Part I. Rulings — Internal Revenue Bulletin 2014-34

Section 382.—Limitation on net operating loss carryforwards and certain built-in losses following ownership change

26 CFR 1.382–3T Definitions and rules relating to a 5-percent shareholder

TD 9685

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1

Segregation Rule Effective Date

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

SUMMARY: This document contains temporary regulations under section 382 of the Internal Revenue Code (Code) that modify the effective date provision of recently published regulations. These regulations affect corporations whose stock is or was acquired by the Department of the Treasury (Treasury) pursuant to certain programs under the Emergency Economic Stabilization Act of 2008 (EESA). The text of these temporary regulations also serves as the text of the proposed regulations set forth in the notice of proposed rulemaking on this subject in the Proposed Rules section in this issue of the Bulletin . This document also modifies the existing regulations to provide a cross-reference to this temporary regulation.

DATES: Effective Date : These regulations are effective on July 31, 2014.

Applicability Date : For dates of applicability, see section 1.382–3T(j)(17).

FOR FURTHER INFORMATION CONTACT: Stephen R. Cleary, (202) 317-5353 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

Section 382

Section 382 of the Code provides that the taxable income of a loss corporation for a year following an ownership change may be offset by pre-change losses only to the extent of the section 382 limitation for such year. An ownership change occurs with respect to a corporation if it is a loss corporation on a testing date and, immediately after the close of the testing date, the percentage of stock of the corporation owned by one or more 5-percent shareholders has increased by more than 50 percentage points over the lowest percentage of stock of such corporation owned by such shareholders at any time during the testing period.

Pursuant to section 382(g)(4)(A), shareholders who own less than five percent of a loss corporation are aggregated and treated as a single 5-percent shareholder (a public group). In addition, new public groups may be created as a result of certain transactions under the segregation rules in the section 382 regulations. Any new public group is tracked separately from, and in addition to, the public group or groups that existed previously and is treated as a new 5-percent shareholder that increases its ownership interest in the loss corporation.

One particular segregation rule, which was imposed by § 1.382–2T(j)(3)(i) of the Temporary Income Tax Regulations until it was superseded, required segregation when an individual or entity that owned five percent or more of the loss corporation transferred an interest in the loss corporation to public shareholders. After the sale, stock owned by a public group that existed immediately before the sale was treated separately from the stock owned by the public group that acquired stock from the seller. This separate public group was treated as a new 5-percent shareholder. However, this rule was rendered inoperative by § 1.382–3(j)(13), part of a set of regulations published in TD 9638

[78 FR 62418] on October 22, 2013. Un

der the new regulation, no new public group is created on the transfer of stock to the public shareholders; instead, the transferred stock is treated as acquired proportionately by the public groups existing at the time of the transfer.

Notice 2010–2 (2010–2 IRB 251 (December 16, 2009)) (see § 1.601.601(d)(2)(ii)(B) of this chapter), provides guidance regarding the application of section 382 of the Code and other provisions of law to corporations whose instruments are acquired and disposed of by the Treasury pursuant to EESA. Notice 2010–2 relates to instruments acquired by Treasury pursuant to the following EESA programs: (i) the Capital Purchase Program for publiclytraded issuers; (ii) the Capital Purchase Program for private issuers; (iii) the Capital Purchase Program for S corporations; (iv) the Targeted Investment Program; (v) the Asset Guarantee Program; (vi) the Systemically Significant Failing Institutions Program; (vii) the Automotive Industry Financing Program; and (viii) the Capital Assistance Program for publiclytraded issuers. (These programs are collectively referred to as “Programs” in that Notice and in this preamble.)

Under Section III(G) of Notice 2010–2, a “Covered Instrument” is an instrument that is acquired by Treasury in exchange for an instrument that was issued to Treasury under the Programs, or is acquired by Treasury in exchange for another Covered Instrument. For most purposes of that Notice, a Covered Instrument is treated as though it had been issued directly to Treasury under the Programs.

Section III(E) of Notice 2010–2 provides the following rule to govern the sale by Treasury of stock of a corporation to public shareholders:

Section 382 treatment of stock sold by Treasury to public shareholders . If Treasury sells stock that was issued to it pursuant to the Programs (either directly or upon the exercise of a warrant) and the sale creates a public group (“New Public Group”), the New Public Group’s ownership in the issuing corporation shall not be considered to have in

Bulletin No. 2014–34 379 August 18, 2014

creased solely as a result of such a sale. A New Public Group’s ownership shall be treated as having increased to the extent the New Public Group increases its ownership pursuant to any transaction other than a sale of stock by Treasury, including pursuant to a stock issuance described in section 1.382–3(j)(2) or a redemption (see § 1.382–2T(j)(2)(iii)(C)). Such stock is considered outstanding for purposes of determining the percentage of stock owned by other 5-percent shareholders on any testing date, and section 382 (and the regulations thereunder) shall otherwise apply to the New Public Group in the same manner as with respect to other public groups.

This rule was created to prevent a loss corporation from experiencing an owner shift when Treasury sells stock to public shareholders. By its terms, the rule relies on the assumption that the stock sale “creates a public group.” As explained earlier in this preamble, § 1.382–2T(j)(3)(i), before it was superseded, required creation of a new public group when a 5-percent shareholder sold stock in a loss corporation to public shareholders. However, under § 1.382–3(j)(13) as now in effect, such a transfer does not create a new public group.

Explanation of Provision

The IRS and Treasury are concerned that the elimination of the segregation rule described earlier in this preamble may have unintentionally rendered inoperative the rule in Notice 2010–2 that protects a loss corporation from an owner shift when Treasury sells stock that it held pursuant to the Programs to public shareholders. To prevent this result, the temporary regulation modifies the effective date rule of TD 9638 to except from the changes to the segregation rules in that regulation the sale by the Treasury Department to public shareholders of any “Program Instrument” (an instrument issued pursuant to a Program or a Covered Instrument). As a result, a sale of stock by Treasury to the public will create a public group, and the rule of Section III(E) of Notice 2010–2 will continue to apply as intended. This provision will only affect the sale of a Program Instrument by the Treasury Department and will not affect the applica

tion of the segregation rule changes in TD 9638 to any other transactions involving stock of the corporations that participated in the Programs.

Special Analyses

These regulations are necessary to provide corporations with immediate guidance regarding the continuing effect of Notice 2010–2 in light of the change to the segregation rules provided by TD 9638. Because of the need for immediate guidance, the IRS and the Treasury Department are issuing temporary regulations which are effective immediately.

It has also been determined that this temporary regulation is not a significant regulatory action as defined in Executive Order 12866, as supplemented by Executive Order 13563. Therefore, a regulatory assessment is not required. For the application of the Regulatory Flexibility Act (5 U.S.C. chapter 6), refer to the Special Analysis section of the preamble of the cross-referenced notice of proposed rulemaking published in this issue of the Bulletin . Pursuant to section 7805(f) of the Code, these regulations have been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business.

Drafting Information

The principal author of these regulations is Stephen R. Cleary of the Office of Associate Chief Counsel (Corporate). However, other personnel from the IRS and the Treasury Department participated in their development.

Amendments to the Regulations

Accordingly, 26 CFR part 1 is amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for part 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805 - - Section 1.382–3T also issued under 26 U.S.C. 382(g)(4)(C) and 26 U.S.C. 382(m). - -

Par. 2. Section 1.382–3 is amended by revising paragraph (j)(17) to read as follows:

§ 1.382–3 Definitions and rules relating to a 5-percent shareholder .

- - - (j) - - (17) Effective/applicability date . [Reserved]. For further guidance, see § 1.382–3T(j)(17).
- - - Par. 3. Section 1.382–3T is added to read as follows:

§ 1.382–3T Definitions and rules relating to a 5-percent shareholder (temporary) .

(a) through (j)(16) [Reserved]. For further guidance see § 1.382–3(a) through (j)(16).

(17) Effective/applicability date . This paragraph (j) generally applies to issuances or deemed issuances of stock in taxable years beginning on or after November 4, 1992. However, paragraphs (j)(11)(ii) and (j)(13) through (j)(15) of this section and Examples 5 through 13 of paragraph (j)(16) of this section apply to testing dates occurring on or after October 22, 2013, other than with respect to the sale of a Program Instrument by the Treasury Department. For purposes of this paragraph (j)(17), a Program Instrument is an instrument issued pursuant to a Program, as defined in Internal Revenue Service Notice 2010–2 (2010–2 IRB 251 (December 16, 2009)) (see § 601.601(a)(2)(ii)(B) of this chapter), or a Covered Instrument, as defined in that Notice. Taxpayers may apply paragraphs (j)(11)(ii) and (j)(13) through (j)(15) of this section and Examples 5 through 13 of paragraph (j)(16) of this section in their entirety (other than with respect to a sale of a Program Instrument by the Treasury Department) to all testing dates that are included in a testing period beginning before and ending on or after October 22, 2013. However, the provisions described in the preceding sentence may not be applied to any date on or before the date of any ownership change that occurred before October 22, 2013, under the regulations in effect before October 22, 2013, and they may not be ap

August 18, 2014 380 Bulletin No. 2014–34

plied as described in the preceding sentence if such application would result in an ownership change occurring on a date before October 22, 2013, that did not occur under the regulations in effect before October 22, 2013. See § 1.382–3(j)(14)(ii) and (iii), as contained in 26 CFR part 1 revised as of April 1, 1994 for the application of paragraph (j)(10) to stock issued on the exercise of certain options exercised on or after November 4, 1992, and for an election to apply paragraphs (j)(1) through (12) retroactively to certain issuances and deemed issuances of stock occurring in taxable years prior to November 4, 1992.

(18) Expiration date . This section 1.382–3T expires on or before July 28, 2017.

John Dalrymple Deputy Commissioner for Services and Enforcement.

Approved July 18, 2014,

Mark J. Mazur Assistant Secretary of the Treasury

(Tax Policy).

(Filed by the Office of the Federal Register on July 30, 2014, 8:45 a.m., and published in the issue of the Federal Register for July 31, 2014, 79 F.R. 44280)

Section 2032A.—Valuation of Certain Farm, Etc., Real Property

26 CFR 20.2032A–4: Method of valuing farm real property.

Rev. Rul. 2014–21

ISSUE

This revenue ruling contains a list of the average annual effective interest rates on new loans under the Farm Credit System. This revenue ruling also contains a list of the states within each Farm Credit System Bank Territory.

Under § 2032A(e)(7)(A)(ii) of the Internal Revenue Code, rates on new Farm Credit System Bank loans are used in computing the special use value of real property used as a farm for which an election is made under § 2032A. The rates in Table 1 of this revenue ruling may be used by estates that value farmland under § 2032A as of a date in 2014.

REV. RUL. 2014–21 TABLE 1

TABLE OF INTEREST RATES

(Year of Valuation 2014)

Average annual effective interest rates, calculated in accordance with § 2032A(e)(7)(A) and § 20.2032A–4(e) of the Estate Tax Regulations, to be used under § 2032A(e)(7)(A)(ii),are set forth in the accompanying Table of Interest Rates (Table 1). The states within each Farm Credit System Bank Territory are set forth in the accompanying Table of Farm Credit System Bank Territories (Table 2).

Rev. Rul. 81–170, 1981–1 C.B. 454, contains an illustrative computation of an average annual effective interest rate. The rates applicable for valuation in 2013 are in Rev. Rul. 2013–19, 2013–39 I.R.B. 240. For rate information for years prior to 2013, see Rev. Rul. 2012–26, 2012–39 I.R.B. 358, and other revenue rulings that are referenced therein.

DRAFTING INFORMATION

The principal author of this revenue ruling is Lane Damazo of the Office of the Associate Chief Counsel (Passthroughs and Special Industries). For further information regarding this revenue ruling, contact Lane Damazo at (202) 317-6859 (not a toll-free number).

Farm Credit System Bank Servicing State in Which Property is Located Rate

AgFirst, FCB.............................................................................................................................................................................5.29

AgriBank, FCB.........................................................................................................................................................................4.71

CoBank, ACB...........................................................................................................................................................................4.31

Texas, FCB ...............................................................................................................................................................................4.82

REV. RUL. 2014–21 TABLE 2

TABLE OF FARM CREDIT SYSTEM BANK TERRITORIES

Farm Credit System Bank Location of Property

AgFirst, FCB ..........................Delaware, District of Columbia, Florida, Georgia, Maryland, North Carolina, Pennsylvania,

South Carolina, Virginia, West Virginia.

AgriBank, FCB.......................Arkansas, Illinois, Indiana, Lowa, Kentucky, Michigan, Minnesota, Missouri, Nebraska,

North Dakota, Ohio, South Dakota, Tennessee, Wisconsin, Wyoming.

CoBank, ACB.........................Alaska, Arizona, California, Colorado, Connecticut, Hawaii, Idaho, Kansas, Maine,

Massachusetts, Montana, New Hampshire, New Jersey, New Mexico, New York, Nevada, Oklahoma, Oregon, Rhode Island, Utah, Vermont, Washington.

Texas, FCB.............................Alabama, Louisiana, Mississippi, Texas.

Bulletin No. 2014–34 381 August 18, 2014

Section 6707.—Failure to Furnish Information Regarding Reportable Transactions

26 CFR 1.6707–1: material advisor penalty for fail- ure to furnish information regarding reportable transactions

TD 9686

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 301

Material Advisor Penalty for Failure to Furnish Information Regarding Reportable Transactions

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations and removal of temporary regulations.

SUMMARY: This document contains final regulations relating to the assessment of penalties against material advisors who fail to timely file a true and complete return. The regulations implement amendments made by the American Jobs Creation Act of 2004. These regulations affect material advisors responsible for disclosing reportable transactions.

DATES: Effective Date : These regulations are effective on July 31, 2014.

Applicability Date : For dates of applicability, see § 301.6707–1(f).

FOR FURTHER INFORMATION CONTACT: James G. Hartford at (202) 317-6844 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This document contains amendments to the Procedure and Administration Regulations (26 CFR Part 301) under section 6707. On December 22, 2008, a notice of proposed rulemaking (REG–160872–04) was published in the Federal Register (73 FR 78254) relating to the penalty under section 6707 of the Internal Revenue Code imposed on material advisors for

failure to furnish information regarding reportable transactions (the proposed regulations). No comments were received from the public in response to the notice of proposed rulemaking. No public hearing was requested or held. The proposed regulations are adopted by this Treasury decision with revisions as discussed in this preamble.

Section 6707 was originally added to the Code by section 141(b) of the Tax Reform Act of 1984, Public Law 98–369, 98 Stat. 494 (July 18, 1984). At that time, section 6707 imposed a penalty for failing to timely register a tax shelter or for filing false or incomplete information with respect to the tax shelter registration. Section 301.6707–1T of the temporary regulations implementing the penalty was published shortly after section 6707 became law.

The American Jobs Creation Act of 2004, Public Law 108–357, 118 Stat. 1418 (AJCA), was enacted on October 22, 2004. As amended by AJCA, section 6707 imposes a penalty on a material advisor required to file a return under section 6111(a) with respect to a reportable transaction who fails to timely file such a return or who files the return with false or incomplete information. Section 6707, as amended, is effective for returns due after October 22, 2004.

In 2007, the Treasury Department and the IRS issued Rev. Proc. 2007–21, 2007–1 CB 613 (February 26, 2007), (see § 601.601(d)(2)(ii)( b )), of this chapter, to provide procedures for requesting rescission of a penalty assessed under section 6707 for failure by a material advisor to disclose a reportable transaction and under section 6707A for failure by a taxpayer to disclose a reportable transaction. For each penalty, the revenue procedure provides the deadline by which a person must request rescission; the information the person must provide in the rescission request; where the person must submit the rescission request; and the rules governing requests for additional information from the person requesting rescission. In addition, the revenue procedure sets forth the factors that weigh in favor of and against granting rescission. For example, one factor described in the revenue procedure as weighing in favor of rescission of the section 6707 penalty is filing a Form 8918,

“Material Advisor Disclosure Statement,” after the due date but before the taxpayer files a Form 8886, “Reportable Transaction Disclosure Statement,” identifying the material advisor as an advisor with respect to the transaction or before the IRS contacts the material advisor concerning the reportable transaction.

On December 22, 2008, proposed regulations implementing the penalty under section 6707 were published. The proposed regulations set forth the rules for application of the penalty under section 6707, including examples and relevant definitions such as the definition of incomplete information, false information, and when a failure is intentional so that the higher penalty with respect to listed transactions will apply. The proposed regulations also adopted the factors described in Rev. Proc. 2007–21 that will be considered when determining whether a request for rescission of a section 6707 penalty with respect to a non-listed reportable transaction will be granted. In addition, the proposed regulations generally restated the existing authority of the Secretary to prescribe procedures for requesting rescission by revenue procedure or other guidance published in the Internal Revenue Bulletin. The proposed regulations did not address the procedures for requesting rescission in Rev. Proc. 2007–21, such as the deadline, the information provided, where to submit the request, and requests for additional information.

Explanation of Revisions

These regulations remove temporary regulations § 301.6707–1T (TD 7964), 49 FR 32712, which implement section 6707 as enacted in 1984. Amendments to section 6707 made by section 816 of AJCA render temporary regulations § 301.6707–1T obsolete.

The final regulations make several substantive changes to the proposed regulations. First, a new paragraph (iii) has been added under § 301.6707–1(a)(1)(B) regarding the penalty in the case of listed transactions. This new paragraph clarifies that only one section 6707 penalty will apply in the case of a transaction that is both a listed transaction and a reportable transaction other than a listed transaction, and that the penalty that applies in these cases is the higher penalty for listed transactions

August 18, 2014 382 Bulletin No. 2014–34

under § 301.6707–1(a)(1)(B). Section 301.6707–1(a)(1) of the final regulations has also been clarified to provide that if there is a failure with respect to more than one reportable or listed transaction, a material advisor will be subject to a separate penalty for each transaction.

In addition, § 301.6707–1(a)(2), which describes gross income derived from a transaction for purposes of determining the penalty in the case of a listed transaction, has been clarified to provide that only fees from a listed transaction for which the advisor is a material advisor are taken into account for purposes of computing the penalty. A new example 4 has been added to illustrate this clarification.

Finally, § 301.6707–1(e) of the proposed regulations is modified to provide additional guidance on rescission of the penalty under section 6707. Under Rev. Proc. 2007–21 and § 301.6707–1(e)(3)(i) of the proposed regulations, filing a Form 8918, “Material Advisor Disclosure Statement,” after the due date will be a factor weighing strongly in favor of rescission unless the form is filed after the taxpayer files a Form 8886, “Reportable Transaction Disclosure Statement,” identifying the material advisor as an advisor with respect to the transaction or after the IRS contacts the material advisor concerning the reportable transaction. The final regulations modify this rule to also consider whether circumstances indicate that the material advisor delayed filing the Form 8918, recognizing that the mere filing of a Form 8886 before filing the Form 8918, alone, is not indicative of whether rescission is appropriate. Accordingly, the final regulations provide that if a material advisor unintentionally failed to file a Form 8918, but then files a properly completed form with the IRS, that filing will be a factor that weighs in favor of rescission of the section 6707 penalty if the facts suggest that the material advisor did not delay filing the form until after the IRS had taken steps to identify that person as a material advisor with respect to that particular transaction. The final regulations further provide that the late filing will not weigh in favor of rescission if the facts and circumstances suggest that the material advisor delayed filing the Form 8918 until after the material advisor’s client filed its Form 8886 (or successor form)

disclosing the client’s participation in the particular reportable transaction.

In addition, the final regulations clarify the language of the proposed regulations in a few other ways not intended to be substantive, including clarification of examples.

Effect on Other Documents

Sections 4.04, 4.05, and 4.06 of Revenue Procedure 2007–21, relating to the factors for rescission of the section 6707 penalty, are superseded as of July 31, 2014.

Special Analyses

It has been determined that this Treasury Decision is not a significant regulatory action as defined in Executive Order 12866, as supplemented by Executive Order 13563. Therefore, a regulatory assessment is not required. The IRS has determined that sections 553(b) and (d) of the Administrative Procedure Act (5 U.S.C. chapter 5) do not apply to these regulations and because the regulations do not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Internal Revenue Code, the notice of proposed rulemaking preceding these regulations was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business. No comments were received on the proposed regulations.

Drafting Information

The principal author of these regulations is James G. Hartford of the Office of the Associate Chief Counsel (Procedure and Administration).

Penalties, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

Accordingly, 26 CFR Part 301 is amended as follows:

PART 301—PROCEDURE AND ADMINISTRATION

Paragraph 1. The authority citation for part 301 continues to read in part as follows:

Authority: 26 U.S.C. 7805. - - Par. 2. Section 301.6707–1 is added to read as follows:

§ 301.6707–1 Failure to furnish information regarding reportable transactions .

(a)(1) In general . A material advisor who is required to file a return under section 6111(a) of the Internal Revenue Code (Code) with respect to any reportable transaction who fails to file a timely return in accordance with § 301.6111–3(e) or who files a return with false or incomplete information with respect to the reportable transaction will be subject to a penalty. A material advisor who fails to file a timely return or who files a false or incomplete return with respect to more than one reportable transaction will be subject to a separate section 6707 penalty for each transaction.

(i) Reportable transactions . The amount of the penalty for failing to timely file a return under section 6111(a), or filing the return with false or incomplete information with respect to any reportable transaction other than a listed transaction is $50,000.

(ii) Listed transactions . (A) In general . The amount of the penalty for failing to timely file a return under section 6111(a), or filing the return with false or incomplete information with respect to a listed transaction is the greater of $200,000 or 50 percent of the gross income derived by the material advisor with respect to aid, assistance, or advice that is provided with respect to the listed transaction before the date the return is filed under section 6111.

(B) Intentional action or failure . If the failure or action subject to the penalty is with respect to a listed transaction and is intentional, the penalty is the greater of $200,000 or 75 percent of the gross income derived by the material advisor with respect to aid, assistance, or advice that is provided with respect to the listed transaction before the date the return is filed under section 6111.

Bulletin No. 2014–34 383 August 18, 2014

(C) Transaction that is both a listed transaction and reportable transaction other than a listed transaction . In the case of a penalty imposed under section 6707 with respect to a transaction that is both a listed transaction and a reportable transaction other than a listed transaction, the penalty under this paragraph (a)(1)(ii), and not the penalty under paragraph (a)(1)(i) of this section, will apply.

(2) Gross income derived by the mate- rial advisor . For purposes of calculating the amount of the penalty with respect to a listed transaction, the gross income derived by the material advisor will be determined in accordance with § 301.6111– 3(b)(3)(ii) of this chapter. If a person is a material advisor with regard to more than one type of listed transaction, the gross income derived from each type of listed transaction will be considered separately and will not be aggregated to determine the amount of any section 6707 penalty for failing to make a proper return under section 6111(a). Further, only gross income derived from listed transactions for which the advisor is a material advisor under section 6111 is taken into account for purposes of computing the penalty.

(b) Definitions —(1) Derive . The term “derive” is defined in § 301.6111–3(c)(3).

(2) False information . For purposes of this section, the term “false information: means information provided on a Form 8918, “Material Advisor Disclosure Statement” (or successor form), filed with the Internal Revenue Service (IRS) that is untrue or incorrect when the Form 8918 (or successor form) was filed. False information does not include information provided on a Form 8918 (or successor form) filed with the IRS that is immaterial or that is untrue or incorrect due to a mistake or accident after the exercise of reasonable care.

(3) Incomplete information . For purposes of this section, the term “incomplete information” means a Form 8918 (or successor form) filed with the IRS that does not provide the information required under § 301.6111–3(d). A Form 8918 (or successor form) filed with the IRS will not be considered incomplete when the information not provided on the form is immaterial or was not provided due to mistake or accident after the exercise of reasonable care. Whether information is imma

terial will be determined based upon the facts and circumstances surrounding each failure to file or filing of an incomplete return. A material advisor who completes the form to the best of the material advisor’s ability and knowledge after the exercise of reasonable effort to obtain the information will not be considered to have filed incomplete information within the meaning of this section. A Form 8918 (or successor form) will be considered to provide incomplete information when it omits information required to be provided under § 301.6111–3(d) or contains a statement that the omitted information will be provided upon request.

(4) Intentional . For purposes of this section, the failure to timely file a return or the submission of a return with false or incomplete information is intentional if—

(i) The material advisor knew of the obligation to file a return and knowingly did not timely file a return with the IRS; or

(ii) The material advisor filed a return knowing that it was false or incomplete.

(5 ) Listed transaction . The term “listed transaction” is defined in section 6707A(c)(2) of the Code and § 1.6011– 4(b)(2) of this chapter. (6) Material Advisor . The term “material advisor” is defined in section 6111(b)(1) of the Code and § 301.6111– 3(b). (7) Reportable transaction . The term “reportable transaction” is defined in section 6707A(c)(1) of the Code and § 1.6011–4(b)(1) of this chapter.

(c) Assessment of penalty —(1) Inten- tional failure determined based on all the facts and circumstances . Whether a material advisor intentionally failed to timely file a return or intentionally filed a false or incomplete return will be determined based upon all the facts and circumstances surrounding the non-filing or filing of a false and/or incomplete return. The higher penalty under the flush language of section 6707(b)(2) will not apply to any material advisor whose failure to timely file or whose furnishing of false or incomplete information was unintentional. The failure to timely file a return, or filing a return with false or incomplete information, will be considered unintentional if the material advisor subsequently files a true and complete return prior to the earlier of the date that any taxpayer files a Form 8886, “Re

portable Transaction Disclosure Statement” (or successor form) identifying the material advisor with respect to the reportable transaction in question, or the date the IRS contacts the material advisor concerning the reportable transaction.

(2) Individual liability in the case of more than one material advisor . If there is more than one material advisor who is responsible for filing a return under section 6111 with respect to the same reportable transaction, a separate penalty under section 6707 may be assessed against each material advisor who fails to timely file or files a return with false or incomplete information. The determination of whether the failure or action subject to the penalty is intentional will be made individually for each material advisor.

(3) Designation agreements . A material advisor who is required to file a return under section 6111 and who is a party to a designation agreement within the meaning of § 301.6111–3(f) is subject to a penalty under section 6707 if the designated material advisor fails to file a return timely or files a return with false or incomplete information. In the case of a listed transaction, if the designated material advisor fails to file a return timely, or files a return with false or incomplete information, the nondesignated material advisor who is a party to the designation agreement will not be treated as intentionally failing to file the return, or intentionally filing a return with false or incomplete information, unless the nondesignated material advisor knew or should have known that the designated material advisor would fail to file a true and complete return timely.

(d) Examples . The rules of paragraphs (a) through (c) of this section are illustrated by the following examples:

Example 1 . Advisor A becomes a material advisor as defined under section 6111(b)(1) and § 301.6111–3(b) in the fourth quarter of 2014 with respect to a reportable transaction other than a listed transaction, and Advisor B also becomes a material advisor in the same quarter with respect to the same reportable transaction. Advisors A and B fail to timely file the Form 8918 with respect to the reportable transaction. Under paragraph (a)(1)(ii) of this section, the penalty for failure by a material advisor to timely disclose a reportable transaction other than a listed transaction is $50,000. Because the section 6707 penalty applies to each material advisor independently under paragraph (c)(2) of this section, Advisors A and B each are subject to a section 6707 penalty of $50,000.

August 18, 2014 384 Bulletin No. 2014–34

(2) Requesting rescission . The Secretary may prescribe the procedures for a material advisor to request rescission of a section 6707 penalty by guidance published in the Internal Revenue Bulletin.

(3) Factors that weigh in favor of granting rescission. In determining whether rescission would promote compliance with the requirements of the Code and effective tax administration, the Commissioner (or the Commissioner’s delegate) will take into account the following list of factors that weigh in favor of granting rescission. This is not an exclusive list, and no single factor will be determinative of whether to grant rescission in any particular case. Rather, the Commissioner (or the Commissioner’s delegate) will consider and weigh all relevant factors, regardless of whether the factor is included in this list.

(i) The material advisor, upon becoming aware of the failure to disclose a reportable transaction in accordance with section 6111 and the regulations thereunder, filed a complete and proper, albeit untimely, Form 8918 (or successor form). This factor weighs in favor of rescission if circumstances suggest that the material advisor did not delay in filing an untimely but properly completed Form 8918 (or successor form) until after the IRS had taken steps to identify the person as a material advisor with respect to the reportable transaction. For instance, this factor will weigh strongly in favor of rescission if the material advisor files the Form 8918 (or successor form) prior to the date the IRS contacts the material advisor concerning the reportable transaction. However, this factor will not weigh in favor of rescission if the facts and circumstances indicate that the material advisor delayed filing the Form 8918 (or successor form) until after a taxpayer files a Form 8886 (or successor form) identifying the material advisor with respect to the reportable transaction in question.

(ii) The material advisor’s failure to disclose the reportable transaction properly was due to an unintentional mistake of fact that existed despite the material advisor’s reasonable attempts to ascertain the correct facts with respect to the transaction.

(iii) The material advisor has an established history of properly disclosing other

Example 2 . Same as Example 1, except that Advisor B timely files the Form 8918. Advisors A and B did not enter into a designation agreement. Accordingly, paragraph (c)(3) of this section does not apply and only Advisor A is subject to a $50,000 section 6707 penalty.

Example 3 . Advisor C becomes a material advisor to Client X on January 5, 2015, with respect to a listed transaction. Advisor C derives $400,000 in gross income from his advice to Client X because he expects to receive that amount from Client X, even though he has not yet received that amount. On January 5, 2016, Advisor C becomes a material advisor to Client Y with respect to the same type of listed transaction. Advisor C derives $100,000 in gross income from his advice to Client Y because he expects to receive that amount from Client Y, even though he has not yet received that amount. At no time did Advisor C file a Form 8918 to disclose the listed transaction. For purposes of this example, assume that Advisor C’s failure to file a Form 8918 was unintentional. Therefore, under paragraph (c)(2) of this section, Advisor C is subject to a section 6707 penalty based on the gross income derived from Client X and Client Y. Accordingly, Advisor C is subject to a penalty of $250,000 (50 percent of $500,000, the gross income derived from Clients X and Y).

Example 4 . Same as Example 3, except that the gross income Advisor C expects to receive from his advice to Client Y (a C corporation) is $20,000. Because the material advisor fee threshold is not satisfied with respect to Client Y, Advisor C is not a material advisor to Client Y with respect to the listed transaction. Advisor C is, however, a material advisor with respect to Client X with respect to the same listed transaction. Therefore, Advisor C is subject to a section 6707 penalty with respect to the failure to timely file a Form 8918 disclosing the listed transaction. Although Advisor C provided advice with respect to two transactions that are the same type of listed transaction, Advisor C was only a material advisor with respect to advice provided to Client X. Therefore, under paragraph (c)(2) of this section Advisor C is subject to a section 6707 penalty based only on the gross income derived from Client X. Accordingly, Advisor C is subject to a penalty of $200,000 (50 percent of $400,000, the gross income derived from Client X).

Example 5 . Same as Example 3, except that Advisor C files a Form 8918 disclosing the listed transaction on November 16, 2015. Because Advisor C becomes a material advisor to Client X on January 5, 2015, the Form 8918 is required to be filed on or before April 30, 2015 (the last day of the month that follows the end of the calendar quarter in which the advisor became a material advisor with regard to the reportable transaction). See § 301.6111–3(e). Therefore, Advisor C did not timely file the Form 8918. Advisor C is subject to a $200,000 penalty under section 6707 for his unintentional failure because, as of the date he filed the Form 8918, the gross income Advisor C had received or expected to receive with respect to advice relating to a listed transaction that was not disclosed only included $400,000 of gross income for advice to Client X. By the time that Advisor C provides advice to Client Y on January 5, 2016, Advisor C has disclosed the listed transaction.

Example 6 . Same as Example 3, except that Advisor C files the Form 8918 on February 16, 2016, disclosing the listed transaction. Because Advisor C first becomes a material advisor with respect to the listed transaction on January 5, 2015, the Form 8918 is required to be filed on or before April 30, 2015 regardless of the fact that Advisor C is also a material advisor to a second client, Client Y, with respect to the same listed transaction. This is because under the facts of Example 3, Advisor C “becomes” a material advisor on January 5, 2015. The date on which a material advisor “becomes” a material advisor is determinative of the due date for the Form 8918 under § 301.6111–3(e). Therefore, when Advisor C files the Form 8918 on February 16, 2016, the form is not timely filed under section 6111. Under paragraph (c)(2) of this section, Advisor C is subject to a penalty under section 6707 of $250,000 (50 percent of $500,000) because, as of the date that the Form 8918 was filed, the gross income that Advisor C received or expected to receive as a material advisor with respect to a listed transaction that was not disclosed included gross income for advice to both Client X ($400,000) and Client Y ($100,000).

Example 7 . Advisor D becomes a material advisor as defined under section 6111(b)(1) and § 301.6111–3(b) in the first quarter of 2016 with respect to a reportable transaction other than a listed transaction. Advisor D does not file a Form 8918 by April 30, 2016. The transaction is then identified as a listed transaction in published guidance on July 7, 2016. Advisor D knew that he had a new obligation to file a Form 8918 by October 31, 2016, and intentionally fails to file the Form 8918. Advisor D is subject to only one penalty, in the amount of the greater of $200,000, or 75 percent of the gross income he derived from the transaction, for intentionally failing to disclose the listed transaction in accordance with § 301.6111–3(d)(1) and (e).

Example 8 . Same as Example 7, except that Advisor D filed a Form 8918 disclosing the listed transaction on October 15, 2016. As a result of that disclosure, Advisor D is not subject to the section 6707 penalty amount described in § 301.6707– 1(a)(1)(ii). However, because Advisor D did not timely file a Form 8918 by April 30, 2016, the due date for the Form 8918 with respect to the reportable transaction for which Advisor D became a material advisor in the first quarter of 2016, Advisor D is subject to a section 6707 penalty of $50,000 as described in § 301.6707–1(a)(1)(i). The disclosure of the listed transaction does not correct Advisor D’s initial failure to disclose the reportable transaction by April 30, 2016.

(e) Rescission authority —(1) In gen- eral. The Commissioner (or the Commissioner’s delegate) may rescind the section 6707 penalty if— (i) The violation relates to a reportable transaction that is not a listed transaction; and

(ii) Rescinding the penalty would promote compliance with the requirements of the Code and effective tax administration.

Bulletin No. 2014–34 385 August 18, 2014

reportable transactions and complying with other tax laws, including compliance with any requests made by the IRS under section 6112, if applicable.

(iv) The material advisor demonstrates that the failure to include on any return or statement any information required to be disclosed under section 6111 arose from events beyond the material advisor’s control.

(v) The material advisor cooperates with the IRS by providing timely information with respect to the transaction at issue that the Commissioner (or the Commissioner’s delegate) may request in consideration of the rescission request. In considering whether a material advisor cooperates with the IRS, the Commissioner (or the Commissioner’s delegate) will take into account whether the material advisor meets the deadlines described in guidance published in the Internal Revenue Bulletin for complying with requests for additional information.

(vi) Assessment of the penalty weighs against equity and good conscience, including whether the material advisor demonstrates that there was reasonable cause for, and the material advisor acted in good

faith with respect to, the failure to timely file or to include on any return any information required to be disclosed under section 6111. An important factor in determining reasonable cause and good faith is the extent of the material advisor’s efforts to determine whether there was a requirement to file the return required under section 6111. The presence of reasonable cause, however, will not necessarily be determinative of whether to grant rescission.

(4) Absence of favorable factors weighs against rescission . The absence of facts establishing the factors described in paragraph (e)(3) of this section weighs against granting rescission. The presence or absence of any one of these factors, however, will not necessarily be determinative of whether to grant rescission; rather the determination will be made in consideration of all of the factors and any other facts and circumstances.

(5) Factors not considered . In determining whether to grant rescission, the Commissioner (or the Commissioner’s delegate) will not consider doubt as to collectability of, or liability for, the penalties (except that the Commissioner (or

the Commissioner’s delegate) may consider doubt as to liability to the extent it is a factor in the determination of reasonable cause and good faith).

(f) Effective/applicability date . The rules of this section apply to returns the due date for which is after July 31, 2014.

§ 301.6707–1T [Removed]

Par. 3. Section 301.6707–1T is removed.

John Dalrymple, Deputy Commissioner for Services and Enforcement.

Approved June 26, 2014.

Mark J. Mazur, Assistant Secretary of the Treasury

(Tax Policy).

(Filed by the Office of the Federal Register on July 30, 2014, 8:45 a.m., and published in the issue of the Federal Register for July 31, 2014, 79 F.R. 44282)

August 18, 2014 386 Bulletin No. 2014–34