Academic journal article Journal of Accountancy

IRS Issues Final Regulations on Tax Shelter Excise Taxes

Academic journal article Journal of Accountancy

IRS Issues Final Regulations on Tax Shelter Excise Taxes

Article excerpt

The IRS and Treasury Department issued final regulations under IRC [section] 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. …

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