[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]]

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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.

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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