On September 22, 2007, the IRS released new Form 8886-T, Disclosure by Tax-Exempt Entity Regarding Prohibited Tax Shelter Transaction, and the final instructions for its use. The new form requires tax-exempt organizations to report prohibited tax shelter transactions (e.g., listed transactions, including transactions “substantially similar” to listed transactions, confidential transactions, and contractual protection transactions). If the prohibited tax shelter transaction is a listed transaction, organizations must identify the specific listed transaction and all other parties to the transaction, whether taxable or tax-exempt (if known). A separate Form 8886-T must be filed for each prohibited tax shelter transaction. In addition, the entity or entity manager must keep a copy of all documents and other records related to a prohibited tax shelter transaction.
If the tax-exempt entity is a nonplan entity, Form 8886-T must be filed by the entity; if it is a plan entity, the form must be filed by the entity manager. In addition to the Form 8886-T, a tax-exempt entity and/or entity manager may be liable for excise taxes in connection with the prohibited tax shelter transaction.
The final instructions indicate that a taxable party to a prohibited tax shelter transaction must provide a statement, to any tax-exempt entity that is party to the transaction, that the transaction qualifies as a prohibited tax shelter transaction. Also, if a tax-exempt entity “participates in” any reportable transaction, including one of the categories of prohibited tax shelter transactions, the entity may also be required to file Form 8886, Reportable Transaction Disclosure Statement.
When to File
The due date for Form 8886-T depends on whether the entity is a party to a prohibited tax shelter transaction to reduce its own federal tax liability or whether it is trying to “facilitate” the transaction by reason of its tax-exempt, tax-indifferent, or tax-favored status.
For a tax-exempt entity that is a party to a prohibited tax shelter transaction because it is facilitating the transaction by reason of its exempt status, Form 8886-T must be filed on or before May 15 of the year following the close of the calendar year during which the entity entered into the prohibited tax shelter transaction. For a tax-exempt entity that became a party to a prohibited tax shelter transaction that is a listed transaction to reduce (or eliminate) its own tax liability, Form 8886-T must be filed on or before the date the first tax return (original or amended) is filed reflecting a reduction (or elimination) of the entity’s liability for federal employment, excise, or unrelated business income taxes derived directly or indirectly from tax consequences or tax strategy described in published guidance that lists the transaction.
Transition rules: For a tax-exempt entity that entered into a prohibited tax shelter transaction after May 17, 2006, but before January 1, 2007, and is deemed to be a “party to” the transaction by reason of its tax-exempt status, Form 8886-T is due on or before November 5, 2007. For a tax-exempt entity that entered into a listed transaction after May 17, 2006, but before January 1, 2007, and the listed transaction reduces (or eliminates) its federal tax liability, Form 8886-T is due by the later of two dates: either on or before November 5, 2007, or the date the first tax return (whether original or amended) is filed reflecting a reduction (or elimination) of the tax-exempt entity’s federal tax liability derived from the tax consequences or the tax strategy described in published guidance that lists the transaction.
Note that the instructions indicate that no disclosure on Form 8886-T is required for any prohibited tax shelter transaction entered into on or before May 17, 2006. However, certain tax-exempt entities may still be liable for the Sec. 4965 entity-level excise tax.
There is a monetary penalty for the failure to disclose the information required for a prohibited tax shelter transaction. The penalty is $100 for each day during which such failure continues, not to exceed $50,000 for each required disclosure. In addition, the Service may, in a written demand to the entity or entity manager, specify a future date by which the required disclosure must be filed. Failure to comply with this demand will result in an additional penalty of $100 per day after the expiration of the time specified in the demand, not to exceed $10,000 for each required disclosure. For a nonplan entity, the penalty is imposed on the entity; for a plan entity, the penalty is imposed on the entity manager.
A penalty will be assessed to the entity or the entity manager for each failure to timely file Form 8886-T in accordance with its instructions. The form must be completed in its entirety, with all required attachments, to be considered complete. Inclusion of statements such as “information provided on request” or “details provided on request” or other similar statements in the space provided will subject the entity or the entity manager to a penalty under Sec. 6652(c).
The new Form 8886-T and the final instructions provide exempt organizations with a concise road map for complying with the disclosure provisions of Sec. 6033 and Temp. Regs. Sec. 1.6033-5T. The form and instructions also provide informal guidance as to the mechanics of the prohibited tax shelter rules under Sec. 4965 and Prop. Regs. Secs. 53.4965-1 through -9. While there are no significant differences between the draft Form 8886-T released on June 28, 2007, and the final Form 8886-T, the instructions incorporate much of the guidance released on July 6, 2007 (REG-142039-06), on determining when a tax-exempt organization qualifies as a party to a prohibited tax shelter transaction.
One key provision in the instructions to the final Form 8886-T is the prohibition on including responses such as “information provided on request” or “details provided on request,” or other similar statements. The IRS is clearly taking the approach, consistent with other taxpayer disclosure requirements and the applicable regulations, that all items on the Form 8886-T must be complete (with all required attachments) and directly address the information requested; otherwise they will be deemed unresponsive and may subject the tax-exempt entity or its managers to penalties under Sec. 6652(c). The applicable penalty is generally the same as for failure to disclose the Form 8886-T.
Finally, the instructions point exempt organizations to the forms for reporting any Sec. 4965 excise tax: Form 4720, Return of Certain Excise Taxes Under Chapters 41 and 42 of the Internal Revenue Code (in the case of nonplan entities), and Form 5330, Return of Excise Taxes Related to Employee Benefit Plans (in the case of plan entities). The instructions also clarify that an exempt organization that files Form 8886-T may also have an obligation to file Form 8886, Reportable Transaction Disclosure Statement, to report the underlying reportable transaction (the listed transaction, including “substantially similar” transactions, confidential transaction, or contractual protection transaction). The Form 8886-T itself is subject to public inspection under Sec. 6104(b).
David J. Kautter, CPA Ernst & Young LLP Washington, DC
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