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FROM THE OFFICE OF PUBLIC AFFAIRS
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JS-70The Treasury Department and the Internal Revenue Service are issuing final regulations requiring taxpayers to disclose their participation in potentially abusive tax avoidance transactions, promoters to register certain abusive transactions, and advisors to maintain lists of clients who have entered into potentially abusive tax avoidance transactions. These rules will help ensure that the Treasury Department and the Internal Revenue Service get the information needed to identify and evaluate questionable transactions.
By issuing final regulations, we are putting the promoters that sell questionable transactions and the taxpayers that participate in them on notice. We are increasing our efforts to identify and shut down abusive tax avoidance transactions as quickly as possible,stated Treasury Assistant Secretary for Tax Policy Pam Olson. The final regulations improve the system by helping us get the information needed to identify questionable transactions and the taxpayers who have participated in them. Besides using the information to target enforcement resources better, the Treasury Department and the Internal Revenue Service will use this information to prepare guidance that advises taxpayers about transactions marketed to them that may not work as advertised.
These final regulations conform the taxpayer disclosure regulations and the promoter list-maintenance regulations so that the rules are easier to apply and administer. In addition, in response to the comments received when the rules were proposed in October 2002, the final regulations reflect a number of changes intended to reduce unnecessary disclosure.
Six Categories of Potential Tax Avoidance Transactions Covered. Taxpayers will be required to disclose and promoters will be require to maintain investor lists for six categories of transactions:
(1) Listed transactions (i.e., transaction that have been specifically identified by the IRS as tax avoidance transactions);
(2) Transactions marketed under conditions of confidentiality;
(3) Transactions with contractual protection;
(4) Transactions generating a tax loss exceeding specified amounts;
(5) Transactions resulting in a book-tax difference exceeding $10 million; and
(6) Transactions generating a tax credit when the underlying asset is held for a brief period of time.
The final regulations generally are effective for transactions entered into on or after the date that they are filed with the Federal Register, which is expected to be this Friday, February 28, 2003. Taxpayers, however, may elect to apply the final disclosure regulations for transactions entered into on or after January 1, 2003.
Background. After evaluating the effectiveness of the prior rules, in March 2002, the Treasury Department issued its Enforcement Proposals for abusive tax avoidance transactions. The Enforcement Proposals include administrative, regulatory, and legislative actions and proposals. These final regulations carry out an important regulatory action by simplifying the definition of a transaction that must be disclosed on a return by a taxpayer and for which lists of participants must be maintained by a promoter. These changes provide objective rules that more clearly identify when taxpayers and promoters are covered by the disclosure and list-maintenance requirements. The final regulations, therefore, will enhance compliance and disclosure.
The text of the final regulations and the text of two related revenue procedures are attached. They are subject to minor technical changes for publication by the Federal Register and the Internal Revenue Service.
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