[Federal Register Volume 70, Number 40 (Wednesday, March 2, 2005)]
[Rules and Regulations]
[Pages 10037-10041]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-3950]


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9186]
RIN 1545-BD42


Qualified Amended Returns

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary regulations.

-----------------------------------------------------------------------

SUMMARY: This document contains temporary regulations that modify the 
rules relating to qualified amended returns by providing additional 
circumstances that end the period within which a taxpayer may file an

[[Page 10038]]

amended return that constitutes a qualified amended return. These 
regulations provide that the period for filing a qualified amended 
return is terminated once the IRS has served a John Doe summons on a 
third party with respect to the taxpayer's tax liability. In addition, 
for taxpayers who have claimed tax benefits from undisclosed listed 
transactions, the regulations provide that the period for filing a 
qualified amended return is terminated once the IRS contacts a 
promoter, organizer, seller, or material advisor concerning the listed 
transaction. The regulations also provide that the date on which 
published guidance is issued announcing a settlement initiative for a 
listed transaction in which penalties are compromised or waived is an 
additional date by which a taxpayer must file a qualified amended 
return. 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 published elsewhere in this issue of the 
Federal Register.

DATES: Effective Date: These regulations are effective March 2, 2005.
    Applicability Dates: For dates of applicability, see Sec.  1.6664-
1T(b)(3).

FOR FURTHER INFORMATION CONTACT: Nancy M. Galib, 202-622-4940 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    This document contains temporary regulations under 26 CFR part 1 
relating to qualified amended returns. Section 1.6664-2(c) provides 
that the amount reported on a qualified amended return will be treated 
as an amount shown as tax on the taxpayer's return for purposes of 
determining whether there is an underpayment of tax subject to an 
accuracy-related penalty. Section 1.6664-2(c)(3) provides that an 
amended return, or request for administrative adjustment under section 
6227 of the Internal Revenue Code, is a qualified amended return if it 
is filed before the earliest of: (1) The date on which the IRS first 
contacts the taxpayer concerning an examination of the return; (2) the 
date on which the IRS first contacts a person described in section 
6700(a) concerning the examination of an activity described in section 
6700(a) with respect to which the taxpayer claimed any tax benefit on 
the return directly or indirectly through the entity, plan or 
arrangement described in section 6700(a)(1)(A); or (3) for certain 
pass-through items, the date on which the IRS first contacts the pass-
through entity in connection with an examination of the return to which 
the pass-through item relates. These provisions are intended to 
encourage voluntary compliance by permitting taxpayers to avoid 
accuracy-related penalties by filing an amended return before the IRS 
begins an investigation of the taxpayer or the promoter of a 
transaction in which the taxpayer participated.
    The Treasury Department and the IRS have determined that additional 
rules providing for the termination of the period for filing a 
qualified amended return are necessary because existing rules may 
encourage taxpayers to delay filing amended returns until after the IRS 
has taken steps to identify taxpayers as participants in potentially 
abusive transactions. To discourage the wait-and-see approach of some 
taxpayers and to encourage voluntary compliance, the Treasury 
Department and the IRS announced in Notice 2004-38, 2004-24 I.R.B. 949, 
that regulations modifying the definition of qualified amended return 
in Sec.  1.6664-2(c)(3) would be issued. Notice 2004-38 announced that 
the regulations would provide that the period for filing a qualified 
amended return is terminated when the IRS serves a John Doe summons 
under section 7609(f) with respect to the taxpayer's tax liability. 
Notice 2004-38 also announced that the regulations would provide that 
the period for filing a qualified amended return would terminate when 
the IRS contacts an organizer, seller, or material advisor concerning a 
listed transaction for which the taxpayer has claimed a tax benefit. 
Notice 2004-38 provided that the regulations would be effective for 
amended returns or requests for administrative adjustment filed on or 
after April 30, 2004.

Explanation of Provisions

    These regulations provide the rules announced in Notice 2004-38 
that identify additional circumstances that terminate the period within 
which a taxpayer may file a qualified amended return. Temporary 
regulation Sec.  1.6664-2T(c)(3)(i) provides that a qualified amended 
return must be filed before the IRS serves on a third party a John Doe 
summons relating to the tax liability of a person, group, or class that 
includes the taxpayer or pass-through entity of which the taxpayer is a 
partner, shareholder, beneficiary, or holder of a residual interest in 
a REMIC with respect to a return that reflects the activity that is the 
subject of the summons. Any taxpayer so identified also is precluded 
from filing a qualified amended return in a year not identified in the 
summons if the original return for that year reflected the taxpayer's 
participation in the transaction or activity to which the summons 
relates.
    Temporary regulation Sec.  1.6664-2T(c)(3)(ii) provides special 
rules with respect to undisclosed listed transactions. An undisclosed 
listed transaction is a transaction that: (1) is the same or 
substantially similar to a listed transaction as defined in Sec.  
1.6011-4(b)(2) (regardless of whether Sec.  1.6011-4 requires the 
taxpayer to disclose the transaction); and (2) was not previously 
disclosed by the taxpayer within the meaning of Sec.  1.6011-4 or Sec.  
1.6011-4T, or had not been disclosed under Announcement 2002-2 by the 
deadline therein. In the case of an undisclosed listed transaction for 
which a taxpayer claims any direct or indirect tax benefits on its 
return, a taxpayer may not file a qualified amended return on or after 
the earlier of: (1) The date on which the IRS first contacts any person 
regarding an examination of that person's liability under section 
6707(a) with respect to the undisclosed listed transaction of the 
taxpayer; or (2) the date on which the IRS issues to any person a 
request for information required to be included on a list under section 
6112 relating to a type of listed transaction regarding which that 
person made a tax statement to or for the benefit of the taxpayer 
(regardless of whether the taxpayer's information is required to be 
included on the list requested by the IRS). For purposes of this 
section, an examination of a person's liability under section 6707(a) 
includes examinations under section 6707, in effect prior to and after 
the amendments made by section 816 of the American Jobs Creation Act of 
2004, Pub. L. 108-357 (118 Stat. 1418).
    An amended return that is filed to disclose a transaction, but that 
does not show an additional amount due, is treated as a qualified 
amended return for purposes of Sec.  1.6662-3(c) or Sec.  1.6662-4(e) 
and (f). These temporary regulations also provide that a qualified 
amended return includes an amended return filed solely to disclose 
information pursuant to Sec.  1.6011-4, provided that the taxpayer also 
makes the required disclosure to the Office of Tax Shelter Analysis.
    In addition to these rules, temporary regulation Sec.  1.6664-
2T(c)(3)(i) also provides that the date on which published guidance is 
issued providing for a settlement initiative for a listed transaction 
is an additional date by which a taxpayer who participated in the 
listed transaction must file a qualified amended return for the taxable 
years in which the taxpayer claimed any

[[Page 10039]]

direct or indirect tax benefits from the listed transaction. The 
Commissioner may waive the requirements of this provision or identify a 
later date by which a taxpayer who participated in the listed 
transaction must file a qualified amended return in the published 
guidance announcing the listed transaction settlement initiative.
    These temporary regulations also clarify the existing rules 
applicable to qualified amended returns. Temporary regulation Sec.  
1.6664-2T(c)(3)(i)(B) clarifies that the period for filing a qualified 
amended return terminates on the date the IRS first contacts a person 
concerning an examination under section 6700, regardless of whether the 
IRS ultimately establishes that such person violated section 6700. 
Temporary regulation Sec.  1.6664-2T(c)(3)(i) also clarifies that a 
taxpayer must file a qualified amended return before the IRS first 
contacts the taxpayer concerning a criminal investigation of the 
taxpayer that includes the tax period covered by the return.

Effective Date

    Paragraphs (c)(1), (c)(2), (c)(3)(i)(A), (c)(3)(i)(B), 
(c)(3)(i)(C), (c)(3)(i)(D) (second sentence), (c)(3)(i)(E), and (c)(4) 
of Sec.  1.6664-2T are applicable for amended returns and requests for 
administrative adjustment filed on or after March 2, 2005. Paragraphs 
(c)(3)(i)(D) (first sentence) and (c)(3)(ii) of Sec.  1.6664-2T are 
applicable for amended returns and requests for administrative 
adjustment filed on or after April 30, 2004.

Effect on Other Documents

    Notice 2004-38 (2004-24 I.R.B. 949) is obsolete as of March 2, 
2005.

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 the 
regulation does not impose a collection of information on small 
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not 
apply. Pursuant to section 7805(f), this Treasury decision will be 
submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on its impact on small business.

Drafting Information

    The principal author of this regulation is Nancy M. Galib, Office 
of Associate Chief Counsel (Procedure & Administration), Administrative 
Provisions and Judicial Practice Division.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

0
Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

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


0
Par. 2. Section 1.6664-1T is added to read as follows:


Sec.  1.6664-1T  Accuracy-related and fraud penalties; definitions and 
special rules (temporary).

    (a) through (b)(2) [Reserved]. For further guidance, see Sec.  
1.6664-1.
    (b)(3) Qualified amended returns. Sections 1.6664-2T(c)(1), (c)(2), 
(c)(3)(i)(A), (c)(3)(i)(B), (c)(3)(i)(C), (c)(3)(i)(D) (second 
sentence), (c)(3)(i)(E), and (c)(4) are applicable for amended returns 
and requests for administrative adjustment filed on or after March 2, 
2005. Sections 1.6664-2T(c)(3)(i)(D) (first sentence) and (c)(3)(ii) 
are applicable for amended returns and requests for administrative 
adjustment filed on or after April 30, 2004.

0
Par. 3. Section 1.6664-2 is revised to read as follows:


Sec.  1.6664-2  Underpayment.

* * * * *
    (c) [Reserved]. For further guidance, see Sec.  1.6664-2T.
* * * * *

0
Par. 4. Section 1.6664-2T is added to read as follows:


Sec.  1.6664-2T  Underpayment (temporary).

    (a) through (b) [Reserved]. For further guidance, see Sec.  1.6664-
2.
    (c) Amount shown as the tax by the taxpayer on his return--(1) 
Defined. For purposes of paragraph (a) of this section, the ``amount 
shown as the tax by the taxpayer on his return'' is the tax liability 
shown by the taxpayer on his return, determined without regard to the 
items listed in Sec.  1.6664-2(b) (1), (2), and (3), except that it is 
reduced by the excess of--
    (i) The amounts shown by the taxpayer on his return as credits for 
tax withheld under section 31 (relating to tax withheld on wages) and 
section 33 (relating to tax withheld at source on nonresident aliens 
and foreign corporations), as payments of estimated tax, or as any 
other payments made by the taxpayer with respect to a taxable year 
before filing the return for such taxable year; over
    (ii) The amounts actually withheld, actually paid as estimated tax, 
or actually paid with respect to a taxable year before the return is 
filed for such taxable year.
    (2) Effect of qualified amended return. The ``amount shown as the 
tax by the taxpayer on his return'' includes an amount shown as 
additional tax on a qualified amended return (as defined in paragraph 
(c)(3) of this section), except that such amount is not included if it 
relates to a fraudulent position on the original return.
    (3) Qualified amended return defined. (i) General rule. A qualified 
amended return is an amended return, or a timely request for an 
administrative adjustment under section 6227, filed after the due date 
of the return for the taxable year (determined with regard to 
extensions of time to file) and before the earliest of--
    (A) The date the taxpayer is first contacted by the Internal 
Revenue Service concerning any examination (including a criminal 
investigation) with respect to the return;
    (B) The date any person is first contacted by the Internal Revenue 
Service concerning an examination of that person under section 6700 
(relating to the penalty for promoting abusive tax shelters) of an 
activity with respect to which the taxpayer claimed any tax benefit on 
the return directly or indirectly through the entity, plan or 
arrangement described in section 6700(a)(1)(A);
    (C) In the case of a pass-through item (as defined in Sec.  1.6662-
4(f)(5)), the date the pass-through entity (as defined in Sec.  1.6662-
4(f)(5)) is first contacted by the Internal Revenue Service in 
connection with an examination of the return to which the pass-through 
item relates;
    (D) The date on which the Internal Revenue Service serves a summons 
described in section 7609(f) relating to the tax liability of a person, 
group, or class that includes the taxpayer (or pass-through entity of 
which the taxpayer is a partner, shareholder, beneficiary, or holder of 
a residual interest in a REMIC) with respect to an activity for which 
the taxpayer claimed any tax benefit on the return directly or 
indirectly. This rule applies to any return on which the taxpayer 
claimed a direct or indirect tax benefit from the type of activity that 
is the subject of the summons, regardless of whether the summons seeks 
the

[[Page 10040]]

production of information for the taxable period covered by such 
return; and
    (E) The date on which the Commissioner announces by revenue ruling, 
revenue procedure, notice, or announcement, to be published in the 
Internal Revenue Bulletin (see Sec.  601.601(d)(2)), a settlement 
initiative to compromise or waive penalties with respect to a listed 
transaction. This rule applies only to a taxpayer who participated in 
the listed transaction and for the taxable year(s) in which the 
taxpayer claimed any direct or indirect tax benefits from the listed 
transaction. The Commissioner may waive the requirements of this 
paragraph or identify a later date by which a taxpayer who participated 
in the listed transaction must file a qualified amended return in the 
published guidance announcing the listed transaction settlement 
initiative.
    (ii) Undisclosed listed transactions. An undisclosed listed 
transaction is a transaction that is the same as, or substantially 
similar to, a listed transaction within the meaning of Sec.  1.6011-
4(b)(2) (regardless of whether Sec.  1.6011-4 requires the taxpayer to 
disclose the transaction) and was not previously disclosed by the 
taxpayer within the meaning of Sec.  1.6011-4 or Sec.  1.6011-4T, or 
had not been disclosed under Announcement 2002-2, 2002-1 C.B. 304, by 
the deadline therein. In the case of an undisclosed listed transaction 
for which a taxpayer claims any direct or indirect tax benefits on its 
return (regardless of whether the transaction was a listed transaction 
at the time the return was filed), an amended return or request for 
administrative adjustment under section 6227 will not be a qualified 
amended return if filed on or after the earliest of--
    (A) The dates described in Sec.  1.6664-2(c)(3)(i);
    (B) The date on which the Internal Revenue Service first contacts 
any person regarding an examination of that person's liability under 
section 6707(a) with respect to the undisclosed listed transaction of 
the taxpayer; or
    (C) The date on which the Internal Revenue Service requests, from 
any person who made a tax statement to or for the benefit of the 
taxpayer, or who is a material advisor (within the meaning of section 
6111) with respect to the taxpayer, the information required to be 
included on a list under section 6112 relating to a transaction that is 
the same as, or substantially similar to, the undisclosed listed 
transaction, regardless of whether the taxpayer's information is 
required to be included on that list.
    (4) Special rules. (i) A qualified amended return includes an 
amended return that is filed to disclose information pursuant to Sec.  
1.6662-3(c) or Sec.  1.6662-4 (e) and (f) and that does not report any 
additional tax liability. A qualified amended return also includes an 
amended return filed solely to disclose information pursuant to Sec.  
1.6011-4, if the taxpayer also makes the required disclosure to the 
Office of Tax Shelter Analysis under Sec.  1.6011-4(e). See Sec.  
1.6662-3(c), Sec.  1.6662-4(f), and Sec.  1.6664-4(c) for rules 
relating to adequate disclosure.
    (ii) The Commissioner may by revenue procedure prescribe the manner 
in which the rules of paragraph (c) of this section regarding qualified 
amended returns apply to particular classes of taxpayers.
    (5) Examples. The following examples illustrate the provisions of 
paragraphs (c)(3) and (c)(4) of this section:

    Example 1. T, an individual taxpayer, claimed tax benefits on 
its 2002 Federal income tax return from a transaction that is 
substantially similar to the transaction identified as a listed 
transaction in Notice 2002-65, 2002-2 C.B. 690 (Partnership Entity 
Straddle Tax Shelter). T did not disclose his participation in this 
transaction on a Form 8886, Reportable Transaction Disclosure 
Statement, as required by Sec.  1.6011-4. On June 30, 2004, the IRS 
requested from P, T's material advisor, an investor list required to 
be maintained under section 6112. The section 6112 request, however, 
related to the type of transaction described in Notice 2003-81, 
2003-2 C.B. 1223 (Tax Avoidance Using Offsetting Foreign Currency 
Option Contracts). T did not participate in (within the meaning of 
Sec.  1.6011-4(c)), and claimed no tax benefits from, a transaction 
described in Notice 2003-81. T may file a qualified amended return 
relating to the transaction described in Notice 2002-65 because T 
did not claim a tax benefit with respect to the listed transaction 
that is the subject of the section 6112 request.
    Example 2. The facts are the same as in Example 1, except that 
T's 2002 Federal income tax return reflected T's participation in 
the transaction described in Notice 2003-81. As of June 30, 2004, T 
may not file a qualified amended return for the 2002 tax year.
    Example 3. Corporation X claimed tax benefits from a transaction 
on its 2002 Federal income tax return. In October 2003, the IRS and 
Treasury identified the transaction as a listed transaction. In 
December 2003, the IRS contacted P concerning an examination of P's 
liability under section 6707(a) (as in effect prior to the amendment 
to section 6707 by section 816 of the American Jobs Creation Act of 
2004, P.L. 108-357, 118 Stat. 1418). P is the organizer of a section 
6111 tax shelter who provided representations to X regarding tax 
benefits from the transaction, and the IRS has contacted P about the 
failure to register that transaction. Three days later, X filed an 
amended return.
    X's amended return is not a qualified amended return, because X 
did not disclose the transaction before the IRS contacted P. X's 
amended return would have been a qualified amended return if it was 
submitted prior to the date on which the IRS contacted P.
    Example 4. The facts are the same as in Example 3 except that, 
instead of contacting P concerning an examination under section 
6707(a), in December 2003, the IRS served P a summons described in 
section 7609(f). X cannot file a qualified amended return after the 
summons has been served regardless of when, or whether, the 
transaction becomes a listed transaction.
    Example 5. On November 30, 2003, the Internal Revenue Service 
served Corporation Y, a credit card company, a summons described in 
section 7609(f). The summons requested the identity of, and 
information concerning, United States taxpayers who, during the 
taxable years 2001 and 2002, had signature authority over 
Corporation Y's credit cards issued by, through, or on behalf of 
certain offshore financial institutions. In obtaining court approval 
for the summons, the IRS provided reports and declarations that 
established a reasonable basis for believing that this ascertainable 
group of taxpayers may have been using these offshore credit card 
accounts to avoid complying with the internal revenue laws of the 
United States. Corporation Y complied with the summons, and 
identified, among others, Taxpayer B. On May 31, 2004, before the 
IRS first contacted Taxpayer B concerning an examination of Taxpayer 
B's federal income tax return for the taxable year 2002, Taxpayer B 
filed an amended return for that taxable year, that showed an 
increase in Taxpayer B's federal income tax liability. Under 
paragraph (c)(3)(i)(D) of this section, the amended return is not a 
qualified amended return because it was not filed before the summons 
was served on Corporation Y.
    Example 6. The facts are the same as in Example 5. Taxpayer B 
continued to maintain the offshore credit card account through 2003 
to avoid compliance with the internal revenue laws. On March 21, 
2005, Taxpayer B filed an amended return for the taxable year 2003, 
that showed an increase in Taxpayer B's federal income tax 
liability. Under paragraph (c)(3)(i)(D) of this section, the amended 
return is not a qualified amended return because it was not filed 
before the summons for 2001 and 2002 was served on Corporation Y, 
and the return reflects an activity that is the subject of the same 
summons.
    Example 7. On November 30, 2003, the Internal Revenue Service 
served Corporation Y, a credit card company, a summons described in 
section 7609(f). The summons requested the identity of, and 
information concerning, United States taxpayers who, during the 
taxable years 2001 and 2002, had signature authority over 
Corporation Y's credit cards issued by, through, or on behalf of 
certain offshore financial institutions. In obtaining court approval 
for the summons, the IRS established a reasonable basis for 
believing that this ascertainable group of taxpayers may have been 
using these offshore credit card accounts to avoid complying with

[[Page 10041]]

the internal revenue laws of the United States. Taxpayer C did not 
have signature authority over any of Corporation Y's credit cards 
during either 2001 or 2002 and, therefore, was not a person 
described in the summons.
    In 2003, Taxpayer C first acquired signature authority over a 
Corporation Y credit card issued by an offshore financial 
institution. Taxpayer C's ability to file a qualified amended return 
for 2003 is not limited by paragraph (c)(3)(i)(D) because Taxpayer 
C's return does not reflect an activity that was the subject of the 
summons that was served on Corporation Y for 2001 and 2002.
    Example 8. On April 15, 2004, Taxpayer D timely filed his 2003 
federal income tax return. The return reported tax benefits from a 
transaction that had previously been identified as a listed 
transaction. The tax treatment of the transaction also reflected a 
position that was contrary to a revenue ruling. D did not include 
with his return a Form 8275, Disclosure Statement, as required by 
Sec.  1.6662-3(c), or a Form 8886, Reportable Transaction Disclosure 
Statement, as required by Sec.  1.6011-4. On March 21, 2005, D filed 
a qualified amended return that disclosed the listed transaction on 
an attached Form 8886, but that did not report any additional tax. D 
also filed the Form 8886 with the Office of Tax Shelter Analysis as 
required by Sec.  1.6011-4. D has not adequately disclosed the 
transaction under Sec.  1.6662-3(c) because D failed to file a Form 
8275. (d) through (g) [Reserved]. For further guidance, see Sec.  
1.6664-2.

Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
    Approved: February 23, 2005.
Eric Solomon,
Acting Assistant Secretary of the Treasury.
[FR Doc. 05-3950 Filed 3-1-05; 8:45 am]
BILLING CODE 4830-01-P