SECTION 2. BACKGROUND

.01 Section 6011 and the regulations thereunder require a taxpayer that has participated in a reportable transaction to disclose certain information with respect to the reportable transaction with its tax return. Section 1.6011–4(b) of the Income Tax Regulations describes six categories of reportable transactions. One category of reportable transactions is a transaction that is the same as, or substantially similar to, one of the types of transactions that the Internal Revenue Service has determined to be a tax avoidance transaction and has identified by notice, regulation, or other form of published guidance as a “listed transaction.” Treas. Reg. § 1.6011–4(b)(2).

.02 The American Jobs Creation Act of 2004, Pub. L. No. 108–357, 118 Stat. 1418 (the Act) was enacted on October 22, 2004. Section 811 of the Act added section 6707A to the Code to provide a monetary penalty for the failure to include on any return or statement any information required to be disclosed under section 6011 with respect to a reportable transaction. Section 6707A(b)(1) provides that the penalty for failure to include information with respect to a reportable transaction, other than a listed transaction, is $10,000 in the case of

a natural person, and $50,000 in any other case. Section 6707A(b)(2) provides that for a listed transaction, the penalty is increased to $100,000 in the case of a natural person, and $200,000 in any other case.

.03 Section 812 of the Act, which added section 6662A to the Code, provides that a 20-percent accuracy-related penalty may be imposed on any “reportable transaction understatement,” as defined in section 6662A(b). Section 6662A(c) increases the penalty rate to 30-percent for the portion of any reportable transaction understatement with respect to which the relevant facts affecting the tax treatment of the item were not adequately disclosed in accordance with regulations prescribed under section 6011. If the penalty under section 6707A for failure to include reportable transaction information with a return is rescinded pursuant to section 6707A(d), the taxpayer is treated as having adequately disclosed the relevant facts with respect to that reportable transaction, and the 30-percent penalty rate under section 6662A(c) does not apply. See I.R.C. § 6664(d)(2). In addition, section 6662A(e)(2)(C)(ii) provides that the reportable transaction understatement penalty does not apply to any portion of an understatement on which the 40-percent accuracy-related penalty for a gross valuation misstatement is imposed under section 6662(h).

.04 Section 6707A(e) requires a person that is required to file periodic reports under section 13 or 15(d) of the Securities Exchange Act of 1934, or is required to be consolidated with another person for purposes of those reports, to disclose in those reports for the periods specified by the Secretary the requirement to pay the penalties set forth in section 6707A(e)(2). If the person fails to disclose the requirement to pay the penalties, as required by section 6707A(e), that failure shall be treated as a failure to disclose a listed transaction and shall be subject to an additional penalty.

.05 Under section 6707A(e), the penalties a person must disclose in periodic reports filed with the SEC are as follows:

(1) the penalty imposed by section 6707A(a) in the amount determined under section 6707A(b)(2) for failure to disclose a listed transaction;

(2) the accuracy-related penalty imposed by section 6662A(a) at the 30-percent rate determined under section 6662A(c) for a reportable transaction

2005–33 I.R.B. 296 August 15, 2005

10–K filed with the SEC that relates to the fiscal year in which a decision upholding the 30-percent penalty (either directly, or in the alternative to the 40-percent penalty) becomes final. If, after commencing a refund action described above, the person enters into a written settlement agreement with the government expressly acknowledging the applicability of the 30-percent penalty in the alternative to the 40-percent penalty, the person must disclose the requirement to pay either the 30-percent or 40-percent penalty, as applicable, on the first Form 10–K filed with the SEC that relates to the fiscal year in which the settlement agreement is entered into.