[Federal Register Volume 84, Number 58 (Tuesday, March 26, 2019)]
[Rules and Regulations]
[Pages 11217-11222]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-05546]
[[Page 11217]]
=======================================================================
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 301
[TD 9853]
RIN 1545-BK62
Reportable Transactions Penalties Under Section 6707A
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
-----------------------------------------------------------------------
SUMMARY: This document contains final 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 final regulations are
necessary to clarify the amount of the penalty under section 6707A, as
amended by the Small Business Jobs Act of 2010. The final regulations
will affect any taxpayer who fails to properly disclose participation
in a reportable transaction.
DATES: Effective Date: These regulations are effective on March 26,
2019.
FOR FURTHER INFORMATION CONTACT: Concerning the final regulations,
Michael Franklin, (202) 317-6844 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains final regulations amending 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 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 for failure to
disclose a reportable transaction. It also imposes a penalty on certain
taxpayers for failure to 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. On
September 11, 2008, temporary regulations (TD 9425) 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 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 of the decrease in tax shown on the return as a
result of a reportable transaction and provided maximum and minimum
penalty 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 Jobs Act amendment 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) adopting and amending the proposed
regulations published on September 11, 2008. 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.
On August 28, 2015, the Treasury Department and the IRS published
in the Federal Register (80 FR 52231-01) a notice of proposed
rulemaking proposing amendments to regulations under 26 CFR part 301 to
provide guidance on the amount of the penalty under section 6707A, as
amended by the Jobs Act.
Summary of Comments and Explanation of Revisions
One electronic comment was submitted under the regulation number
for the proposed regulations. The comment is available for public
inspection at http://www.regulations.gov or upon request. The IRS
received no requests for a public hearing, and none was held.
The comment addressed two different issues, the first being the
definition of ``decrease in tax'' provided in Sec. 301.6707A-
1(d)(1)(i) of the proposed regulations. Section 6707A(b)(1) provides
that, subject to certain minimum and maximum amounts, the amount of the
penalty under subsection (a) of section 6707A 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 301.6707A-1(d)(1)(i) of the proposed
regulations defines a ``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
definition in Sec. 301.6707A-1(d)(1)(i) also encompasses situations
where a taxpayer's participation in a reportable transaction creates a
liability for a tax that would not exist absent participation in the
transaction. For example, a taxpayer engaging in a listed transaction
involving a Roth IRA may be subject to an excise tax on excess IRA
contributions. If the taxpayer fails to report the excise tax on the
taxpayer's excess IRA contributions, this amount of tax would not
appear on the return filed by the taxpayer that reflected the
taxpayer's participation in the reportable transaction. The excise tax
would also not appear on a return filed by the taxpayer if the taxpayer
had not engaged in the transaction, because there would be no excess
contribution on which the excise tax would be imposed. Therefore, the
difference between these two returns would result in no decrease in tax
attributable to the abusive Roth IRA transaction. To account for this
type of situation, Sec. 301.6707A-1(d)(1)(i)(B) of the proposed
regulations includes in the definition of decrease in tax ``any other
tax that results from participation in the
[[Page 11218]]
reportable transaction but was not reported on the taxpayer's return.''
Example 1 in Sec. 301.6707A-1(d)(3)(i) illustrates this rule.
The commenter noted that the proposed regulation includes tax that
should have been shown on the return, but was not, in the definition of
``decrease in tax'' described in Sec. 301.6707A-1(d)(1)(i)(B) of the
proposed regulations. The decrease in tax described in Sec. 301.6707A-
1(d)(1)(i)(B) of the proposed regulations will only exist if the
taxpayer's reporting position is invalid. If the taxpayer's reporting
position were determined to be correct, there would be no additional
tax resulting from the participation in the reportable transaction that
the taxpayer was required to, but did not, report on the taxpayer's
return. The commenter contended that including this unreported tax as
part of the decrease in tax used to calculate the penalty conflicts
with the common understanding that the section 6707A penalty is
intended to apply even if the taxpayer's reporting position is
determined to be correct. In this situation, the Service will not be
able to impose the penalty without first determining the merits of the
reporting position. The commenter expressed concerns about whether
Congress intended for the penalty to apply in such circumstances,
absent adjudication on the merits of the underlying reporting position.
The commenter noted that, in contrast, Sec. 301.6707A-1(d)(1)(i)(A) of
the proposed regulations defines ``decrease in tax'' by comparing the
amount reported on the taxpayer's return (reflecting participation in
the reportable transaction) with the tax liability that would be
reported on a hypothetical return that did not reflect participation in
the reportable transaction. This portion of the definition is not
affected by the assumption that the taxpayer's reporting position is
invalid.
The definition of ``decrease in tax'' in Sec. 301.6707A-1(d)(1)(i)
of the proposed regulations remains the same in the final regulations.
The plain language of section 6707A supports the definition of decrease
in tax provided in these final regulations. As noted above, section
6707A(b)(1) provides that the amount of the section 6707A penalty
``shall be 75 percent of the decrease in tax shown on the return as a
result of such transaction.'' It is entirely consistent with this
statutory language to include, when determining the ``decrease in tax''
upon which the amount of the penalty is calculated, other tax that
would result from participation in the reportable transaction and that
was not reported on the taxpayer's return. If the taxpayer's
participation in the reportable transaction resulted in a decrease in
the amount of tax reported on the return, the plain language of section
6707A allows that amount to be taken into account in determining the
amount of the section 6707A penalty.
The same commenter also suggested adding an additional factor to
the list of factors that the IRS considers when determining whether to
rescind a section 6707A penalty in Sec. 301.6707A-1(e)(3) of the final
regulations (Sec. 301.6707A-1(d)(3) in the previous version of these
regulations). The commenter suggested adding the filing of a timely
amended return that removes the tax benefits claimed with respect to
the reportable transaction to that list of factors. The commenter
expressed concern that taxpayers might mistakenly believe that they can
remedy the failure to disclose the reportable transaction by filing an
amended return that does not report the benefits of the transaction and
that the filing of such amended return renders moot any obligation to
disclose participation in the reportable transaction.
The final regulations do not adopt this suggestion. The section
6707A penalty applies when a taxpayer fails to report participation in
a reportable transaction as required under section 6011. The filing of
an amended return that does not report the benefits of the reportable
transaction does not remedy the failure to which the section 6707A
penalty applies, namely the failure to report participation in the
reportable transaction. Furthermore, the list of factors in Sec.
301.6707A-1(e)(3) that the IRS considers in deciding whether to rescind
a section 6707A penalty is not exclusive. The IRS is not precluded from
considering factors other than those listed in the regulation,
including the filing of an amended return.
Although no changes were made specifically in response to public
comments, some revisions were made to the proposed regulations. Section
301.6707A-1(d)(1)(ii) was revised to clarify how the penalty is
calculated in situations where a transaction becomes reportable after
the filing of the return or returns reflecting participation in the
transaction.
Section 1.6011-4(a) provides that every taxpayer that has
participated in a reportable transaction and who is required to file a
tax return must file within the time prescribed in Sec. 1.6011-4(e) a
disclosure statement in the form prescribed by Sec. 1.6011-4(d). If a
transaction becomes a listed transaction or a transaction of interest
after the filing of the return or returns reflecting a taxpayer's
participation in such transaction but while the period of limitations
on assessment remains open for any year in which the taxpayer
participated in the transaction, Sec. 1.6011-4(e)(2)(i) requires the
taxpayer to file a single disclosure statement with respect to the
taxpayer's participation in the transaction with the Office of Tax
Shelter Analysis (OTSA) within 90 calendar days after the date on which
the transaction became a listed transaction or a transaction of
interest. In order for a disclosure statement to be considered
complete, Sec. 1.6011-4(d) requires the disclosure statement to
describe the expected tax treatment and all potential tax benefits
expected to result from the transaction, describe any tax result
protection with respect to the transaction, and identify and describe
the transaction in sufficient detail for the IRS to be able to
understand the tax structure of the transaction and the identity of all
parties involved in the transaction.
Section 1.6011-4(e)(2)(i) requires taxpayers to file a single
disclosure statement with respect to a subsequently listed transaction
or transaction of interest if the period of limitations on assessment
remains open with respect to any year in which the taxpayer
participated in the reportable transaction. Therefore, a taxpayer that
first participated in a listed transaction or transaction of interest
during a year for the which the period of limitations on assessment is
closed at the time the transaction becomes reportable, but that also
participated in the same reportable transaction during a year for which
the period of limitations on assessment remains open at the time the
transaction becomes reportable, is required to describe participation
in that reportable transaction during years for which the period of
limitations is closed at the time the transaction becomes reportable.
In the final regulations, Sec. 301.6707A-1(d)(1)(ii) is revised to
clarify that, when a taxpayer whose participation in a subsequently
identified listed transaction or transaction of interest is reflected
on more than one return and when that taxpayer fails to file, as
required by Sec. 1.6011-4(a), a complete and proper disclosure
statement in the time prescribed under Sec. 1.6011-4(e)(2)(i), the
amount of the penalty will be calculated by aggregating the decrease in
tax shown on each return for which the period of limitations on
assessment remains open at the time the transaction becomes reportable,
subject to the statutory minimum and maximum penalty amounts. Decreases
in tax shown on returns for years for
[[Page 11219]]
which the period of limitations is not open at the time the transaction
becomes reportable will not be taken into account in calculating the
amount of the penalty. Example 5 in Sec. 301.6707A-1(d)(3)(v) is
revised to more clearly illustrate how the penalty is calculated in
situations where a taxpayer fails to disclose participation in a
subsequently identified transaction.
Section 6501, which prescribes the period of limitation for
assessment of tax, does not preclude the IRS from taking into account
decreases in tax shown on returns for which the period of limitations
has closed when calculating the amount of the penalty. However, in the
interest of providing to taxpayers the repose generally provided for by
the expiration of the period of limitations on assessment, these final
regulations adopt an approach wherein those amounts are not taken into
account in calculating the penalty. When a transaction becomes
reportable after the filing of the return or returns reflecting
participation in that transaction, the obligation to file a disclosure
statement does not arise until the transaction becomes a listed
transaction or transaction of interest. When the transaction becomes a
listed transaction or transaction of interest, the taxpayer then has 90
calendar days to file a complete and accurate disclosure statement with
the OTSA. It is the failure to file this disclosure statement that
gives rise to liability for a single section 6707A penalty.
The approach to calculating the penalty adopted in these final
regulations is also more administrable. By including in the calculation
of the penalty only decreases in tax shown on returns for which the
period of limitations on assessment remains open, there is certainty
about which returns need to be reviewed and which decreases in tax are
taken into account in calculating the amount of the penalty. If
decreases in tax reported on returns for tax years for which the period
of limitations on assessment is closed were taken into account in
calculating the amount of the penalty, an indefinite number of prior
year returns would have to be reviewed to determine whether the return
reflects participation in the reportable transaction and to correctly
calculate the penalty. The approach adopted in these regulations avoids
this uncertainty, providing uniformity and repose to both taxpayers and
the IRS.
In addition to the changes to Sec. 301.6707A-1(d)(1)(ii), one
additional example was added to Sec. 301.6707A-1(d)(3)(vii) of the
final regulations. Example 7 illustrates the application of the penalty
in situations where a taxpayer that fails to disclose a subsequently
listed transaction files an amended return again reporting the tax
benefits associated with that transaction but does not disclose
participation in the transaction on the amended return as required by
Sec. 1.6011-4. Further, all examples were updated and revised for
clarity with non-substantive changes.
Special Analyses
This regulation is not subject to review under section 6(b) of
Executive Order 12866 pursuant to the Memorandum of Agreement (April
11, 2018) between the Department of the Treasury and the Office of
Management and Budget regarding review of tax regulations. Because the
final 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, the
notice of proposed rulemaking that preceded these final regulations was
submitted to the Chief Counsel for Advocacy of the Small Business
Administration for comment on its impact on small businesses. No
comments were received on the proposed regulations.
Drafting Information
The principal author of these regulations is Michael Franklin 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.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 301 is amended as follows:
PART 301--PROCEDURE AND ADMINISTRATION
0
Paragraph 1. The authority citation for part 301 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
0
Par. 2. Section 301.6707A-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 ``(d)(3)(i)'' and
``(d)(3)'' wherever they appear and adding ``(e)(3)(i)'' and ``(e)(3)''
in their place, respectively.
0
6. In newly designated paragraph (e)(3)(i), removing the language
``(including an amended return or application for tentative refund)''
wherever it appears.
0
7. In newly designated paragraph (f), removing ``(e)(1)'', ``(e)(2)'',
``(e)(3)'', and ``(e)(1)(i) through (e)(1)(iii)'' wherever they appear
and adding ``(f)(1)'', ``(f)(2)'', ``(f)(3)'', and ``(f)(1)(i) through
(iii)'' in their place, respectively.
0
8. Revising newly designated paragraph (g).
The additions and revisions 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. (A) 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:
(1) The excess of the amount of the tax that would have been 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
(2) Any other tax that results from participation in the reportable
transaction but was not reported on the taxpayer's return.
(B) The amount of tax that would have been 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. The calculation of the penalty is unaffected by
whether a taxpayer's tax liability is ultimately settled with the IRS
for a different
[[Page 11220]]
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, as required by Sec. 1.6011-4(a) of this chapter, a complete and
proper disclosure statement disclosing participation in a listed
transaction or transaction of interest with respect to more than one
return in the time prescribed under Sec. 1.6011-4(e)(2)(i) of this
chapter, the amount of the penalty will be computed by aggregating the
decrease in tax shown on each return for which the period of
limitations on assessment remains open.
(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 (SEC), 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 the failure to disclose.
(3) Examples. The rules in paragraphs (d)(1) and (2) of this
section are illustrated by the following examples:
(i) Example 1. Taxpayer X, a natural person, participated in a
listed transaction involving a Roth IRA and filed a return
reflecting participation in the transaction. X failed to disclose
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 X's Roth IRA. On X's return reflecting
participation in the listed transaction, 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 X's income tax would have remained
$25,000. There would, therefore, be no difference between the tax on
the return as filed and the tax on the 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, under paragraph (d)(1) of
this section, the decrease in tax resulting from the listed
transaction is $10,000. This amount is determined by adding zero
(the excess of the amount of tax that would have been 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 under section 6707A is $7,500, which amount is 75 percent of
the $10,000 decrease in tax.
(ii) Example 2. Taxpayer X participated in a listed transaction
that resulted in a $40,000 decrease in the tax shown on the return
reflecting participation in the transaction. X failed to disclose
its participation in the transaction as required by the regulations
under section 6011 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 under paragraph (d)(1) of this section, 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 under section 6707A is $30,000, which amount is 75 percent
of the $40,000 decrease in tax.
(iii) Example 3. For the 2018 tax year, Taxpayer X, a natural
person, failed to disclose participation in a reportable transaction
that is not a listed transaction and, therefore, 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, $4,500 of which were deductible after applying
the 7.5 percent floor in section 213(a) and (f). If X's return had
not reflected participation in the reportable transaction, X's
adjusted gross income would have been $140,000 and the deductible
medical expenses would be limited to $1,500 ($3,000 less than the
deductible amount claimed). Under paragraph (d)(1) of this section,
the decrease in tax shown on X's return as a result of X's
participation in the reportable transaction takes into account both
the tax on the additional $40,000 in adjusted gross income had X not
participated in the reportable transaction and the tax on the $3,000
adjustment to X's deductible medical expenses caused by the increase
in adjusted gross income.
(iv) Example 4. Taxpayer X, a natural person, timely filed X's
2019 return and reported income tax of $40,000. X did not
participate in a reportable transaction in 2019. X participated in a
listed transaction in 2020, but failed to file a complete and proper
disclosure statement with X's 2020 return as required by the
regulations under section 6011. As filed, the 2020 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
2020 return, the return would show income tax of $15,000 and no
loss. X files an amended return for the 2019 tax year on which the
only amendment is to carry back the $10,000 loss reported on the
2020 tax return to the 2019 tax year. The loss carryback reduces X's
tax liability for 2019 by $3,000 to $37,000. X fails to file a
complete and proper disclosure statement with the 2019 amended
return as required by the regulations under section 6011. Two
penalties under section 6707A apply: one for X's failure to disclose
participation in a listed transaction reflected on the 2020 return
and another for the failure to disclose participation in the same
listed transaction reflected on the 2019 amended return. Under
paragraph (d)(1) of this section, the decrease in tax on the 2020
return resulting from the listed transaction is $15,000, which is
the excess of the amount of tax that would have been shown on X's
2020 return if that return did not reflect X's participation in the
listed transaction over the tax X actually reported on the 2020
return. The amount of the section 6707A penalty with respect to the
2020 return is $11,250, which amount is 75 percent of the decrease
in tax. Under paragraph (d)(1) of this section, the decrease in tax
on the 2019 amended return that results from the listed transaction
is $3,000. This amount is computed by determining the excess of the
amount of tax that would have been shown on X's 2019 amended return
if that return did not reflect X's participation in the listed
transaction over the tax X actually reported on the 2019 amended
return reflecting the loss carryback resulting from X's
participation in the listed transaction in 2020. See paragraph (c)
of this section. However, because X is a natural person, and because
75 percent of the $3,000 decrease in tax is less than $5,000, which
is the minimum penalty under paragraph (a) of this section and
section 6707A(b)(3), the section 6707A penalty with respect to the
failure to disclose the listed transaction with respect to the 2019
amended return is $5,000. Accordingly, X is subject to a $11,250
section 6707A penalty for failure to disclose participation in a
listed transaction reflected on the 2020 return and a $5,000 section
6707A penalty for failure to disclose participation in a listed
transaction reflected on the 2019 amended return.
(v) Example 5. Taxpayer X, a corporation, timely files its
2019, 2020, and 2021 returns, each of which reflects participation
in the same transaction. In 2023, the transaction becomes a listed
transaction. When the transaction at issue became listed, the
periods of limitations on assessment on X's 2020 and 2021 tax year
were open, but the period of limitations on assessment on X's 2019
tax year was closed. Pursuant to Sec. 1.6011-4(a) and (e)(2)(i) of
this chapter, X is required to file a single disclosure statement
reflecting its participation in the listed transaction 90 calendar
days after the date on which the transaction becomes a listed
transaction. X failed to file a disclosure
[[Page 11221]]
statement as required. Pursuant to paragraph (d)(1)(ii) of this
section, the section 6707A penalty is computed by aggregating the
decrease in tax shown on the 2020 return and the decrease in tax
shown on the 2021 return. Because the period of limitations on
assessment for X's 2019 tax year was closed at the time the
transaction became listed, the decrease in tax shown on the 2019
return as a result of X's participation in the listed transaction is
not taken into account in computing the amount of the penalty. The
decreases in tax shown on the returns as a result of X's
participation in the transaction are $265,000 in tax year 2020 and
$7,000 in tax year 2021. Under paragraph (d)(1) of this section, the
total decrease in tax shown is computed by adding the decrease in
tax for 2020 and the decrease in tax for 2021, which is $272,000.
Seventy-five percent of that amount is $204,000. Because X is a
corporation, the maximum penalty amount is $200,000 under paragraph
(a) of this section and section 6707A(b)(2)(A). Accordingly, X is
subject to a section 6707A penalty of $200,000, rather than
$204,000.
(vi) Example 6. Taxpayer X, a natural person, files X's 2019
return reflecting participation in a reportable transaction that is
not a listed transaction, but fails to disclose the transaction as
required by the regulations under section 6011. The decrease in tax
with respect to X's 2019 return as a result of participation in the
reportable transaction is $20,000. X files an amended 2019 return to
include a net operating loss carried forward from a prior year,
which X inadvertently failed to include when filing the original
2019 return. The amended return reflects participation in the same
reportable transaction, but X again fails to disclose the
transaction as required by the regulations under section 6011. The
decrease in tax with respect to the amended 2019 return as a result
of participation in the transaction is also $20,000. X is subject to
two separate 6707A penalties: one for the failure to disclose the
reportable transaction with respect to the tax benefits from the
reportable transaction reflected on the original 2019 return and one
for the failure to disclose the reportable transaction with respect
to the tax benefits from the reportable transaction reflected on the
amended 2019 return. Seventy-five percent of the $20,000 decrease in
tax shown on the original 2019 return is $15,000 and on the amended
2019 return is another $15,000. However, because X is a natural
person, the amount of the penalty for failure to disclose is limited
to the maximum amount of $10,000 under Sec. 301.6707A-1(a) and
section 6707A(b)(2)(B). Accordingly, the amount of the section 6707A
penalty for the 2019 original return is $10,000 and the amount of
the section 6707A penalty for the 2019 amended return is also
$10,000, for a total penalty of $20,000.
(vii) Example 7. Taxpayer X, a natural person, timely files X's
2019 return on April 15, 2020, reflecting participation in a
transaction that was not identified as a reportable transaction when
X filed the return, the only year X participated in the transaction.
In early 2021, the IRS identifies the transaction as a listed
transaction. X fails to disclose the listed transaction as required
by the regulations under section 6011. In late 2021, X files an
amended 2019 income tax return to claim deductions that had been
omitted from the originally filed 2019 return. The amended 2019
return reflects X's participation in the listed transaction. X does
not disclose the listed transaction when filing the amended 2019
return. The decrease in tax resulting from X's participation in the
transaction is $100,000 with respect to the original 2019 return and
$80,000 with respect to the 2019 amended return. Pursuant to Sec.
1.6011-4(e)(2)(i) of this chapter, X was required to file a
disclosure statement reflecting X's participation in the listed
transaction if the period of limitations on assessment of tax
remained open for any taxable year in which the taxpayer
participated in the listed transaction. When the transaction at
issue became listed, the period of limitations on assessment on X's
2019 tax year was open. Pursuant to Sec. 1.6011-4(e)(1) of this
chapter, X was also required to disclose participation in the
transaction when the 2019 amended return was filed because the
transaction was a listed transaction at that time. X is subject to
two penalties under section 6707A: one for the failure to disclose
participation in a listed transaction reflected on X's original 2019
return within 90 calendar days of the date the transaction became a
listed transaction as required by Sec. 1.6011-4(e)(2)(i) of this
chapter and another for the failure to disclose participation in the
same listed transaction reflected on the 2019 amended return.
Seventy-five percent of this decrease in tax with respect to the
original 2019 return is $75,000 (75 percent of $100,000) and with
respect to the 2019 amended return is $60,000 (75 percent of
$80,000). Pursuant to paragraph (d)(1)(iv) of this section, because
X is subject to two separate penalties, the maximum penalty amount
of $100,000 under Sec. 301.6707A-1(a) and section 6707A(b)(2)(A)
applies separately to each penalty and does not operate to reduce
the amount of the X's 6707A penalties.
(viii) Example 8. Under Sec. 1.6011-4 of this chapter,
Partnership M is required to attach a disclosure statement to its
Form 1065, U.S. Return of Partnership Income, for the 2020 taxable
year. M fails to do so and is, therefore, subject to a penalty under
section 6707A. No tax is required to be shown on M's Form 1065.
Pursuant to Sec. 301.6707A-1(d)(2), M is subject to the minimum
section 6707A penalty of $10,000. 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.
(ix) Example 9. In tax year 2019, Taxpayer X participated in a
listed transaction that resulted in a $150,000 deduction. X's gross
income for 2019 before the listed transaction deduction is $100,000.
X uses $100,000 of the deduction resulting in zero tax liability for
2019. X carried over to tax year 2020 the remaining $50,000 net
operating loss that was not used in 2019. X's gross income for tax
year 2020 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 of this chapter, X is required to disclose
participation in the listed transaction for both 2019 and 2020, 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 2019 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 listed
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 2019
will be 75 percent of the decrease in tax. The decrease in tax on
the 2020 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 2020 will be 75 percent of the decrease in tax,
subject to the minimum and maximum penalty amount limitations.
(x) Example 10. In tax year 2020, Taxpayer X, a natural person,
participated in a listed transaction that resulted in a $50,000
deduction. X also has a net operating loss carryover of $150,000
from 2019. X uses the deduction of $50,000 and a portion of the net
operating loss carryover resulting in zero tax liability for 2020. X
carries over the remaining net operating loss to tax year 2021. X's
gross income for 2021 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 of this chapter, X is required
to disclose participation in the listed transaction for both 2020
and 2021, 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 2020 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 2020 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 2020 return. The decrease in tax on the
2021 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 2021 (i.e., if X had not offset
$50,000 of its 2020 gross income with the deduction resulting from
the reportable transaction and thus had used $100,000 of its net
operating loss carryover in 2020), 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 2021 will be 75 percent of this decrease in
tax, subject to the minimum and maximum penalty amount limitations.
(xi) Example 11. Taxpayer X, a public corporation required to
file periodic reports under section 13 or 15(d) of the Securities
[[Page 11222]]
Exchange Act of 1934, timely filed its 2019 return reflecting tax
benefits from a reportable transaction that is not a listed
transaction and properly disclosed the transaction in accordance
with the regulations under section 6011. In 2023, as a result of an
examination of X's 2019 return, the IRS imposes a penalty under
section 6662A with respect to the reportable transaction. The
decrease in tax for purposes of paragraph (d)(1) of this section is
$190,000. As a person who is required to file periodic reports under
section 13 or 15(d) of the Securities Exchange Act of 1934, X is
required, pursuant to section 6707A(e), to disclose the penalty
imposed under section 6662A to the Securities and Exchange
Commission in 2023, 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 is subject to a penalty
under section 6707A(e), which equals 75 percent of the decrease in
tax resulting from the transaction. The decrease in tax resulting
from the reportable transaction was $190,000, 75 percent of which is
$142,500. Because X is a corporation and the transaction is not a
listed transaction, the amount of the penalty is limited to $50,000
under paragraph (a) of this section and section 6707A(b)(2)(B).
Therefore, rather than $142,500, X is subject to a $50,000 section
6707A penalty for failure to disclose the section 6662A penalty to
the SEC.
* * * * *
(g) Applicability date. (1) This section applies to penalties
assessed after March 26, 2019.
(2) For penalties assessed before March 26, 2019, Sec. 301.6707A-1
(as contained in 26 CFR part 1, revised April 2018) shall apply.
Kirsten Wielobob,
Deputy Commissioner for Services and Enforcement.
Approved: November 16, 2018.
David J. Kautter,
Assistant Secretary of the Treasury (Tax Policy).
Editorial note: This document was received for publication by
the Office of the Federal Register on March 19, 2019.
[FR Doc. 2019-05546 Filed 3-25-19; 8:45 am]
BILLING CODE 4830-01-P