[Federal Register Volume 75, Number 128 (Tuesday, July 6, 2010)]
[Rules and Regulations]
[Pages 38700-38710]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-16237]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1, 53, 54, 301 and 602

[TD 9492]
RIN 1545-BG18


Excise Taxes on Prohibited Tax Shelter Transactions and Related 
Disclosure Requirements; Disclosure Requirements With Respect to 
Prohibited Tax Shelter Transactions; Requirement of Return and Time for 
Filing

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations and removal of temporary regulations.

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SUMMARY: This document contains final regulations that provide guidance 
under section 4965 of the Internal Revenue Code (Code), relating to 
entity-level and manager-level excise taxes with respect to prohibited 
tax shelter transactions to which tax-exempt entities are parties; 
sections 6033(a)(2) and 6011(g), relating to certain disclosure 
obligations with respect to such transactions; and sections 6011 and 
6071, relating to the requirement of a return and time for filing with 
respect to section 4965 taxes. This action is necessary to implement 
section 516 of the Tax Increase Prevention Reconciliation Act of 2005. 
These final regulations affect a broad array of tax-exempt entities, 
including charities, state and local government entities, Indian tribal 
governments and employee benefit plans, as well as entity managers of 
these entities.

DATES: Effective Date: These regulations are effective July 6, 2010.
    Applicability Date: For dates of applicability, see Sec. Sec.  
1.6033-5(f), 53.4965-9(b) and (c), 53.6071-1(h), 54.6011-1(d), 
301.6011(g)-1(j) and 301.6033-5(b).

FOR FURTHER INFORMATION CONTACT: For questions concerning these 
regulations, contact Benjamin Akins at (202) 622-1124 or Michael 
Blumenfeld at (202) 622-6070. For questions specifically relating to 
qualified pension plans, individual retirement accounts, and similar 
tax-favored savings arrangements, contact Cathy Pastor at (202) 622-
6090 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information contained in these final regulations 
has been reviewed and approved by the Office of Management and Budget 
in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3507(d)) under control number 1545-2079. The collection of information 
in these final regulations is in Sec.  301.6011(g)-1. The collection of 
information in Sec.  301.6011(g)-1 flows from section 6011(g), which 
requires a taxable party to a prohibited tax shelter transaction to 
disclose to any tax-exempt entity that is a party to the transaction 
that the transaction is a prohibited tax shelter transaction. The 
likely recordkeepers are taxable entities or individuals that 
participate in prohibited tax shelter transactions. The estimated 
number of recordkeepers is between 1,250 and 6,500. The information 
that is required to be collected for purposes of Sec.  301.6011(g)-1 is 
a subset of information that is required to be collected in order to 
complete and file Form 8886, ``Reportable Transaction Disclosure 
Statement.'' The estimated paperwork burden for taxpayers filling out 
Form 8886 is approved under OMB number 1545-1800.
    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

[[Page 38701]]

number assigned by the Office of Management and Budget.
    Books and records relating to the collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, returns and 
return information are confidential, as required by section 6103.

Background

    The Tax Increase Prevention and Reconciliation Act of 2005, Public 
Law 109-222 (120 Stat. 345) (TIPRA), enacted on May 17, 2006, defines 
certain transactions as prohibited tax shelter transactions and imposes 
excise taxes and disclosure requirements with respect to prohibited tax 
shelter transactions to which a tax-exempt entity is a party. Section 
516 of TIPRA added new section 4965 and amended sections 6033(a)(2) and 
6011(g) of the Code.
    On July 6, 2007, the IRS and the Treasury Department published 
final and temporary regulations under sections 6011 and 6071 (TD 9334) 
and temporary regulations under section 6033 (TD 9335) in the Federal 
Register (72 FR 36869; 72 FR 36871). Also on July 6, 2007, the IRS and 
the Treasury Department issued a notice of proposed rulemaking cross-
referencing those temporary regulations (REG-142039-06; REG-139268-06) 
in the Federal Register (72 FR 36927). This notice of proposed 
rulemaking also included proposed regulations under sections 4965 and 
6011(g). On August 16, 2007, and August 31, 2007, the IRS and the 
Treasury Department issued corrections to TD 9334 (72 FR 45894; 72 FR 
50211). On August 16, 2007, the IRS and the Treasury Department issued 
corrections to TD 9335 (72 FR 45890).
    The IRS did not receive any comments or requests for a public 
hearing. Accordingly, the proposed regulations are adopted as final by 
this Treasury decision with certain revisions described below.

Explanation of Provisions

Definition of Party to a Prohibited Tax Shelter Transaction

    The proposed regulations set forth a three-part definition of the 
term ``party to a prohibited tax shelter transaction.'' Under the 
proposed regulations, a tax-exempt entity is a party to a prohibited 
tax shelter transaction if it: (1) Facilitates a prohibited tax shelter 
transaction by reason of its exempt, tax indifferent or tax-favored 
status; (2) enters into a listed transaction and reflects on its tax 
return (whether an original or an amended return) a reduction or 
elimination of its liability for applicable Federal employment, excise 
or unrelated business income taxes that is derived directly or 
indirectly from tax consequences or tax strategy described in the 
published guidance that lists the transaction; or (3) is identified in 
published guidance, by type, class or role, as a party to a prohibited 
tax shelter transaction. The final regulations eliminate the second 
part of this definition; therefore, a tax-exempt entity that enters 
into a transaction to reduce or eliminate its own tax liability 
generally will not be considered a party to a prohibited tax shelter 
transaction under these regulations. However, under the third part of 
the definition in the proposed regulations, which is retained in the 
final regulations, the IRS and the Treasury Department may identify in 
published guidance specific transactions or circumstances in which a 
tax-exempt entity that enters into a transaction to reduce or eliminate 
its own tax liability will be treated as a party to a prohibited tax 
shelter transaction for purposes of section 4965.
    A variety of circumstances may arise in which an entity generally 
exempt from tax may nevertheless be subject to some form of Federal 
taxation. When such circumstances arise, some tax-exempt entities may 
seek ways to reduce or eliminate the Federal tax as would a similarly 
situated entity that is not exempt from tax. In general, exempt status 
does not provide additional opportunities or incentives for a tax-
exempt entity to engage in a listed transaction to reduce or eliminate 
taxes imposed upon it. Further, a tax-exempt entity that engages in 
such transactions is subject to the same disclosure rules and increased 
penalties as other similarly situated taxpayers (for example, sections 
6011, 6707A, 6662, 6662A and 6663).
    Accordingly, the IRS and the Treasury Department believe that, as a 
general rule, a tax-exempt entity that engages in a listed transaction 
to reduce or eliminate its own tax liability should not be considered a 
party to a prohibited tax shelter transaction for purposes of section 
4965. The IRS and the Treasury Department have retained the ability to 
provide exceptions to this general rule through published guidance that 
identifies, by type, class or role, a tax-exempt entity as a party to a 
prohibited tax shelter transaction, including a tax-exempt entity that 
enters into a particular transaction to reduce or eliminate its own tax 
liability.
    Because the IRS and the Treasury Department have eliminated the 
second part of the definition of the term ``party,'' certain other 
conforming changes were made to the regulations.

Timing for Disclosure by Taxable Party to Tax-Exempt Party

    The proposed regulations required a taxable party to a prohibited 
tax shelter transaction to disclose by statement to each tax-exempt 
entity that the taxable party knows or has reason to know is a party to 
such transaction that the transaction is a prohibited tax shelter 
transaction. The proposed regulations required the taxable party to 
make the disclosure within 60 days after the last to occur of (1) the 
date the person becomes a taxable party to the transaction, or (2) the 
date the taxable party knows or has reason to know that the tax-exempt 
entity is a party to the transaction. The proposed regulations provided 
an exception if the person does not know or have reason to know that 
the tax-exempt entity is a party to the transaction on or before the 
first date on which the transaction is required to be disclosed by the 
person under section 6011.
    These final regulations modify the rule governing the timing of 
this disclosure. The taxable party now must make the disclosure within 
60 days after the last to occur of (1) the date the person becomes a 
taxable party to the transaction, (2) the date the taxable party knows 
or has reason to know that the tax-exempt entity is a party to the 
transaction, or (3) July 6, 2010. These final regulations retain the 
exception for persons who do not know or have reason to know that a 
tax-exempt entity is a party to the transaction on or before the first 
date on which the transaction is required to be disclosed by the person 
under section 6011.

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. It is hereby 
certified that the collection of information in Sec.  301.6011(g)-1 
will not have a significant economic impact on a substantial number of 
small entities. Accordingly, a regulatory flexibility analysis under 
the Regulatory Flexibility Act (5 U.S.C. 601) (RFA) is not required. 
The effect of these regulations on small entities flows directly from 
the statutes these regulations implement. Section 6011(g), as amended 
by TIPRA, requires any

[[Page 38702]]

taxable party to a prohibited tax shelter transaction to notify any 
tax-exempt entity that is a party to such transaction that the 
transaction is a prohibited tax shelter transaction. In implementing 
this statute, Sec.  301.6011(g)-1 of the regulations requires every 
taxable party to a prohibited tax shelter transaction (or a single 
taxable party acting by designation on behalf of other taxable parties) 
to provide to every tax-exempt entity that the taxable party knows or 
has reason to know is a party to the transaction a single statement 
disclosing that the transaction is a prohibited tax shelter transaction 
within 60 days after the last to occur of: (1) The date the taxable 
person becomes a taxable party to the transaction; (2) the date the 
taxable party knows or has reason to know that the tax-exempt entity is 
a party to the transaction; or (3) July 6, 2010. These final 
regulations retain the exception for persons who do not know or have 
reason to know that a tax-exempt entity is a party to the transaction 
on or before the first date on which the transaction is required to be 
disclosed by the person under section 6011. Moreover, it is unlikely 
that a significant number of small businesses will engage in 
transactions that are subject to disclosure under Sec.  301.6011(g).
    Pursuant to section 7805(f) of the Code, the notice of proposed 
rulemaking preceding these regulations was submitted to the Chief 
Counsel for Advocacy of the Small Business Administration for comment 
on its impact on small business.

Drafting Information

    The principal authors of these regulations are Benjamin Akins and 
Cathy Pastor, Office of Division Counsel/Associate Chief Counsel (Tax 
Exempt and Government Entities). However, other personnel from the IRS 
and the Treasury Department participated in their development.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

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 301

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

26 CFR Part 602

    Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

0
Accordingly, 26 CFR parts 1, 53, 54, 301, and 602 are 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 1.6033-5 is added to read as follows:


Sec.  1.6033-5  Disclosure by tax-exempt entities that are parties to 
certain reportable transactions.

    (a) In general. Every tax-exempt entity (as defined in section 
4965(c)) shall file with the IRS on Form 8886-T, ``Disclosure by Tax-
Exempt Entity Regarding Prohibited Tax Shelter Transaction'' (or a 
successor form), in accordance with this section and the instructions 
to the form, a disclosure of--
    (1) Such entity's being a party (as defined in Sec.  53.4965-4 of 
this chapter) to a prohibited tax shelter transaction (as defined in 
section 4965(e)); and
    (2) The identity of any other party (whether taxable or tax-exempt) 
to such transaction that is known to the tax-exempt entity.
    (b) Frequency of disclosure. A single disclosure is required for 
each prohibited tax shelter transaction.
    (c) By whom disclosure is made--(1) Tax-exempt entities referred to 
in section 4965(c)(1), (2) or (3). In the case of tax-exempt entities 
referred to in section 4965(c)(1), (2) or (3), the disclosure required 
by this section must be made by the entity.
    (2) Tax-exempt entities referred to in section 4965(c)(4), (5), (6) 
or (7). In the case of tax-exempt entities referred to in section 
4965(c)(4), (5), (6) or (7), including a fully self-directed qualified 
plan, IRA, or other savings arrangement, the disclosure required by 
this section must be made by the entity manager (as defined in section 
4965(d)(2)) of the entity.
    (d) Time and place for filing--(1) In general. The disclosure 
required by this section shall be filed on or before May 15 of the 
calendar year following the close of the calendar year during which the 
tax-exempt entity entered into the prohibited tax shelter transaction.
    (2) Subsequently listed transactions. In the case of subsequently 
listed transactions (as defined in section 4965(e)(2)), the disclosure 
required by this section shall be filed on or before May 15 of the 
calendar year following the close of the calendar year during which the 
transaction was identified by the Secretary as a listed transaction.
    (3) Transition rule. If a tax-exempt entity entered into a 
prohibited tax shelter transaction after May 17, 2006, and before 
January 1, 2007, the disclosure required by this section shall be filed 
on or before November 2, 2007.
    (4) No disclosure. Disclosure is not required with respect to any 
prohibited tax shelter transaction entered into by a tax-exempt entity 
on or before May 17, 2006.
    (e) Penalty for failure to provide disclosure statement. See 
section 6652(c)(3) for the penalty applicable to the failure to 
disclose a prohibited tax shelter transaction in accordance with this 
section.
    (f) Effective date/applicability date. This section applies with 
respect to transactions entered into by a tax-exempt entity after May 
17, 2006.


Sec.  1.6033-5T  [Removed].

0
Par. 3. Section 1.6033-5T is removed.

PART 53--FOUNDATION AND SIMILAR EXCISE TAXES

0
Par. 4. The authority citation for part 53 continues to read, in part, 
as follows:

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


0
Par. 5. Sections 53.4965-1 through 53.4965-9 are added to subpart K to 
read as follows:


Sec.  53.4965-1  Overview.

    (a) Entity-level excise tax. Section 4965 imposes two excise taxes 
with respect to certain tax shelter transactions to which tax-exempt 
entities are parties. Section 4965(a)(1) imposes an entity-level excise 
tax on certain tax-exempt entities that are parties to ``prohibited tax 
shelter transactions,'' as defined in section 4965(e). See Sec.  
53.4965-2 for the discussion of covered tax-exempt entities. See Sec.  
53.4965-3 for the definition of prohibited tax shelter transactions. 
See Sec.  53.4965-4 for the definition of tax-exempt party to a 
prohibited tax shelter transaction. The entity-level excise tax under 
section 4965(a)(1) is imposed on a specified percentage of the entity's 
net income or proceeds that are attributable to the transaction for the 
relevant tax year (or a period within that tax year). The rate of tax 
depends on whether the entity knew or had reason to know that the 
transaction was a prohibited tax shelter transaction at the time the 
entity became

[[Page 38703]]

a party to the transaction. See Sec.  53.4965-7(a) for the discussion 
of the entity-level excise tax under section 4965(a)(1). See Sec.  
53.4965-6 for the discussion of ``knowing or having reason to know.'' 
See Sec.  53.4965-8 for the definition of net income and proceeds and 
the standard for allocating net income and proceeds that are 
attributable to a prohibited tax shelter transaction to various 
periods.
    (b) Manager-level excise tax. Section 4965(a)(2) imposes a manager-
level excise tax on ``entity managers,'' as defined in section 4965(d), 
of tax-exempt entities who approve the entity as a party (or otherwise 
cause the entity to be a party) to a prohibited tax shelter transaction 
and know or have reason to know, at the time the tax-exempt entity 
enters into the transaction, that the transaction is a prohibited tax 
shelter transaction. See Sec.  53.4965-5 for the definition of entity 
manager and the meaning of ``approving or otherwise causing,'' and 
Sec.  53.4965-6 for the discussion of ``knowing or having reason to 
know.'' See Sec.  53.4965-7(b) for the discussion of the manager-level 
excise tax under section 4965(a)(2).
    (c) Effective/applicability dates. See Sec.  53.4965-9 for the 
discussion of the relevant effective and applicability dates.


Sec.  53.4965-2  Covered tax-exempt entities.

    (a) In general. Under section 4965(c), the term ``tax-exempt 
entity'' refers to entities that are described in sections 501(c), 
501(d), or 170(c) (other than the United States), Indian tribal 
governments (within the meaning of section 7701(a)(40)), and tax-
qualified pension plans, individual retirement arrangements and similar 
tax-favored savings arrangements that are described in sections 
4979(e)(1), (2) or (3), 529, 457(b), or 4973(a). The tax-exempt 
entities referred to in section 4965(c) are divided into two broad 
categories, non-plan entities and plan entities.
    (b) Non-plan entities. Non-plan entities are--
    (1) Entities described in section 501(c);
    (2) Religious or apostolic associations or corporations described 
in section 501(d);
    (3) Entities described in section 170(c), including states, 
possessions of the United States, the District of Columbia, political 
subdivisions of states and political subdivisions of possessions of the 
United States (but not including the United States); and
    (4) Indian tribal governments within the meaning of section 
7701(a)(40).
    (c) Plan entities. Plan entities are--
    (1) Entities described in section 4979(e)(1) (qualified plans under 
section 401(a), including qualified cash or deferred arrangements under 
section 401(k) (including a section 401(k) plan that allows designated 
Roth contributions));
    (2) Entities described in section 4979(e)(2) (annuity plans 
described in section 403(a));
    (3) Entities described in section 4979(e)(3) (annuity contracts 
described in section 403(b), including a section 403(b) arrangement 
that allows Roth contributions);
    (4) Qualified tuition programs described in section 529;
    (5) Eligible deferred compensation plans under section 457(b) that 
are maintained by a governmental employer as defined in section 
457(e)(1)(A);
    (6) Arrangements described in section 4973(a) which include--
    (i) Individual retirement plans defined in sections 408(a) and (b), 
including--
    (A) Simplified employee pensions (SEPs) under section 408(k);
    (B) Simple individual retirement accounts (SIMPLEs) under section 
408(p);
    (C) Deemed individual retirement accounts or annuities (IRAs) 
qualified under a qualified plan (deemed IRAs) under section 408(q)); 
and
    (D) Roth IRAs under section 408A.
    (ii) Arrangements described in section 220(d) (Archer Medical 
Savings Accounts (MSAs));
    (iii) Arrangements described in section 403(b)(7) (custodial 
accounts treated as annuity contracts);
    (iv) Arrangements described in section 530 (Coverdell education 
savings accounts); and
    (v) Arrangements described in section 223(d) (health savings 
accounts (HSAs)).
    (d) Effective/applicability dates. See Sec.  53.4965-9 for the 
discussion of the relevant effective and applicability dates.


Sec.  53.4965-3  Prohibited tax shelter transactions.

    (a) In general. Under section 4965(e), the term prohibited tax 
shelter transaction means--
    (1) Listed transactions within the meaning of section 6707A(c)(2), 
including subsequently listed transactions described in paragraph (b) 
of this section; and
    (2) Prohibited reportable transactions, which consist of the 
following reportable transactions within the meaning of section 
6707A(c)(1)--
    (i) Confidential transactions, as described in Sec.  1.6011-4(b)(3) 
of this chapter; or
    (ii) Transactions with contractual protection, as described in 
Sec.  1.6011-4(b)(4) of this chapter.
    (b) Subsequently listed transactions. A subsequently listed 
transaction for purposes of section 4965 is a transaction that is 
identified by the Secretary as a listed transaction after the tax-
exempt entity has entered into the transaction and that was not a 
prohibited reportable transaction (within the meaning of section 
4965(e)(1)(C) and paragraph (a)(2) of this section) at the time the 
entity entered into the transaction.
    (c) Cross-reference. The determination of whether a transaction is 
a listed transaction or a prohibited reportable transaction for section 
4965 purposes shall be made under the law applicable to section 
6707A(c)(1) and (c)(2).
    (d) Effective/applicability dates. See Sec.  53.4965-9 for the 
discussion of the relevant effective and applicability dates.


Sec.  53.4965-4  Definition of tax-exempt party to a prohibited tax 
shelter transaction.

    (a) In general. For purposes of sections 4965 and 6033(a)(2), a 
tax-exempt entity is a party to a prohibited tax shelter transaction if 
the entity--
    (1) Facilitates a prohibited tax shelter transaction by reason of 
its tax-exempt, tax indifferent or tax-favored status; or
    (2) Is identified in published guidance, by type, class or role, as 
a party to a prohibited tax shelter transaction.
    (b) Published guidance may identify which tax-exempt entities, by 
type, class or role, will not be treated as a party to a prohibited tax 
shelter transaction.
    (c) Example. The following example illustrates the principle of 
paragraph (a)(1) of this section:
    Example.  A tax-exempt entity enters into a transaction 
(Transaction A) with an S corporation. Transaction A is the same as 
or substantially similar to the transaction identified by the 
Secretary as a listed transaction in Notice 2004-30 (2004-1 CB 828). 
The tax-exempt entity's role in Transaction A is similar to the role 
of the tax-exempt party, as described in Notice 2004-30. Under the 
terms of the transaction, as described in Notice 2004-30, the tax-
exempt entity receives the S corporation stock and purports to aid 
the S corporation and its shareholders in avoiding taxable income. 
The tax-exempt entity facilitates Transaction A by reason of its 
tax-exempt, tax indifferent or tax-favored status. Accordingly, the 
tax-exempt entity is a party to Transaction A for purposes of 
sections 4965 and 6033(a)(2). See Sec.  601.601(d)(2)(ii)(b) of this 
chapter.

    (d) Effective/applicability dates. See Sec.  53.4965-9 for the 
discussion of the relevant effective and applicability dates.

[[Page 38704]]

Sec.  53.4965-5  Entity managers and related definitions.

    (a) Entity manager of a non-plan entity--(1) In general. Under 
section 4965(d)(1), an entity manager of a non-plan entity is--
    (i) A person with the authority or responsibility similar to that 
exercised by an officer, director, or trustee of an organization (that 
is, the non-plan entity); and
    (ii) With respect to any act, the person who has final authority or 
responsibility (either individually or as a member of a collective 
body) with respect to such act.
    (2) Definition of officer. For purposes of paragraph (a)(1)(i) of 
this section, a person is considered to be an officer of the non-plan 
entity (or to have similar authority or responsibility) if the person--
    (i) Is specifically designated as such under the certificate of 
incorporation, by-laws, or other constitutive documents of the non-plan 
entity; or
    (ii) Regularly exercises general authority to make administrative 
or policy decisions on behalf of the non-plan entity.
    (3) Exception for acts requiring approval by a superior. With 
respect to any act, any person is not described in paragraph (a)(2)(ii) 
of this section if the person has authority merely to recommend 
particular administrative or policy decisions, but not to implement 
them without approval of a superior.
    (4) Delegation of authority. A person is an entity manager of a 
non-plan entity within the meaning of paragraph (a)(1)(ii) of this 
section if, with respect to any prohibited tax shelter transaction, 
such person has been delegated final authority or responsibility with 
respect to such transaction (including by transaction type or dollar 
amount) by a person described in paragraph (a)(1)(i) of this section or 
the governing board of the entity. For example, an investment manager 
is an entity manager with respect to a prohibited tax shelter 
transaction if the non-plan entity's governing body delegated to the 
investment manager the final authority to make certain investment 
decisions and, in the exercise of that authority, the manager committed 
the entity to the transaction. To be considered an entity manager of a 
non-plan entity within the meaning of paragraph (a)(1)(ii) of this 
section, a person need not be an employee of the entity. A person is 
not described in paragraph (a)(1)(ii) of this section if the person is 
merely implementing a decision made by a superior.
    (b) Entity manager of a plan entity--(1) In general. Under section 
4965(d)(2), an entity manager of a plan entity is the person who 
approves or otherwise causes the entity to be a party to the prohibited 
tax shelter transaction.
    (2) Special rule for plan participants and beneficiaries who have 
investment elections--(i) Fully self-directed plans or arrangements. In 
the case of a fully self-directed qualified plan, IRA, or other savings 
arrangement (including a case where a plan participant or beneficiary 
is given a list of prohibited investments, such as collectibles), if 
the plan participant or beneficiary selected a certain investment and, 
therefore, approved the plan entity to become a party to a prohibited 
tax shelter transaction, the plan participant or the beneficiary is an 
entity manager.
    (ii) Plans or arrangements with limited investment options. In the 
case of a qualified plan, IRA, or other savings arrangement where a 
plan participant or beneficiary is offered a limited number of 
investment options from which to choose, the person responsible for 
determining the pre-selected investment options is an entity manager 
and the plan participant or the beneficiary generally is not an entity 
manager.
    (c) Meaning of ``approves or otherwise causes''--(1) In general. A 
person is treated as approving or otherwise causing a tax-exempt entity 
to become a party to a prohibited tax shelter transaction if the person 
has the authority to commit the entity to the transaction, either 
individually or as a member of a collective body, and the person 
exercises that authority.
    (2) Collective bodies. If a person shares the authority described 
in paragraph (c)(1) of this section as a member of a collective body 
(for example, board of trustees or committee), the person will be 
considered to have exercised such authority if the person voted in 
favor of the entity becoming a party to the transaction. However, a 
member of the collective body will not be treated as having exercised 
the authority described in paragraph (c)(1) of this section if he or 
she voted against a resolution that constituted approval or an act that 
caused the tax-exempt entity to be a party to a prohibited tax shelter 
transaction, abstained from voting for such approval, or otherwise 
failed to vote in favor of such approval.
    (3) Exceptions--(i) Successor in interest. If a tax-exempt entity 
that is a party to a prohibited tax shelter transaction is dissolved, 
liquidated, or merged into a successor entity, an entity manager of the 
successor entity will not, solely by reason of the reorganization, be 
treated as approving or otherwise causing the successor entity to 
become a party to a prohibited tax shelter transaction, provided that 
the reorganization of the tax-exempt entity does not result in a 
material change to the terms of the transaction. For purposes of this 
paragraph (c)(3)(i), a material change includes an extension or renewal 
of the agreement (other than an extension or renewal that results from 
another party to the transaction unilaterally exercising an option 
granted by the agreement) or a more than incidental change to any 
payment under the agreement. A change for the sole purpose of 
substituting the successor entity for the original tax-exempt party is 
not a material change.
    (ii) Exercise or nonexercise of options. Nonexercise of an option 
pursuant to a transaction involving the tax-exempt entity generally 
will not constitute an act of approving or causing the entity to be a 
party to the transaction. If, pursuant to a transaction involving the 
tax-exempt entity, the entity manager exercises an option (such as a 
repurchase option), the entity manager will not be subject to the 
entity manager-level tax if the exercise of the option does not result 
in the tax-exempt entity becoming a party to a second transaction that 
is a prohibited tax shelter transaction.
    (4) Example. The following example illustrates the principles of 
paragraph (c)(3)(ii) of this section:
    Example. In a sale-in, lease-out (SILO) transaction described in 
Notice 2005-13 (2005-9 IRB 630), X, which is a non-plan entity, has 
purported to sell property to Y, a taxable entity and lease it back 
for a term of years. At the end of the basic lease term, X has the 
option of ``repurchasing'' the property from Y for a predetermined 
purchase price, with funds that have been set aside at the inception 
of the transaction for that purpose. The entity manager, by deciding 
to exercise or not exercise the ``repurchase'' option is not 
approving or otherwise causing the non-plan entity to become a party 
to a second prohibited tax shelter transaction. See Sec.  
601.601(d)(2)(ii)(b) of this chapter.

    (5) Coordination with the reason-to-know standard. The 
determination that an entity manager approved or caused a tax-exempt 
entity to be a party to a prohibited tax shelter transaction, by 
itself, does not establish liability for the section 4965(a)(2) tax. 
For rules on determining whether an entity manager knew or had reason 
to know that the transaction was a prohibited tax shelter transaction, 
see Sec.  53.4965-6(b).
    (d) Effective/applicability dates. See Sec.  53.4965-9 for the 
discussion of the relevant effective and applicability dates.

[[Page 38705]]

Sec.  53.4965-6  Meaning of ``knows or has reason to know''.

    (a) Attribution to the entity. An entity will be treated as knowing 
or having reason to know for section 4965 purposes if one or more of 
its entity managers knew or had reason to know that the transaction was 
a prohibited tax shelter transaction at the time the entity manager(s) 
approved the entity as (or otherwise caused the entity to be) a party 
to the transaction. The entity shall be attributed the knowledge or 
reason to know of any entity manager described in Sec.  53.4965-
5(a)(1)(i) even if that entity manager does not approve the entity as 
(or otherwise cause the entity to be) a party to the transaction.
    (b) Determining whether an entity manager knew or had reason to 
know--(1) In general. Whether an entity manager knew or had reason to 
know that a transaction is a prohibited tax shelter transaction is 
based on all facts and circumstances. In order for an entity manager to 
know or have reason to know that a transaction is a prohibited tax 
shelter transaction, the entity manager must have knowledge of 
sufficient facts that would lead a reasonable person to conclude that 
the transaction is a prohibited tax shelter transaction. An entity 
manager will be considered to have ``reason to know'' if a reasonable 
person in the entity manager's circumstances would conclude that the 
transaction was a prohibited tax shelter transaction based on all the 
facts reasonably available to the manager at the time of approving the 
entity as (or otherwise causing the entity to be) a party to the 
transaction. Factors that will be considered in determining whether a 
reasonable person in the entity manager's circumstances would conclude 
that the transaction was a prohibited tax shelter transaction include, 
but are not limited to--
    (i) The presence of tax shelter indicia (see paragraph (b)(2) of 
this section);
    (ii) Whether the entity manager received a disclosure statement 
prior to the consummation of the transaction indicating that the 
transaction may be a prohibited tax shelter transaction (see paragraph 
(b)(3) of this section); and
    (iii) Whether the entity manager made appropriate inquiries into 
the transaction (see paragraph (b)(4) of this section).
    (2) Tax-shelter indicia. The presence of indicia that a transaction 
is a tax shelter will be treated as an indication that the entity 
manager knew or had reason to know that the transaction was a 
prohibited tax shelter transaction. Tax shelter indicia include but are 
not limited to--
    (i) The transaction is extraordinary for the entity considering 
prior investment activity;
    (ii) The transaction promises an economic return for the 
organization that is exceptional considering the amount invested by, 
the participation of, or the absence of risk to the organization; or
    (iii) The transaction is of significant size relative to the 
receipts of the entity.
    (3) Effect of disclosure statements. Receipt by an entity manager 
of a statement, including a statement described in section 6011(g), in 
advance of a transaction that the transaction may be a prohibited tax 
shelter transaction (or a statement that a partnership, hedge fund or 
other investment conduit may engage in a prohibited tax shelter 
transaction in the future) is a factor relevant in the determination of 
whether the entity manager knew or had reason to know that the 
transaction is a prohibited transaction. However, an entity manager 
will not be treated as knowing or having reason to know that the 
transaction was a prohibited tax shelter transaction solely because the 
entity manager receives such a disclosure.
    (4) Appropriate inquiries. What inquiries are appropriate will be 
determined from the facts and circumstances of each case. For example, 
if one or more tax shelter indicia are present or if an entity manager 
receives a disclosure statement described in paragraph (b)(3) of this 
section, an entity manager has a responsibility to inquire further 
whether the transaction is a prohibited tax shelter transaction.
    (c) Reliance on professional advice--(1) In general. An entity 
manager is not required to obtain the advice of a professional tax 
advisor to establish that the entity manager made appropriate 
inquiries. Moreover, not seeking professional advice, by itself, shall 
not give rise to an inference that the entity manager had reason to 
know that a transaction is a prohibited tax shelter transaction.
    (2) Reliance on written opinion of professional tax advisor. An 
entity manager may establish that he or she did not have a reason to 
know that a transaction was a prohibited tax shelter transaction at the 
time the tax-exempt entity entered into the transaction if the entity 
manager reasonably, and in good faith, relied on the written opinion of 
a professional tax advisor. Reliance on the written opinion of a 
professional tax advisor establishes that the entity manager did not 
have reason to know if, taking into account all the facts and 
circumstances, the reliance was reasonable and the entity manager acted 
in good faith. For example, the entity manager's education, 
sophistication, and business experience will be relevant in determining 
whether the reliance was reasonable and made in good faith. In no event 
will an entity manager be considered to have reasonably relied in good 
faith on an opinion unless the requirements of this paragraph (c)(2) 
are satisfied. The fact that these requirements are satisfied, however, 
will not necessarily establish that the entity manager reasonably 
relied on the opinion in good faith. For example, reliance may not be 
reasonable or in good faith if the entity manager knew, or reasonably 
should have known, that the advisor lacked knowledge in the relevant 
aspects of Federal tax law.
    (i) All facts and circumstances considered. The advice must be 
based upon all pertinent facts and circumstances and the law as it 
relates to those facts and circumstances. The requirements of this 
paragraph (c)(2) are not satisfied if the entity manager fails to 
disclose a fact that it knows, or reasonably should know, is relevant 
to determining whether the transaction is a prohibited tax shelter 
transaction.
    (ii) No unreasonable assumptions. The advice must not be based on 
unreasonable factual or legal assumptions (including assumptions as to 
future events) and must not unreasonably rely on the representations, 
statements, findings, or agreements of the entity manager or any other 
person (including another party to the transaction or a material 
advisor within the meaning of sections 6111 and 6112).
    (iii) ``More likely than not'' opinion. The written opinion of the 
professional tax advisor must apply the appropriate law to the facts 
and, based on this analysis, must conclude that the transaction was not 
a prohibited tax shelter transaction at a ``more likely than not'' 
level of certainty at the time the entity manager approved the entity 
(or otherwise caused the entity) to be a party to the transaction.
    (3) Special rule. An entity manager`s reliance on a written opinion 
of a professional tax advisor will not be considered reasonable if the 
advisor is, or is related to a person who is, a material advisor with 
respect to the transaction within the meaning of sections 6111 and 
6112.
    (d) Subsequently listed transactions. An entity manager will not be 
treated as knowing or having reason to know that a transaction (other 
than a prohibited reportable transaction as defined in section 
4965(e)(1)(C) and Sec.  53.4965-3(a)(2)) is a prohibited tax shelter

[[Page 38706]]

transaction if the entity enters into the transaction before the date 
on which the transaction is identified by the Secretary as a listed 
transaction.
    (e) Effective/applicability dates. See Sec.  53.4965-9 for the 
discussion of the relevant effective and applicability dates.


Sec.  53.4965-7  Taxes on prohibited tax shelter transactions.

    (a) Entity-level taxes--(1) In general. Entity-level excise taxes 
apply to non-plan entities (as defined in Sec.  53.4965-2(b)) that are 
parties to prohibited tax shelter transactions.
    (i) Prohibited tax shelter transactions other than subsequently 
listed transactions--(A) Amount of tax if the entity did not know and 
did not have reason to know. If the tax-exempt entity did not know and 
did not have reason to know that the transaction was a prohibited tax 
shelter transaction at the time the entity entered into the 
transaction, the tax is the highest rate of tax under section 11 
multiplied by the greater of--
    (1) The entity's net income with respect to the prohibited tax 
shelter transaction (after taking into account any tax imposed by 
Subtitle D, other than by this section, with respect to such 
transaction) for the taxable year; or
    (2) 75 percent of the proceeds received by the entity for the 
taxable year that are attributable to such transaction.
    (B) Amount of tax if the entity knew or had reason to know. If the 
tax-exempt entity knew or had reason to know that the transaction was a 
prohibited tax shelter transaction at the time the entity entered into 
the transaction, the tax is the greater of--
    (1) 100 percent of the entity's net income with respect to the 
transaction (after taking into account any tax imposed by Subtitle D, 
other than by this section, with respect to such transaction) for the 
taxable year; or
    (2) 75 percent of the proceeds received by the entity for the 
taxable year that are attributable to such transaction.
    (ii) Subsequently listed transactions--(A) In general. In the case 
of a subsequently listed transaction (as defined in section 4965(e)(2) 
and Sec.  53.4965-3(b)), the tax-exempt entity's income and proceeds 
attributable to the transaction are allocated between the period before 
the transaction became listed and the period beginning on the date the 
transaction became listed. See Sec.  53.4965-8 for the standard for 
allocating net income or proceeds to various periods. The tax for each 
taxable year is the highest rate of tax under section 11 multiplied by 
the greater of--
    (1) The entity's net income with respect to the subsequently listed 
transaction (after taking into account any tax imposed by Subtitle D, 
other than by this section, with respect to such transaction) for the 
taxable year that is allocable to the period beginning on the later of 
the date such transaction is identified by the Secretary as a listed 
transaction or the first day of the taxable year; or
    (2) 75 percent of the proceeds received by the entity for the 
taxable year that are attributable to such transaction and allocable to 
the period beginning on the later of the date such transaction is 
identified by the Secretary as a listed transaction or the first day of 
the taxable year.
    (B) No increase in tax. The 100 percent tax under section 
4965(b)(1)(B) and Sec.  53.4965-7(a)(1)(i)(B) does not apply to any 
subsequently listed transaction (as defined in section 4965(e)(2) and 
Sec.  53.4965-3(b)) entered into by a tax-exempt entity before the date 
on which the transaction is identified by the Secretary as a listed 
transaction.
    (2) Taxable year. The excise tax imposed under section 4965(a)(1) 
applies for the taxable year in which the entity becomes a party to the 
prohibited tax shelter transaction and any subsequent taxable year for 
which the entity has net income or proceeds attributable to the 
transaction. A taxable year for tax-exempt entities is the calendar 
year or fiscal year, as applicable, depending on the basis on which the 
tax-exempt entity keeps its books for Federal income tax purposes. If a 
tax-exempt entity has not established a taxable year for Federal income 
tax purposes, the entity's taxable year for the purpose of determining 
the amount and timing of net income and proceeds attributable to a 
prohibited tax shelter transaction will be deemed to be the annual 
period the entity uses in keeping its books and records.
    (b) Manager-level taxes--(1) Amount of tax. If any entity manager 
approved or otherwise caused the tax-exempt entity to become a party to 
a prohibited tax shelter transaction and knew or had reason to know 
that the transaction was a prohibited tax shelter transaction, such 
entity manager is liable for the $20,000 tax. See Sec.  53.4965-5(d) 
for the meaning of approved or otherwise caused. See Sec.  53.4965-6 
for the meaning of knew or had reason to know.
    (2) Timing of the entity manager tax. If a tax-exempt entity enters 
into a prohibited tax shelter transaction during a taxable year of an 
entity manager, then the entity manager that approved or otherwise 
caused the tax-exempt entity to become a party to the transaction is 
liable for the entity manager tax for that taxable year if the entity 
manager knew or had reason to know that the transaction was a 
prohibited tax shelter transaction.
    (3) Example. The application of paragraph (b)(2) of this section is 
illustrated by the following example:

    Example. The entity manager's taxable year is the calendar year. 
On December 1, 2006, the entity manager approved or otherwise caused 
the tax-exempt entity to become a party to a transaction that the 
entity manager knew or had reason to know was a prohibited tax 
shelter transaction. The tax-exempt entity entered into the 
transaction on January 31, 2007. The entity manager is liable for 
the entity manager level tax for the entity manager's 2007 taxable 
year, during which the tax-exempt entity entered into the prohibited 
tax shelter transaction.

    (4) Separate liability. If more than one entity manager approved or 
caused a tax-exempt entity to become a party to a prohibited tax 
shelter transaction while knowing (or having reason to know) that the 
transaction was a prohibited tax shelter transaction, then each such 
entity manager is separately (that is, not jointly and severally) 
liable for the entity manager-level tax with respect to the 
transaction.
    (c) Effective/applicability dates. See Sec.  53.4965-9 for the 
discussion of the relevant effective and applicability dates.


Sec.  53.4965-8  Definition of net income and proceeds and standard for 
allocating net income or proceeds to various periods.

    (a) In general. For purposes of section 4965(a), the amount and the 
timing of the net income and proceeds attributable to the prohibited 
tax shelter transaction will be computed in a manner consistent with 
the substance of the transaction. In determining the substance of 
listed transactions, the IRS will look to, among other items, the 
listing guidance and any subsequent guidance published in the Internal 
Revenue Bulletin relating to the transaction.
    (b) Definition of net income and proceeds--(1) Net income. A tax-
exempt entity's net income attributable to a prohibited tax shelter 
transaction is its gross income derived from the transaction reduced by 
those deductions that are attributable to the transaction and that 
would be allowed by chapter 1 of the Internal Revenue Code if the tax-
exempt entity were treated as a taxable entity for this purpose, and 
further reduced by taxes imposed by

[[Page 38707]]

Subtitle D, other than by this section, with respect to the 
transaction.
    (2) Proceeds--(i) Tax-exempt entities that facilitate the 
transaction by reason of their tax-exempt, tax indifferent or tax-
favored status. Solely for purposes of section 4965, in the case of a 
tax-exempt entity that is a party to the transaction by reason of Sec.  
53.4965-4(a)(1) of this chapter, the term proceeds means the gross 
amount of the tax-exempt entity's consideration for facilitating the 
transaction, not reduced for any costs or expenses attributable to the 
transaction. Published guidance with respect to a particular prohibited 
tax shelter transaction may designate additional amounts as proceeds 
from the transaction for section 4965 purposes.
    (ii) Treatment of gifts and contributions. To the extent not 
otherwise included in the definition of proceeds in paragraph (b)(2)(i) 
of this section, any amount that is a gift or a contribution to a tax-
exempt entity and is attributable to a prohibited tax shelter 
transaction will be treated as proceeds for section 4965 purposes, 
unreduced by any associated expenses.
    (c) Allocation of net income and proceeds--(1) In general. For 
purposes of section 4965(a), the net income and proceeds attributable 
to a prohibited tax shelter transaction must be allocated in a manner 
consistent with the tax-exempt entity's established method of 
accounting for Federal income tax purposes. If the tax-exempt entity 
has not established a method of accounting for Federal income tax 
purposes, solely for purposes of section 4965(a) the tax-exempt entity 
must use the cash receipts and disbursements method of accounting (cash 
method) provided for in section 446 of the Internal Revenue Code to 
determine the amount and timing of net income and proceeds attributable 
to a prohibited tax shelter transaction.
    (2) Special rule. If a tax-exempt entity has established a method 
of accounting other than the cash method, the tax-exempt entity may 
nevertheless use the cash method of accounting to determine the amount 
of the net income and proceeds--
    (i) Attributable to a prohibited tax shelter transaction entered 
into prior to the effective date of section 4965(a) tax and allocable 
to pre- and post-effective date periods; or
    (ii) Attributable to a subsequently listed transaction and 
allocable to pre- and post-listing periods.
    (d) Transition year rules. In the case of the taxable year that 
includes August 16, 2006 (the transition year), the IRS will treat the 
period beginning on the first day of the transition year and ending on 
August 15, 2006, and the period beginning on August 16, 2006, and 
ending on the last day of the transition year as short taxable years. 
This treatment is solely for purposes of allocating net income or 
proceeds under section 4965. The tax-exempt entity continues to file 
tax returns for the full taxable year, does not file tax returns with 
respect to these deemed short taxable years and does not otherwise take 
the short taxable years into account for Federal tax purposes. 
Accordingly, the net income or proceeds that are properly allocated to 
the transition year in accordance with this section will be treated as 
allocable to the period--
    (1) Ending on or before August 15, 2006 (and accordingly not 
subject to tax under section 4965(a)) to the extent such net income or 
proceeds would have been properly taken into account in accordance with 
this section by the tax-exempt entity in the deemed short year ending 
on August 15, 2006; and
    (2) Beginning after August 15, 2006 (and accordingly subject to tax 
under section 4965(a)) to the extent such income or proceeds would have 
been properly taken into account in accordance with this section by the 
tax-exempt entity in the short year beginning August 16, 2006.
    (e) Allocation to pre- and post-listing periods. If a transaction 
(other than a prohibited reportable transaction (as defined in section 
4965(e)(1)(C) and Sec.  53.4965-3(a)(2)) to which the tax-exempt entity 
is a party is subsequently identified in published guidance as a listed 
transaction during a taxable year of the entity (the listing year) in 
which it has net income or proceeds attributable to the transaction, 
the net income or proceeds are allocated between the pre- and post-
listing periods. The IRS will treat the period beginning on the first 
day of the listing year and ending on the day immediately preceding the 
date of the listing, and the period beginning on the date of the 
listing and ending on the last day of the listing year as short taxable 
years. This treatment is solely for purposes of allocating net income 
or proceeds under section 4965. The tax-exempt entity continues to file 
tax returns for the full taxable year, does not file tax returns with 
respect to these deemed short taxable years and does not otherwise take 
the short taxable years into account for Federal tax purposes. 
Accordingly, the net income or proceeds that are properly allocated to 
the listing year in accordance with this section will be treated as 
allocable to the period--
    (1) Ending before the date of the listing (and accordingly not 
subject to tax under section 4965(a)) to the extent such net income or 
proceeds would have been properly taken into account in accordance with 
this section by the tax-exempt entity in the deemed short year ending 
on the day immediately preceding the date of the listing; and
    (2) Beginning on the date of the listing (and accordingly subject 
to tax under section 4965(a)) to the extent such income or proceeds 
would have been properly taken into account in accordance with this 
section by the tax-exempt entity in the short year beginning on the 
date of the listing.
    (f) Examples. The following examples illustrate the allocation 
rules of this section:

    Example 1. (i) In 1999, X, a calendar year non-plan entity using 
the cash method of accounting, entered into a lease-in/lease-out 
transaction (LILO) substantially similar to the transaction 
described in Notice 2000-15 (2000-1 CB 826) (describing Rev. Rul. 
99-14 (1999-1 CB 835), superseded by Rev. Rul. 2002-69 (2002-2 CB 
760)). In 1999, X purported to lease property to Y pursuant to a 
``head lease,'' and Y purported to lease the property back to X 
pursuant to a ``sublease'' of a shorter term. In form, X received 
$268M as an advance payment of head lease rent. Of this amount, 
$200M had been, in form, financed by a nonrecourse loan obtained by 
Y. X deposited the $200M with a ``debt payment undertaker.'' This 
served to defease both a portion of X's rent obligation under its 
sublease and Y's repayment obligation under the nonrecourse loan. Of 
the remainder of the $268M advance head lease rent payment, X 
deposited $54M with an ``equity payment undertaker.'' This served to 
defease the remainder of X's rent obligation under the sublease as 
well as the exercise price of X's end-of-sublease term purchase 
option. This amount inures to the benefit of Y and enables Y to 
recover its investment in the transaction and a return on that 
investment. In substance, the $54M is a loan from Y to X. X retained 
the remaining $14M of the advance head lease rent payment. In 
substance, this represents a fee for X's participation in the 
transaction. See Sec.  601.601(d)(2)(ii)(b) of this chapter.
    (ii) According to the substance of the transaction, the head 
lease, sublease and nonrecourse debt will be ignored for Federal 
income tax purposes. Therefore, any net income or proceeds resulting 
from these elements of the transaction will not be considered net 
income or proceeds attributable to the LILO transaction for purposes 
of section 4965(a). The $54M deemed loan from Y to X and the $14M 
fee are not ignored for Federal income tax purposes.
    (iii) Under X's established cash basis method of accounting, any 
net income received in 1999 and attributable to the LILO transaction 
is allocated to X's December 31, 1999, tax year for purposes of 
section 4965. The $14M fee received in 1999, and which constitutes 
proceeds of the transaction, is likewise allocated to that tax year. 
Because the 1999 tax year is before the effective date

[[Page 38708]]

of the section 4965 tax, X will not be subject to any excise tax 
under section 4965 for the amounts received in 1999.
    (iv) Any earnings on the amount deposited with the equity 
payment undertaker that constitute gross income to X will be reduced 
by X's original issue discount deductions with respect to the deemed 
loan from Y, in determining X's net income from the transaction.
    Example 2.  B, a non-plan entity using the cash method of 
accounting, has an annual accounting period that ends on December 
31, 2006. B entered into a prohibited tax shelter transaction on 
March 15, 2006. On that date, B received a payment of $600,000 as a 
fee for its involvement in the transaction. B received no other 
proceeds or income attributable to this transaction in 2006. Under 
B's method of accounting, the payment received by B on March 15, 
2006, is taken into account in the deemed short year ending on 
August 15, 2006. Accordingly, solely for purposes of section 4965, 
the payment is treated as allocable solely to the period ending on 
or before August 15, 2006, and is not subject to the excise tax 
imposed by section 4965(a).
    Example 3.  The facts are the same as in Example 2, except that 
B received an additional payment of $400,000 on September 30, 2006. 
Under B's method of accounting, the payment received by B on 
September 30, 2006, is taken into account in the deemed short year 
beginning on August 16, 2006. Accordingly, solely for purposes of 
section 4965, the $400,000 payment is treated as allocable to the 
period beginning after August 15, 2006, and is subject to the excise 
tax imposed by section 4965(a).
    Example 4.  C, a non-plan entity using the cash method of 
accounting, has an annual accounting period that ends on December 
31. C entered into a prohibited tax shelter transaction on May 1, 
2005. On March 15, 2007, C received a payment of $580,000 
attributable to the transaction. On June 1, 2007, the transaction is 
identified by the IRS in published guidance as a listed transaction. 
On June 15, 2007, C received an additional payment of $400,000 
attributable to the transaction. Under C's method of accounting, the 
payments received on March 15, 2007, and June 15, 2007, are taken 
into account in 2007. The IRS will treat the period beginning on 
January 1, 2007, and ending on May 31, 2007, and the period 
beginning on June 1, 2007, and ending on December 31, 2007, as short 
taxable years. The payment received by C on March 15, 2007, is taken 
into account in the deemed short year ending on May 31, 2007. 
Accordingly, solely for purposes of section 4965, the payment is 
treated as allocable solely to the pre-listing period, and is not 
subject to the excise tax imposed by section 4965(a). The payment 
received by C on June 15, 2007, is taken into account in the deemed 
short year beginning on June 1, 2007. Accordingly, solely for 
purposes of section 4965, the payment is treated as allocable to the 
post-listing period, and is subject to the excise tax imposed by 
section 4965(a).

    (g) Effective/applicability dates. See Sec.  53.4965-9 for the 
discussion of the relevant effective and applicability dates.


Sec.  53.4965-9  Effective/applicability dates.

    (a) In general. The taxes under section 4965(a) and Sec.  53.4965-7 
are effective for taxable years ending after May 17, 2006, with respect 
to transactions entered into before, on or after that date, except that 
no tax under section 4965(a) applies with respect to income or proceeds 
that are properly allocable to any period ending on or before August 
15, 2006.
    (b) Applicability of the regulations. As of July 6, 2010, except as 
provided in paragraph (c) of this section, Sec. Sec.  53.4965-1 through 
53.4965-8 of this chapter will apply to taxable years ending after July 
6, 2007. A tax-exempt entity may rely on the provisions of Sec. Sec.  
53.4965-1 through 53.4965-8 for taxable years ending on or before July 
6, 2007.
    (c) Effective/applicability date with respect to certain knowing 
transactions--(1) Entity-level tax. The 100 percent tax under section 
4965(b)(1)(B) and Sec.  53.4965-7(a)(1)(i)(B) does not apply to 
prohibited tax shelter transactions entered into by a tax-exempt entity 
on or before May 17, 2006.
    (2) Manager-level tax. The IRS will not assert that an entity 
manager who approved or caused a tax-exempt entity to become a party to 
a prohibited tax shelter transaction is liable for the entity manager 
tax under section 4965(b)(2) and Sec.  53.4965-7(b)(1) with respect to 
the transaction if the tax-exempt entity entered into such transaction 
prior to May 17, 2006.


0
Par. 6. Section 53.6071-1, paragraphs (g) and (h) are revised to read 
as follows:


Sec.  53.6071-1  Time for filing returns.

* * * * *
    (g) Taxes imposed with respect to prohibited tax shelter 
transactions to which tax-exempt entities are parties--(1) Returns by 
certain tax-exempt entities. A Form 4720, ``Return of Certain Excise 
Taxes Under Chapters 41 and 42 of the Internal Revenue Code,'' required 
by Sec.  53.6011-1(b) for a tax-exempt entity described in section 
4965(c)(1), (c)(2) or (c)(3) that is a party to a prohibited tax 
shelter transaction and is liable for tax imposed by section 4965(a)(1) 
shall be filed on or before the due date (not including extensions) for 
filing the tax-exempt entity's annual information return under section 
6033(a)(1). If the tax-exempt entity is not required to file an annual 
information return under section 6033(a)(1), the Form 4720 shall be 
filed on or before the 15th day of the fifth month after the end of the 
tax-exempt entity's taxable year or, if the entity has not established 
a taxable year for Federal income tax purposes, the entity's annual 
accounting period.
    (2) Returns by entity managers of tax-exempt entities described in 
section 4965(c)(1), (c)(2) or (c)(3). A Form 4720, required by Sec.  
53.6011-1(b) for an entity manager of a tax-exempt entity described in 
section 4965(c)(1), (c)(2) or (c)(3) who is liable for tax imposed by 
section 4965(a)(2) shall be filed on or before the 15th day of the 
fifth month following the close of the entity manager's taxable year 
during which the entity entered into the prohibited tax shelter 
transaction.
    (3) Transition rule. A Form 4720, for a section 4965 tax that is or 
was due on or before October 4, 2007, will be deemed to have been filed 
on the due date if it is filed by October 4, 2007, and if all section 
4965 taxes required to be reported on that Form 4720 are paid by 
October 4, 2007.
    (h) Effective/applicability date. Paragraph (g) of this section is 
applicable on July 6, 2007.


Sec.  53.6071-1T  [Amended]

0
Par. 7. Section 53.6071-1T(g) & (h) are removed.

PART 54--PENSION EXCISE TAXES

0
Par. 8. The authority citation for part 54 continues to read, in part, 
as follows:

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


0
Par. 9. Section 54.6011-1, paragraphs (c) and (d) are revised to read 
as follows:


Sec.  54.6011-1  General requirement of return, statement or list.

* * * * *
    (c) Entity manager tax on prohibited tax shelter transactions--(1) 
In general. Any entity manager of a tax-exempt entity described in 
section 4965(c)(4), (c)(5), (c)(6), or (c)(7) who is liable for tax 
under section 4965(a)(2) shall file a return on Form 5330, ``Return of 
Excise Taxes Related to Employee Benefit Plans,'' on or before the 15th 
day of the fifth month following the close of such entity manager's 
taxable year during which the entity entered into the prohibited tax 
shelter transaction, and shall include therein the information required 
by such form and the instructions issued with respect thereto.
    (2) Transition rule. A Form 5330, ``Return of Excise Taxes Related 
to Employee Benefit Plans,'' for an excise tax under section 4965 that 
is or was due on or before October 4, 2007, will be deemed to have been 
filed on the due date if it is filed by October 4, 2007, and if the 
section 4965 tax that was required to be reported on that Form 5330 is 
paid by October 4, 2007.

[[Page 38709]]

    (d) Effective/applicability date. Paragraph (c) of this section is 
applicable on July 6, 2007.


Sec.  54.6011-1T  [Amended]

0
Par. 10. Section Sec.  54.6011-1T(c) & (d) are removed.

PART 301--PROCEDURE AND ADMINISTRATION

0
Par. 11. The authority citation for part 301 continues to read, in 
part, as follows:

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


0
Par. 12. Section 301.6011(g)-1 is added to read as follows:


Sec.  301.6011(g)-1  Disclosure by taxable party to the tax-exempt 
entity.

    (a) Requirement of disclosure--(1) In general. Except as provided 
in paragraph (d)(2) of this section, any taxable party (as defined in 
paragraph (c) of this section) to a prohibited tax shelter transaction 
(as defined in section 4965(e) and Sec.  53.4965-3 of this chapter) 
must disclose by statement to each tax-exempt entity (as defined in 
section 4965(c) and Sec.  53.4965-2 of this chapter) that the taxable 
party knows or has reason to know is a party to such transaction (as 
defined in paragraph (b) of this section) that the transaction is a 
prohibited tax shelter transaction.
    (2) Determining whether a taxable party knows or has reason to 
know. Whether a taxable party knows or has reason to know that a tax-
exempt entity is a party to a prohibited tax shelter transaction is 
based on all the facts and circumstances. If the taxable party knows or 
has reason to know that a prohibited tax shelter transaction involves a 
tax-exempt, tax indifferent or tax-favored entity, relevant factors for 
determining whether the taxable party knows or has reason to know that 
a specific tax-exempt entity is a party to the transaction include--
    (i) The extent of the efforts made to determine whether a tax-
exempt entity is facilitating the transaction by reason of its tax-
exempt, tax indifferent or tax-favored status (or is identified in 
published guidance, by type, class or role, as a party to the 
transaction); and
    (ii) If a tax-exempt entity is facilitating the transaction by 
reason of its tax-exempt, tax indifferent or tax-favored status (or is 
identified in published guidance, by type, class or role, as a party to 
the transaction), the extent of the efforts made to determine the 
identity of the tax-exempt entity.
    (b) Definition of tax-exempt party to a prohibited tax shelter 
transaction. For purposes of section 6011(g), a tax-exempt entity is a 
party to a prohibited tax shelter transaction if the entity is defined 
as such under Sec.  53.4965-4 of this chapter.
    (c) Definition of taxable party--(1) In general. For purposes of 
this section, the term taxable party means--
    (i) A person who has entered into and participates or expects to 
participate in the transaction under Sec. Sec.  1.6011-4(c)(3)(i)(A), 
(B), or (C), 20.6011-4, 25.6011-4, 31.6011-4, 53.6011-4, 54.6011-4, or 
56.6011-4 of this chapter; or
    (ii) A person who is designated as a taxable party by the Secretary 
in published guidance.
    (2) Special rules--(i) Certain listed transactions. If a 
transaction that was otherwise not a prohibited tax shelter transaction 
becomes a listed transaction after the filing of a person's tax return 
(including an amended return) reflecting either tax consequences or a 
tax strategy described in the published guidance listing the 
transaction (or a tax benefit derived from tax consequences or a tax 
strategy described in the published guidance listing the transaction), 
the person is a taxable party beginning on the date the transaction is 
described as a listed transaction in published guidance.
    (ii) Persons designated as non-parties. Published guidance may 
identify which persons, by type, class or role, will not be treated as 
a party to a prohibited tax shelter transaction for purposes of section 
6011(g).
    (d) Time for providing disclosure statement--(1) In general. A 
taxable party to a prohibited tax shelter transaction must make the 
disclosure required by this section to each tax-exempt entity that the 
taxable party knows or has reason to know is a party to the transaction 
within 60 days after the last to occur of--
    (i) The date the person becomes a taxable party to the transaction 
within the meaning of paragraph (c) of this section;
    (ii) The date the taxable party knows or has reason to know that 
the tax-exempt entity is a party to the transaction within the meaning 
of paragraph (b) of this section; or
    (iii) July 6, 2010.
    (2) Termination of a disclosure obligation. A person shall not be 
required to provide the disclosure otherwise required by this section 
if the person does not know or have reason to know that the tax-exempt 
entity is a party to the transaction within the meaning of paragraph 
(b) of this section on or before the first date on which the 
transaction is required to be disclosed by the person under Sec. Sec.  
1.6011-4, 20.6011-4, 25.6011-4, 31.6011-4, 53.6011-4, 54.6011-4, or 
56.6011-4 of this chapter.
    (3) Disclosure is not required with respect to any prohibited tax 
shelter transaction entered into by a tax-exempt entity on or before 
May 17, 2006.
    (e) Frequency of disclosure. One disclosure statement is required 
per tax-exempt entity per transaction. See paragraph (h) of this 
section for rules relating to designation agreements.
    (f) Form and content of disclosure statement. The statement 
disclosing to the tax-exempt entity that the transaction is a 
prohibited tax shelter transaction must be a written statement that--
    (1) Identifies the type of prohibited tax shelter transaction 
(including the published guidance citation for a listed transaction); 
and
    (2) States that the tax-exempt entity's involvement in the 
transaction may subject either it or its entity manager(s) or both to 
excise taxes under section 4965 and to disclosure obligations under 
section 6033(a) of the Internal Revenue Code.
    (g) To whom disclosure is made. The disclosure statement must be 
provided--
    (1) In the case of a non-plan entity as defined in Sec.  53.4965-
2(b) of this chapter, to--
    (i) Any entity manager of the tax-exempt entity with authority or 
responsibility similar to that exercised by an officer, director or 
trustee of an organization; or
    (ii) If a person described in paragraph (g)(1)(i) of this section 
is not known, to the primary contact on the transaction.
    (2) In the case of a plan entity as defined in Sec.  53.4965-2(c) 
of this chapter, including a fully self-directed qualified plan, IRA, 
or other savings arrangement, to any entity manager of the plan entity 
who approved or otherwise caused the entity to become a party to the 
prohibited tax shelter transaction.
    (h) Designation agreements. If more than one taxable party is 
required to disclose a prohibited tax shelter transaction under this 
section, the taxable parties may designate by written agreement a 
single taxable party to disclose the transaction. The transaction must 
then be disclosed in accordance with this section. The designation of 
one taxable party to disclose the transaction does not relieve the 
other taxable parties of their obligation to disclose the transaction 
to a tax-exempt entity that is a party to the transaction in accordance 
with this section, if the designated taxable party fails to disclose 
the transaction to the tax-exempt entity in a timely manner.

[[Page 38710]]

    (i) Penalty for failure to provide disclosure statement. See 
section 6707A for the penalty applicable to the failure to disclose a 
prohibited tax shelter transaction in accordance with this section.
    (j) Effective date/applicability date. This section will apply with 
respect to transactions entered into by a tax-exempt entity after May 
17, 2006.

0
Par. 13. Section 301.6033-5 is added to read as follows:


Sec.  301.6033-5  Disclosure by tax-exempt entities that are parties to 
certain reportable transactions.

    (a) In general. For provisions relating to the requirement of the 
disclosure by a tax-exempt entity that it is a party to certain 
reportable transactions, see Sec.  1.6033-5 of this chapter (Income Tax 
Regulations).
    (b) Effective date/applicability date. This section applies with 
respect to transactions entered into by a tax-exempt entity after May 
17, 2006.


Sec.  301.6033-5T  [Removed]

0
Par. 14. Section 301.6033-5T is removed.

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

0
Par. 15. The authority citation for part 602 continues to read, in 
part, as follows:

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


0
Par. 16. In Sec.  602.101, paragraph (b) is amended by adding the 
following entry in numerical order to the table to read as follows:


Sec.  602.101  OMB Control Numbers.

* * * * *
    (b) * * *

------------------------------------------------------------------------
                                                            Current OMB
   CFR part or section where identified and described       Control No.
------------------------------------------------------------------------
 
                                * * * * *
301.6011(g)-1...........................................       1545-2079
 
                                * * * * *
------------------------------------------------------------------------


Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
    Approved: June 29, 2010.
Michael Mundaca,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2010-16237 Filed 7-2-10; 8:45 am]
BILLING CODE 4830-01-P