The IRS and Treasury Department issued final regulations under IRC § 4965 for excise taxes on tax-exempt entities that enter into prohibited tax shelter transactions and on their managers who approve such transactions or have reason to know that they are prohibited tax shelter transactions.
Certain tax-exempt entities such as section 501(c) entities, churches and government entities are subject to the entity-level excise tax, which is imposed when the entity is a party to a prohibited tax shelter transaction or a subsequently listed transaction. These transactions are those identified by the IRS as listed and reportable transactions under sections 6707A(c)(2) and 6707A(c)(1), respectively. A subsequently listed transaction is a transaction that became a listed transaction after the entity entered into it (and was not a reportable transaction when the entity entered into it). The amount of the tax is based on the entity’s knowledge of the nature of the transaction and on the amount of the entity’s net income from, or the proceeds of, the transaction.
Managers of tax-exempt entities are persons with the authority or responsibility to approve the prohibited tax shelter transactions. The amount of this excise tax is $20,000 for each approval causing the entity to be a party to such a transaction.
In 2007 the IRS issued proposed regulations defining many terms in section 4965 and providing details about the disclosure that a taxable party must make to the tax-exempt entity. These final regulations adopt the proposed regulations, with some changes. They simplify the definition of a tax-exempt party to a prohibited tax shelter transaction by eliminating an entity that “enters into a listed transaction and reflects on its tax return (whether an original or an amended return) a reduction or elimination of its liability for applicable 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.” Such a tax-exempt entity is subject to the same disclosure rules and increased penalties as taxable entities.
Final regulation § 301.6011(g)-1(d)(1) also modifies the timing of required disclosures by a taxable party in such arrangements. Now a taxable party to a prohibited tax shelter transaction must provide disclosure of the nature of the transaction to the tax-exempt entity within 60 days of the last to occur of:
- The date the person becomes a taxable party to the transaction;
- The date the taxable party knows or has reason to know that the tax-exempt entity is a party to the transaction; or
- July 6, 2010.
The taxes under section 4965 apply generally to tax years ending after May 17, 2006. Disclosure requirements under section 6011(g) apply generally to transactions entered into after that date.
Definitions under the final regulations (§§ 53.4965-1 through 53.4965-8) apply generally as of July 6, 2010, to tax years ending after July 6, 2007.
By Karyn Bybee Friske, CPA, Ph.D., Pickens Professor of Business and associate professor of accounting, and Darlene Pulliam, CPA, Ph.D., McCray Professor of Business and professor of accounting, both of the College of Business, West Texas A&M University, Canyon, Texas.
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