Section 2. Terms of Initiative

(a) Tax Adjustments—

(1) Taxpayers will concede all claimed tax benefits and attributes, including basis adjustments, from the Son of Boss transaction.

(2) Taxpayers will be allowed to treat (i) their net out-of-pocket costs and fees as a long-term capital loss, or (ii) one-half of their net out-of-pocket costs and fees as an ordinary loss, in the year those costs and fees were paid or accrued. If tax benefits, including benefits attributable to those costs and fees, were claimed in a year barred by the period of limitations on assessment, the costs and fees will be allowed only to the extent they exceed the tax benefits claimed in the barred years.

(b) Application of Penalties—

(1) Taxpayers who properly disclosed their Son of Boss transaction under Announcement 2002–2, 2002–1 C.B. 304, will not pay a penalty on the underpayment attributable to that Son of Boss transaction.

(2) Taxpayers who did not properly disclose their Son of Boss transaction under Announcement 2002–2 and who:

(i) Did not directly or indirectly claim tax benefits from any other listed transaction, including any other Son of Boss transaction, will pay a penalty of 10 percent of the underpayment attributable to the Son of Boss transaction; or

(ii) Directly or indirectly claimed tax benefits from another listed transaction, including any other Son of Boss transaction, will pay a penalty of 20 percent on the underpayment attributable to the Son of Boss transaction.

For purposes of this announcement, a “listed transaction” is a transaction that is the same as, or substantially similar to, one identified by the Service under section 6011 and the Treasury regulations as of the date the taxpayer submits the Notice of Election, regardless of whether (a) the Service had identified the transaction as a listed transaction at the time the taxpayer entered into the transaction, or (b) the transaction is (or was) required to be disclosed by the taxpayer as a listed transaction pursuant to the regulations (including the temporary regulations) under section 6011.

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Boss transaction, including out-of-pocket costs and fees, (c) determine appropriate penalties, including those under section 6662 or section 6663, and (d) issue a Notice of Deficiency or Notice of Final Partnership Administrative Adjustment, as appropriate.

The Office of Chief Counsel will closely coordinate Son of Boss cases by treating them as if they were designated for litigation under Chief Counsel procedures for designating cases for litigation. Likewise, in refund and TEFRA partnership suits handled by the Department of Justice, Chief Counsel expects to recommend against any settlement more favorable to the taxpayer than is provided in this initiative. Department of Justice regulations require Assistant Attorney General approval of any settlement contrary to the Chief Counsel’s recommendation. Consequently, taxpayers should not expect to settle their cases on better terms if they proceed to litigation, whether in the Tax Court or in other forums.