Modification of Tax Shelter Rules II

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Parts 1 and 301 [TD 8961] RIN 1545-
BA04

TITLE: Modification of Tax Shelter Rules II

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary regulations.

SUMMARY: These temporary regulations modify the rules relating to
the requirement that certain corporate taxpayers file a statement
with their Federal corporate income tax returns under section
6011(a) and the registration of confidential corporate tax shelters
under section 6111(d). These regulations provide the public with
additional guidance needed to comply with the disclosure rules under
section 6011(a), the registration requirement under section 6111(d),
and the list maintenance requirement under section 6112 applicable
to tax shelters. The temporary regulations affect corporations
participating in certain reportable transactions, persons
responsible for registering confidential corporate tax shelters, and
organizers of potentially abusive tax shelters. The text of these
temporary regulations also serves as the text of the proposed
regulations set forth in the notice of proposed rulemaking on this
subject in the Proposed Rules section of this issue of the Federal
Register.

DATES: Effective Date: These temporary regulations are effective
August 2, 2001. Applicability Date: For dates of applicability, see
§1.6011-4T(g)and §301.6111-2T(h).

FOR FURTHER INFORMATION CONTACT: Danielle M. Grimm (202) 622-
3080(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This document amends 26 CFR parts 1 and 301 to provide modified
rules relating to the disclosure of certain reportable transactions
by corporate investors on their Federal corporate income tax returns
under section 6011 and the registration of confidential corporate
tax shelters under section 6111.

On February 28, 2000, the IRS issued temporary and proposed
regulations regarding section 6011 (TD 8877, REG-103735-00), section
6111 (TD 8876, REG-110311-98), and section 6112 (TD 8875,
REG-103736-00)(collectively, the February regulations). The February
regulations were published in the Federal Register (65 FR 11205, 65
FR 11215, 65 FR 11211) on March 2, 2000. On August 11, 2000, the IRS
issued temporary and proposed regulations regarding sections 6011,
6111, and 6112 (TD 8896, REG-103735-00, REG-110311-98,
REG-103736-00) (collectively, the August regulations). The August
regulations were published in the Federal Register (65 FR 49909) on
August 16, 2000, modifying the February regulations.

Based on comments that have been received, the IRS and Treasury have
determined that certain additional interim changes to the temporary
and proposed regulations are warranted. The changes in the proposed
rules are published elsewhere in this issue of the Federal Register.

These interim changes are intended to assist taxpayers and ease tax
administration by simplifying and clarifying certain provisions of
the regulations, addressing certain practical problems relating to
compliance with the regulations, and making certain other changes
relating to the scope of the regulations. The IRS and Treasury
continue to evaluate all the comments and recommendations received,
and other changes may be made in the final regulations.

Explanation of Provisions

1. Different Foreign Tax Treatment Characteristic in §1.6011-
4T(b)(3)(i)(F) Under section 6011, reportable transactions include
listed transactions and transactions that have at least two of six
specified characteristics. One of the characteristics is present if
the expected characterization of any significant aspect of the
transaction for Federal income tax purposes differs from the
expected characterization of such aspect of the transaction for
purposes of taxation of any party to the transaction in another
country. Commentators have suggested that the inclusion of this
characteristic causes the regulations to be overinclusive. Based on
these comments and further review, the IRS and Treasury have removed
this characteristic from the temporary and proposed regulations.

2. Clarification of Exceptions Under §1.6011-4T

Long-standing and generally accepted exception in §1.6011-4T(b)
(3)(ii)(B) The temporary regulations under section 6011 provide that
a transaction, other than a listed transaction, is not a reportable
transaction if one of four exceptions is satisfied. One exception
applies if the taxpayer has participated in the transaction in the
ordinary course of its business in a form consistent with customary
commercial practice, and the taxpayer reasonably determines that
there is a long-standing and generally accepted understanding that
the expected Federal income tax benefits (taking into account any
combination of intended tax consequences) from the transaction are
allowable under the Code for substantially similar transactions.

Commentators have requested additional guidance on the meaning of
the phrase long-standing and generally accepted that is contained in
this exception. This exception is intended to apply to transactions
the structure of which is customary and the intended tax treatment
of which is widely known and generally accepted as properly
allowable under the Internal Revenue Code.

Ordinarily, a determination as to whether the intended tax treatment
of a transaction has achieved such a level of general acceptance
cannot be made unless information relating to the structure and tax
treatment of substantially similar transactions has been in the
public domain and widely known for a period of years. However, the
applicability of this exception does not depend on such general
acceptance having existed for any minimum period of time.
Accordingly, the IRS and Treasury have eliminated the phrase long-
standing from the exception and have added language to clarify the
scope of the exception. Corresponding changes have been made in
§301.6111-2T.

b. No reasonable basis exception in §1.6011-4T(b)(3)(ii)(C)
This exception generally provides that a transaction, other than a
listed transaction, is not reportable if the taxpayer reasonably
determines that there is no reasonable basis under Federal tax law
for denial of any significant portion of the expected Federal income
tax benefits from the transaction. Commentators have requested
additional guidance on the no reasonable basis determination.
Accordingly, the regulations clarify that for purposes of this
exception, whether the IRS would have a reasonable basis for its
position is to be determined by applying the same standard as that
applicable to taxpayers under §1.6662-3(b)(3). Thus, the
reasonable basis standard is not satisfied by an IRS position that
would be merely arguable or that would constitute merely a colorable
claim. The determination of whether the IRS would have such a
reasonable basis is qualitative in nature and does not depend on any
percentage or other quantitative assessment of the likelihood that
the taxpayer would ultimately prevail if a significant portion of
the expected tax benefits were disallowed by the IRS. Corresponding
changes have been made to newly redesignated §301.6111-2T(b)(4)
(i).

3. Economic Substance Test

Commentators have suggested that the economic substance test, as
articulated in §301.6111-2T(b)(3), may encompass transactions
for which registration pursuant to section 6111(d) or list
maintenance under section 6112 would not be appropriate. Further,
the IRS and Treasury believe that substantially all transactions
encompassed by the economic substance test for which registration
and list maintenance are appropriate will constitute other tax
structured transactions within the meaning of §301.6111-2T(b)
(4). Accordingly, the economic substance test as described in
§301.6111-2T(b)(3) is removed from the temporary and proposed
regulations under section 6111.

4. Presumption Against Confidentiality Section 301.6111-2T(c)(3)
contains a presumption that, unless facts and circumstances clearly
indicate otherwise, an offer is not considered made under conditions
of confidentiality if the tax shelter promoter provides express
written authorization to each offeree permitting the offeree (and
each employee, representative, or other agent of such offeree) to
disclose the structure and tax aspects of the transaction to any and
all persons, without limitation of any kind on such disclosure.
There has been a request to clarify the phrase to disclose the
structure and tax aspects of the transaction.

Accordingly, the IRS and Treasury have added language to clarify
that this phrase is to be construed broadly and includes all
materials (including opinions or other tax analyses) that are
provided to the offeree related to the structure and tax aspects of
the transaction.

5. Tax Shelter Registration in §301.6111-2T(e)(2)(ii)(E) The
August regulations provided that the Form 8264, Application for
Registration of a Tax Shelter, was to be filed with the Kansas City
Service Center. Recently, the Service issued Announcement 2001-62
(2001-24 I.R.B. 1337), instructing taxpayers to file these forms
with the Ogden Service Center. The instructions to Form 8264 will be
revised to reflect the change in filing location. Accordingly, the
regulations are amended to provide that the Form 8264 is to be filed
as prescribed in the instructions to the form.

6. Effective Date The regulations are applicable August 2, 2001.
However, in general, taxpayers may rely on the regulations after
February 28, 2000.

Special Analyses

It has been determined that this Treasury decision is not a
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory assessment is not required. It has also been
determined that section 553(b) of the Administrative Procedure Act
(5 U.S.C. chapter 5) does not apply to these regulations, and
because these regulations impose no new collection of information on
small entities, a Regulatory Flexibility Analysis under the
Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required.
Pursuant to section 7805(f) of the Internal Revenue Code, these
temporary regulations will be submitted to the Chief Counsel for
Advocacy of the Small Business Administration for comment on their
impact on small business.

Drafting Information

The principal author of these regulations is Danielle M. Grimm,
Office of the Associate Chief Counsel (Passthroughs and Special
Industries). However, other personnel from the IRS and Treasury
Department participated in their development. List of Subjects

26 CFR Part 1 Income taxes, Reporting and record keeping
requirements.

26 CFR Part 301 Employment taxes, Estate taxes, Excise taxes, Gift
taxes, Income taxes, Penalties, Reporting and record keeping
requirements.

Adoption of Amendments to the Regulations Accordingly, 26 CFR parts
1 and 301 are amended as follows:

PART 1--INCOME TAXES

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

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

Par. 2. Section 1.6011-4T is amended as follows:

1. Paragraph (b)(3)(i)(F) is removed.

2. Paragraphs (b)(3)(ii)(B) and (C) are revised.

3. Paragraph (b)(5) is amended by removing the language long-
standing and from the fifth sentence in Example 1 and the seventh
sentence in Example 3.

4. Paragraph (g) is revised. The revisions and addition read as
follows: §1.6011-4T Requirement of statement disclosing
participation in certain transactions by corporate taxpayers
(Temporary).

* * * * *

(b) * * *

(3) * * *

(ii) * * *

(B) The taxpayer has participated in the transaction in the ordinary
course of its business in a form consistent with customary
commercial practice, and the taxpayer reasonably determines that
there is a generally accepted understanding that the taxpayer's
intended tax treatment of the transaction (taking into account any
combination of intended tax consequences) is properly allowable
under the Internal Revenue Code for substantially similar
transactions. There is no minimum period of time for which such a
generally accepted understanding must exist. In general, however, a
taxpayer cannot reasonably determine whether the intended tax
treatment of a transaction has become generally accepted unless
information relating to the structure and tax treatment of such
transactions has been in the public domain (e.g., rulings, published
articles, etc.) and widely known for a sufficient period of time
(ordinarily a period of years) to provide knowledgeable tax
practitioners and the IRS reasonable opportunity to evaluate the
intended tax treatment. The mere fact that the taxpayer may have
received an opinion or advice from one or more knowledgeable tax
practitioners to the effect that the taxpayer's intended tax
treatment of the transaction should or will be sustained, if
challenged by the IRS, is not sufficient to satisfy the requirements
of this paragraph (b)(3)(ii)(B).

(c) The taxpayer reasonably determines that there is no reasonable
basis under Federal tax law for denial of any significant portion of
the expected Federal income tax benefits from the transaction. This
paragraph (b)(3)(ii)(C) applies only if the taxpayer reasonably
determines that there is no basis that would meet the standard
applicable to taxpayers under §1.6662-3(b)(3) under which the
IRS could disallow any significant portion of the expected Federal
income tax benefits of the transaction. Thus, the reasonable basis
standard is not satisfied by an IRS position that would be merely
arguable or that would constitute merely a colorable claim. However,
the taxpayer's determination of whether the IRS would or would not
have a reasonable basis for such a position must take into account
the entirety of the transaction and any combination of tax
consequences that are expected to result from any component steps of
the transaction, must not be based on any unreasonable or
unrealistic factual assumptions, and must take into account all
relevant aspects of Federal tax law, including the statute and
legislative history, treaties, administrative guidance, and judicial
decisions that establish principles of general application in the
tax law (e.g., Gregory v. Helvering, 293 U.S. 465 (1935)). The
determination of whether the IRS would or would not have such a
reasonable basis is qualitative in nature and does not depend on any
percentage or other quantitative assessment of the likelihood that
the taxpayer would ultimately prevail if a significant portion of
the expected tax benefits were disallowed by the IRS.

* * * * *

(g) Effective date. This section applies to Federal corporate income
tax returns filed after February 28, 2000. However, paragraphs (b)
(3)(ii)(B), (b)(3)(ii)(C), and (b)(5) Examples 1 and 3, of this
section apply to Federal corporate income tax returns filed after
August 2, 2001. Taxpayers may rely on the rules in paragraphs (b)(3)
(ii)(B), (b)(3)(ii)(C), and (b)(5) Examples 1 and 3, of this section
for Federal corporate income tax returns filed after February 28,
2000. Otherwise, the rules that apply with respect to Federal
corporate income tax returns filed after February 28, 2000, and on
or before August 2, 2001, are contained in §1.6011-4T in effect
prior to August 2, 2001 (see 26 CFR part 1 revised as of April 1,
2001). PART 301--PROCEDURE AND ADMINISTRATION Par. 3. The authority
citation for part 301 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *

Par. 4. Section 301.6111-2T is amended as follows:

1. Paragraph (b)(1) is revised.

2. Paragraph (b)(3) is removed.

3. Paragraphs (b)(4), (b)(5), (b)(6) and (b)(7) are redesignated
paragraphs (b)(3), (b)(4), (b)(5) and (b)(6), respectively.

4. Newly redesignated paragraph (b)(3)introductory text is amended
by revising the reference to "(b)(4)" with "(b)(3)."

5. Newly redesignated paragraph (b)(3)(ii) is revised.

6. Newly redesignated paragraph (b)(4) introductory text is amended
by removing the reference "(b)(5)(i)" and adding "(b)(4)(i)" in its
place.

7. Newly redesignated paragraph (b)(4)(i) is revised.

8. Newly redesignated paragraph (b)(4)(ii) is amended by removing
the reference "(b)(6)" and adding "(b)(5)" in its place.

9. Newly redesignated paragraph (b)(6) is amended as follows:

a. Paragraph (b)(6), introductory text, is revised.

b. Example 1 is removed.

c. "Example 2." is redesignated as "Example."

d. The language "long-standing and" is removed from paragraph (i) in
the newly redesignated Example.

e. The fourth sentence of paragraph (i) in the newly redesignated
Example is removed.

f. Paragraph (ii)in the newly redesignated "Example" is revised.

10. Paragraphs (c)(3) and (e)(2)(ii)(E) are revised.

11. Paragraph (h) is amended by adding 3 sentences at the end.

The revisions and additions read as follows: §301.6111-2T
Confidential corporate tax shelters (temporary).

* * * * *

(b) * * * (1) In general. The avoidance or evasion of Federal income
tax will be considered a significant purpose of the structure of a
transaction if the transaction is described in paragraph (b)(2) or
(3) of this section. However, a transaction described in paragraph
(b)(3) of this section need not be registered if the transaction is
described in paragraph (b)(4) of this section. For purposes of this
section, Federal income tax benefits include deductions, exclusions
from gross income, nonrecognition of gain, tax credits, adjustments
(or the absence of adjustments) to the basis of property, and any
other tax consequences that may reduce a taxpayer's Federal income
tax liability by affecting the timing, character, or source of any
item of income, gain, deduction, loss, or credit. * * * * *

(3) * * *

(ii) There is a generally accepted understanding that the expected
Federal income tax benefits from the transaction (taking into
account any combination of intended tax consequences) are properly
allowable under the Internal Revenue Code for substantially similar
transactions. There is no minimum period of time for which such a
generally accepted understanding must exist. In general, however, a
tax shelter promoter (or other person who would be responsible for
registration under this section) cannot reasonably determine whether
the intended tax treatment of a transaction has become generally
accepted unless information relating to the structure and tax
treatment of such transactions has been in the public domain (e.g.,
rulings, published articles, etc.) and widely known for a sufficient
period of time (ordinarily a period of years) to provide
knowledgeable tax practitioners and the IRS reasonable opportunity
to evaluate the intended tax treatment. The mere fact that one or
more knowledgeable tax practitioners have provided an opinion or
advice to the effect that the intended tax treatment of the
transaction should or will be sustained, if challenged by the IRS,
is not sufficient to satisfy the requirements of this paragraph (b)
(3)(ii).

(4) * * *

(i) In the case of a transaction other than a transaction described
in paragraph (b)(2) of this section, the tax shelter promoter (or
other person who would be responsible for registration under this
section) reasonably determines that there is no reasonable basis
under Federal tax law for denial of any significant portion of the
expected Federal income tax benefits from the transaction. This
paragraph (b)(4)(i) applies only if the tax shelter promoter (or
other person who would be responsible for registration under this
section) reasonably determines that there is no basis that would
meet the standard applicable to taxpayers under §1.6662-3(b)(3)
of this chapter under which the IRS could disallow any significant
portion of the expected Federal income tax benefits of the
transaction. Thus, the reasonable basis standard is not satisfied by
an IRS position that would be merely arguable or that would
constitute merely a colorable claim. However, the determination of
whether the IRS would or would not have a reasonable basis for such
a position must take into account the entirety of the transaction
and any combination of tax consequences that are expected to result
from any component steps of the transaction, must not be based on
any unreasonable or unrealistic factual assumptions, and must take
into account all relevant aspects of Federal tax law, including the
statute and legislative history, treaties, administrative guidance,
and judicial decisions that establish principles of general
application in the tax law (e.g., Gregory v. Helvering, 293 U.S. 465
(1935)). The determination of whether the IRS would or would not
have such a reasonable basis is qualitative in nature and does not
depend on any percentage or other quantitative assessment of the
likelihood that the taxpayer would ultimately prevail if a
significant portion of the expected tax benefits were disallowed by
the IRS.

* * * * *

(6) Example. The following example illustrates the application of
paragraphs (b)(1) through (4) of this section. Assume, for purposes
of the example, that the transaction is not the same as or
substantially similar to any of the types of transactions that the
IRS has identified as listed transactions under section 6111 and,
thus, is not described in paragraph

(b)(2) of this section. The example is as follows:

Example. * * *

(ii) Analysis. The transaction represented by this combination of
financial instruments is a transaction described in paragraph (b)(3)
of this section. However, if Y is uncertain whether this transaction
is described in paragraph (b)(3) of this section, or is otherwise
uncertain whether registration is required, Y may apply for a ruling
under paragraph (b)(5) of this section, and the transaction will not
be required to be registered while the ruling is pending or for
sixty days thereafter.

(c) * * *

(3) Presumption. Unless facts and circumstances clearly indicate
otherwise, an offer is not considered made under conditions of
confidentiality if the tax shelter promoter provides express written
authorization to each offeree permitting the offeree (and each
employee, representative, or other agent of such offeree) to
disclose to any and all persons, without limitation of any kind, the
structure and tax aspects of the transaction, and all materials of
any kind (including opinions or other tax analyses) that are
provided to the offeree related to such structure and tax aspects.

* * * * *

(e) * * *

(2) * * *

(ii) * * *

(E) Sign the Form 8264 and file the form as prescribed in the
instructions to the form.

* * * * *

(h) Effective date. * * * However, paragraphs (b)(1),

(b)(3)(ii), (b)(4)(i), (b)(6)Example(i) and (ii), (c)(3), and

(e)(2)(ii)(E) of this section apply to confidential corporate tax
shelters in which any interests are offered for sale after August

2, 2001. The rules in paragraphs (b)(1), (b)(3)(ii), (b)(4)(i), (b)
(6), (b)(6)Example(i) and (ii), (c)(3), and (e)(2)(ii)(E), of this
section may be relied upon for confidential corporate tax shelters
in which any interests are offered for sale after February 28, 2000.
Otherwise, the rules that apply to confidential corporate tax
shelters in which any interests are offered for sale after February
28, 2000, and on or before August 2, 2001 are contained in this
§301.6111-2T in effect prior to August 2, 2001 (See 26 CFR part
301 revised as of April 1, 2001). Par. 5. Section 301.6112-1T is
amended by removing the authority citation immediately following the
section.

David A. Mader
Acting Deputy Commissioner of Internal Revenue.

Approved: July 31, 2001

Mark Weinberger
Assistant Secretary of the Treasury.

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