Note: The following is an excerpt from the introduction to the article as published in The Tax Lawyer. Author citations have been omitted for brevity. Tax Section members may read the article in its entirety in Adobe Acrobat format.
Transactions of Interest: Are They “Interesting” Enough To Warrant the New Obligations?
Jared H. Binstock
In early August 2007, the Treasury expanded its reportable transaction regime by adding a new category consisting of “transactions of interest.” A transaction of interest is “a transaction that the [Service] and [Treasury] believe has a potential for tax avoidance or evasion, but for which the [Service] and [Treasury] lack enough information to determine whether the transaction should be identified specifically as a tax avoidance transaction.” As a result of the promulgated regulations, taxpayers and “material advisors” are now required to disclose, in some cases retroactively, a substantial amount of information regarding their participation in published transactions of interest. While the adoption of this new category of reportable transactions will further the Treasury’s goal of enhancing transparency without subjecting taxpayers and practitioners to the harsh consequences of deeming a transaction as “listed,” the Treasury, as well as the Service, should have taken further steps to limit the uncertainty taxpayers and practitioners face in planning future transactions.In Part II, this Comment provides a background of the tax shelter industry and highlights the need for increased transparency regarding potentially abusive transactions. This part also addresses the initial governmental response to combat the evolution of abusive transactions. Part III(A) begins with a discussion of the new requirements under Regulation section 1.6011-4, promulgated in August 2007. This part also reviews new requirements for material advisors with respect to transactions of interest. Next, Part III(B) argues that the Treasury did not sufficiently balance its need for information with the administrative burden that this new category places on taxpayers and advisors or the potential chilling effect on the market. Specifically, Part III(B)(1) argues that the Treasury and the Service created too much uncertainty for taxpayers and advisors by (1) failing to provide a general description of what the Service will look for when it designates a transaction of interest, (2) mandating disclosure of transactions that are “substantially similar” to those found in published guidance, and (3) failing to define “participation” in the regulations. Part III(B)(2) then analyzes several aspects of the promulgated regulations and argues that the Treasury missed a valuable opportunity to ease taxpayer and advisor concerns by (1) not requiring advance notice and a comment period before designating a transaction of interest, (2) rendering such designations retroactive without limiting the time period a transaction can remain “of interest,” and (3) shortening the time period for disclosure. By not providing the appropriate clarity, the Treasury and the Service appear instead to have placed an undue burden on taxpayers and advisors for the sake of a fishing expedition.