Saturday, July 29, 2006

TAX EXEMPT ENTITIES PARTICIPATING IN TAX SHELTER TRANSACTIONS

The Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA), enacted on May 17, 2006, includes new excise taxes and disclosure rules under Code Sections 4965 and 6033 that target certain potentially abusive tax shelter transactions to which a tax-exempt entity is a party. The managers of these entities, and in some cases the entities themselves, can be subject to excise taxes if the entity is a party to a prohibited tax shelter transaction. In Notice 2006-65, the IRS issued guidance as to the applicability of these new rules. Some of the key aspects include:

-Entities that may be affected by the new provisions include, but are not limited to, charities, churches, state and local governments, Indian tribal governments, qualified pension plans, individual retirement accounts, and similar tax-favored savings arrangements.

-Prohibited tax shelter transactions include (a) transactions that are identified by the IRS as potentially abusive “listed” tax avoidance transactions pursuant to Code Sections 6707A(c)(2) and 6011, and (b) reportable transactions that are (i) within the meaning of § 1.6011-4(b)(3) of the Income Tax Regulations, and (ii) transactions with contractual protection within the meaning of § 1.6011-4(b)(4) of the Income Tax Regulations.

-A tax-exempt entity, if subject to these rules and if a party to a prohibited tax shelter transaction, must disclose to the IRS (a) that such entity is a party to the prohibited tax shelter transaction; and (b) the identity of any other party to the transaction which is known to such tax-exempt entity.

Managers and trustees of tax-exempt entities conducting any activities that are more than plain vanilla activities should review these requirements to avoid penalties under these rules.
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