The IRS has released final and proposed regulations dealing with the application of Code Section 4965 and the reporting requirements relating to that Section. Section 4965 imposes entity-level and manager-level excise taxes for prohibited tax shelter transactions to which tax-exempt entities are parties. Section 6033(a)(2) imposes disclosure requirements on tax-exempt entities that are parties to prohibited tax shelter transactions.
The following summarizes the application of these provisions.
---Section 4945 imposes entity-level and manager-level excise taxes for prohibited tax shelter transactions to which tax-exempt entities are parties
---Section 6033(a)(2) imposes disclosure requirements on tax-exempt entities that are parties to prohibited tax shelter transactions
---Plan and Non-plan Entities
-------Include entities described in Section 501(c), religious or apostolic associations or corporations described in Section 501(d) , entities described in Section 170(c) , including states, U.S. possessions, the District of Columbia, state political subdivisions and U.S. possession political subdivisions (but not including the U.S.), and Indian tribal governments.
-------Plan entities include Section 401(a) qualified pension, profit-sharing and stock bonus plans, Section 403(a) annuity plans, Section 403(b) annuity contracts, Section 529 qualified tuition programs, Section 457(b) retirement plans maintained by a governmental employer, IRAs under Section 408(a) , Archer MSAs under Section 220(d) , individual retirement annuities under Section 408(b) , Section 530 Coverdell education savings accounts, and health savings accounts under Section 223(d) .
---Only non-plan entities are subject to the entity level tax.
Transactions Covered That Can Give Rise to the Imposition of the Excise Taxes
---Prohibited Tax Shelter Transactions
-------Those identified by IRS as potentially abusive "listed" tax avoidance transactions and reportable transactions that are confidential transactions or transactions with contractual protection
---A Subsequently Listed Transaction
-------One that is identified as a listed transaction after the tax-exempt entity has become a party to the transaction and that was not a prohibited reportable transaction at the time the tax-exempt entity became a party to the transaction
-------Penalties relating to subsequently listed transactions incur excise tax generally only after the IRS identifies them as a listed transaction
---Every tax-exempt entity identified above that is a party to a prohibited tax shelter transaction must disclose to IRS: (a) that the 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
---Any taxable party to a prohibited tax shelter transaction must disclose by statement to any tax-exempt entity that is a party to the transaction that it's a prohibited tax shelter transaction
---Form 4720, Return of Certain Excise Taxes Under Chapters 41 and 42 of the Code
-------Due on or before the date the non-plan entity's annual return under Section 6033(a)(1) (e.g., Form 990) is due, if the non-plan entity is required to file a return
---Form 5330, Return of Excise Taxes Related to Employee Benefit Plans
-------For entity managers of plan entities who are liable for Section 4965 taxes as entity managers
Expanded Definition of "Party" to a Prohibited Tax Shelter Transaction
---The proposed regulations would incorporate the definition of "party" in Notice 2007-18: a tax-exempt entity that facilitates a prohibited tax shelter transaction by reason of its tax-exempt, tax indifferent or tax-favored status
---Proposed regulations would broaden the term "party" to include a tax-exempt entity that enters into a listed transaction and reflects on its 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
-------A tax-exempt entity doesn't become a party to a prohibited tax shelter transaction solely because it invests in an entity that in turn becomes involved in a prohibited tax shelter transaction
TD 9334, 07/05/2007 ; Reg. § 53.6011-1 , Reg. § 53.6011-1T , Reg. § 53.6071-1 , Reg. § 53.6071-1T , TD 9335, 07/05/2007 ; Reg. § 1.6033-5T , Reg. § 301.6033-5T , Preamble to Prop Reg 07/05/2007 ; Preamble to Prop Reg 07/05/2007 Prop Reg § 1.6033-5 , Reg. § 53.4965-1 through Reg. § 53.4965-9