[Federal Register Volume 71, Number 212 (Thursday, November 2, 2006)]
[Proposed Rules]
[Pages 64501-64504]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-18323]



[[Page 64501]]

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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 301

[REG-103043-05]
RIN 1545-BE28


AJCA Modifications to the Section 6112 Regulations

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations under section 6112 
of the Internal Revenue Code which provide the rules relating to the 
obligation of material advisors to prepare and maintain lists with 
respect to reportable transactions. These regulations affect material 
advisors responsible for keeping lists under section 6112.

DATES: Written or electronic comments and requests for a public hearing 
must be received by January 31, 2007.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-103043-05), room 
5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
103043-05), Courier's Desk, Internal Revenue Service, Crystal Mall 4 
Building, 1901 S. Bell St., Arlington, VA, or sent electronically, via 
the IRS Internet site at http://www.irs.gov/regs or via the Federal 
eRulemaking Portal at http://www.regulations.gov (indicate IRS and REG-
103043-05).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Tara P. Volungis or Charles Wien, 202-622-3070; concerning the 
submissions of comments and requests for hearing, Kelly Banks, 202-622-
0392 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information contained in this notice of proposed 
rulemaking has been submitted to the Office of Management and Budget 
for review in accordance with the Paperwork Reduction Act of 1995 (44 
U.S.C. 3507(d)). Comments on the collection of information should be 
sent to the Office of Management and Budget, Attn: Desk Officer for the 
Department of the Treasury, Office of Information and Regulatory 
Affairs, Washington, DC 20503, with copies to the Internal Revenue 
Service, Attn: IRS Reports Clearance Officer, SE:W:CAR:MP:T:T:SP, 
Washington, DC 20224. Comments on the collection of information should 
be received by January 2, 2007.
    Comments are specifically requested concerning:
    Whether the proposed collection of information is necessary for the 
proper performance of the functions of the Internal Revenue Service, 
including whether the information will have practical utility;
    The accuracy of the estimated burden associated with the proposed 
collection of information (see below);
    How the quality, utility, and clarity of the information to be 
collected may be enhanced;
    How the burden of complying with the proposed collections of 
information may be minimized, including through the application of 
automated collection techniques or other forms of information 
technology; and
    Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of service to provide information.
    The collection of information in this proposed regulation is in 
Sec.  301.6112-1(b) and (d). This information is required in order for 
a material advisor to comply with the list maintenance rules under 
section 6112. This information will be used to improve compliance with 
the tax laws by giving the IRS earlier notification of transactions 
that may not comport with the tax laws. The collection of information 
is mandatory. The likely respondents are business or other for-profit 
institutions or individuals.
    Estimated total annual reporting burden: 50,000 hours.
    Estimated average annual burden hours per respondent: 100 hours.
    Estimated number of respondents: 500.
    Estimated annual frequency of responses: On occasion.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number assigned by the Office of Management and Budget.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background

    This document proposes to amend 26 CFR part 301 by amending the 
rules relating to the list maintenance requirements of material 
advisors with respect to reportable transactions under section 6112.
    The American Jobs Creation Act of 2004, Public Law 108-357, 118 
Stat. 1418, (AJCA) was enacted on October 22, 2004. Section 815 of the 
AJCA amended section 6112 to provide that each material advisor (as 
defined in section 6111, as amended by the AJCA) with respect to any 
reportable transaction is required to maintain a list (in such manner 
as the Secretary may by regulations prescribe) identifying each person 
with respect to whom the advisor acted as a material advisor with 
respect to the transaction, and containing other information as the 
Secretary may by regulations require. Section 815 of the AJCA is 
effective for transactions with respect to which material aid, 
assistance, or advice is provided after October 22, 2004. Prior to the 
amendments to section 6111 made by the AJCA, the definition of material 
advisor was in Sec.  301.6112-1 of the Procedure and Administration 
Regulations.
    In response to the AJCA, the IRS and Treasury Department issued 
interim guidance affecting section 6112 in Notice 2004-80, 2004-2 C.B. 
963; Notice 2005-17, 2005-1 C.B. 606; Notice 2005-22, 2005-1 C.B. 756; 
and Notice 2006-6, 2006-5 I.R.B. 385 (see Sec.  601.601(d)(2)). The IRS 
and Treasury Department have received various comments and questions 
regarding the application of section 6112 under the AJCA. Consequently, 
the IRS and Treasury Department propose amendments to the rules 
relating to the list maintenance obligation of material advisors under 
section 6112.

Explanation of Provisions

A. In General

    These proposed regulations are being issued concurrently with 
proposed regulations under Sec.  1.6011-4 and Sec.  301.6111-3 
published elsewhere in the Federal Register. The definition of material 
advisor is provided in the proposed regulations under Sec.  301.6111-
3(b). The definition of reportable transaction is provided in the 
proposed regulations under Sec.  1.6011-4(b)(1). Under these proposed 
regulations, each material advisor for any reportable transaction must 
maintain a list identifying each person with respect to whom the 
advisor acted as a material advisor and containing other information 
described in the regulations.

[[Page 64502]]

B. The List

    The information that must be contained in the list under these 
proposed regulations is similar to the information required to be 
included on the list under the current Sec.  301.6112-1 regulations, 
with some additions or clarifications, such as, the name of each other 
material advisor to the transaction, if known by the material advisor, 
and any designation agreement to which the material advisor is a party. 
The IRS and Treasury Department believe that this information is 
required to be provided under the current regulations. However, due to 
questions raised by material advisors under the current regulations, 
these proposed amendments clarify that the name of other material 
advisors and designation agreements are required to be maintained.
    To date, the IRS has received lists under the current regulations 
that are not in a form that enables the IRS to determine without undue 
delay or difficulty the information required under the regulation. Some 
material advisors have merely produced boxes of documents rather than a 
list as required under Sec.  301.6112-1. Under section 6708 as amended 
by the AJCA, any person who is required to maintain a list under 
section 6112(a) who fails to make the list available to the Secretary 
upon written request within 20 business days after the date of the 
request, must pay a penalty of $10,000 for each day of such failure. 
Failure to maintain the list in accordance with these regulations also 
subjects a person to the penalty under section 6708. The proposed 
regulations specifically clarify that the list to be maintained by the 
material advisor and furnished to the IRS upon request consists of 
three separate components: (1) An itemized statement of information, 
(2) a detailed description of the transaction, and (3) copies of 
documents relating to the transaction. The itemized statement of 
information must contain all of the requested information in a form 
that is easy to understand (for example, in a format such as a list, 
spreadsheet, or table). In order for the material advisor to be in 
compliance with its obligations under section 6112, the material 
advisor must maintain and furnish in the time prescribed the itemized 
statement of information, the description of the transaction, and the 
copies of documents. Under the proposed regulations, the Secretary, in 
published guidance, may provide a form or method for maintaining and/or 
furnishing a list.

C. Other Clarifications and Modifications

    The proposed regulations remove the provision detailing how a 
privilege is claimed with regard to certain information on the list. 
The regulations continue to require that if a claim of privilege is 
made, the material advisor must continue to maintain the list in 
accordance with these regulations.
    Similar to provisions in the current Sec.  301.6112-1 regulations, 
material advisors under the proposed regulations may have a designation 
agreement authorizing one material advisor to maintain and furnish the 
list. However, the designation agreement does not relieve the other 
material advisors of their obligation to furnish the list if the 
designated material advisor fails to furnish the list in a timely 
manner. Thus, parties to a designation agreement may still be liable 
for the penalty under section 6708.
    Contrary to the provisions in the current regulations under Sec.  
301.6112-1, these proposed regulations contain no provision to toll the 
requirement for maintaining the list when a potential material advisor 
requests a private letter ruling on a specific transaction. The IRS and 
Treasury Department believe that removing the tolling provision will 
promote effective tax administration. Consequently, potential material 
advisors may request a ruling on a transaction, as provided in the 
temporary regulations under Sec.  301.6111-3T(h), under the regular 
procedures for requesting a ruling, provided the ruling request is not 
factual or hypothetical, but the requirement for disclosing the 
transaction under section 6111 and maintaining the list under section 
6112 will not be tolled. Final regulations removing the tolling 
provision are being issued concurrently with these proposed 
regulations. The removal of the tolling provision is effective for all 
ruling requests received on or after November 1, 2006.

D. Effective Date

    Generally, when these proposed regulations become final, they will 
apply to transactions with respect to which a material advisor makes a 
tax statement on or after the date the regulations are published as 
final regulations in the Federal Register. However, upon publication 
the final regulations will apply to transactions of interest entered 
into on or after November 2, 2006 with respect to which a material 
advisor makes a tax statement under Sec.  301.6111-3 on or after 
November 2, 2006.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866. Therefore, a regulatory assessment is not required. It also has 
been determined that section 553(b) of the Administrative Procedure Act 
(5 U.S.C. chapter 5) does not apply to these regulations. It is hereby 
certified that the collection of information in these regulations will 
not have a significant economic impact on a substantial number of small 
entities. This certification is based upon the fact that most of the 
information is already required to be reported under the current 
regulations; the clarifications and new information required by the 
proposed regulations add little or no new burden to the existing 
requirements. Therefore, a Regulatory Flexibility Analysis under the 
Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required. 
Pursuant to section 7805(f) of the Internal Revenue Code, this notice 
of proposed rulemaking will be submitted to the Chief Counsel for 
Advocacy of the Small Business Administration for comment on its impact 
on small business.

Comments and Requests for a Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written comments (a signed original 
and eight (8) copies) or electronic comments that are submitted timely 
to the IRS. The IRS and Treasury Department request comments on the 
clarity of the proposed rules, how they can be made easier to 
understand, and the administrability of the rules in the proposed 
regulations. All comments will be available for public inspection and 
copying. A public hearing will be scheduled if requested in writing by 
any person that submits timely written or electronic comments. If a 
public hearing is scheduled, notice of the date, time, and place for 
the public hearing will be published in the Federal Register.

Drafting Information

    The principal authors of these regulations are Tara P. Volungis and 
Charles Wien, Office of the Associate Chief Counsel (Passthroughs and 
Special Industries). However, other personnel from the IRS and Treasury 
Department participated in their development.

List of Subjects in 26 CFR Part 301

    Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income 
taxes,

[[Page 64503]]

Penalties, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 301 is proposed to be amended as follows:

PART 301--PROCEDURE AND ADMINISTRATION

    Paragraph 1. The authority citation for part 301 continues to read, 
in part, as follows:

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

    Par. 2. Section 301.6112-1 is revised to read as follows:


Sec.  301.6112-1  Material advisors of reportable transactions must 
keep lists of advisees, etc.

    (a) In general. Each material advisor, as defined in Sec.  
301.6111-3(b), with respect to any reportable transaction, as defined 
in Sec.  1.6011-4(b) of this chapter, shall prepare and maintain a list 
in accordance with paragraph (b) of this section and shall furnish such 
list to the Internal Revenue Service (IRS) in accordance with paragraph 
(e) of this section.
    (b) Preparation and maintenance of lists--(1) In general. A 
separate list must be prepared and maintained for each reportable 
transaction. However, one list must be maintained for substantially 
similar transactions. A list must be maintained in a form that enables 
the IRS to determine without undue delay or difficulty the information 
required in paragraph (b)(3) of this section. The Secretary may, by 
publication in the Internal Revenue Bulletin (see Sec.  
601.601(d)(2)(ii)(b) of this chapter), provide a form or method for 
maintaining and/or furnishing a list.
    (2) Persons required to be included on lists. A material advisor is 
required to maintain a list identifying each person with respect to 
whom the advisor acted as a material advisor with respect to the 
reportable transaction. However, a material advisor is not required to 
identify a person on the list if the person entered into a listed 
transaction or a transaction of interest more than 6 years before the 
transaction was identified in published guidance as a listed 
transaction or a transaction of interest.
    (3) Contents. Each list must include the three components described 
in paragraph (b)(3)(i), (ii), and (iii) of this section.
    (i) Statement. An itemized statement containing the following 
information--
    (A) The name of each reportable transaction, the citation to the 
published guidance number identifying the transaction if the 
transaction is a listed transaction or a transaction of interest, and 
the reportable transaction number obtained under section 6111;
    (B) The name, address, and TIN of each person required to be 
included on the list;
    (C) The date on which each person required to be included on the 
list entered into each reportable transaction, if known by the material 
advisor;
    (D) The amount invested in each reportable transaction by each 
person required to be included on the list, if known by the material 
advisor;
    (E) A summary or schedule of the tax treatment that each person is 
intended or expected to derive from participation in each reportable 
transaction; and
    (F) The name of each other material advisor to the transaction, if 
known by the material advisor.
    (ii) Description of the transaction. A detailed description of each 
reportable transaction that describes both the tax structure of the 
transaction and the purported tax treatment of the transaction.
    (iii) Documents. The following documents--
    (A) A copy of any designation agreement (as described in paragraph 
(f) of this section) to which the material advisor is a party; and
    (B) Copies of any additional written materials, including tax 
analyses or opinions, relating to each reportable transaction that are 
material to an understanding of the purported tax treatment or tax 
structure of the transaction that have been shown or provided to any 
person who acquired or may acquire an interest in the transactions, or 
to their representatives, tax advisors, or agents, by the material 
advisor or any related party or agent of the material advisor. However, 
a material advisor is not required to retain earlier drafts of a 
document provided the material advisor retains a copy of the final 
document (or, if there is no final document, the most recent draft of 
the document) and the final document (or most recent draft) contains 
all the information in the earlier drafts of such document that is 
material to an understanding of the purported tax treatment or the tax 
structure of the transaction.
    (c) Definitions. For purposes of this section, the following terms 
are defined as:
    (1) Material advisor. The term material advisor is defined in Sec.  
301.6111-3(b).
    (2) Reportable transaction. The term reportable transaction is 
defined in Sec.  1.6011-4(b)(1) of this chapter.
    (3) Listed transaction. The term listed transaction is defined in 
Sec.  1.6011-4(b)(2) of this chapter. See also Sec. Sec.  20.6011-4(a), 
25.6011-4(a), 31.6011-4(a), 53.6011-4(a), 54.6011-4(a), or 56.6011-4(a) 
of this chapter.
    (4) Substantially similar. The term substantially similar is 
defined in Sec.  1.6011-4(c)(4) of this chapter.
    (5) Person. The term person is defined in Sec.  301.6111-3(c)(4).
    (6) Related party. A person is a related party with respect to 
another person if such person bears a relationship to such other person 
described in section 267(b) or 707(b).
    (7) Tax. The term tax is defined in Sec.  301.6111-3(c)(6).
    (8) Tax benefit. The term tax benefit is defined in Sec.  301.6111-
3(c)(7).
    (9) Tax return. The term tax return is defined in Sec.  301.6111-
3(c)(8).
    (10) Tax structure. The term tax structure is defined in Sec.  
301.6111-3(c)(9).
    (11) Tax treatment. The term tax treatment is defined in Sec.  
301.6111-3(c)(10).
    (12) Transaction of interest. The term transaction of interest is 
defined in Sec.  1.6011-4(b)(6) of this chapter. See also Sec. Sec.  
20.6011-4(a), 25.6011-4(a), 31.6011-4(a), 53.6011-4(a), 54.6011-4(a), 
or 56.6011-4(a) of this chapter.
    (d) Retention of lists. Each material advisor must maintain each 
component of the list described in paragraph (b)(3) of this section in 
a readily accessible form for seven years following the earlier of the 
date on which the material advisor last made a tax statement relating 
to the transaction, or the date the transaction was last entered into, 
if known. If the material advisor required to prepare, maintain, and 
furnish the list is a corporation, partnership, or other entity 
(entity) that has dissolved or liquidated before completion of the 
seven-year period, the person responsible under State law for winding 
up the affairs of the entity must prepare, maintain and furnish each 
component of the list on behalf of the entity, unless the entity 
submits the list to the Office of Tax Shelter Analysis (OTSA) within 60 
days after the dissolution or liquidation. If State law does not 
specify any person as responsible for winding up the affairs, then each 
of the directors of the corporation, the general partners of the 
partnership, or the trustees, owners, or members of the entity are 
responsible for preparing, maintaining and furnishing each component of 
the list on behalf of the entity, unless the entity submits the list to 
the OTSA within 60 days after the dissolution or liquidation. The 
responsible person must also provide notice to OTSA of

[[Page 64504]]

such dissolution or liquidation within 60 days after the dissolution or 
liquidation. The list and the notice provided to OTSA must be sent to: 
Internal Revenue Service, OTSA Mail Stop 4915, 1973 North Rulon White 
Blvd., Ogden, Utah 84404, or to such other address as provided by the 
Commissioner.
    (e) Furnishing of lists--(1) In general. Each material advisor 
responsible for maintaining a list must, upon written request by the 
IRS, make each component of the list described in paragraph (b)(3) of 
this section available to the IRS by furnishing each component of the 
list to the IRS within 20 business days from the day on which the 
request is provided. The 20 business-day period shall begin on the 
first business day following the earlier of the date that the IRS mails 
a request for the list by certified or registered mail to the last 
known address of the material advisor required to maintain the list, or 
hand-delivers the written request in person. Business days include 
every calendar day other than Saturdays, Sundays, or legal holidays. 
For purposes of this paragraph (e), legal holiday shall have the same 
meaning provided in section 7503. The request is not required to be in 
the form of an administrative summons. Each component of the list must 
be furnished to the IRS in a form that enables the IRS to determine 
without undue delay or difficulty the information required in paragraph 
(b)(3) of this section. If any component of the list is not in a form 
that enables the IRS to determine without undue delay or difficulty the 
information required in paragraph (b)(3) of this section, the material 
advisor will not be considered to have complied with the list 
maintenance provisions in section 6112 and this section.
    (2) Claims of privilege. Each material advisor who is required to 
maintain a list with respect to a reportable transaction, must still 
maintain the list pursuant to the requirements of this section even if 
a person asserts a claim of privilege with respect to the information 
specified in paragraph (b)(3)(iii)(B) of this section.
    (f) Designation agreements. If more than one material advisor is 
required to maintain a list of persons for a reportable transaction, in 
accordance with paragraph (b) of this section, the material advisors 
may designate by written agreement a single material advisor to 
maintain the list or a portion of the list. The designation of one 
material advisor to maintain the list does not relieve the other 
material advisors from their obligation to furnish the list to the IRS 
in accordance with paragraph (e)(1) of this section, if the designated 
material advisor fails to furnish the list to the IRS in a timely 
manner. A material advisor is not relieved from the requirement of this 
section because a material advisor is unable to obtain the list from 
any designated material advisor, any designated material advisor did 
not maintain a list, or the list maintained by any designated material 
advisor is not complete.
    (g) Effective date. In general, this section applies to 
transactions with respect to which a material advisor makes a tax 
statement under Sec.  301.6111-3 on or after the date these regulations 
are published as final regulations in the Federal Register. However, 
upon the publication of final regulations, this section will apply to 
transactions of interest entered into on or after November 2, 2006 with 
respect to which a material advisor makes a tax statement under Sec.  
301.6111-3 on or after November 2, 2006.

Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
 [FR Doc. E6-18323 Filed 11-1-06; 8:45 am]
BILLING CODE 4830-01-P