SECTION 2. BACKGROUND

.01 Section 1.6011–4 requires a taxpayer who participates in a reportable transaction to disclose the transaction in accordance with the procedures provided in § 1.6011–4. Under § 1.6011–4(b), there are six categories of reportable transactions. One category of reportable transactions is a transaction with a significant book-tax difference. A transaction with a significant book-tax difference is defined in § 1.6011–4(b)(6) as a transaction where the amount for tax purposes of any item or items of income, gain, expense, or loss from the transaction differs by more than $10 million on a gross basis from the amount of the item or items for book purposes in any taxable year. For purposes of § 1.6011–4(b)(6), the amount of an item for book purposes is determined by applying U.S. generally accepted accounting principles for worldwide income.

.02 Section 1.6011–4(b)(6)(ii) provides that the following taxpayers must disclose transactions with a significant book-tax difference: (1) reporting companies under the Securities Exchange Act of 1934 (15 U.S.C. 78a) and related business entities; and (2) business entities that have $250 million or more in gross assets for book purposes at the end of any financial accounting period that ends with or within the entity’s taxable year in which the transaction occurs.

.03 On July 7, 2004, the Treasury Department and Internal Revenue Service released a draft of the final version of Schedule M–3, Net Income (Loss) Reconcilia- tion For Corporations With Total Assets of $10 Million or More . In general, for taxable years ending on or after December 31, 2004, any corporation (or U.S. consolidated tax group) required to file Form 1120, U.S. Corporation Income Tax Re- turn, that reports total assets at the end of the corporation’s (or U.S. consolidated tax group’s) taxable year that equal or exceed $10 million on Schedule L of Form 1120 is required to complete and file Schedule M–3.