In some situations, taxpayers have only 90 days from the date a listed transaction or transaction of interest is identified to disclose it to the IRS. In other cases, taxpayers are not required to disclose participation in a newly identified listed transaction or transaction of interest until they file their next return. Failure to timely disclose a listed transaction or a transaction of interest could result in significant penalties—up to $200,000—even if there is no tax due. Because these rules can be confusing and mistakes are costly, knowing whether the 90-day time limit applies to a transaction is essential.
There currently are five categories of reportable transactions that must be disclosed, including listed transactions and transactions of interest—the newest category added by final regulations (TD 9350) issued on August 3, 2007 (revised final regulations). Under the general disclosure rules, a taxpayer must attach a statement (generally Form 8886, Reportable Transaction Disclosure Statement) to its federal income tax return for each year in which the taxpayer participated in the reportable transaction. In addition, for the first year that the taxpayer participates in a reportable transaction, it must send a copy of the disclosure statement to the Office of Tax Shelter Analysis (OTSA).
Before the revised final regulations were issued, there was an exception to the general disclosure rule for a transaction identified as a listed transaction after the taxpayer filed a return reporting participation in the transaction, but before the limitation period expired for the last return that reflected participation in the transaction (subsequently listed transaction). Under this exception, a taxpayer was required to disclose past participation in the listed transaction by attaching a disclosure statement to the first tax return filed after the transaction was identified (regardless of whether the taxpayer participated in the transaction in that year) and to send a copy of the disclosure statement to OTSA.
Revised Final Regs. Alter Timing of Disclosure
The revised final regulations shorten the time for disclosure of a subsequently listed transaction from the next filed return to within 90 calendar days after the date the listed transaction is identified as such by the IRS in published guidance (90-day rule) (Regs. Sec. 1.6011-4(e)(2)). The regulations apply this shortened disclosure period for subsequently identified transactions of interest, i.e., those identified as transactions of interest following the filing of a tax return reflecting the transaction. These 90-day disclosures are sent to OTSA only. The 90-day rule applies regardless of whether the taxpayer participated in the transaction in the year the transaction became a listed transaction or a transaction of interest.
Notwithstanding this 90-day disclosure rule, if the taxpayer participated in the transaction during the tax year in which the transaction is first identified as a listed transaction or transaction of interest, then the taxpayer must disclose such participation with its regularly filed income tax return under the general rule.
Although Regs. Sec. 1.6011-4(e)(2) appears to require disclosure to OTSA within 90 days after the transaction is identified as either a transaction of interest or a listed transaction, that is not always the case. As explained below, the 90-day rule applies only if:
1. The taxpayer already has reported the tax consequences or tax structure of the listed transaction or transaction of interest on a previously filed return, and
2. The taxpayer has entered into the listed transaction or the transaction of interest on or after the effective date of the 90-day rule (August 3, 2007, for listed transactions; November 2, 2006, for transactions of interest).
From a practical perspective, this later effective date for listed transactions means that many taxpayers may not be subject immediately to the 90-day rule for subsequently listed transactions.
Subsequently Listed Transactions
The revised final regulations require taxpayers to disclose subsequently listed transactions within 90 days of the notice date only if (1) the listed transaction is identified as such after the taxpayer files its first tax return reflecting participation in the listed transaction, and (2) the limitation period remains open for any year in which the taxpayer participated in the listed transaction. However, as noted, the 90-day rule applies only to subsequently listed transactions entered into on or after August 3, 2007. Thus, even if the transaction was reported on a previously filed return, a transaction entered into before August 3, 2007, will not be subject to the 90-day rule if such transaction is subsequently listed. Instead, the prior rule, which requires disclosure on the next filed tax return, will continue to apply to such transactions.
The examples below illustrate the impact of the disclosure timing rules in the revised final regulations. For purposes of these examples, the listed transaction is the distressed asset trust (DAT) transaction identified as a listed transaction in Notice 2008-34 on February 27, 2008.
Example 1: The taxpayer entered into the DAT transaction before August 3, 2007. The 90-day disclosure obligation does not apply, and the taxpayer must disclose its participation in the transaction on its next filed tax return.
Example 2: The taxpayer entered into the transaction on August 15, 2007, but did not file its tax return before February 27, 2008, the day the transaction was identified as a listed transaction. The 90-day disclosure obligation does not apply, and the taxpayer must disclose its participation in the transaction on its next filed tax return.
Example 3: The taxpayer entered into the transaction on August 15, 2007, but filed its tax return reflecting participation in the transaction before February 27, 2008, the day the transaction was identified as a listed transaction. The 90-day disclosure obligation applies, and the taxpayer must disclose the transaction to OTSA on or before May 27, 2008.
As these examples illustrate, to determine whether the 90-day disclosure rule applies, taxpayers should consider the date on which the transaction is entered into and whether a tax return reflecting participation in the transaction has already been filed.
In certain situations, the revised final regulations impose a 90-day disclosure obligation on taxpayers that participate in subsequently identified transactions of interest and listed transactions. However, this early disclosure obligation may not apply immediately to many taxpayers. Understanding the timing of disclosure obligations allows taxpayers to adopt appropriate internal controls to identify potentially reportable transactions of interest and listed transactions and to avoid significant penalties by timely complying with their disclosure obligations.