July 5, 2010
IRS Issues Final Rules on Tax-Exempts and Tax Shelters
As reported in today's Daily Tax Report, the Internal Revenue Service issued final regulations (T.D. 9492) regarding the involvement of tax-exempt organizations in prohibited tax shelters. As background, the Tax Increase Prevention and Reconciliation Act of 2005 created section 4965 of the Internal Revenue Code, which imposes excise taxes on tax-exempt organizations, including their managers, that participate in prohibited tax shelters. The proposed regulations issued in 2007 provided a three-part definition of the term "party to a prohibited tax shelter transaction," the second of which stated that a tax-exempt entity is a party to a prohibited tax shelter if it "enters into a listed transaction and reflects on its tax return . . . a reduction or elimination of its liability for federal employment, excise or unrelated business income taxes that is derived directly or indirectly from tax consequences or tax strategy described in the published guidance that lists the transaction." The final regulations eliminate this second definition, thereby acknowledging that a tax-exempt entity that enters into a transaction to reduce or eliminate its own tax liability generally will not be considered a party to a prohibited tax shelter. However, the third part of the definition set forth in the proposed regulations is retained in the final regulations, whereby the IRS and the Treasury Department may identify in published guidance specific transactions or circumstances in which a tax-exempt entity that enters into a transaction to reduce or eliminate its own tax liability will be treated as a party to a prohibited tax shelter transaction for purposes of section 4965.
The final regulations also modify the rules as to the timing of this disclosure. The taxable party in a tax shelter transaction must now make the disclosure within 60 days after the last to occur of (1) the date the person becomes a taxable party to the transaction, (2) the date the taxable party knows or has reason to know that the tax-exempt entity is a party to the transaction, or (3) July 6, 2010. The final regulations retain the exception for persons who do not know or have reason to know that a tax-exempt entity is a party to the transaction on or before the first date on which the transaction is required to be disclosed by the person under section 6011.
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