LMSB designates loss importation transaction as Tier I issue
Tier I Issue - Loss Importation Transaction - Directive No. 1

IRS's Large and Mid-Size Business Division (LMSB) has issued a directive to the field, identifying a “loss importation transaction” as a Tier I issue and providing a uniform approach for examiners to evaluate potential compliance risks and outline the issue management and oversight process. A loss importation transaction is an international tax avoidance transaction in which a U.S. taxpayer typically uses offsetting positions with respect to foreign currency or other property for the purpose of importing a loss, but not the corresponding gain, in determining U.S. taxable income.
RIA observation: Under IRS's rules of engagement for LMSB examinations, Tier I issues are of high strategic importance to LMSB and have a significant impact on one or more industries. Tier I issues could include areas involving a large number of taxpayers, significant dollar risk, substantial compliance risk or high visibility, where there are established legal positions and/or LMSB direction.
Background. Notice 2007-57, 2007-29 IRB 87 , identifies loss importation transactions, and substantially similar ones, as listed transactions for purposes of Reg. § 1.6011-4(b)(2) , Code Sec. 6111 and Code Sec. 6112 (see Weekly Alert ¶ 11 06/28/2007 ). In the variation described in Notice 2007-57 , a U.S. taxpayer (Taxpayer) is a shareholder of an S corporation (S Corporation). S Corporation acquires control of a foreign entity (Foreign Entity) by purchasing from a foreign shareholder stock of Foreign Entity meeting the requirements of Code Sec. 1504(a)(2) (dealing with affiliated groups of corporations). Then S Corporation purchases the Foreign Entity stock. Foreign Entity is classified as a corporation for U.S. tax purposes under Reg. § 301.7701-2(b)(2) and Reg. § 301.7701-3(b)(2)(i)(B) , and is a controlled foreign corporation (CFC) under Code Sec. 957(a) .
Foreign Entity enters into substantially offsetting positions in foreign currency. Next, Foreign Entity disposes of or closes out some positions in the foreign currency for a gain while retaining the offsetting loss positions. Foreign Entity is not itself subject to U.S. taxation on the gains from the offsetting options. Foreign Entity may use the proceeds from these dispositions or closings out to enter into new positions in foreign currency. By entering into the new positions in foreign currency, Foreign Entity can effectively preserve the retained loss positions in the foreign currency and virtually eliminate further economic risk.
After realizing gains from disposing of or closing out some of the offsetting positions, Foreign Entity elects to be disregarded as an entity separate from its owner for U.S. tax purposes. Based on the effective date of this election, Foreign Entity is not a CFC for an uninterrupted period of 30 days during Foreign Entity's tax year, and S Corporation is not required to include any of Foreign Entity's subpart F income in its gross income under Code Sec. 951(a) . The gains are not otherwise subject to U.S. taxation. The election results in the distribution of all of Foreign Entity's assets and liabilities to its shareholder in a deemed liquidation of Foreign Entity. ( Reg. § 301.7701-3(g)(1)(iii) ) After the election, some or all of the loss positions in the foreign currency are allowed to expire, are disposed of, or are closed out, and some or all of the gain positions are allowed to expire, are disposed of, or are closed out, resulting in an aggregate net loss. S Corporation passes Taxpayer's pro rata share of the loss through to Taxpayer. Taxpayer purports to have sufficient basis in its S Corporation stock or in its debt to S Corporation to enable Taxpayer to claim the loss.
Notice 2007-57 also describes some variations of the above transaction.
LMSB Directive. The LMSB Directive noted that loss importation transactions are designed so that taxpayers may claim losses without taking into account the corresponding gain attributable to the offsetting positions. In these transactions, taxpayers attempt to exploit the entity classification rules and Code Sec. 951 (dealing with amounts included in a U.S. shareholder's gross income). IRS has been challenging these transactions by disallowing the loss or allocating the loss to the entity that economically incurred the loss. For transactions after Oct. 22, 2004, Code Sec. 362(e)(1) and Code Sec. 334(b)(1)(B) may prevent importation of losses by providing the transferee or distributee with a fair market value basis in imported assets, thus preventing a later recognition of loss.
The LMSB Directive noted that these transactions were often implemented in combination with other listed transactions such as “Intermediary Transactions” described in Notice 2008-111, 2008-51 IRB 1299 (see Weekly Alert ¶ 11 12/04/2008 ), and Son of Boss Transactions described in Notice 2000-44, 2000-2 CB 255 (see Weekly Alert ¶ 3 08/17/2000 ). Only a very small number of cases have been brought to IRS's attention through listed transaction disclosures under Code Sec. 6011 . Taxpayers who engaged in these transactions but do not file the required disclosures under Code Sec. 6011 and its regs are subject to penalties under Code Sec. 6707A . They may also be subject to an extended period of limitations under Code Sec. 6501(c)(10) . Material advisors who don't file the required disclosures under Code Sec. 6111 and its regs are subject to penalties under Code Sec. 6707(a) .
LMSB has not uncovered evidence that would suggest widespread promotion of loss importation transactions. But these transactions may have escaped detection during the course of examinations of other listed transactions. IRS believes that these transactions are most frequently detected during the course of an audit. Examiners are directed to look for the following U.S. tax disclosures which may be made in connection with these transactions:
... A Form 8832 (check the box election).
... A Form 5471 with respect to the ownership of the foreign entity for the period it is treated as a corporation for U.S. tax purposes.
... A Code Sec. 367(b) disclosure with respect to the deemed liquidation of the foreign entity resulting from the check the box election.
... A Form 926 and a Code Sec. 351 disclosure with respect to the transfer of the option contracts to the foreign entity.
... A Form 8858 or 8865 with respect to the ownership of the foreign entity for the period it is treated as a disregarded entity or partnership for U.S. tax purposes.
IRS advises examination teams to carefully scrutinize cases where a U.S. taxpayer is using offsetting positions with respect to foreign currency or other property and where the tax disclosures described above were filed or would otherwise be required. Heightened scrutiny should be given to cases already identified as involving intermediary transactions or Son of Boss Transactions. IRS examination teams with this issue should contact the Loss Importation Technical Advisor as soon as they identify indicators of this issue and follow the procedures set out in the LMSB Directive throughout the development of the case.
References: For disclosure of tax avoidance transactions, see FTC 2d/FIN ¶ S-4400 et seq.; United States Tax Reporter ¶ 61,114 et seq.; TaxDesk ¶ 817,000 et seq.; TG ¶ 71807 et seq.
Notice 2007-57, 2007-29 IRB 87, 06/20/2007, IRC Sec(s). 6011
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Loss importation transactions—listed transactions.
Headnote:
IRS will challenge transactions in which U.S. taxpayers attempts to use offsetting positions in foreign currency to claim losses without taking into account corresponding gains. Variations of this arrangement were detailed, with IRS noting that taxpayers are trying to exploit entity classification rules and Code Sec. 951(a); and that it intends to assert one or combination of arguments, including economic substance doctrine, in denying claims losses. These and substantially similar arrangements as “listed transactions”, subject to Code Sec. 6011; disclosure requirements, Code Sec. 6111; tax shelter registration, or Code Sec. 6112; list maintenance requirements.
Reference(s): ¶ 60,115.02(10); ¶ 61,114; ¶ 61,124; Code Sec. 6011; Code Sec. 6111; Code Sec. 6112;
Full Text:
The Internal Revenue Service and the Treasury Department are aware of a type of transaction, described below, in which a U.S. taxpayer uses offsetting positions with respect to foreign currency or other property for the purpose of importing a loss, but not the corresponding gain, in determining U.S. taxable income. This notice alerts taxpayers and their representatives that these transactions are tax avoidance transactions and identifies these transactions, and substantially similar transactions, as listed transactions for purposes of § 1.6011-4(b)(2) of the Income Tax Regulations and § § 6111 and 6112 of the Internal Revenue Code. This notice also alerts persons involved with these transactions to certain responsibilities that may arise from their involvement with these transactions.
Facts
In one variation of the loss importation transaction, a U.S. taxpayer (Taxpayer) is a shareholder of an S corporation (S Corporation). S Corporation acquires control of a foreign entity (Foreign Entity) by purchasing from a foreign shareholder stock of Foreign Entity meeting the requirements of § 1504(a)(2). When S Corporation purchases the Foreign Entity stock, Foreign Entity is classified as a corporation for U.S. tax purposes under § 301.7701-2(b)(2) and § 301.7701-3(b)(2)(i)(B) of the Procedure and Administration Regulations, and is a controlled foreign corporation (CFC) within the meaning of § 957(a).
Foreign Entity enters into substantially offsetting positions in foreign currency. Next, Foreign Entity disposes of or closes out some positions in the foreign currency for a gain while retaining the offsetting loss positions. Foreign Entity is not itself subject to U.S. taxation on the gains from the offsetting options. Foreign Entity may use the proceeds from these dispositions or closings out to enter into new positions in foreign currency. By entering into the new positions in foreign currency, Foreign Entity can effectively preserve the retained loss positions in the foreign currency and virtually eliminate further economic risk.
After realizing gains from disposing of or closing out some of the offsetting positions, Foreign Entity elects to be disregarded as an entity separate from its owner for U.S. tax purposes. Based on the effective date of this election, Foreign Entity is not a CFC for an uninterrupted period of 30 days during Foreign Entity's taxable year, and S Corporation is not required to include any of Foreign Entity's subpart F income in its gross income. See § 951(a). The gains are not otherwise subject to U.S. taxation. See, e.g., § § 881 and 882. The election results in the distribution of all of Foreign Entity's assets and liabilities to its shareholder in a deemed liquidation of Foreign Entity. See Treas. Reg. § 301.7701-3(g)(1)(iii). After the election, some or all of the loss positions in the foreign currency are allowed to expire, are disposed of, or are closed out, and some or all of the gain positions are allowed to expire, are disposed of, or are closed out, resulting in an aggregate net loss. S Corporation passes Taxpayer's pro rata share of the loss through to Taxpayer. Taxpayer purports to have sufficient basis in its S Corporation stock or in its indebtedness to S Corporation to enable Taxpayer to claim the loss.
Variations exist in the types of entities and forms of loss importation used in the transaction described above. For example, in one variation of the transaction, a C corporation may be used instead of an S corporation; or a foreign entity with more than one owner may elect to be classified for U.S. tax purposes as a partnership, rather than as an entity disregarded as separate from its owner. Further, the importation of the loss may be accomplished by other methods, such as a corporate reorganization described in § 368(a) or a transfer to which § 351 applies. Variations also exist in how the offsetting positions may be used in the transaction described above. For example, taxpayers may use positions with respect to property other than foreign currency.
Discussion
The transactions described in this notice are designed so that taxpayers may claim losses without taking into account the corresponding gains attributable to the offsetting positions in foreign currency or other property. In the loss importation transaction described above, taxpayers are attempting to exploit the entity classification rules and § 951(a) in order to claim losses without taking into account the corresponding gains attributable to the offsetting positions in foreign currency. The Service may challenge these transactions by, for example, disallowing the loss or allocating the loss to the CFC. The Service may assert one or a combination of arguments including, but not limited to, arguments under § § 165, 269, 482, and 988. In addition, the Service may assert that the transaction fails one or more judicial doctrines, such as the economic substance doctrine.
Transactions that are the same as, or substantially similar to, the transactions described in this notice are identified as “ listed transactions” for purposes of § § 1.6011-4(b)(2) and § § 6111 and 6112 effective June 20, 2007, the date this notice was released to the public. Independent of their classification as listed transactions, transactions that are the same as, or substantially similar to, the transactions described in this notice may already be subject to the requirements of § 6011, § 6111, § 6112, or the regulations thereunder.
Persons required to disclose these transactions under § 1.6011-4 who fail to do so may be subject to the penalty under § 6707A which applies to returns and statements due after October 22, 2004. Persons required to disclose these transactions under § 1.6011-4 who fail to do so may be subject to an extended period of limitations under § 6501(c)(10). Persons required to disclose or register these transactions under § 6111 who fail to do so may be subject to the penalty under § 6707(a). Persons required to maintain lists of investors under § 6112 who fail to do so (or who fail to provide such lists when requested by the Service) may be subject to the penalty under § 6708(a). In addition, the Service may impose penalties on persons involved in these transactions or substantially similar transactions, including the accuracy-related penalty under § 6662 or § 6662A.
The Service and Treasury recognize that some taxpayers may have filed tax returns taking the position that they were entitled to the purported tax benefits of the type of transactions described in this notice. These taxpayers should take appropriate corrective action and ensure that their transactions are disclosed properly.
Drafting Information
The principal author of this notice is Megan Stoner of the Office of Associate Chief Counsel (Passthroughs and Special Industries). For further information regarding this notice, contact Ms. Stoner at (202) 622-3070 (not a toll-free call).
IRS designates loss importation deals as listed transactions
Notice 2007-57, 2007-29 IRB
Notice 2007-57 warns that transactions in which a U.S. taxpayer uses offsetting positions with respect to foreign currency or other property for the purpose of importing a loss, but not the corresponding gain, in determining U.S. taxable income, are tax avoidance transactions. The Notice identifies these transactions, and substantially similar ones, as listed transactions for purposes of Reg. § 1.6011-4(b)(2) , Code Sec. 6111 and Code Sec. 6112 .
How loss importation transactions work. In one variation, a U.S. taxpayer (Taxpayer) is a shareholder of an S corporation (S Corporation). S Corporation acquires control of a foreign entity (Foreign Entity) by purchasing from a foreign shareholder stock of Foreign Entity meeting the requirements of Code Sec. 1504(a)(2) (dealing with affiliated groups of corporations). Then S Corporation purchases the Foreign Entity stock, Foreign Entity is classified as a corporation for U.S. tax purposes under Reg. § 301.7701-2(b)(2) and Reg. § 301.7701-3(b)(2)(i)(B) , and is a controlled foreign corporation (CFC) under Code Sec. 957(a) .
Foreign Entity enters into substantially offsetting positions in foreign currency. Next, Foreign Entity disposes of or closes out some positions in the foreign currency for a gain while retaining the offsetting loss positions. Foreign Entity is not itself subject to U.S. taxation on the gains from the offsetting options. Foreign Entity may use the proceeds from these dispositions or closings out to enter into new positions in foreign currency. By entering into the new positions in foreign currency, Foreign Entity can effectively preserve the retained loss positions in the foreign currency and virtually eliminate further economic risk.
After realizing gains from disposing of or closing out some of the offsetting positions, Foreign Entity elects to be disregarded as an entity separate from its owner for U.S. tax purposes. Based on the effective date of this election, Foreign Entity is not a CFC for an uninterrupted period of 30 days during Foreign Entity's tax year, and S Corporation is not required to include any of Foreign Entity's subpart F income in its gross income under Code Sec. 951(a) . The gains are not otherwise subject to U.S. taxation. The election results in the distribution of all of Foreign Entity's assets and liabilities to its shareholder in a deemed liquidation of Foreign Entity. ( Reg. § 301.7701-3(g)(1)(iii) ) After the election, some or all of the loss positions in the foreign currency are allowed to expire, are disposed of, or are closed out, and some or all of the gain positions are allowed to expire, are disposed of, or are closed out, resulting in an aggregate net loss. S Corporation passes Taxpayer's pro rata share of the loss through to Taxpayer. Taxpayer purports to have sufficient basis in its S Corporation stock or in its debt to S Corporation to enable Taxpayer to claim the loss.
Notice 2007-57 also describes some variations of the above transaction.
IRS's view of these deals. IRS says that, in the loss importation transaction described above, taxpayers are attempting to exploit the entity classification rules and Code Sec. 951(a) in order to claim losses without taking into account the corresponding gains attributable to the offsetting positions in foreign currency. IRS says it may challenge these transactions by, for example, disallowing the loss or allocating the loss to the CFC. It may assert one or a combination of arguments including, but not limited to, arguments under Code Sec. 165 (dealing with allowable losses), Code Sec. 269 (dealing with acquisitions made to evade or avoid income tax), Code Sec. 482 (dealing with allocation of income and deductions between related taxpayers), and Code Sec. 988 (dealing with the treatment of foreign currency transactions). In addition, it may assert that the transaction lacks economic substance or fails to meet other judicial doctrines.
Transactions that are the same as, or substantially similar to, the transactions described in Notice 2007-57 are identified as “listed transactions” for purposes of Reg. § 1.6011-4(b)(2) , Code Sec. 6111 , and Code Sec. 6112 , effective June 20, 2007. Independent of their classification as listed transactions, IRS says transactions that are the same as, or substantially similar to, the ones described in Notice 2007-57 may already be subject to the requirements of Code Sec. 6011 , Code Sec. 6111 and Code Sec. 6112 , or their regs.
Notice 2007-57 also provides that persons required to:
... disclose these transactions under Reg. § 1.6011-4 but fail to do so may be subject to the penalty under Code Sec. 6707A , which applies to returns and statements due after Oct. 22, 2004;
... .disclose these transactions under Reg. § 1.6011-4 , but fail to do so may be subject to an extended period of limitations under Code Sec. 6501(c)(10) ;
... disclose or register these transactions under Code Sec. 6111 , but fail to do so may be subject to the penalty under Code Sec. 6707(a) ;
... maintain lists of investors under Code Sec. 6112 , but fail to do so (or fail to provide such lists when requested by IRS) may be subject to the penalty under Code Sec. 6708(a) .
In addition, IRS says it may impose penalties on persons involved in these transactions or substantially similar transactions, including the accuracy-related penalty under Code Sec. 6662 or Code Sec. 6662A .
References: For disclosure of tax avoidance transactions, see FTC 2d/FIN ¶ S-4400 et seq.; United States Tax Reporter ¶ 61,114 et seq.; TaxDesk ¶ 817,000 et seq.; TG ¶ 71807 et seq. ed.
EXP ¶61,114 Disclosure and list maintenance for tax shelter reportable transactions.
CAUTION: The IRS has issued final regulations ( TD 9351, 7/31/2007 ) that would make the following changes to rules regarding material advisors (defined below) for tax shelter reportable transactions .
Each material advisor must file a return for each reportable transaction (see ¶60,114.02 ) by the date described below. Reg §301.6111-3(a) . A “material advisor” with respect to a transaction is a person who provides any material aid, assistance or advice in organizing, managing, promoting, selling, implementing, insuring or carrying out any reportable transaction, and directly or indirectly derives gross income in excess of the threshold amount (defined below). “Transaction” includes all of the factual elements relevant to the expected tax treatment of any investment, entity, plan or arrangement and includes any series of steps as part of a plan. Reg §301.6111-3(b)(1) .
The following terms are defined in the final regulations:
• Material aid, assistance or advice.
• Tax statement.
• Confidential transactions.
• Transactions with contractual protection.
• Loss transactions.
• Special rules for capacity as an employee, post-filing advice and publicly filed statements. Reg §301.6111-3(b)(2) .
A tax statement is any oral or written statement (including another person's statement) that relates to a tax aspect of a transaction that causes the transaction to be a reportable transaction (see ¶60,114.02 ). Reg §301.6111-3(b)(2)(ii) .
Under proposed regs, a statement would relate to a tax aspect of a transaction that would cause it to be patented transaction (see ¶60,114.02 ) if the statement is made or provided by the patent holder or the patent holder's agent (as defined in Prop Reg §1.6011-4(b)(7)(ii)(C) or Prop Reg §1.6011-4(b)(7)(ii)(D) , see ¶60,114.02 ) and concerns the tax planning method that is the subject of the patent. Prop Reg §301.6111-3(b)(2)(ii)(E) . When the proposed regulations are adopted as final, the rules will apply to transactions entered into after Sept. 25, 2007. Prop Reg §301.6111-3(i)(2) .
The statutory threshold gross income amount is $50,000 for a reportable transaction (see ¶60,114.02 ) substantially all of the tax benefits from which were provided to natural persons (looking through any partnerships, S corporations, or trusts), and $250,000 for all other transactions (discussed below). Reg §301.6111-3(b)(3)(i)(A) . For listed transactions, the amounts are lowered to $10,000 and $25,000 respectively. For transactions of interest, the IRS could identify reduced threshold amounts in published guidance. Reg §301.6111-3(b)(3)(i)(B) .
Under proposed regs for a patented transaction (see ¶60,114.02 ), the threshold amounts in Reg §301.6111-3(b)(3)(i)(A) would be reduced, from $50,000 to $250 and from $250,000 to $500. Prop Reg §301.6111-3(b)(3)(i)(C) . When the proposed regulations are adopted as final, the rules will apply to transactions entered into after Sept. 25, 2007. Prop Reg §301.6111-3(i)(2) .
Material advisor's disclosure statement.
A material advisor required to file a disclosure statement must file a completed Form 8918 , (Oct. 2007) , Material Advisor Disclosure Statement. The form must describe the expected tax treatment and all potential tax benefits expected to result from the transaction, any tax result protection and the transaction in sufficient detail for the IRS to understand the tax structure of the reportable transaction. Reg §301.6111-3(d)(1) . The IRS will issue a reportable transaction number for a disclosed material transaction. Material advisors must provide this number to all taxpayers and material advisors for whom the advisor acts as a material advisor. Reg §301.6111-3(d)(2) .
The disclosure statement for a reportable transaction must be filed by the last day of the month following the end of the calendar quarter in which the advisor became a material advisor with respect to the reportable transaction. Reg §301.6111-3(e) .
The final regulations also include provisions relating to designation agreements (i.e., relating to which of several material advisors should disclose a transaction) and post-filing advice, as well as conforming changes to protective disclosures. Reg §301.6111-3(f) , Reg §301.6111-3(g) .
The final regulations provide that the IRS has discretion, if a potential material advisor requests a ruling as to whether a transaction is a reportable transaction on or before the date that disclosure would be required, to determine that the submission satisfies the disclosure rules if the request fully discloses all relevant facts relating to the transaction that would otherwise be required to be disclosed. Reg §301.6111-3(h) .
Each material advisor for a “reportable transaction” (see ¶60,114.02 ) is required to file an information return with the IRS identifying and describing the transaction and the potential tax benefits that are expected to result from the transaction. Code Sec. 6111(a) ; Reg §301.6111-3 . A “material advisor” is a person who provides certain assistance or advice with regard to the transaction and receives more than certain threshold amounts of income. Code Sec. 6111(b)(1)(A) ; Reg §301.6111-3(b) .
Each material advisor with respect to any reportable transaction (including listed transactions, Conf Rept No. 108-755 ( PL 108-357, 10/22/2004 ), p. 597, see ¶61,111.0079 , must make a return (in the form prescribed by the IRS) setting forth:
• information identifying and describing the transaction;
• information describing any potential tax benefits expected to result from the transaction; and
• any other information that the IRS requests. Code Sec. 6111(a) ; Reg §301.6111-3(d) .
“Reportable transaction” has the same meaning as provided by Code Sec. 6707A(c) (generally, a transaction of a type that the IRS determines as having a potential for tax avoidance or evasion, see ¶67,07A4 ). Code Sec. 6111(b)(2) .
A reportable transaction is defined in Reg §1.6011-4(b)(1) (see ¶60,114.02 ). Reg §301.6112-1(c)(2) . In addition, the rules in Reg § 301.6112-1(b)(2), before amended by TD 9352, 7/31/2007 and Reg § 301.6112-1(c)(2), before amended by TD 9352, 7/31/2007 , see ¶61,124 (without regard to provisions relating to a transaction required to be registered under former Code Sec. 6111 as in effect before Oct. 23, 2004) apply in determining whether a transaction is a reportable transaction with respect to a material advisor. Determinations made by published guidance under Reg §1.6011-4(b)(8) (see ¶60,114.02 ) that a transaction is not considered a reportable transaction or is excluded from a category of reportable transactions, also apply. Notice 2004-80, Sec. A.2, 2004-2 CB 963 .
Who is a material advisor.
A material advisor is any person:
• who provides any material aid, assistance, or advice with respect to organizing, managing, promoting, selling, implementing, insuring, or carrying out any reportable transaction; and
• who directly or indirectly derives gross income in excess of a threshold amount (or such other amount prescribed by the IRS) for that assistance or advice. Code Sec. 6111(b)(1)(A) ; Reg §301.6111-3(b)(1) .
The threshold amount is:
• $50,000 for a reportable transaction substantially all of the tax benefits from which are provided to natural persons (looking through any partnerships, S corporations, or trusts), and
• $250,000 in any other case. Code Sec. 6111(b)(1)(B) ; Reg §301.6111-3(b)(3)(i) .
OBSERVATION: A person can exceed the gross income threshold amount through a combination of different services, for example, promoting and selling, or organizing, promoting and insuring, provided directly or indirectly.
Example 1. X, an individual, receives compensation for material legal services he provides in connection with the organization of a reportable transaction. He is also a partner in a partnership that materially participates in the promotion and sale of the transaction. X is a material advisor if the gross income he derives from the combination of (a) his legal services in connection with the transaction, and (b) his share of the partnership's gross income for promotion and sale of the transaction, exceeds the gross income threshold.
OBSERVATION: Apparently, the threshold gross income amount is applied on a transaction-by- transaction basis.
Example 2. Y gives material advice with respect to organizing two different reportable transactions substantially all of the benefits from which are provided to natural persons. Y receives gross income of $60,000 for the first transaction and $45,000 for the second. Y is a material advisor with respect to the first reportable transaction, but not with respect to the second.
OBSERVATION: The definition of material advisor also applies for purposes of the requirement under Code Sec. 6112 to maintain a list of persons for whom the advisor acted as a material advisor, see ¶61,124 .
Authority for additional disclosure by material advisors.
The IRS may issue regulations which provide:
• that only one person is required to satisfy the disclosure-by-information-return requirements of Code Sec. 6111(a) in cases where two or more persons would otherwise be required to satisfy the requirements;
• exemptions from the disclosure requirements; and
• rules as may be necessary or appropriate to carry out the purposes of the disclosure requirements, Code Sec. 6111(c) , including, for example, rules regarding the aggregation of fees in appropriate circumstances. Conf Rept No. 108-755 ( PL 108-357, 10/22/2004 ) p. 595, ¶61,111.0079 .

Transactions that are not “reportable transactions.”
The IRS has identified certain transactions that are not reportable transactions (see ¶60,114.02 ) under the disclosure rules.
• A transaction with contractual protection is a reportable transaction (see ¶60,114.02 ). Reg §1.6011-4(b)(4)(i) . Generally, this is a transaction involving a fee that is refundable if all or part of the intended tax consequences from the transaction are not sustained or a transaction involving a fee that is contingent on the taxpayer's realization of the tax benefits from the transaction. Reg §1.6011-4(b)(4)(i) ; Rev. Proc. 2004-65, Sec. 2.01, 2004-50 IRB . In determining whether a transaction has a contractual protection, transactions in which the refundable or contingent fee is related to the work opportunity credit, the pre-2007 welfare-to-work credit; and the Indian employment credit are not taken into account. Rev. Proc. 2004-65, Sec. 4.02, 2004-50 IRB 965 . A transaction does not have contractual protection solely because a party to the transaction has the right to terminate the transaction on the happening of an event affecting the taxation of one or more parties to the transaction. Reg §1.6011-4(b)(4)(iii)(A) .
• A loss transaction is a reportable transaction. Generally, a loss transaction is any transaction resulting in the taxpayer claiming a loss under Code Sec. 165 , see ¶1654 et seq., of at least:
(1) $10 million in any single tax year, or $20 million in any combination of tax years for corporations or partnerships that have only corporations as partners (looking through any partners that are themselves partnerships), whether or not any losses flow through to one or more partners; or $2 million in any single tax year, or $4 million in any combination of tax years for all other partnerships, whether or not any losses flow through to one or more partners;
(2) $2 million in any single tax year or $4 million in any combination of tax years for other partnerships, S corporations, individuals, or trusts; or
(3) $50,000 in any single tax year for individuals or trusts if the loss arises from a Code Sec. 988 , see ¶9884 et seq., transaction (relating to foreign currency transactions). Reg §1.6011-4(b)(5)(i) .
In determining whether a transaction is a loss transaction, loss on the sale of an asset with a “qualifying basis,” for example, basis equal to the amount paid in cash for the asset, and certain other losses, for example, casualty or theft losses, and involuntary conversions, are not taken into account: Rev. Proc. 2004-66, 2004-50 IRB 966 .
(1) In the case of transactions involving solely foreign tax credits, sales made in the ordinary course of the taxpayer's trade or business of property described in Code Sec. 1221(a)(1) , see ¶12,214.01 . However, this exception applies only to credits with respect to sales proceeds and not to the receipt of other income, such as interest received on bonds held in inventory.
(2) Transactions involving a brief asset holding period under the principles of Code Sec. 246(c)(4) , see ¶2434.04 , solely by reason of (i) a hedge that reduces only the risk of interest rate or currency fluctuations, or (ii) a guarantee issued by a person that is related to the taxpayer within the meaning of Code Sec. 267(b) , see ¶2674 et seq. or Code Sec. 707(b) , see ¶7074 et seq.
(3) Transactions involving a debt instrument that has a term of 45 days or less if the taxpayer's holding period in the debt instrument equals the debt instrument's entire term.
(4) Transactions resulting in a foreign tax credit for withholding taxes imposed in respect of non-dividend income or gain with respect to any property that are not disallowed under Code Sec. 901(l) , see ¶9014.08 . Rev. Proc. 2004-68, Sec. 4, 2004-50 IRB 969 .
For purposes of Code Sec. 6111 , disclosure is required for reportable transactions with respect to which a material advisor makes a tax statement (other than post-filing advice described in Reg § 301.6112-1(c)(2)(iv)(A), before amended by TD 9352, 7/31/2007 , see ¶61,124 ) after Oct. 22, 2004, regardless of whether any portion of the fee was received before Oct. 22, 2004, or whether the transaction was entered into before Oct. 22, 2004. Notice 2005-22, 2005-1 CB 756 modifying and clarifying Notice 2004-80, 2004-2 CB 963 .
Protective disclosures.
If a potential material advisor is uncertain whether a transaction must be disclosed, the advisor must disclose the transaction and indicate on the disclosure statement that the disclosure is being filed on a protective basis. IRS will not treat disclosure statements filed protectively differently from other disclosure statements filed under Code Sec. 6111 . For a protective disclosure to be effective, the advisor must comply with the regs under Reg §301.6111-3 and Reg §301.6112-1 by providing IRS with all requested information.
Rulings.
If a potential material advisor requests a ruling as to whether a specific transaction is a reportable transaction on or before the date that disclosure would otherwise be required under Code Sec. 6111 , the IRS in its discretion can determine that the submission satisfies the disclosure rules for that transaction if the request fully discloses all relevant facts relating to the transaction that would otherwise be required to be disclosed. The potential obligation of the person to disclose the transaction under Code Sec. 6111 (or to maintain or furnish the list under Reg §301.6112-1 ) won't be suspended while the ruling request is pending. Reg §301.6111-3(h) .
Prior law.
For disclosures required to be filed before Nov. 1, 2007, material advisors could have used either Form 8264, Application for Registration of a Tax Shelter, or Form 8918, to meet the disclosure requirement. Notice 2007-85, 2007-45 IRB 965 .
For transactions with respect to which a material advisor made a tax statement before Aug. 3, 2007, material advisors had to disclose reportable transactions on Form 8264 (see below) ( Notice 2007-85, 2007-45 IRB 965 ) and the regs discussed above generally did not apply.
For transactions entered into before Aug. 3, 2007, the rules in Notice 2004-80, 2004-2 CB 963 , Notice 2005-17, 2005-1 CB 606 , and Notice 2005-22, 2005-1 CB 756 , as in effect before Aug. 3, 2007, generally applied to the transactions described above. Reg §301.6111-3(i)(1) .
Form 8264, Application for Registration of a Tax Shelter, had to be filed instead of Form 8918. A material advisor required to file a return for a reportable transaction had to complete Form 8264 in the following way. A material advisor was required to complete only Parts I (except item 1(b)), IV, and V of Form 8264. In completing Form 8264, the form and instructions were to be read to apply, by substituting:
• “reportable transaction” each place “tax shelter” or “confidential corporate tax shelter” appeared;
• “material advisor” each place “organizer” or “principal organizer” appeared; and
• “Date the material advisor became a material advisor with respect to the reportable transaction” in place of “Date an interest in the tax shelter was first offered for sale” in Part I, line 7, of the form. Notice 2004-80, Sec. A(3), 2004-2 CB 963 . Form 8264 had to be signed under penalty of perjury and sent to IRS Service Center, Ogden, UT 84201.
In Part IV, fees had to be determined by applying the rules in Reg § 301.6112-1(c)(3)(iii), before amended by TD 9352, 7/31/2007 (see ¶61,124 ) instead of the instructions. In Part V, the material advisor had to identify the type of reportable transaction under Reg §1.6011-4(b) (see ¶60,114.02 ) that was being disclosed, and describe the facts of the transaction and the potential tax benefits expected to result from the transaction. Notice 2004-80, Sec. A.3, 2004-2 CB 963 .
A material advisor could file a single Form 8264 for substantially similar transactions. A material advisor was required to supplement information disclosed on Form 8264 if the information provided was no longer accurate, or if additional information that was not disclosed on Form 8264 became available. Notice 2004-80, Sec. A.3, 2004-2 CB 963 .
Once a material advisor had filed a Form 8264 with respect to a transaction, the material advisor was not required to file (1) an additional Form 8264 for each additional taxpayer that later entered into the same transaction or (2) a Form 8264 for a separate transaction that was the same as or substantially similar to the transaction for which the material advisor filed a Form 8264. A material advisor could not make modifications to Form 8264. Notice 2005-22, 2005-1 CB 756 clarifying and modifying Notice 2004-80, 2004-2 CB 963 .
If a person was required to disclose a reportable transaction, and the person registered the transaction under Code Sec. 6111 as in effect before Oct. 22, 2004, that registration met the disclosure requirements provided that the material advisor amended the previous registration to reflect any information required by Notice 2004-80. Notice 2004-80, Sec. A.4, 2004-2 CB 963 .
The return, which was an information return, Conf Rept No. 108-755 ( PL 108-357, 10/22/2004 ) p. 595, ¶61,111.0079 , had to be filed not later than the date specified by the IRS. Code Sec. 6111(a) . The return had to be filed by the last day of the month following the end of the calendar quarter in which a person became a material advisor. However, if a person became a material advisor after Oct. 22, 2004, and before Apr. 1, 2005, that material advisor had to file the return before May 1, 2005. Notice 2005-22, 2005-1 CB 756 modifying and clarifying Notice 2004-80, Sec. A.4, 2004-2 CB 963 .
Before Aug. 3, 2007, the rule on transactions with contractual protection ( Reg §1.6011-4(b)(4) ) didn't apply, but a similar rule applied under prior regs. Reg § 1.6011-4(b)(4), before removed by TD 9350, 7/31/2007 . Further, the following two types of transactions were reportable transactions:
• A transaction with a significant book-tax difference. This was a transaction where the amount for tax purposes of any item or items of income, gain, expense, or loss from the transaction differed by more than $10 million on a gross basis from the amount or amounts for book purposes in any tax year. Certain book-tax differences described in Rev. Proc. 2004-67, 2004-50 IRB 967 were not taken into account. Rev. Proc. 2004-67, 2004-50 IRB 967 ; Reg § 1.6011-4(b)(6), before removed by TD 9350, 7/31/2007 .
• A transaction involving a brief asset holding period, generally a transaction resulting in a taxpayer claiming a tax credit of more than $250,000 if the underlying asset was held by the taxpayer for less than 46 days. Reg § 1.6011-4(b)(7), before removed by TD 9350, 7/31/2007 . In determining whether a transaction was one involving a brief asset holding period, the following transactions were not taken into account:
(1) In the case of transactions involving solely foreign tax credits, sales made in the ordinary course of the taxpayer's trade or business of property described in Code Sec. 1221(a)(1) , see ¶12,214.01 . However, this exception applied only to credits with respect to sales proceeds and not to the receipt of other income, such as interest received on bonds held in inventory. Rev. Proc. 2004-68, Sec. 4, 2004-50 IRB 969 .
(2) Transactions involving a brief asset holding period under the principles of Code Sec. 246(c)(4) , see ¶2434.04 , solely by reason of (i) a hedge that reduced only the risk of interest rate or currency fluctuations, or (ii) a guarantee issued by a person that was related to the taxpayer within the meaning of Code Sec. 267(b) , see ¶2674 et seq. or Code Sec. 707(b) , see ¶7074 et seq. Rev. Proc. 2004-68, Sec. 4, 2004-50 IRB 969 .
(3) Transactions involving a debt instrument that had a term of 45 days or less if the taxpayer's holding period in the debt instrument equaled the debt instrument's entire term. Rev. Proc. 2004-68, Sec. 4, 2004-50 IRB 969 .
(4) Transactions resulting in a foreign tax credit for withholding taxes imposed in respect of non-dividend income or gain with respect to any property that were not disallowed under Code Sec. 901(l) , see ¶9014.08 . Rev. Proc. 2004-68, Sec. 4, 2004-50 IRB 969 .
For transactions of interest entered into before Nov. 2, 2006, for which a material advisor made a tax statement before Nov. 2, 2006, the regs discussed above did not apply. Reg §301.6111-3(i)(1) .
For ruling requests received before Nov. 1, 2006 ( Reg §301.6111-3(i)(1) ), Reg §301.6111-3(h) didn't apply, but a similar rule applied under temporary regs. Reg § 301.6111-3T(h), before removed by TD 9351, 7/31/2007 ; Reg § 301.6111-3T(i)(2), before removed by TD 9351, 7/31/2007 .
Before Feb. 24, 2005, Notice 2005-22 didn't apply. Notice 2005-22, 2005-1 CB 756 .
Before Nov. 16, 2004, the revenue procedures described above were not in effect. Rev. Proc. 2004-65, 2004-50 IRB 965 ; Rev. Proc. 2004-66, 2004-50 IRB 966 ; Rev. Proc. 2004-67, 2004-50 IRB 967 ; Rev. Proc. 2004-68, 2004-50 IRB 969 .
For transactions for which material aid, assistance, or advice was provided before Oct. 23, 2004, Sec. 815(c), PL 108-357, 10/22/2004 , the Code Sec. 6111 rules described above did not apply. Code Sec. 6111 before amend by Sec. 815(a), PL 108-357, 10/22/2004 .
For transactions with respect to which material aid, assistance, or advice was provided before Oct. 23, 2004, Notice 2004-80 was not in effect. Notice 2005-22, 2005-1 CB 756 modifying and clarifying Notice 2004-80, 2004-2 CB 963 .
For the registration rules that applied to transactions for which material aid, assistance, or advice was provided before Oct. 23, 2004, see ¶61,114.01 .
For transactions entered into before Jan. 1, 2003, the revenue procedures described above didn't apply. Rev. Proc. 2004-65, 2004-50 IRB 965 ; Rev. Proc. 2004-66, 2004-50 IRB 966 ; Rev. Proc. 2004-67, 2004-50 IRB 967 ; Rev. Proc. 2004-68, 2004-50 IRB 969 .