[Federal Register Volume 80, Number 167 (Friday, August 28, 2015)]
[Proposed Rules]
[Pages 52231-52236]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-21259]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 301

[REG-103033-11]
RIN 1545-BK62


Reportable Transactions Penalties Under Section 6707A

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations that provide 
guidance regarding the amount of the penalty under section 6707A of the 
Internal Revenue Code (Code) for failure to include on any return or 
statement any information required to be disclosed under section 6011 
with respect to a reportable transaction. The proposed regulations are 
necessary to clarify the amount of the penalty under section 6707A, as 
amended by the Small Business Jobs Act of 2010. The proposed 
regulations would affect any taxpayer who fails to properly disclose 
participation in a reportable transaction.

DATES: Written or electronic comments and requests for a public hearing 
must be received by November 27, 2015.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-103033-11), Room 
5205, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
103033-11), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue NW., Washington, DC, or sent electronically via the Federal 
eRulemaking Portal at http://www.regulations.gov (indicate IRS and REG-
103033-11).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Melissa Henkel, (202) 317-6844; concerning submissions of comments or 
requests for a public hearing, Oluwafunmilayo (Funmi) Taylor, (202) 
317-6901 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    This document contains proposed amendments to 26 CFR part 301 under 
section 6707A of the Internal Revenue Code. Section 6707A was added to 
the Code by section 811(a) of the American Jobs Creation Act of 2004 
(Pub. L. 108-357, 118 Stat. 1418) and was amended

[[Page 52232]]

by section 11(a)(41) of the Tax Technical Corrections Act of 2007 (Pub. 
L. 110-172, 121 Stat. 2473). Section 6707A imposes a penalty on a 
taxpayer who has a duty to disclose a reportable transaction and fails 
to do so. It also imposes a requirement that certain taxpayers must 
disclose in filings with the Securities and Exchange Commission (SEC) 
any requirement to pay a penalty under (1) section 6707A with respect 
to a listed transaction, (2) section 6662A with respect to an 
undisclosed reportable transaction, or (3) section 6662(h) with respect 
to an undisclosed reportable transaction. Failure to make that required 
disclosure to the SEC subjects a taxpayer to another penalty under 
section 6707A. On September 11, 2008, temporary regulations (TD 9425) 
relating to the penalty under section 6707A were published in the 
Federal Register (73 FR 52784). A notice of proposed rulemaking (REG-
160868-04) cross-referencing the temporary regulations was published in 
the Federal Register on the same day (73 FR 52805). Section 6707A was 
amended again in 2010 by section 2041(a) of the Small Business Jobs Act 
of 2010 (Pub. L. 111-240, 124 Stat. 2504) (the Jobs Act), which changed 
the amount of the penalty from a stated dollar amount to a percentage 
(with maximum and minimum dollar amounts). Before the Jobs Act was 
enacted, the penalty was $10,000 in the case of a natural person 
($50,000 in any other case) and, in the case of a listed transaction, 
$100,000 in the case of a natural person ($200,000 in any other case). 
In some cases, this structure resulted in penalties that were 
potentially disproportionate to the tax benefit derived from the 
transaction. See ``Legislative Recommendations with Legislative Action: 
Modify Internal Revenue Code Section 6707A to Ameliorate Unconscionable 
Impact,'' National Taxpayer Advocate 2008 Annual Report to Congress 
vol. 1, at 419. In response, Congress amended section 6707A(b) through 
the Jobs Act. See Joint Committee on Taxation, General Explanation of 
Tax Legislation Enacted in the 111th Congress (JCS-2-11), March 2011 
(explaining the reasons for the change to section 6707A). The Jobs Act 
amended section 6707A(b) to make the penalty 75 percent of the decrease 
in tax shown on the return as a result of a reportable transaction, 
with a minimum penalty amount of $10,000 ($5,000 in the case of a 
natural person). The maximum penalty amount is $200,000 ($100,000 in 
the case of a natural person) for failure to disclose a listed 
transaction, or $50,000 ($10,000 in the case of a natural person) for 
failure to disclose any other reportable transaction. The 2010 
amendment specifying the amount of the penalty applies to penalties 
assessed after December 31, 2006. See Jobs Act Sec.  2041(b), 124 Stat. 
at 2560. On September 7, 2011, final regulations (TD 9550) were 
published in the Federal Register (76 FR 55256). The final regulations 
in TD 9550 did not provide guidance on the amount of the penalty as 
amended by the Jobs Act beyond reciting the language of section 6707A 
because the notice of proposed rulemaking on which those final 
regulations were based predated the Jobs Act. The proposed regulations 
in this document provide guidance on the amount of the penalty under 
section 6707A, as amended by the Jobs Act.

Explanation of Provisions

    The following is a summary of the proposed changes to the existing 
regulations relating to the penalties under section 6707A.

1. Definition of Return

    Treas. Reg. Sec.  1.6011-4 establishes that a taxpayer whose 
amended return or application for tentative refund reflects 
participation in a reportable transaction has the same disclosure 
obligation as a taxpayer whose original return reflects participation 
in a reportable transaction. Treas. Reg. Sec.  301.6707A-1, published 
on September 11, 2011, clarifies that a taxpayer's failure to disclose 
participation in a reportable transaction will trigger a penalty under 
section 6707A regardless of whether the participation is reflected on 
an original return, an amended return, or an application for tentative 
refund. In its current state, the regulation generally refers to 
original returns, amended returns, and applications for tentative 
refund in every case where all three terms are relevant. The proposed 
regulations streamline these references by defining the term ``return'' 
to include all three. This change simplifies sentences throughout the 
regulation without changing their meaning.

2. Amount of the Penalty

A. Decrease in Tax
    Subject to certain minimum and maximum amounts, ``the amount of the 
penalty under subsection (a) with respect to any reportable transaction 
shall be 75 percent of the decrease in tax shown on the return as a 
result of such transaction (or which would have resulted from such 
transaction if such transaction were respected for Federal tax 
purposes).'' Section 6707A(b)(1). The proposed regulations define this 
decrease in tax generally as the difference between the amount of tax 
reported on the return as filed and the amount of tax that would be 
reported on a hypothetical return where the taxpayer did not 
participate in the reportable transaction. The amount of tax shown on 
the hypothetical return will reflect adjustments that result 
mechanically from backing out the reportable transaction, such as tax 
items affected by an increase in adjusted gross income resulting from 
non-participation in the reportable transaction.
    In some situations, a taxpayer's participation in a listed 
transaction creates a liability for a tax that would not exist absent 
participation in the transaction. For example, a taxpayer engaging in a 
listed abusive Roth IRA transaction may be subject to an excise tax on 
excess IRA contributions. If the taxpayer fails to report the excise 
tax on his excess IRA contributions, this amount of tax would not 
appear on the return filed by the taxpayer that reflected his 
participation in the reportable transaction. The excise tax would also 
not appear on a return filed by the taxpayer if he had not engaged in 
the transaction, because there would be no excess contribution on which 
excise tax would be imposed. Therefore, the difference between these 
two returns would result in no decrease in tax attributable to the 
unreported tax. To capture this tax, the proposed regulations include 
in the definition of the decrease in tax ``any other tax that results 
from participation in the reportable transaction but was not reported 
on the taxpayer's return.'' Example 1 in Sec.  301.6707A-1(d)(2) 
illustrates this rule.
B. Subsequently Identified Transactions
    Listed transactions and transactions of interest are identified in 
published guidance. See Sec.  1.6011-4(b)(2), (6). Once a listed 
transaction or a transaction of interest is identified by published 
guidance, a taxpayer has a reporting obligation if the taxpayer 
participated in the transaction prior to the issuance of the guidance 
and the statute of limitations for the year of the taxpayer's 
participation remains open. See Sec.  1.6011-4(e)(2). Under Sec.  
1.6011-4, the taxpayer may use a single disclosure statement to 
disclose multiple years of participation in a reportable transaction. 
Because the taxpayer in these cases is permitted to disclose multiple 
years of participation on a single statement, the taxpayer's failure to 
complete and submit the disclosure statement properly will result in no 
more than one penalty under section 6707A. The

[[Page 52233]]

proposed regulations provide, however, that the amount of that penalty 
will be determined by taking into account the aggregate decrease in tax 
shown on all of the returns for which disclosure was not provided. 
Accordingly, under the proposed regulations, the decrease in tax will 
be determined separately for each year of participation for which only 
a single disclosure statement was required and the amount of the 
penalty will be 75 percent of the aggregate decrease in tax in all 
years for which disclosure was required, subject to the minimum and 
maximum penalty amount limitations.
C. Penalty Under Section 6707A(e) for Failure To Report to the 
Securities and Exchange Commission
    Section 6707A(e) generally requires certain taxpayers who must pay 
penalties under sections 6707A, 6662A (accuracy-related penalty on 
understatements with respect to reportable transactions), or 6662(h) 
(accuracy-related penalty on underpayments attributable to gross 
valuation misstatements) to disclose their liability for these 
penalties in filings with the SEC. The flush language of section 
6707A(e) provides that ``[f]ailure to make a disclosure in accordance 
with the preceding sentence shall be treated as a failure to which the 
penalty under subsection (b)(2) applies.'' However, as discussed in the 
Background section of this preamble, subsection (b)(2) was amended in 
2010. Prior to enactment of the Jobs Act, section 6707A(b)(2) provided 
that the amount of the penalty for failure to disclose participation in 
a listed transaction was $100,000 for natural persons and $200,000 in 
any other case. After the 2010 amendments, section 6707A(b)(2) now 
provides that ``[t]he amount of the penalty under subsection (a) with 
respect to any reportable transaction shall not exceed-- (A) in the 
case of a listed transaction, $200,000 ($100,000 in the case of a 
natural person), or (B) in the case of any other reportable 
transaction, $50,000 ($10,000 in the case of a natural person).''
    Treasury and the Service do not believe that Congress intended its 
reference to subsection (b)(2) to impose the maximum penalty on 
violations of section 6707A(e). This would be contrary to the purpose 
of the 2010 amendments to section 6707A, which sought to make the 
penalty proportionate to the tax benefit derived by the transaction. A 
reference solely to subsection (b)(2) does not make sense in terms of 
describing the amount of the penalty, as subsection (b)(2) merely caps 
the amount of the penalty that can be imposed on a failure to disclose 
and does not provide a particular amount for the penalty. It seems 
likely that the intent was to reference the amount of the penalty 
generally under subsection (b). The proposed regulations clarify this 
point.
    In each case giving rise to an obligation to disclose liability in 
filings with the SEC, there must be a reportable transaction for the 
relevant penalty to arise. The amount of the penalty for a violation of 
section 6707A(e), therefore, will be 75 percent of the decrease in tax, 
as provided in section 6707A(b). In addition to being consistent with 
the language of section 6707A(e), the proposed regulations are also 
consistent with the Congressional intent of the 2010 amendments to 
section 6707A to render proportionality between the amount of the 
penalty and the tax benefit derived from the reportable transaction. 
See JCS-2-11.
D. Minimum and Maximum Amount of the Penalty
    Pursuant to section 6707A(b)(2), ``[t]he amount of the penalty 
under subsection (a) with respect to any reportable transaction shall 
not exceed'' certain specified dollar values. Likewise, under section 
6707A(b)(3), ``[t]he amount of the penalty under subsection (a) with 
respect to any transaction shall not be less than'' certain specified 
dollar values. Under the proposed regulations, these minimum and 
maximum limits on the amount of the penalty would be applied separately 
to each individual penalty under section 6707A(a). The limitations in 
sections 6707A(b)(2) and (3) apply expressly to ``[t]he amount of the 
penalty under subsection (a).'' Because, as provided in Sec.  
301.6707A-1(c), each separate failure to disclose a reportable 
transaction gives rise to a new penalty under section 6707A(a), the 
minimum and maximum limits on the amount of the penalty apply 
separately to each failure to disclose.

Special Analyses

    Certain IRS regulations, including this one, are exempt from the 
requirements of Executive Order 12866 of, as supplemented and 
reaffirmed by Executive Order 13563. Therefore, a regulatory impact 
assessment is not required. It also has been determined that section 
553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does 
not apply to the proposed regulations. Because the proposed regulations 
would not impose a collection of information on small entities, the 
Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply.
    Pursuant to section 7805(f) of the Internal Revenue Code, this 
notice of proposed rulemaking has been submitted to the Chief Counsel 
for Advocacy of the Small Business Administration for comment on its 
impact on small businesses.

Comments and Requests for Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written or electronic comments that 
are submitted timely to the IRS. The Treasury Department and the IRS 
request comments on all aspects of the proposed regulations. All 
comments will be available for public inspection and copying at 
www.regulations.gov or upon request. A public hearing will be scheduled 
if requested in writing by any person that timely submits written 
comments. If a public hearing is scheduled, notice of the date, time, 
and place for the public hearing will be published in the Federal 
Register.

Drafting Information

    The principal authors of the proposed regulations are Melissa 
Henkel of the Office of the Associate Chief Counsel (Procedure and 
Administration) and Spence Hanemann, formerly of the Office of the 
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.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 301 is proposed to be 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 301.6707A-1 is amended by:
0
1. Adding paragraph (b)(3).
0
2. In paragraph (c)(1), removing the language ``(including an amended 
return or application for tentative refund)'' in the fifth sentence.
0
3. Redesignating paragraphs (d), (e) and (f) as paragraphs (e), (f), 
and (g).
0
4. Adding new paragraph (d).
0
5. In newly designated paragraph (e), removing the language ``(d)'' 
wherever it appears and adding ``(e)'' in its place.
0
6. In newly designated paragraph (e)(3)(i), removing the language

[[Page 52234]]

``(including an amended return or application for tentative refund)'' 
wherever it appears.
0
7. In newly designated paragraph (f), removing the language ``(e)'' 
wherever it appears and adding ``(f)'' in its place.
0
8. Revising newly designated paragraphs (g)(1) and (g)(2).
    The revisions and additions read as follows:


Sec.  301.6707A-1.   Failure to include on any return or statement any 
information required to be disclosed under section 6011 with respect to 
a reportable transaction.--

* * * * *
    (b) * * *
    (3) Return. For purposes of this section, the term ``return'' means 
an original return, amended return, or application for tentative 
refund, except where otherwise indicated. As used in examples, the term 
``return'' means an original return, except where otherwise indicated.
* * * * *
    (d) Calculation of the penalty. (1) Decrease in tax--(i) In 
general. As used in this section, the phrase ``decrease in tax shown on 
the return as a result of the transaction or the decrease that would 
have resulted from the transaction if it were respected for Federal tax 
purposes'' means the sum of (A) the excess of the amount of the tax 
that would be shown on the return if the return did not reflect the 
taxpayer's participation in the reportable transaction over the tax 
actually reported on the return reflecting participation in the 
reportable transaction and (B) any other tax that results from 
participation in the reportable transaction but was not reported on the 
taxpayer's return. The amount of tax that would be shown on the return 
if it did not reflect the taxpayer's participation in the reportable 
transaction includes adjustments that result mechanically from backing 
out the reportable transaction, such as tax items affected by an 
increase in adjusted gross income resulting from not participating in 
the transaction. Under this rule, it makes no difference whether a 
taxpayer's tax liability is ultimately settled with the IRS for a 
different amount or whether the taxpayer subsequently reports a 
different amount of tax on an amended return, because these amounts do 
not enter into the calculation of the decrease in tax shown on the 
return (or returns) to which the penalty relates.
    (ii) Subsequently identified transactions. If the taxpayer fails to 
file a complete and proper disclosure statement required by Sec.  
1.6011-4(e)(2)(i) disclosing participation in a listed transaction or 
transaction of interest with respect to more than one return, the 
amount of the penalty will be computed by aggregating the decrease in 
tax shown on each return for which the required disclosure was not 
provided.
    (iii) Penalty for failure to report to the SEC. In the case of a 
penalty imposed under section 6707A(e) for failure to disclose 
liability for certain penalties in reports to the Securities and 
Exchange Commission, the amount of the penalty will be determined under 
section 6707A(b) and this paragraph (d), regardless of whether the 
penalty that the taxpayer failed to disclose is imposed under section 
6707A, 6662A, or 6662(h).
    (iv) Minimum and maximum amount of the penalty. The limitations on 
the minimum and maximum penalty amounts described in paragraph (a) of 
this section apply separately to each failure to disclose that is 
subject to a penalty.
    (2) No tax required to be shown on return. For returns with respect 
to which disclosure is required but on which no tax is required to be 
shown (for example, returns of passthrough entities), the minimum 
penalty amount will be imposed for failures to disclose.
    (3) Examples. The rules in paragraphs (d)(1) and (2) of this 
section are illustrated by the following examples:

    Example 1.  Taxpayer X, a natural person, filed a return 
reflecting participation in an abusive Roth IRA transaction listed 
in Notice 2004-8, 2004-1 I.R.B. 333 (Jan. 26, 2004). As described in 
the notice, X's Roth IRA acquired shares of a wholly owned 
corporation and then X sold assets to the corporation at less than 
fair market value, effectively transferring value to the corporation 
comparable to a contribution to the Roth IRA. X failed to disclose 
his participation in the listed transaction as required by the 
regulations under section 6011. As a result of the transaction, X 
was liable under section 4973 for a $10,000 excise tax for excess 
contributions to his Roth IRA. On his return, X correctly reported 
$25,000 of income tax, none of which was attributable to the listed 
transaction, but failed to report the excise tax. If X had not 
participated in the listed transaction, the excise tax under section 
4973 would not have applied and his income tax would have remained 
$25,000. There would, therefore, be no difference between the tax on 
his return as filed and the tax on his return if it did not reflect 
participation in the transaction. The excise tax, however, is 
another tax that resulted from participation in the transaction but 
was not reported on X's return, as described in paragraph 
(d)(1)(i)(B) of this section. Therefore, the decrease in tax 
resulting from the listed transaction is $10,000, which amount is 
the sum of zero (the excess of the amount of tax that would be shown 
on X's return if the return did not reflect X's participation in the 
transaction over the tax X actually reported on the return 
reflecting X's participation in the transaction) and $10,000 (the 
amount of excise tax that resulted from participation in the 
transaction but was not reported on the return). The amount of the 
penalty will be $7,500, which amount is 75 percent of the $10,000 
decrease in tax.
    Example 2.  Taxpayer X participated in a listed transaction that 
resulted in a $40,000 decrease in the tax shown on its return. X 
failed to disclose its participation and is, therefore, subject to a 
penalty under section 6707A. After weighing litigating hazards and 
other costs of litigation, the IRS Office of Appeals agreed to 
settle X's deficiency for $20,000. For purposes of calculating the 
amount of the penalty, the settlement does not affect the decrease 
in tax shown on X's return as a result of the listed transaction, 
which remains $40,000. The amount of X's penalty will be $30,000, 
which amount is 75 percent of the $40,000 decrease in tax.
    Example 3.  Taxpayer X, a natural person, participated in a 
nonlisted reportable transaction and, because he failed to disclose 
his participation, is subject to a penalty under section 6707A. 
After offsetting gross income with the losses generated in the 
reportable transaction, X's return reported adjusted gross income of 
$100,000. The return also reported $12,000 of medical expenses, 
$2,000 of which were deductible after applying the 10 percent floor 
in section 213(a). If X's return had not reflected participation in 
the reportable transaction, his adjusted gross income would have 
been $140,000. The decrease in tax shown on X's return as a result 
of the transaction would take into account both the tax on the 
$40,000 difference in adjusted gross income and the tax on the 
$2,000 adjustment to X's deductible medical expenses under section 
213(a) caused by the increase in adjusted gross income.
    Example 4.  Taxpayer X, a natural person, timely filed his 2014 
return and reported income tax of $40,000. X did not participate in 
a reportable transaction in 2014. X participated in a listed 
transaction in 2015, but failed to file a complete and proper 
disclosure statement with his 2015 return as required by the 
regulations under section 6011. As filed, the 2015 return reports 
that X owes no tax and has a loss of $10,000. If the tax 
consequences of the listed transaction were not reflected on the 
2015 return, the return would show income tax of $15,000 and no 
loss. X files an amended return for his 2014 tax year on which its 
only amendment is to carry back the $10,000 loss reported on its 
2015 tax return to the 2014 tax year, which decreases X's tax 
liability for 2014 by $3,000. X fails to file a complete and proper 
disclosure statement with the 2014 amended return as required by the 
regulations under section 6011. X will be assessed two penalties 
under section 6707A: one for his failure to disclose participation 
in a listed transaction reflected on his 2015 tax return and another 
for his failure to disclose participation in the same listed 
transaction reflected on his 2014 amended return. The decrease in 
tax on the 2015 tax return resulting from the listed transaction is 
$15,000, which amount is the excess of the

[[Page 52235]]

amount of tax that would be shown on X's return if the return did 
not reflect X's participation in the transaction over the tax X 
actually reported on the return reflecting X's participation in the 
transaction. The amount of the penalty with respect to the 2015 tax 
return is $11,250, which amount is 75 percent of the decrease in 
tax. The decrease in tax on the 2014 amended return that results 
from the listed transaction is $3,000, which is the excess of the 
amount of tax that would be shown on X's return if the return did 
not reflect X's participation in the transaction over the tax X 
actually reported on the return reflecting X's participation in the 
transaction. See Sec.  301.6707A-1(c). Because X is a natural 
person, the amount of the penalty with respect to the 2014 amended 
return is $5,000, which is the minimum penalty under Sec.  
301.6707A-1(a) and section 6707A(b)(3).
    Example 5.  Taxpayer X, a corporation, timely files its 2012 and 
2013 tax returns, each of which reflects participation in the same 
transaction. In 2015, the transaction becomes a listed transaction 
and X fails to file a complete and proper disclosure statement as 
required by the regulations under section 6011. X was required to 
file a single disclosure statement reflecting its participation in 
the listed transaction for all years which had open periods of 
limitation on assessment at the time the transaction became listed. 
When the transaction at issue became listed, the periods of 
assessment on X's 2012 and 2013 tax years were open. Pursuant to 
paragraph (d)(1)(ii) of this section, the amount of the penalty for 
X's single failure to disclose its participation in the transaction 
in 2012 and 2013 is computed by aggregating the decrease in tax 
shown on the 2012 return and the decrease in tax shown on the 2013 
return. The decreases in tax shown on the returns as a result of X's 
participation in the transaction are $265,000 in tax year 2012 and 
$7,000 in tax year 2013. The total decrease in tax shown on both 
returns is $272,000, and 75 percent of that amount is $204,000. 
Because X is a corporation, the amount of the penalty will be 
limited to the maximum amount of $200,000 under Sec.  301.6707A-1(a) 
and section 6707A(b)(2)(A).
    Example 6.  The 2014 return of Taxpayer X, a natural person, 
reflects participation in a nonlisted reportable transaction, but X 
fails to file a complete and proper disclosure statement as required 
by the regulations under section 6011. The decrease in tax shown on 
X's 2014 return as a result of participation in the reportable 
transaction is $20,000. X subsequently files an amended 2014 return 
to include a net operating loss carried forward from a prior year, 
which X inadvertently failed to include when he filed his original 
return. The amended return reflects participation in the same 
reportable transaction, but X again fails to file a complete and 
proper disclosure statement. The decrease in tax shown on the 
amended 2014 return as a result of participation in the transaction 
is also $20,000. X is subject to two separate penalties: one for 
each failure to disclose. Seventy-five percent of the $20,000 
decrease in tax shown on each of the original 2014 return and the 
amended 2014 return is $15,000 for each return. Because X is a 
natural person, the amount of the penalty for failure to disclose 
with respect to the original return will be limited to the maximum 
amount of $10,000 under Sec.  301.6707A-1(a) and section 
6707A(b)(2)(B). The amount of the penalty for failure to disclose 
with respect to the amended return will also be limited to the 
maximum amount of $10,000.
    Example 7.  Partnership M is required to attach Form 8886, 
Reportable Transaction Disclosure Statement, to its Form 1065, U.S. 
Return of Partnership Income, for the 2014 taxable year. It fails to 
do so and is, therefore, subject to a penalty under section 6707A. 
The amount of the penalty will be the minimum penalty of $10,000 
under Sec.  301.6707A-1(a) and section 6707A(b)(3) because Form 1065 
is a return that does not show an amount of tax that would be 
decreased as a result of participation in the reportable 
transaction. The partners of Partnership M may have separate 
disclosure obligations as required by the regulations under section 
6011 and would be subject to separate section 6707A penalties if 
they fail to comply with the disclosure requirements.
    Example 8.  In tax year 2014, Taxpayer X participated in a 
listed transaction that resulted in a $150,000 deduction. X's gross 
income for 2014 before the listed transaction deduction is $100,000. 
X uses $100,000 of the deduction to offset $100,000 of gross income 
and reports tax of zero for 2014. X also has a $50,000 net operating 
loss for 2014. X timely elects to waive the carryback period and 
carry over the 2014 net operating loss to tax year 2015. X's gross 
income for tax year 2015 is $200,000 but as a result of the $50,000 
net operating loss carryover, X reports $150,000 adjusted gross 
income. Pursuant to Sec.  1.6011-4, X is required to disclose 
participation in the listed transaction for both 2014 and 2015, but 
X fails to make the required disclosures and is therefore subject to 
the section 6707A penalty for each failure. The decrease in tax on 
the 2014 return is the amount of tax on $100,000 because that is the 
difference between the amount of tax that would have been shown on 
the return if it did not reflect participation in the reportable 
transaction and the tax actually reported. No other tax resulted 
from X's participation in the listed transaction. The amount of the 
penalty with respect to X's failure to disclose with respect to 2014 
will be 75 percent of the decrease in tax. The decrease in tax on 
the 2015 return is the difference between the tax shown on the 
return as filed and the tax that would be shown if the $50,000 net 
operating loss was not used, including any changes to the amount of 
tax that are only indirectly connected with the listed transaction. 
The amount of the penalty with respect to X's failure to disclose 
with respect to 2015 will be 75 percent of the decrease in tax.
    Example 9.  In tax year 2014, Taxpayer X, a natural person, 
participated in a listed transaction that resulted in a $50,000 
deduction. X's gross income for 2014 before the listed transaction 
deduction is $100,000. X also has a net operating loss carryover of 
$150,000 from 2013. X uses the deduction of $50,000 and a portion of 
the net operating loss carryover to offset $100,000 of gross income 
and reports adjusted gross income of zero for 2014. X carries over 
the remaining net operating loss to tax year 2015. X's gross income 
for 2015 is $250,000, but as a result of the net operating loss 
carryover, X reports reduced adjusted gross income of $150,000. 
Pursuant to Sec.  1.6011-4, X is required to disclose participation 
in the listed transaction for both 2014 and 2015, but X fails to 
make the required disclosures and is subject to the section 6707A 
penalty for each failure. The decrease in tax on the 2014 return 
that results from the reportable transaction is zero. Because X has 
$150,000 of a net operating loss carryover not attributable to the 
reportable transaction, X's tax without the benefits of the 
reportable transaction is the same as the tax shown on the 2014 
return as filed. Because X is a natural person, the minimum penalty 
of $5,000 under Sec.  301.6707A-1(a) and section 6707A(b)(3) will 
apply for the failure to disclose the listed transaction with the 
2014 return. The decrease in tax on the 2015 return is the 
difference between the tax shown on the return as filed and the tax 
that would be shown if X had only $50,000 of net operating loss to 
carry over to 2015 (i.e., if X had not offset $50,000 of its 2014 
gross income with the deduction resulting from the reportable 
transaction and thus had used $100,000 of its net operating loss 
carryover in 2014), including any changes to the amount of tax that 
are only indirectly connected with the listed transaction. The 
amount of the penalty with respect to the disclosure relating to 
2015 will be 75 percent of this decrease in tax.
    Example 10.  In tax year 2014, Taxpayer X, a corporation, 
engaged in a nonlisted reportable transaction and is subject to a 
penalty under section 6662A because its 2014 return resulted in a 
reportable transaction understatement. As a result of X's 
involvement in the transaction, it reported tax of $10,000 for 2014; 
if X had not engaged in the transaction, it would have reported tax 
of $200,000. X disclosed its involvement in the transaction as 
required by the regulations under section 6011, and thus was not 
subject to a penalty under section 6707A(a). As a person who is 
required to file periodic reports under section 13 or 15(d) of the 
Securities Exchange Act of 1934, however, X was also required, 
pursuant to section 6707A(e), to disclose the penalty imposed under 
section 6662A to the Securities and Exchange Commission, which X 
failed to do. X's failure to disclose the section 6662A penalty is 
treated as a failure to disclose to which section 6707A(b) applies. 
Thus, X will be subject to a penalty under section 6707A(e), which 
will equal 75 percent of the decrease in tax resulting from the 
transaction. The decrease in tax resulting from the nonlisted 
reportable transaction was $190,000, 75 percent of which is 
$142,500. Because X is a corporation, the amount of the penalty will 
be limited to $50,000 under Sec.  301.6707A-1(a) and section 
6707A(b)(2)(B).
* * * * *
    (g) * * *
    (1) This section applies to penalties assessed after the date that 
these regulations are published as final regulations in the Federal 
Register.

[[Page 52236]]

    (2) For penalties assessed before the date that these regulations 
are published as final regulations in the Federal Register, Sec.  
301.6707A-1 (as contained in 26 CFR part 1, revised April 2013) shall 
apply.

John M. Dalrymple,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2015-21259 Filed 8-27-15; 8:45 am]
 BILLING CODE 4830-01-P