[Federal Register Volume 72, Number 119 (Thursday, June 21, 2007)]
[Unknown Section]
[Pages 34176-34178]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-12081]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 301

[TD 9333]
RIN 1545-BG64


Application of Section 6404(g) of the Internal Revenue Code 
Suspension Provisions

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary regulations.

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SUMMARY: This document contains temporary regulations under section 
6404(g)(2)(E) of the Internal Revenue Code on the suspension of any 
interest, penalty, addition to tax, or additional amount with respect 
to listed transactions or undisclosed reportable transactions. The 
temporary regulations reflect changes to the law made by the Internal 
Revenue Service Restructuring and Reform Act of 1998, the American Jobs 
Creation Act of 2004, the Gulf Opportunity Zone Act of 2005, and the 
Tax Relief and Health Care Act of 2006. The temporary regulations 
provide guidance to individual taxpayers who have participated in 
listed transactions or undisclosed reportable transactions. The text of 
the 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 in this issue of the Federal 
Register.

DATES: Effective Date: These regulations are effective on June 21, 
2007.
    Applicability Date: These regulations apply to interest relating to 
listed transactions and undisclosed reportable transactions accruing 
before, on, or after October 3, 2004.

FOR FURTHER INFORMATION CONTACT: Stuart Spielman, (202) 622-7950 (not a 
toll-free call).

SUPPLEMENTARY INFORMATION:

Background

    This document amends the Procedure and Administration Regulations 
(26 CFR part 301) by adding rules under section 6404(g) relating to the 
suspension of interest, penalties, additions to tax, or additional 
amounts with respect to listed transactions or undisclosed reportable 
transactions. Section 3305 of the Internal Revenue Service 
Restructuring and Reform Act of 1998, Public Law 105-206 (112 Stat. 
685, 743) (RRA 98), added section 6404(g) to the Code, effective for 
taxable years ending after July 22, 1998. Section 6404(g) generally 
suspends interest and certain penalties if the IRS does not contact a 
taxpayer regarding possible adjustments to the taxpayer's liability 
within a specified period of time. Section 903(c) of the American Jobs 
Creation Act of 2004, Public Law 108-357 (118 Stat. 1418, 1652) (AJCA), 
excepted from the general interest suspension rules any interest, 
penalty, addition to tax, or additional amount with respect to a listed 
transaction or an undisclosed reportable transaction, effective for 
interest accruing after October 3, 2004. Section 303 of the Gulf 
Opportunity Zone Act of 2005, Public Law 109-135 (119 Stat. 2577, 2608-
09) (GOZA), modified the effective date of the exception from the 
suspension rules for certain listed and reportable transactions. 
Section 426(b) of the Tax Relief and Health Care Act of 2006, Public 
Law 109-432 (120 Stat. 2922, 2975), provided a technical correction 
regarding the authority to exercise the ``reasonably and in good 
faith'' exception to the effective date rules. Section 8242 of the 
Small Business and Work Opportunity Tax Act of 2007, Public Law 110-28 
(121 Stat. 112, 200), extended the current eighteen-month period within 
which the IRS can, without suspension of interest, contact a taxpayer 
regarding possible adjustments to the taxpayer's liability to thirty-
six months, effective for notices provided after November 25, 2007.

Explanation of Provisions

    If an individual taxpayer files a Federal income tax return on or 
before the due date for that return (including extensions), and if the 
IRS does not timely provide a notice to that taxpayer specifically 
stating the taxpayer's liability and the basis for that liability, then 
the IRS must suspend any interest, penalty, addition to tax, or 
additional amount with respect to any failure relating to the return 
that is computed by reference to the period of time the failure 
continues and that is properly allocable to the suspension period. A 
notice is timely if provided before the close of the eighteen-month 
period (thirty-six month period, in the case of notices provided after 
November 25, 2007) beginning on the later of the date on which the 
return is filed or the due date of the return without regard to 
extensions. The suspension period

[[Page 34177]]

begins on the day after the close of the eighteen-month period (or 
thirty-six month period) and ends twenty-one days after the IRS 
provides the notice. This suspension rule applies separately with 
respect to each item or adjustment. If, on or after December 21, 2005, 
a taxpayer provides to the IRS an amended return or other signed 
written document showing an additional tax liability, then the 
eighteen-month period (or thirty-six month period) does not begin to 
run with respect to the items that gave rise to the additional tax 
liability until that return or other signed written document is 
provided to the IRS.
    The general rule for suspension does not apply to any interest, 
penalty, addition to tax, or additional amount relating to any 
reportable transaction with respect to which the requirement of section 
6664(d)(2)(A) is not met or a listed transaction as defined in section 
6707A(c). This exception applies to interest accruing after October 3, 
2004. With respect to interest relating to listed transactions or 
undisclosed reportable transactions accruing on or before October 3, 
2004, the general rule for suspension applies only to (1) a participant 
in a settlement initiative, (2) a taxpayer acting reasonably and in 
good faith, or (3) a closed transaction. A participant in a settlement 
initiative is a taxpayer who, as of January 23, 2006, was participating 
in a settlement initiative described in IRS Announcement 2005-80, 2005-
2 CB 967 (see Sec.  601.601(d)(2)(ii)(b)); or had entered into a 
settlement agreement under Announcement 2005-80 or any other prior or 
contemporaneous settlement initiative either formally published or 
directly communicated to taxpayers known to have participated in a tax 
shelter promotion. A taxpayer acting reasonably and in good faith is a 
taxpayer who the IRS determines has acted reasonably and in good faith, 
taking into account all the facts and circumstances surrounding a 
transaction. A transaction is a ``closed transaction'' if, as of 
December 14, 2005, the assessment of all federal income taxes for the 
taxable year in which the tax liability to which the interest relates 
is prevented by the operation of any law or rule of law. A transaction 
is also a closed transaction if a closing agreement under section 7121 
has been entered into with respect to the tax liability arising in 
connection with the transaction.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866. A 
regulatory assessment is therefore 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. For 
applicability of the Regulatory Flexibility Act (5 U.S.C. chapter 6), 
please refer to the cross-reference notice of proposed rulemaking 
published elsewhere in this issue of the Federal Register. 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 its impact on small business.

Drafting Information

    The principal author of these regulations is Stuart Spielman of the 
Office of Associate Chief Counsel (Procedure and Administration).

List of Subjects in 26 CFR Part 301

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

Amendments to the Regulations

0
Accordingly, 26 CFR part 301 is amended as follows:

PART 301--PROCEDURE AND ADMINISTRATION

0
Paragraph 1. The authority citation for part 301 continues to read in 
part as follows:

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


0
Par. 2. Section 301.6404-0T is added to read as follows:


Sec.  301.6404-0T  Table of contents (temporary).

    This section lists the paragraphs contained in Sec.  301.6404-4T.

Sec.  301.6404-4T Listed transactions and undisclosed reportable 
transactions (temporary).

    (a) [Reserved].
    (b)(1) through (b)(4) [Reserved].
    (5) Listed transactions and undisclosed reportable transactions.
    (i) In general.
    (ii) Effective dates.
    (iii) Special rule for certain listed or undisclosed reportable 
transactions.
    (A) Participant in a settlement initiative.
    (1) Participant in a settlement initiative who as of January 23, 
2006, had not reached agreement with the IRS.
    (2) Participant in a settlement initiative who, as of January 
23, 2006, had reached agreement with the IRS.
    (B) Taxpayer acting in good faith.
    (1) In general.
    (2) Presumption.
    (3) Examples.
    (C) Closed transactions.


0
Par. 3. Section 301.6404-4T is added to read as follows:


Sec.  301.6404-4T  Listed transactions and undisclosed reportable 
transactions (temporary).

    (a) [Reserved].
    (b)(1) through (4) [Reserved].
    (5) Listed transactions and undisclosed reportable transactions--
(i) In general. The general rule of suspension under section 6404(g)(1) 
does not apply to any interest, penalty, addition to tax, or additional 
amount with respect to any listed transaction as defined in section 
6707A(c) or any undisclosed reportable transaction. For purposes of 
this section, an undisclosed reportable transaction is a reportable 
transaction described in the regulations under section 6011 that is not 
adequately disclosed under those regulations and that is not a listed 
transaction. Whether a transaction is a listed transaction or an 
undisclosed reportable transaction is determined as of the date the IRS 
provides notice to the taxpayer regarding that transaction that 
specifically states the taxpayer's liability and the basis for that 
liability.
    (ii) Effective/applicability dates. (A) These regulations apply to 
interest relating to listed transactions and undisclosed reportable 
transactions accruing before, on, or after October 3, 2004.
    (B) The applicability of these regulations expires on or before 
June 21, 2010.
    (iii) Special rule for certain listed or undisclosed reportable 
transactions. With respect to interest relating to listed transactions 
and undisclosed reportable transactions accruing on or before October 
3, 2004, the exception to the general rule of interest suspension will 
not apply to a taxpayer who is a participant in a settlement initiative 
with respect to that transaction, to any transaction in which the 
taxpayer has acted reasonably and in good faith, or to a closed 
transaction. For purposes of this special rule, a ``participant in a 
settlement initiative,'' a ``taxpayer acting in good faith,'' and a 
``closed transaction'' have the following meanings:
    (A) Participant in a settlement initiative--(1) Participant in a 
settlement initiative who, as of January 23, 2006, had not reached 
agreement with the IRS. A participant in a settlement initiative 
includes a taxpayer who, as of January 23, 2006, was participating in a 
settlement initiative described in Internal Revenue Service 
Announcement 2005-80, 2005-2 CB 967. See Sec.  601.601(d)(2)(ii)(b) of 
this

[[Page 34178]]

chapter. A taxpayer participates in the initiative by complying with 
Section 5 of the Announcement. A taxpayer is not a participant in a 
settlement initiative if, after January 23, 2006, the taxpayer 
withdraws from or terminates participation in the initiative, or the 
IRS determines that a settlement agreement will not be reached under 
the initiative within a reasonable period of time.
    (2) Participant in a settlement initiative who, as of January 23, 
2006, had reached agreement with the IRS. A participant in a settlement 
initiative is a taxpayer who, as of January 23, 2006, had entered into 
a settlement agreement under Announcement 2005-80 or any other prior or 
contemporaneous settlement initiative either offered through published 
guidance or, if the initiative was not formally published, direct 
contact with taxpayers known to have participated in a tax shelter 
promotion.
    (B) Taxpayer acting in good faith--(1) In general. The IRS may 
suspend interest relating to a listed transaction or an undisclosed 
reportable transaction accruing on or before October 3, 2004, if the 
taxpayer has acted reasonably and in good faith. The IRS' determination 
of whether a taxpayer has acted reasonably and in good faith will take 
into account all the facts and circumstances surrounding the 
transaction. The facts and circumstances include, but are not limited 
to, whether the taxpayer disclosed the transaction and the taxpayer's 
course of conduct after being identified as participating in the 
transaction, including the taxpayer's response to opportunities 
afforded to the taxpayer to settle the transaction, and whether the 
taxpayer engaged in unreasonable delay at any stage of the matter.
    (2) Presumption. If a taxpayer and the IRS promptly enter into a 
settlement agreement with respect to a transaction on terms proposed by 
the IRS or, in the event of atypical facts and circumstances, on terms 
more favorable to the taxpayer, and the taxpayer has complied with the 
terms of that agreement without unreasonable delay, the taxpayer will 
be presumed to have acted reasonably and in good faith except in rare 
and unusual circumstances. Rare and unusual circumstances must involve 
specific actions involving harm to tax administration. Even if a 
taxpayer does not qualify for the presumption described in this 
paragraph (b)(5)(iii)(B)(2), the taxpayer may still be granted interest 
suspension under the general facts and circumstances test set forth in 
paragraph (b)(5)(iii)(B)(1) of this section.
    (3) Examples. The following examples illustrate the rules the IRS 
uses in determining whether a taxpayer has acted reasonably and in good 
faith.

    Example 1. The taxpayer participated in a listed transaction. 
The IRS, in a letter sent directly to the taxpayer in July 2005, 
proposed a settlement of the transaction. The taxpayer informed the 
IRS of his interest in the settlement within the prescribed time 
period. The revenue agent assigned to the taxpayer's case was not 
able to calculate the taxpayer's liability under the settlement or 
tender a closing agreement to the taxpayer until March 2006. The 
taxpayer promptly executed the closing agreement and returned it to 
the IRS with a proposal for arrangements to pay the agreed-upon 
liability. The IRS agreed with the proposed arrangements for full 
payment. For purposes of the application of section 6404(g)(2)(E), 
the taxpayer has acted reasonably and in good faith. Interest 
accruing on or before October 3, 2004, relating to the transaction 
in which the taxpayer participated will be suspended.
    Example 2. The facts are the same as in Example 1, except that 
the letter was sent by the IRS in February 2006, and the closing 
agreement was tendered to the taxpayer in April 2006. For purposes 
of the application of section 6404(g)(2)(E), the taxpayer has acted 
reasonably and in good faith. Interest accruing on or before October 
3, 2004, relating to the transaction in which the taxpayer 
participated will be suspended.
    Example 3. The taxpayer participated in a listed transaction. In 
response to an offer of settlement extended by the IRS in August 
2005, the taxpayer informed the IRS of her interest in entering into 
a closing agreement on the terms proposed by the IRS. The revenue 
agent assigned to the transaction calculated the taxpayer's 
liability under the settlement and tendered a closing agreement to 
the taxpayer in November 2005. The taxpayer executed the closing 
agreement but failed to make any arrangement for payment of the 
agreed-upon liability stated in the closing agreement. Taking into 
account all the facts and circumstances surrounding the transaction, 
the taxpayer did not act reasonably and in good faith. Interest 
accruing on or before October 3, 2004, relating to the transaction 
in which the taxpayer participated will not be suspended.
    Example 4. The taxpayer participated in a listed transaction. In 
a letter sent by the IRS directly to the taxpayer in July 2005, the 
IRS extended an offer of settlement. The July 2005 letter informed 
the taxpayer that, absent atypical facts and circumstances, the 
taxpayer should not expect resolution of the tax issues on more 
favorable terms than proposed in the letter. The taxpayer declined 
the proposed settlement terms of the letter and proceeded to Appeals 
to present what the taxpayer claimed were atypical facts and 
circumstances. The administrative file did not contain sufficient 
information bearing on atypical facts and circumstances, and the 
taxpayer failed to provide additional information when requested by 
Appeals to explain how the transaction originally proposed to the 
taxpayer differed in structure or types of tax benefits claimed, 
from the transaction as implemented by the taxpayer. Appeals 
determined that the taxpayer's facts and circumstances were not 
significantly different from those of other taxpayers who 
participated in that listed transaction and thus, were not atypical. 
In September 2006, the taxpayer and Appeals entered into a closing 
agreement on terms consistent with those originally proposed in the 
July 2005 letter. The taxpayer has complied with the terms of that 
closing agreement. For purposes of the application of section 
6404(g)(2)(E), this taxpayer is not presumed to have acted 
reasonably and in good faith; instead, the IRS will apply the 
general rule to determine whether to suspend interest accruing on or 
before October 3, 2004, relating to the transaction in which the 
taxpayer participated.
    Example 5. The facts are the same as in Example 4, except that 
Appeals agrees that atypical facts were present that warrant 
additional concessions by the government. A settlement is reached on 
terms more favorable to the taxpayer than those proposed in the July 
2005 letter. For purposes of the application of section 
6404(g)(2)(E), this taxpayer is presumed to have acted reasonably 
and in good faith, and absent evidence of rare or unusual 
circumstances harmful to tax administration, is eligible for 
suspension of interest accruing on or before October 3, 2004, 
relating to the transaction in which the taxpayer participated.

    (C) Closed transactions. A transaction is considered closed for 
purposes of this clause if, as of December 14, 2005, the assessment of 
all federal income taxes for the taxable year in which the tax 
liability to which the interest relates is prevented by the operation 
of any law or rule of law, or a closing agreement under section 7121 
has been entered into with respect to the tax liability arising in 
connection with the transaction.
    (c) [Reserved].

Kevin M. Brown,
Deputy Commissioner for Services and Enforcement.
    Approved: June 15, 2007.
Eric Solomon,
Assistant Secretary of the Treasury (Tax Policy).
 [FR Doc. E7-12081 Filed 6-20-07; 8:53 am]
BILLING CODE 4830-01-P