Reportable Transactions Defined
Reportable transactions are defined by Treasury Regulation Section 1.6011-4 and generally include the following categories of transactions. Many times these transactions are perfectly legitimate; however, the government requires disclosure.
Confidential Transactions
These are transactions offered under conditions of confidentiality and for a minimum fee of $250,000 for corporations or partnerships or trusts wholly owned by corporations and $50,000 for all others. Some tax professionals or investment promoters require clients to sign agreements stipulating the client may not disclose a tax strategy to others. Sometimes this is because the professional or promoter does not want competitors to find out about the strategy, but sometimes it is because the professional or promoter does not want the taxing authorities to find out.
Transactions with Contractual Protection
These are transactions with the right to a refund of fees or investment if the transaction’s intended tax consequences do not occur. They also include most contingent fee transactions. Sometimes the promoter of an investment will provide for a refund to the investors if promised tax benefits fall short. The IRS apparently views such a transaction as the sale of a tax benefit. Additionally, tax professionals will sometimes perform services on a contingent fee basis, where the amount of the fee is based on the realization of a tax benefit or refund.
Transactions with contractual protection involving the following tax credits are exempt from the reportable transactions disclosure rules:
- Work opportunity and welfare-to-work credits
- Indian employment credit
- Low-income housing credit
- New markets tax credit
- Empowerment zone employment credit
- Renewal community employment credit
- Employee retention credit
Loss Transactions
These are transactions resulting in a loss under Internal Revenue Code 165 (wagering, theft, capital, worthless securities, casualty, disaster, insolvent financial institution and certain other losses) of at least:
- $10 million in any single taxable year or $20 million in any combination of taxable years for corporations or partnerships wholly owned by corporations
- $2 million in any single taxable year or $4 million in any combination of taxable years for all others
- $50,000 in any single taxable year for individuals or trusts related to foreign currency transactions
The IRS requires disclosure apparently because some of the tax shelters it deems abusive were set up to manufacture large losses of these types.
A loss is not subject to the reportable transactions disclosure rules if all of the following are true:
- The basis of the asset is a “qualifying basis”
- The asset is not an interest in a pass-through entity
- The loss from the sale or exchange of the asset is not an ordinary loss from foreign currency transaction
- The asset has not been separated from any portion of the income it generates
- The asset has never been part of a straddle
A qualifying basis, in general, is one equal to the amount paid in cash for the asset, plus improvements, or acquired in certain tax-free corporate reorganizations, inheritance, gift or a like-kind exchange.
Transactions of Interest
These are transactions that the IRS believes have potential for tax avoidance or evasion, but for which it lacks enough information to determine whether they should be identified specifically as tax avoidance transactions (i.e., listed transactions). Click here for a summary of these transactions.
Listed Transactions
These transactions (and those substantially similar) are identified by the IRS as potentially abusive and are required to be disclosed. These transactions are complex, and the IRS guidance is technical. A brief summary of these transactions is posted on our web site. For detailed information, see the IRS guidance on its web site at http://www.irs.gov/businesses/corporations/article/0,,id=97384,00.html
Transactions Involving Tax-exempt Entities
The Tax Increase Prevention and Reconciliation Act of 2005 also imposed new rules on taxable entities that participate in a reportable transaction involving a tax-exempt entity. Taxable entities must disclose to tax-exempt entities that the transaction is a reportable transaction. Failure to do so subjects the taxable entity to the same penalties as if it fails to disclose a reportable transaction to the IRS.
For More Information
Contact your BKD advisor or:Lisa G. Workman
Director of Tax Services
417.831.7283
