    A transaction with a significant book-tax difference is a 
transaction where the treatment for Federal income tax purposes of any 
item or items from the transaction differs, or is reasonably expected 
to differ, by more than $10 million on a gross basis from the treatment 
of the item or items for book purposes in any taxable year. When making 
this determination, offsetting items are not netted for either tax or 
book purposes. Book income is determined by applying U.S. generally 
accepted accounting principles (GAAP) for worldwide income.
    This category of transaction generally applies to taxpayers that 
are reporting companies under the Securities Exchange Act of 1934 (15 
USCS 78a) (and related business entities) and to business entities that 
have $100 million or more in gross assets. Specific rules are provided 
for taxpayers that file consolidated returns, foreign persons, 
disregarded entities, partnerships, and shareholders of certain foreign 
corporations. For example, where a taxpayer is considered to 
participate in a transaction indirectly through a partnership or 
foreign corporation, items from the transaction that otherwise may be 
considered items of the partnership or foreign corporation (for tax or 
book purposes) are treated as items of the taxpayer (to the extent of 
the taxpayer's allocable share). The mere fact that an item may be 
reported by different persons for tax and book purposes (e.g., on the 
taxpayer's U.S. tax return and on the entity's books and records), 
without more, is not considered a significant book-tax difference in 
such cases. Instead, the taxpayer must test such items for a book-tax 
difference in the same manner as items from a transaction in which the 
taxpayer participated directly.
    The regulations provide various exceptions for this category of 
transaction. The IRS and Treasury specifically request comments on the 
exceptions and whether other exceptions should be provided.

5. Transactions Involving a Brief Asset Holding Period

    A transaction involving a brief asset holding period is a 
transaction resulting in, or that is reasonably expected to result in, 
a tax credit exceeding $250,000 (including a foreign tax credit) if the 
underlying asset giving rise to the credit is held by the taxpayer for 
less than 45 days. For purposes of determining the holding period, the 
principles in section 246(c)(3) and (c)(4) apply.

6. Application of Section 6011 to Estate, Gift, Employment, and Pension 
and Exempt Organizations Excise Taxes

    A listed transaction that involves Federal estate, gift, 
employment, or pension or exempt organizations excise taxes must be 
disclosed in accordance with published guidance identifying such 
transaction as a listed transaction.

Effective Date

    These regulations apply to transactions entered into on or after 
January 1, 2003.

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 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. Because no 
notice of proposed rulemaking is required, the provisions of the 
Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply. Pursuant 
to section 7805(f) of the Internal Revenue Code, these 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 Tara P. Volungis, 
Danielle M. Grimm, and Charlotte Chyr, 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 tax, 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.

26 CFR Part 301

    Administrative practice and procedure, Employment taxes, Estate 
taxes, Excise taxes, Gift taxes, Income

[[Page 64802]]

taxes, Penalties, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR parts 1, 20, 25, 31, 53, 54, 56, 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 revised to read as follows:

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

    (a) In general. Every taxpayer 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 (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, and any series of substantially 
similar transactions entered into in the same taxable year. There are 
six categories of reportable transactions: listed transactions, 
confidential transactions, transactions with contractual protection, 
loss transactions, transactions with a significant book-tax difference, 
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 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 under conditions of 
confidentiality. All the facts and circumstances relating to the 
transaction will be considered when determining whether a transaction 
is offered under conditions of confidentiality, including the prior 
conduct of the parties. If a taxpayer's disclosure of the structure or 
tax aspects of the transaction is limited in any way by an express or 
implied understanding or agreement with or for the benefit of any 
person who makes or provides a statement, oral or written, (or for 
whose benefit a statement is made or provided) as to the potential tax 
consequences that may result from the transaction, a transaction is 
considered offered under conditions of confidentiality, whether or not 
such understanding or agreement is legally binding. A transaction also 
will be considered offered under conditions of confidentiality if the 
taxpayer knows or has reason to know that the taxpayer's use or 
disclosure of information relating to the structure or tax aspects of 
the transaction is limited in any other manner (such as where the 
transaction is claimed to be proprietary or exclusive) for the benefit 
of any person, other than the taxpayer, who makes or provides a 
statement, oral or written, (or for whose benefit a statement is made 
or provided) as to the potential tax consequences that may result from 
the transaction.
    (ii) Privilege. A taxpayer's privilege to maintain the 
confidentiality of a communication relating to a reportable transaction 
in which the taxpayer might participate or has agreed to participate, 
including a taxpayer's confidential communication with the taxpayer's 
attorney, is not itself a condition of confidentiality.
    (iii) Securities law exception. A transaction is not considered 
offered under conditions of confidentiality if disclosure of the 
structure or tax aspects of the transaction is subject to restrictions 
reasonably necessary to comply with federal or state securities laws 
and such disclosure is not otherwise limited.
    (iv) Presumption. Unless the facts and circumstances indicate 
otherwise, a transaction is not considered offered under conditions of 
confidentiality if every person who makes or provides a statement, oral 
or written, (or for whose benefit a statement is made or provided) as 
to the potential tax consequences that may result from the transaction, 
provides express written authorization to the taxpayer permitting the 
taxpayer (and each employee, representative, or other agent of such 
taxpayer) 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 taxpayer related to such structure and tax aspects. 
This presumption is available only in cases in which the written 
authorization to disclose is effective without limitation of any kind 
from the commencement of discussions.
    (4) Transactions with contractual protection. A transaction with 
contractual protection is a transaction for which the taxpayer has 
obtained or been provided with contractual protection against the 
possibility that part or all of the intended tax consequences 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 or offering 
of the transaction to the taxpayer). Notwithstanding the foregoing, a 
transaction will not be considered to have contractual protection 
solely because the issuer of a debt instrument agrees to pay additional 
interest to compensate the holder of such debt instrument for 
withholding tax imposed on interest paid on the debt instrument, or 
because the requirement to pay such additional interest entitles the 
issuer to redeem the debt instrument.
    (5) Loss transactions--(i) In general. A loss transaction is any 
transaction resulting in, or that is reasonably expected to result in, 
a 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) $5 million in any single taxable year or $10 million in any 
combination of taxable years for partnerships or S corporations, 
whether or not any losses flow through to one or more partners or 
shareholders;
    (C) $2 million in any single taxable year or $4 million in any 
combination of taxable years for individuals or trusts, whether or not 
any losses flow through to one or more 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) Section 165 loss. (A) For purposes of this section, in 
determining the

[[Page 64803]]

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 Sec.  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).
    (B) For purposes of this section, a section 165 loss includes an 
amount deductible by virtue of 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.
    (iii) Exceptions. Transactions that result in the following losses 
under section 165 are not loss transactions under this paragraph 
(b)(5)--
    (A) A loss from fire, storm, shipwreck, or other casualty, or from 
theft, as defined in section 165(c)(3); or
    (B) A loss from a compulsory or involuntary conversion as described 
in section 1231(a)(3)(A)(ii) and section 1231(a)(4)(B).
    (6) Transactions with a significant book-tax difference--(i) In 
general. A transaction with a significant book-tax difference is a 
transaction where the treatment for Federal income tax purposes of any 
item or items from the transaction differs, or is reasonably expected 
to differ, by more than $10 million on a gross basis from the treatment 
of the item or items for book purposes in any taxable year. For 
purposes of this determination, offsetting items shall not be netted 
for either tax or book purposes. For purposes of this paragraph (b)(6), 
book income is determined by applying U.S. generally accepted 
accounting principles (GAAP) for worldwide income. Adjustments to any 
reserve for taxes are disregarded for purposes of determining the book-
tax difference.
    (ii) Applicability--(A) In general. This paragraph (b)(6) applies 
only to--
    (1) Taxpayers that are reporting companies under the Securities 
Exchange Act of 1934 (15 USCS 78a) and related business entities (as 
described in section 267(b) or 707(b)); or
    (2) Business entities that have $100 million or more in gross 
assets (the assets of all related business entities (as defined in 
section 267(b) or 707(b)) must be aggregated).
    (B) Consolidated returns. For purposes of this paragraph (b)(6), in 
the case of taxpayers that are members of a group of affiliated 
corporations filing a consolidated return, transactions solely between 
or among members of the group will be disregarded. Moreover, where two 
or more members of the group participate in a transaction that is not 
solely between or among members of the group, items shall be aggregated 
(as if such members were a single taxpayer), but any offsetting items 
shall not be netted.
    (C) Foreign persons. In the case of a taxpayer that is a foreign 
person (other than a foreign corporation that is treated as a domestic 
corporation for Federal tax purposes under section 269B, 953(d), 
1504(d) or any other provision of the Internal Revenue Code), only 
assets that are U.S. assets under Sec.  1.884-1(d) shall be taken into 
account for purposes of paragraph (b)(6)(ii)(A)(2) of this section, and 
only transactions that give rise to income that is effectively 
connected with the conduct of a trade or business within the United 
States (or to losses, expenses, or deductions allocated or apportioned 
to such income) shall be taken into account for purposes of this 
paragraph (b)(6).
    (D) Owners of disregarded entities. In the case of an eligible 
entity that is disregarded as an entity separate from its owner for 
Federal tax purposes, items of income, loss, expense, or deduction that 
otherwise are considered items of the entity for book purposes shall be 
treated as items of its owner, and items arising from transactions 
between the entity and its owner shall be disregarded, for purposes of 
this paragraph (b)(6).
    (E) Partners of partnerships. In the case of a taxpayer that is a 
member or a partner of an entity that is treated as a partnership for 
Federal tax purposes, items of income, loss, expense, or deduction that 
are allocable to the taxpayer for Federal tax purposes but otherwise 
are considered items of the entity for book purposes shall be treated 
as items of the taxpayer, for purposes of this paragraph (b)(6).
    (F) Shareholders of certain foreign corporations. To the extent 
that a taxpayer is considered under paragraph (c)(3)(ii) of this 
section to have indirectly participated in a transaction to which a 
foreign corporation is a direct party, all items from the transaction 
that otherwise are considered items of the foreign corporation for 
Federal tax purposes or book purposes shall be considered items of the 
taxpayer for purposes of this paragraph (b)(6).
    (iii) Exceptions. Items listed in paragraphs (b)(6)(iii)(A) through 
(M) of this section are not items for which reporting is required under 
this paragraph (b)(6).
    (A) Items to the extent a book loss or expense is reported before 
or without a loss or deduction for Federal income tax purposes.
    (B) Items to the extent income or gain for Federal income tax 
purposes is reported before or without book income or gain.
    (C) Depreciation, depletion, and amortization relating solely to 
differences in methods, lives (for example, useful lives, recovery 
periods), or conventions.
    (D) Bad debts or cancellation of indebtedness income.
    (E) Federal, state, local, and foreign taxes.
    (F) Compensation of employees and independent contractors, 
including stock options and pensions.
    (G) Items that for Federal tax purposes cannot be deducted or 
capitalized, such as certain payments for meals and entertainment, and 
certain fines and penalties.
    (H) Charitable contributions of cash or tangible property.
    (I) Tax exempt interest, including municipal bond interest.
    (J) Dividends, including amounts treated as dividends under section 
78, distributions of previously taxed income under sections 959 and 
1293, and income inclusions under sections 551, 951, and 1293.
    (K) Items resulting from transactions under section 1033.
    (L) Gains and losses arising under section 475 or section 1296.
    (M) Section 481 adjustments.
    (7) Transactions involving a brief asset holding period. A 
transaction involving a brief asset holding period is a transaction 
resulting in, or that is reasonably expected to result in, a tax credit 
exceeding $250,000 (including a foreign tax credit) if the underlying 
asset giving rise to the credit is held by the taxpayer for less than 
45 days. For purposes of determining the holding period, the principles 
in 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)(2) 
through (7) of this section, if the Commissioner makes a determination, 
by published guidance, individual ruling under paragraph (f) of this 
section, or otherwise, that the transaction is not subject to the 
reporting requirements of this section.

[[Page 64804]]

    (ii) Special rules for RICs. For purposes of this section, a 
regulated investment company as defined in section 851 is not required 
to disclose transactions described in paragraph (b)(5) or (6) of this 
section.
    (c) Definitions. For purposes of this section, the following terms 
are defined as follows:
    (1) Taxpayer. The term taxpayer means any person described in 
section 7701(a)(1), including S corporations. The term taxpayer also 
includes, unless specifically provided elsewhere in this section, 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) Indirect participation--(i) In general. A taxpayer will have 
indirectly participated in a reportable transaction if the taxpayer's 
Federal tax liability is affected (or in the case of a partnership or 
an S corporation, if a partner's or shareholder's Federal tax liability 
is reasonably expected to be affected) by the transaction even if the 
taxpayer is not a direct party to the transaction (e.g., the taxpayer 
participates as a partner in a partnership, as a shareholder in an S 
corporation, or through a trust or a controlled entity). Moreover, a 
taxpayer will have indirectly participated in a reportable transaction 
if the taxpayer knows or has reason to know that the tax benefits 
claimed from the taxpayer's transaction are derived from a reportable 
transaction.
    (ii) Shareholders of foreign corporations--(A) In general. A 
taxpayer that is a shareholder in a foreign corporation will not be 
considered to have participated indirectly in a transaction to which 
the foreign corporation is a direct party merely because the taxpayer 
is a shareholder in the foreign corporation unless the taxpayer is a 
reporting shareholder (as defined in paragraph (c)(3)(ii)(B) of this 
section) and the transaction either is described in any of the 
paragraphs (b)(2) through (5) or in paragraph (b)(7) of this section, 
or reduces or eliminates an income inclusion that otherwise would be 
required under section 551, 951, or 1293.
    (B) Reporting shareholder. For purposes of paragraph (c)(3)(ii)(A) 
of this section, the term reporting shareholder means a United States 
shareholder (as defined in section 551(a)) in a foreign personal 
holding company (as defined in section 552), 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).
    (iii) Example. The following example illustrates the provisions of 
paragraph (c)(3)(i) of this section:

    Example. Notice 95-53 (1995-2 C.B. 334) (see Sec.  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 receives 
consideration which the transferor treats as current income. The 
transferor later transfers the property subject to the lease in a 
transaction intended to qualify as a substituted basis transaction, 
for example, a transaction described in section 351. In return, the 
transferor receives stock (with low value and high basis) from the 
transferee corporation. The transferee corporation claims the 
deductions associated with the high basis property subject to the 
lease. The transferor and transferee corporation have directly 
participated in the listed transaction. If the transferor 
subsequently transfers the high basis/low value stock to a taxpayer 
in another transaction intended to qualify as a substituted 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 from the lease stripping transaction, then the 
taxpayer is indirectly participating in a reportable transaction. 
Accordingly, the taxpayer must disclose the reportable transaction 
and the manner of the taxpayer's indirect participation in the 
reportable transaction under the rules of this section.

    (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. 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):

    Example 1. Notice 2000-44 (2000-2 C.B. 255) (see Sec.  
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 Sec.  
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.

    (d) Form and content of disclosure statement. The IRS will release 
Form 8886, ``Reportable Transaction Disclosure Statement'' (or a 
successor form), for use by taxpayers in accordance with this paragraph 
(d). A taxpayer required to file a disclosure statement under this 
section must file a completed Form 8886 in accordance with the 
instructions to the form. The form must be attached to the appropriate 
tax returns 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 to: Internal Revenue Service LM:PFTG:OTSA, Large & Mid-Size 
Business Division, 1111 Constitution Ave., NW., Washington, DC 20224, 
or to such other address as provided by the Commissioner.
    (e) Time of providing disclosure--(1) In general. The disclosure 
statement for a reportable transaction must be attached to the 
taxpayer's Federal income tax return for each taxable year for which 
the taxpayer's Federal income tax liability is affected by the 
taxpayer's participation in the transaction. In addition, a copy of the 
disclosure statement must be sent to OTSA at the same time that any 
disclosure statement

[[Page 64805]]

is first filed with the taxpayer's Federal income tax return. 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 Federal income tax return for that prior year. In the case of a 
taxpayer that is a partnership or S corporation, the disclosure 
statement for a reportable transaction must be attached to the 
partnership's or S corporation's Federal income tax return for each 
taxable year ending with or within the taxable year of any partner or 
shareholder whose income tax liability is affected or is reasonably 
expected to be affected by the partnership's or S corporation's 
participation in the transaction. If a transaction becomes a reportable 
transaction (e.g., the transaction subsequently becomes one identified 
in published guidance as a listed transaction described in paragraph 
(b)(2) of this section, or there is a change in facts affecting the 
expected Federal income tax effect of the transaction such that the 
transaction is reportable under any of the paragraphs (b)(5) through 
(7)) on or after the date the taxpayer has filed the return for the 
first taxable year for which the transaction affected the taxpayer's or 
a partner's or a shareholder's Federal income tax liability, the 
disclosure statement must be filed as an attachment to the taxpayer's 
Federal income tax return next filed after the date the transaction 
becomes a reportable transaction (whether or not the transaction 
affects the taxpayer's or any partner's or shareholder's Federal income 
tax liability for that year). 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 published guidance, for example, Rev. Proc. 
94-69 (1994-2 C.B. 804) (see Sec.  601.601(d)(2) of this chapter).
    (2) Example. The following example illustrates the application of 
this paragraph (e):

    Example. In January of 2003, F, a domestic calendar year 
corporation, enters into a transaction that F reasonably expects 
will result in an $8 million section 165 loss in a single year and a 
$15 million section 165 loss over a combination of years. Assume 
that the transaction is not a transaction described in any of the 
paragraphs (b)(2) through (7) of this section, and, therefore, is 
not a reportable transaction under paragraph (b) of this section. On 
March 1, 2005, 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 reportable transaction described in paragraph (b) of this 
section. F is required to file Form 8886 for the transaction as an 
attachment to F's next filed Federal income tax return. If F's 2004 
Federal income tax 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 2004 return and at that 
time a copy of the form must be sent to OTSA.

    (f) Rulings and protective disclosures--(1) Requests for ruling. If 
a taxpayer is uncertain whether a transaction must be disclosed under 
this section, that taxpayer may, on or before the date that disclosure 
would otherwise be required under this section, submit a request to the 
IRS for a ruling as to whether the transaction is subject to the 
disclosure requirements of this section. If the request fully discloses 
all relevant facts relating to the transaction, the potential 
obligation of that taxpayer to disclose the transaction will be 
suspended during the period that the ruling request is pending and, if 
the IRS subsequently concludes that the transaction is a reportable 
transaction subject to disclosure under this section, until the 60th 
day after the issuance of the ruling (or, if the request is withdrawn, 
60 days after the date that the request is withdrawn).
    (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 indicate on the disclosure statement that the taxpayer is 
uncertain whether the transaction is required to be disclosed under 
this section and that the disclosure statement is being filed on a 
protective basis.
    (g) Retention of documents. 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 facts of the transaction, the expected tax treatment of the 
transaction, or the taxpayer's decision to participate in the 
transaction. Such 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 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 generally include, 
but are not limited to, the following: marketing materials related to 
the transaction; written analyses used in decision-making related to 
the transaction; correspondence and 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 tax benefits arising from the reportable transaction; 
and documents, if any, referring to the business purposes for the 
reportable transaction.
    (h) Effective dates. This section applies to Federal income tax 
returns filed after February 28, 2000. However, paragraphs (a) through 
(g) of this section apply to transactions entered into on or after 
January 1, 2003. The rules that apply with respect to transactions 
entered into on or before December 31, 2002, are contained in Sec.  
1.6011-4T in effect prior to January 1, 2003 (see 26 CFR part 1 revised 
as of April 1, 2002 and 2002-28 IRB 90 (see Sec.  601.601(d)(2) of this 
chapter)).

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 20.6011-4T is added to read as follows:


Sec.  20.6011-4T  Requirement of statement disclosing participation in 
certain transactions by taxpayers (temporary).

    (a) In general. If a transaction is identified as a ``listed 
transaction'' as defined in Sec.  1.6011-4T of this chapter by the 
Commissioner in published guidance (see Sec.  601.601(d)(2) of this 
chapter), and the listed transaction involves an estate tax under 
chapter 11 of subtitle B of the Internal Revenue Code, the transaction 
must be disclosed in the manner stated in such published guidance.
    (b) Effective date. This section applies to transactions entered 
into on or after January 1, 2003.

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 25.6011-4T is added to read as follows:


Sec.  25.6011-4T  Requirement of statement disclosing participation in 
certain transactions by taxpayers (temporary).

    (a) In general. If a transaction is identified as a ``listed 
transaction'' as defined in Sec.  1.6011-4T of this chapter by the 
Commissioner in published guidance (see Sec.  601.601(d)(2) of this

[[Page 64806]]

chapter), and the listed transaction involves a gift tax under chapter 
12 of subtitle B of the Internal Revenue Code, the transaction must be 
disclosed in the manner stated in such published guidance.
    (b) Effective date. This section applies to transactions entered 
into on or after January 1, 2003.

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 * * *


    Par. 8. Section 31.6011-4T is added to read as follows:


Sec.  31.6011-4T  Requirement of statement disclosing participation in 
certain transactions by taxpayers (temporary).

    (a) In general. If a transaction is identified as a ``listed 
transaction'' as defined in Sec.  1.6011-4T of this chapter by the 
Commissioner in published guidance (see Sec.  601.601(d)(2) of this 
chapter), and the listed transaction involves an employment tax under 
chapters 21 through 25 of subtitle C of the Internal Revenue Code, the 
transaction must be disclosed in the manner stated in such published 
guidance.
    (b) Effective date. This section applies to transactions entered 
into on or after January 1, 2003.

PART 53--FOUNDATION AND SIMILAR EXCISE TAXES

    Par. 9. The authority citation for part 53 continues to read as 
follows:

    Authority: 26 U.S.C. 7805.

    Par. 10. Section 53.6011-4T is added to read as follows:


Sec.  53.6011-4T  Requirement of statement disclosing participation in 
certain transactions by taxpayers (temporary).

    (a) In general. If a transaction is identified as a ``listed 
transaction'' as defined in Sec.  1.6011-4T of this chapter by the 
Commissioner in published guidance (see Sec.  601.601(d)(2) of this 
chapter), and the listed transaction involves an excise tax under 
chapter 42 of subtitle D of the Internal Revenue Code (relating to 
private foundations and certain other tax-exempt organizations), the 
transaction must be disclosed in the manner stated in such published 
guidance.
    (b) Effective date. This section applies to transactions entered 
into on or after January 1, 2003.

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 54.6011-4T is added to read as follows:


Sec.  54.6011-4T  Requirement of statement disclosing participation in 
certain transactions by taxpayers (temporary).

    (a) In general. If a transaction is identified as a ``listed 
transaction'' as defined in Sec.  1.6011-4T of this chapter by the 
Commissioner in published guidance (see Sec.  601.601(d)(2) of this 
chapter), and the listed transaction involves an excise tax under 
chapter 43 of subtitle D of the Internal Revenue Code (relating to 
qualified pension, etc., plans), the transaction must be disclosed in 
the manner stated in such published guidance.
    (b) Effective date. This section applies to transactions entered 
into on or after January 1, 2003.

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 56.6011-4T is added to read as follows:


Sec.  56.6011-4T  Requirement of statement disclosing participation in 
certain transactions by taxpayers (temporary).

    (a) In general. If a transaction is identified as a ``listed 
transaction'' as defined in Sec.  1.6011-4T of this chapter by the 
Commissioner in published guidance (see Sec.  601.601(d)(2) of this 
chapter), and the listed transaction involves an excise tax under 
chapter 41 of subtitle D of the Internal Revenue Code (relating to 
public charities), the transaction must be disclosed in the manner 
stated in such published guidance.
    (b) Effective date. This section applies to transactions entered 
into on or after January 1, 2003.

PART 301--PROCEDURE AND ADMINISTRATION

    Par. 15. The authority citation for part 301 continues to read in 
part as follows:

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

    Par. 16. Section 301.6111-2T is amended as follows:
    1. Paragraphs (a)(3) and (b)(3)(i) are revised.
    2. Paragraph (c)(3) is amended by adding a sentence at the end of 
the paragraph.
    3. Paragraph (h) is amended by revising the paragraph heading and 
removing the third sentence through the last sentence and adding two 
new sentences in their place.
    The revisions and additions read as follows:


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

    (a) * * *
    (3) For purposes of this section, references to the term 
``transaction'' include all of the factual elements relevant to the 
expected tax treatment of any investment, entity, plan, or arrangement, 
and include any series of steps carried out as part of a plan. For 
purposes of this section, 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 registration. For examples, see Sec.  
1.6011-4T(c)(4) of this chapter.
* * * * *
    (b) * * *
    (3) * * *
    (i) The potential participant is expected to participate in the 
transaction in the ordinary course of its business in a form consistent 
with customary commercial practice (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); and
* * * * *
    (c)
    (3) * * * This presumption is available only in cases in which the 
written authorization to disclose is effective without limitation of 
any kind from the commencement of discussions.
* * * * *
    (h) Effective dates. * * * However, paragraphs (a)(3), (b)(3)(i), 
and (c)(3) of this section apply to confidential corporate tax shelters 
in which any interests are offered for sale on or after January 1, 
2003. The rules that apply to confidential corporate tax shelters in 
which any interests are offered for sale

[[Page 64807]]

after February 28, 2000, and on or before December 31, 2002, are 
contained in Sec.  301.6111-2T in effect prior to January 1, 2003 (see 
26 CFR part 301 revised as of April 1, 2002 and 2002-28 IRB 91 (see 
Sec.  601.601(d)(2) of this chapter)).

Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
    Approved: October 15, 2002.
Pamela F. Olson,
Assistant Secretary of the Treasury.
[FR Doc. 02-26724 Filed 10-17-02; 3:10 pm]
BILLING CODE 4830-01-P