IRS ADDS GST TAX AVOIDANCE TO TAX SHELTER REPORTING & DISCLOSURE – DO WE CARE?

The IRS has issued final regulations that add generation-skipping tax avoidance as reportable under the tax shelter reporting and disclosure rules. Do we care?

The short answer is “not yet.”

Promoting, advising taxpayers about, or participating in a transaction that is the same as or substantially similar to a transactions determined by IRS to be a tax avoidance transaction and a “listed transaction” triggers numerous disclosure and penalty rules. Taxpayers may need to disclose their participation and material advisors may need to disclose these transactions. Material advisors also must maintain lists of advisees and other information with respect to these listed transactions. “Transactions of interest” are included in reportable transactions. These are transactions that 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.

The final regulations finalize proposed regulations that include GST taxes as coming under this rules. It is the position of the Dept. of the Treasury that the changes were “corrective,” not “expansive.”

The reason we don’t care yet is that there are no transactions on the IRS “listed transaction” list or the “transactions of interest” list that involve generation-skipping taxes. Therefore, the rules will only be relevant if the lists are expanded to include transactions involving GST taxes in the future.

Objections to the expansion were raised by persons representing corporate fiduciaries – that they would be subject to reporting as a material advisor simply by being a trustee or a personal representative when a reportable transaction was undertaken by a trust or estate. In response to those comments, Treasury noted that  a “fiduciary will not be treated as a material advisor merely by acting as an executor or trustee with respect to an estate or trust that is incidental to a transaction. A fiduciary will be treated as a material advisor only if the fiduciary provides material aid, assistance or advice as described in § 301.6111-3(b)(2), the fiduciary directly or indirectly derives gross income in excess of the threshold amount as described in § 301.6111-3(b)(3), and the transaction is entered into by the taxpayer.”

T.D. 9556, 11/10/2011; Reg. § 26.6011-4, Reg. § 301.6111-3, Reg. § 301.6112-2