COMPARISON OF RECOMMENDATIONS RELATING TO 

CORPORATE TAX SHELTERS

MADE BY THE DEPARTMENT OF TREASURY AND 

THE STAFF OF THE JOINT COMMITTEE ON TAXATION

Scheduled for a Public Hearing

Before the

SENATE COMMITTEE ON FINANCE

on March 8, 2000

Prepared by the Staff

of the

JOINT COMMITTEE ON TAXATION

March 7, 2000

JCX-25-00
(i)

CONTENTS

Page

................................................................................. 1

RELATING TO CORPORATE TAXPAYERS ......................................... 3

 a tax shelter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

 a corporate tax shelter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

of the common-law economic substance doctrine in a substantive rule . . . . . . . . . . . . . . . . . . . . . . . . 6

enalty under section 6662 ............................................................ 6

 substantial understatement under section 6662 ........................................... 7

y corporate taxpayers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

ons required to be disclosed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

ns from disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

f disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

f disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

ion of disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

or nondisclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

sclosure to shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Page

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THAT AFFECT OTHER PARTIES INVOLVED IN CORPORATE TAX SHELTERS . . . . . . . 14

n tax-indifferent parties that participate in corporate tax shelters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

betting penalty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

tion against promoters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

istration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

ons required to be registered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

ns from registration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

f registration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

or nonregistration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

f professional conduct of practice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
ttee on Taxation, Study of Present-Law Penalty and Interest Provisions as Required by Section 3801 of the

ice Restructuring and Reform Act of 1998 (including Provisions Relating to Corporate Tax Shelters) (JCS-3-

of the Treasury, White Paper: The Problem of Corporate Tax Shelters (Discussion, Analysis and Legislative

 (“White Paper”).

of the Treasury, Report to the Congress on Penalty and Interest Provisions of the Internal Revenue Code,

f Management and Budget, Budget of the United States Government, Fiscal Year 2001: Analytical Perspectives

l. III), pp. 54-86.

ent of the Treasury, General Explanations of the Administration’s Fiscal Year 2001 Revenue Proposals,

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INTRODUCTION

mmittee on Finance has scheduled a public hearing on March 8, 2000, regarding penalties and interest and

 The Internal Revenue Service Restructuring and Reform Act of 1998 directed the Joint Committee on Taxation

f the Treasury to undertake separate studies of the interest and penalty provisions of the Internal Revenue Code

and make any legislative and administrative recommendations they deem appropriate to simplify penalty

uce taxpayer burden. The staff of the Joint Committee on Taxation released its study1 on July 22, 1999. The

asury released its White Paper discussion of corporate tax shelters2 and its report on penalty and interest

99 and October 1999, respectively. On February 7, 2000, the Department of the Treasury released their

sident’s Fiscal Year 2001 Budget Proposals;4 included among the President’s budget proposals are five

ral application to corporate tax shelter arrangements.5 On February 28, 2000, the Department of the Treasury

d proposed regulations relating to (1) disclosure of tax shelters by corporate taxpayers, (2) registration of

 tax shelters by tax shelter promoters, and (3) the maintenance of lists of investors in potentially abusive tax
reas. Reg. secs. 1.6011-4T; 301.6111-2T; and 301.6112-1T. These regulations are reflected, as appropriate, in

umn in the table below.

nt may be cited as follows: Joint Committee on Taxation, Comparison of Recommendations Relating to

rs Made by the Department of Treasury and the Staff of the Joint Committee on Taxation (JCX-25-00), March 7,

he “Recommendation” columns of this document, “No recommendation” means that no specific recommendation

t to that item.

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,7 prepared by the staff of the Joint Committee on Taxation, provides a comparison of the legislative changes

ate tax shelters recommended8 by the Joint Committee staff and the Department of the Treasury.
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r An accuracy-related penalty

under section 6662 applies to anunderstatement of tax that isattributable to a tax shelter.A tax shelter is defined as apartnership, entity, plan, orarrangement a significantpurpose of which is theavoidance or evasion of Federalincome tax.

Specific recommendations withrespect to the definition of acorporate tax shelter aredescribed below.

Specific recommendations withrespect to the definition of acorporate tax shelter aredescribed below.

Present law does not contain aspecial definition of a corporatetax shelter. The definition of atax shelter described aboveapplies to all taxpayers.

Corporate tax shelter - A

partnership, entity, plan, orarrangement (collectivelyreferred to as an “arrangement”)involving a corporate participantwill be considered to have asignificant purpose of Federalincome tax avoidance or evasionunder section 6662 if it satisfiesone of five corporate tax shelterindicators. The mere purchaseor sale of an asset will not

Corporate tax shelter - Any

entity, plan, or arrangement inwhich a direct or indirectcorporate participant attempts toobtain a “tax benefit” in a “taxavoidance transaction.” It isunclear whether thisrecommendation would replaceor be in addition to the presentlaw significant purposedefinition.
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constitute an arrangement forthese purposes.Corporate tax shelter indicators -(1) The present value of thereasonably expected pre-taxprofit from the arrangement isinsignificant relative to thepresent value of the reasonablyexpected net tax benefits.(2) The arrangement involves atax-indifferent participant, and(a) results in taxable incomematerially in excess of economicincome to the tax-indifferentparticipant, (b) permits acorporate participant tocharacterize items of income,gain, loss, deductions, or creditsin a more favorable manner thanit otherwise could without theinvolvement of the taxindifferent participant, or (c)results in a noneconomicincrease, creation,multiplication, or shifting ofbasis for the benefit of the

Tax benefit - Includes any

reduction, exclusion, avoidance,or deferral of tax, or an increasein a refund, but would notinclude a tax benefit clearlycontemplated by the applicableprovision. Tax avoidance transaction - (1) Any transaction in which thepresent value of the reasonablyexpected pre-tax profit of thetransaction is insignificantrelative to the present value ofthe reasonably expected net taxbenefits; and (2) In the case of financingtransactions, any transaction inwhich the present value of thetax benefits of the taxpayer towhom the financing is providedis significantly in excess of thepresent value of the pre-taxprofit or return of the personproviding the financing.
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corporate participant, and resultsin the recognition of income orgain that is not subject toFederal income tax because thetax consequences are borne bythe tax-indifferent participant.(3) The arrangement involvessignificant reasonably expectednet tax benefits and a taxindemnity or similar agreement.(4) The arrangement involvessignificant reasonably expectednet tax benefits and a reasonablyexpected “permanent difference”for U.S. financial reportingpurposes under generallyaccepted accounting principles.(5) The arrangement involvessignificant reasonably expectednet tax benefits and thecorporate participant incurs little(if any) additional economicrisk.
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The economic substancedoctrine has been developed incommon law through numerouscourt cases. This doctrine hasbeen invoked to deny claimedtax benefits if the transactiongiving rise to those benefitslacked economic substanceindependent of taxconsiderations.

No recommendation. Codifies and clarifies the

economic substance doctrine bydisallowing any tax benefitderived in a tax avoidancetransaction (defined above).Applies to any trade or businessor activity engaged in for profitor for the production of income,including those that engage inbusiness in non-corporate forms.Does not apply to any claimedloss or deduction economicallybeen incurred by a taxpayerbefore entering into thetransaction.

r

Imposes a 20-percent penalty onthe portion of any underpaymentattributable to (1) negligence or(2) any substantialunderstatement of income tax.

Increases the penalty rate to 40percent for any understatementthat is attributable to a corporatetax shelter. The IRS would nothave the discretion to waive theunderstatement penalty insettlement negotiations orotherwise for corporate taxshelters.

Increases the penalty rate to 40percent for any understatementthat is attributable to a corporatetax shelter.
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Penalty does not apply if thetaxpayer establishes reasonablecause for the underpayment andthe taxpayer acted in good faith. Reasonable cause may beestablished with a more-likelythan-not opinion of a third-party.

Reduces the 40-percent rate to20 percent if certain disclosuresare made and the tax treatment issupported by substantialauthority.Penalty does apply if thecorporate taxpayer (1) satisfiesdisclosure requirements(including corporate officercertification), (2) reasonablybelieves that there is at least a75-percent likelihood ofsustaining the position on itsmerits, and (3) has a materialnontax business purpose. Repeals the present-lawreasonable cause exception.

Reduces the 40-percent rate to20 percent if certain disclosuresare made.Penalty does not apply if thetaxpayer discloses thetransaction and satisfies astrengthened reasonable causestandard (i.e., the taxpayershows that it had a strong chanceof sustaining its tax position andacted in good faith). 

n

A substantial understatementexists if the correct income taxliability for a taxable yearexceeds the liability reported bythe taxpayer by the greater of 10percent of the correct tax or$5,000 ($10,000 in the case ofmost corporations).

Modifies the penalty withrespect to a corporate tax shelterto eliminate the requirement thatthe understatement besubstantial. Imposes the penaltyon the understatementattributable to each corporate taxshelter (without regard towhether there was an overallunderpayment of tax for the

No recommendation specific tocorporate tax shelters, butanother proposal treats anycorporate understatement inexcess of $10 million assubstantial, regardless ofwhether it exceeds 10 percent ofthe tax liability.
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taxable year).

A corporate taxpayer mustdisclose:(1) Any transaction that is thesame as, or substantially similarto, a transaction identified by theIRS in published guidance asbeing a tax avoidancetransaction (a“listed”transaction) and which isexpected to reduce Federalincome tax liability by morethan $1 million in any singleyear or by more than $2 millionfor any combination of years, or (2) Any transaction having atleast two of six characteristics(“filters”) and which is expectedto reduce Federal income taxliability by more than $5 millionin any single year or $10 millionfor any combination of years.

30-day disclosure -Arrangements that are describedby a tax shelter indicator and inwhich the expected net taxbenefits are at least $1 millionmust be disclosed within 30 daysof entering into the arrangement.Tax-return disclosure -Arrangements that are describedby a tax shelter indicator arerequired to be disclosed oncorporate taxpayer’s tax returns.Corporate tax shelter indicators(same as described in connectionwith the definition of a corporatetax shelter) -(1) The present value of thereasonably expected pre-taxprofit from the arrangement isinsignificant relative to thepresent value of the reasonably

Same as present law (proposedand temporary regulations issuedin February 2000 includedisclosure requirements that aresimilar to those contained in thePresident’s budget proposals).
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Filters:(1) The transaction is offeredunder conditions ofconfidentiality.(2) The transaction involvescontractual protection againstthe possibility that part or all ofthe intended tax benefits fromthe transaction will not besustained.(3) Aggregate contingentpromoter fees for suchtransactions exceed $100,000.(4) The transaction involves abook/tax difference in excess of$5 million in any year.(5) The transaction involves aperson that the taxpayer knowsor has reason to know is in aFederal income tax position thatdiffers from that of the taxpayer(e.g., a tax-exempt entity orforeign person), and the taxpayer

expected net tax benefits.(2) The arrangement involves atax-indifferent participant, andthe arrangement (a) results intaxable income materially inexcess of economic income tothe tax-indifferent participant,(b) permits a corporateparticipant to characterize itemsof income, gain, loss,deductions, or credits in a morefavorable manner than itotherwise could without theinvolvement of the taxindifferent participant, or (c)results in a noneconomicincrease, creation,multiplication, or shifting ofbasis for the benefit of thecorporate participant, and resultsin the recognition of income orgain that is not subject toFederal income tax because thetax consequences are borne bythe tax-indifferent participant.(3) The arrangement involves
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knows or has reason to knowthat such difference haspermitted the transaction to bestructured to provide thetaxpayer with more favorableFederal income tax treatmentthan it could have obtainedwithout the participation of suchperson.(6) The expected U.S. tax andforeign tax characterizations ofany significant aspect of thetransaction differ.

significant reasonably expectednet tax benefits and a taxindemnity or similar agreement.(4) The arrangement involvessignificant reasonably expectednet tax benefits and reasonablyexpected “permanent difference”for U.S. financial reportingpurposes under generallyaccepted accounting principles.(5) The arrangement involvessignificant reasonably expectednet tax benefits and thecorporate participant incurs little(if any) additional economicrisk.

Disclosure is not required fortransactions otherwise subject todisclosure (i.e., exhibiting atleast 2 of the 6 filters describedabove) if:(1) The taxpayer participated inthe transaction in the ordinarycourse of the taxpayer’s trade orbusiness in a form consistent

(1) Disclosure is not required forarrangements that are properlyreported on certain forms (e.g.,Form 1120-FSC for foreignsales corporations; Form 1120-DISC for domestic internationalsales corporations; Form 8586for the low income housingcredit; Form 1120, schedule K,line 12 for tax-exempt interest;

Authorizes the TreasurySecretary to provide exceptionsfrom disclosure.
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with customary commercialpractice and would have enteredinto the transaction onsubstantially the same termsirrespective of the expectedFederal income tax benefits.(2) The taxpayer participated inthe transaction in the ordinarycourse of its business in a formconsistent with customarycommercial practice and thetaxpayer reasonably determinesthat there is a long-standing andgenerally acceptedunderstanding that the expectedFederal income tax benefits fromthe transaction are allowable.(3) The taxpayer reasonablydetermines that there is noreasonable basis under Federaltax law for denial of anysignificant portion of theexpected tax benefits.(4) The transaction is identifiedin published guidance as

and Form 8860 for the qualifiedzone academy bond credit), butonly to the extent provided bythe Treasury Secretary inregulations.(2) Solely for purposes of the30-day disclosure, disclosure isnot required for leasingtransactions that satisfy theguidelines in Rev. Proc. 75-21and the case law thereunder.
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excepted from disclosure.

The disclosure is required to

include: the name of transaction,whether it has been registered bya promoter, a description of theprincipal elements giving rise totax benefits, a description of thetax benefits, identification ofeach tax year affected (and theamount of tax benefits).

The disclosure is required toinclude: a summary of relevantfacts and assumptions, theexpected net tax benefits,identification of each tax shelterindicator that describes thearrangement, legal analysis andrationale for the tax treatment,the business purpose, and theexistence of any contingent fees.

Same as present law.

The disclosure is required no

later than the due date of taxreturn (with extensions).

One disclosure required within30 days of entering into thearrangement and a seconddisclosure required by the duedate of the tax return (withextensions).

The disclosure is required nolater than the original due date oftax return (without extensions).

re No special certification required. A corporate officer must certify

(under penalties of perjury) theadequacy of the disclosure.

A corporate officer must certify(under penalties of perjury) theadequacy of the disclosure. Such officer would be personallyliable for misstatements on thedisclosure form.

e No provision. However, a

failure to disclose adequately areportable transaction is a factor

No recommendation. However,a failure to disclose adequately areportable transaction will

Penalty of $100,000 imposed perfailure to disclose regardless ofwhether the arrangement is a tax
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in determining whether anyunderstatement attributable tothe transaction is due toreasonable cause, and that thetaxpayer acted in good faith.

preclude reduction of the section6662 penalty rate below 40percent.

avoidance transaction. Inaddition, failure to discloseadequately a tax avoidancetransaction will precludereduction of the section 6662penalty rate below 40 percent.

No provision. Requires a corporate participant

to disclose to its shareholders thepayment (including the amountand transaction details) of anunderstatement penalty of atleast $1 million that wasattributable to a corporate taxshelter.

No recommendation.
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ES

No provision. However, one ofthe filters (described above)relates to the involvement ofcertain tax-indifferent parties.

No recommendation. However,one of the corporate tax shelterindicators (described above)relates to the involvement ofcertain tax-indifferent parties.

Any income allocable to a taxindifferent party (trading on itstax exemption) with respect to acorporate tax shelter would betaxable to such party withoutregard to any statutory,regulatory, or treaty exclusion orexception. The other corporateparticipants in the corporate taxshelter would be jointly andseverally liable for such tax (inaddition to any tax resultingfrom the denial of tax benefits tothe corporate participants underthe codification of the economicsubstance doctrine).

Section 6701 imposes a penaltyon any person who (1) aids,assists, procures, or advises withrespect to the preparation orpresentation of any portion of areturn, affidavit, claim, or other

Expands the scope of the aidingand abetting penalty to apply toany person who assists oradvises with respect to thecreation, implementation, orreporting of a corporate tax

No recommendation withrespect to aiding and abetting. The proposal includes, however,a new penalty excise tax of 25percent on fees received inconnection with the purchase
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document, (2) knows (or hasreason to believe) that thedocument will be used inconnection with any materialmatter arising under the internalrevenue laws, and (3) knows thatthe document would result in anunderstatement of anotherperson’s tax liability. Aiding orabetting requires “directinvolvement” in the preparationor presentation of a tax return orother tax-related document. The penalty for aiding andabetting with respect to anindividual’s tax liability is$1,000; the penalty is $10,000with respect to a corporation’stax liability.

shelter that results in anunderstatement penalty if (1) theperson knew or had reason tobelieve that the corporate taxshelter could result in anunderstatement of tax, (2) theperson opined or advised thecorporate participant that thereexisted at least a 75-percentlikelihood that the tax treatmentwould be sustained on the meritsif challenged, and (3) areasonable tax practitionerwould not have believed thatthere existed at least a 75-percent likelihood that the taxtreatment would be sustained onthe merits if challenged.Increases penalty from $10,000to the greater of $100,000 orone-half of the fees related to thetransaction.Requires the publication of thenames of any person penalized

and implementation of acorporate tax shelter (as definedabove) and the rendering ofcertain tax advice related to acorporate tax shelter. The 25-percent penalty excise taxapplies only to persons whoperform services in furtheranceof a corporate tax shelter. Appropriate due process rightsto contest the excise tax wouldbe provided.No recommendation.No recommendation.
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and an automatic referral of theperson to the IRS Director ofPractice.

Under section 7408, theSecretary may bring a civilaction in district court to enjoina person from further engagingin conduct subject to penaltyunder section 6700 (the penaltyfor promoting abusive taxshelters) or section 6701 (thepenalty for aiding and abettingthe understatement of taxliability. The court may grantinjunctive relief if it finds (1)that the person has engaged inconduct subject to the penalty,and (2) that injunctive relief isappropriate to prevent recurrenceof such conduct. Case law hasindicated that traditional equityfactors such as irreparable injuryand likelihood of success on themerits need not be considered,provided that the governmenthas satisfied the statutoryrequirements.

Clarifies that traditional equityfactors such as irreparable injuryand likelihood of success on themerits need not be consideredonce the government hassatisfied the statutoryrequirements.

No recommendation.
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Registration required for anentity, plan, or arrangement: (1)a significant purpose of which isthe avoidance or evasion ofFederal income tax, (2) isoffered under conditions ofconfidentiality, and (3) thepromoters of which receiveaggregate fees in excess of$100,000.An entity, plan, or arrangementhas a significant purpose ofavoiding or evading Federalincome tax if: (1) it is the sameas, or substantially similar to, atransaction identified by the IRSas being a tax avoidancetransaction (i.e., a “listed”transaction); (2) (a) the presentvalue of the reasonably expectedpre-tax profits is insignificantrelative to the present value ofthe expected net tax benefits, or(b) in the case of transactionsthat in substance are theborrowing of money or

Modifies the present-law rules to(1) eliminate the confidentialityrequirement, (2) increase the feethreshold from $100,000 to $1million, and (3) expand theregistration requirement to coverany corporate tax shelter that isreasonably expected to bepresented to more than onepotential participant.

No recommendation.
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acquisition of financial capital,the present value of the incometax deductions of the taxpayer towhom the loan or financialcapital is provided significantlyexceeds the present value of thepre-tax return of the lender orprovider of the financial capital;or (3) the arrangement isstructured to produce taxbenefits that constitute animportant part of the intendedresults of the arrangement andthe promoter reasonably expectsto present the arrangement tomore than one taxpayer.
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Registration not required if - (1) the transaction is identifiedby the IRS in publishedguidance as excepted fromregistration;(2) if not identified as a taxavoidance transaction inpublished guidance (i.e., is not a“listed” transaction) and thepromoter reasonably determinesthat there is no reasonable basisunder Federal tax law for denialof any significant portion of theexpected Federal income taxbenefits from the transaction; or(3) with respect to the thirdcategory of transactions (i.e.,transaction in which tax benefitsconstitute an “important part” ofthe intended results), thepromoter reasonably determinesthat the potential participant isexpected to participate in thetransaction in the ordinarycourse of its business in a formconsistent with customarycommercial practice, and thatthere is a long-standing and

No recommendation. No recommendation.
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generally acceptedunderstanding that the expectedFederal income tax benefits fromthe transaction are allowableunder the Code.

Registration required no later

than the day on which the taxshelter is first offered topotential users.

Requires registration ofcorporate tax shelters no laterthan the earlier of: (1) theearliest day on which there is areasonable belief that thepromoter intends to present thepromotional or marketingmaterials to more than onepotential corporate participant,or (2) the day on which thepresentation to the secondpotential participant occurs.

No recommendation.

on Penalty for nonregistration

equals the greater of $10,000 or50 percent (75 percent ifintentional) of the fees payableto any promoter with respect toofferings prior to the date of lateregistration.

No recommendation. No recommendation.
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al

Treasury Department regulationsgovern the practice of attorneys,certified public accountants,enrolled agents, and otherpersons representing clientsbefore the IRS (“Circular 230"). The IRS Office of Director ofPractice is responsible for theenforcement of Circular 230.

Includes the explicit statutoryauthorization for Circular 230 inthe Code and authorizes theimposition of monetarysanctions.With respect to corporate taxshelters, directs the TreasuryDepartment to amend Circular230 to conform to the aboverecommendations by revisingdefinitions and standards ofpractice and providing moremeaningful enforcementmeasures.

No recommendation. TheTreasury Department recentlyannounced, however, that anupdated version of Circular 230will be issued later in 2000.