Rev. Proc. 2005-51, Revenue Procedure regarding I.R.C. 6707A(e) and Disclosure with the SEC

26 CFR 601.105: Examination of returns and claims
for refund, credit, or abatement; determination of
correct tax liability.
(Also: Part I, §§ 6011, 6662, 6662A, 6707A;
1–6011–4.)

Rev. Proc. 2005–51
SECTION 1. PURPOSE
This revenue procedure provides guidance to persons who may be required
to pay certain penalties under sections
6662(h), 6662A, or 6707A of the Internal
Revenue Code, and who may be required
under section 6707A(e) to disclose those
penalties on reports filed with the Securities and Exchange Commission. This
revenue procedure describes the report on
which the disclosures must be made, the
information that must be disclosed, and
the deadlines by which persons must make
the disclosures on reports filed with the
SEC in order to avoid additional penalties
under section 6707A(e).
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

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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

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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;
(3) the accuracy-related penalty imposed by section 6662(a) at the 40-percent
rate determined under section 6662(h) for
a gross valuation misstatement, if the person would (but for the exclusionary rule
of section 6662A(e)(2)(C)(ii)) have been
subject to the accuracy-related penalty
under section 6662A(a) at the 30-percent
rate determined under section 6662A(c);
and
(4) the penalty imposed by section
6707A(e) for failure to disclose any of the
penalties described in section 2.05(1) –
(3) of this revenue procedure in periodic
reports required under section 13 or 15(d)
of the Securities Exchange Act of 1934, as
specified in this revenue procedure.
SECTION 3. SCOPE
This revenue procedure applies to any
person required to pay any penalty described in section 2.05 of this revenue procedure that is also 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. Further guidance will be issued providing preassessment administrative appeal rights to
persons required to pay the penalties described in section 2.05(1). The administrative appeal rights for the penalties described in section 2.05(2) and (3) are the
same as the administrative appeal rights afforded with respect to the deficiency determinations (or proposed deficiency determinations) with which those penalties
are associated, and no separate administrative appeal rights regarding those penalties
are available. There are no administrative
appeal rights with respect to penalties described in section 2.05(4).
SECTION 4. APPLICATION
.01 Periodic reports required under the
Securities Exchange Act of 1934. In accordance with section 6707A(e), a person
who files SEC Form 10–K, Annual Report,
pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934, either separately or consolidated with another per-

August 15, 2005

son, must disclose in Item 3 (Legal Proceedings) of Form 10–K the requirement
to pay any penalty specified in section 2.05
of this revenue procedure.
.02 Required disclosures. A person
must disclose in the Form 10–K the
amount of any penalty specified in section
2.05 of this revenue procedure, whether
it has paid the penalty in full, the Code
section and subparagraph under which
the penalty was determined (i.e., section 6662(h), section 6662A(c), section
6707A(b)(2), or section 6707A(e)), and
a description of the penalty (i.e., accuracy-related penalty for gross valuation
misstatement, accuracy-related penalty
on an understatement attributable to a
nondisclosed listed or other avoidance
transaction, penalty for failure to include
listed transaction information with return,
or penalty for failure to disclose imposition
of penalty in report filed with the SEC). A
person must disclose in its Form 10–K the
requirement to pay the 40-percent accuracy-related penalty under section 6662(h)
if:
(1) the person consented to the assessment of the 40-percent penalty without
the issuance of a statutory notice of deficiency if the Service proposed the 30-percent penalty determined under section
6662A(c) in the alternative in a notice of
proposed deficiency (30-day letter);
(2) the person consented to the assessment of the 40-percent penalty or did not
timely petition the Tax Court if the Service included the 30-percent penalty determined under 6662A(c) in the alternative in
a statutory notice of deficiency;
(3) the government raised the 30-percent accuracy-related penalty under section 6662A(c) in the alternative in any
pleading in a judicial proceeding challenging the applicability of the 40-percent
penalty and the court expressly determined
that the 30-percent penalty applied in the
alternative to the 40-percent penalty; or
(4) the person expressly acknowledged the applicability of the 30-percent
accuracy-related penalty under section
6662A(c) in the alternative to the 40-percent accuracy-related penalty under section 6662(h) in a written settlement agreement with the government.
.03 When disclosure must be made. (1)
A person required to pay a penalty specified in section 2.05 of this revenue procedure must disclose the requirement to pay

August 15, 2005

the penalty on the Form 10–K filed with
the SEC that relates to the fiscal year (as
defined in 17 C.F.R. § 240.12b–2) in which
the Service sends the person notice and demand for payment of the penalty. If the
person pays the penalty (not including interest) in full prior to the Service sending
notice and demand for payment, the person
must disclose the requirement to pay the
penalty on the Form 10–K filed with the
SEC that relates to the fiscal year in which
the person has paid the penalty. If the person fails to disclose the requirement to pay
any penalty specified in section 2.05, as
specified in the two preceding sentences,
the disclosure must be made on the next
Form 10–K filed with the SEC after the
failure to disclose has occurred. This obligation to disclose on each successive Form
10–K filed will continue until the person
actually discloses its requirement to pay
each of the penalties specified in section
2.05. Each failure to disclose the requirement to pay a penalty specified in section
2.05, in the manner specified in sections
4.01, 4.02 and this section 4.03, will give
rise to a new, separate penalty under section 6707A(e) that also must be disclosed
on the Form 10–K in the manner specified.
Example: In Year 1, Taxpayer T failed to disclose the requirement to pay a section 6662A(c) accuracy-related penalty on the Form 10–K filed with the
SEC (the Year 1 Form 10–K) that relates to the fiscal
year in which the IRS sent notice and demand for payment of the penalty. Taxpayer T is subject to a penalty
under section 6707A(e) for a failure to disclose the
section 6662A(c) accuracy-related penalty. Accordingly, Taxpayer T must disclose on the next Form
10–K filed with the SEC (the Year 2 Form 10–K)
the requirement to pay the original section 6662A(c)
penalty and, if the IRS sends notice and demand for
payment of the section 6707A(e) penalty in the fiscal year to which the Year 2 Form 10–K relates, must
disclose the requirement to pay that penalty as well.

(2) If a person brings a refund action
seeking recovery of a 40-percent accuracy-related penalty under section 6662(h)
and the government raises the 30-percent
penalty under section 6662A(c) in the
alternative in any pleading filed in that
action without having previously raised
the 30-percent penalty in a 30-day letter
or a statutory notice of deficiency, the
requirement to disclose the penalty will
only apply if the 30-percent penalty is
upheld, either directly or in the alternative
to the 40-percent penalty. In that case,
the person must disclose the requirement
to pay either the 30-percent or 40-percent
penalty, as applicable, on the first Form

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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.
SECTION 5. PAPERWORK
REDUCTION ACT
The collection of information contained in this revenue procedure has been
reviewed and approved by the Office of
Management and Budget in accordance
with the Paperwork Reduction Act (44
U.S.C. § 3507) under control number
1545–1956.
An agency may not conduct or sponsor,
and a person is not required to respond
to, a collection of information unless the
collection of information displays a valid
OMB control number.
The collections of information in this
revenue procedure are in sections 4.01 and
4.02. This information is required to enforce the provisions of section 6707A(e)
and make investors or potential investors
aware of a person’s participation in certain
reportable transactions that led to penalties
under the Internal Revenue Code. The collection of information is mandatory. The
likely respondents are businesses that are
publicly traded corporations.
The estimated total annual reporting or
recordkeeping burden is 429.5 hours.
The estimated annual burden per respondent/recordkeeper varies from .25 to
.75 hour, depending on individual circumstances, with an estimated average of .5
hour. The estimated number of respondents or recordkeepers is 859.
The estimated annual frequency of responses (used for reporting requirements
only) is 859.
Books or records relating to a collection
of information must be retained as long
as their contents may become material in
the administration of any internal revenue

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law. Generally, tax returns and tax return
information are confidential, as required
by 26 U.S.C. § 6103.

relates to a return or statement the due date
for which is after October 22, 2004.

SECTION 6. EFFECTIVE DATE

SECTION 7. DRAFTING
INFORMATION

This revenue procedure is effective for
any penalty specified in section 2.05 that

The principal author of this revenue
procedure is Matthew S. Cooper of the

2005–33 I.R.B.

298

Office of the Associate Chief Counsel
(Procedure & Administration), Administrative Provisions & Judicial Practice
Division. For further information regarding this revenue procedure, contact
Matthew S. Cooper at (202) 622–4940
(not a toll-free call).

August 15, 2005