Td 9492

Part I. Rulings and Decisions Under the Internal Revenue Code
of 1986
Section 4965.—Excise Tax
on Certain Tax-Exempt
Entities Entering into
Prohibited Tax Shelter
Transactions
26 CFR 53.4965–1: Definition of tax-exempt party to
a prohibited tax shelter transaction.

T.D. 9492
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Parts 1, 53, 54, 301
and 602
Excise Taxes on Prohibited
Tax Shelter Transactions
and Related Disclosure
Requirements; Disclosure
Requirements with Respect
to Prohibited Tax Shelter
Transactions; Requirement of
Return and Time for Filing
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations and removal
of temporary regulations.
SUMMARY: This document contains final regulations that provide guidance under section 4965 of the Internal Revenue
Code (Code), relating to entity-level and
manager-level excise taxes with respect to
prohibited tax shelter transactions to which
tax-exempt entities are parties; sections
6033(a)(2) and 6011(g), relating to certain
disclosure obligations with respect to such
transactions; and sections 6011 and 6071,
relating to the requirement of a return and
time for filing with respect to section 4965
taxes. This action is necessary to implement section 516 of the Tax Increase Prevention Reconciliation Act of 2005. These
final regulations affect a broad array of taxexempt entities, including charities, state
and local government entities, Indian tribal
governments and employee benefit plans,
as well as entity managers of these entities.

2010–33 I.R.B.

DATES: Effective Date: These regulations
are effective July 6, 2010.
Applicability Date: For dates of applicability, see §§1.6033–5(f), 53.4965–9(b)
and (c), 53.6071–1(h), 54.6011–1(d),
301.6011(g)–1(j) and 301.6033–5(b).
FOR
FURTHER
INFORMATION
CONTACT: For questions concerning
these regulations, contact Benjamin Akins
at (202) 622–1124 or Michael Blumenfeld
at (202) 622–6070.
For questions
specifically relating to qualified pension
plans, individual retirement accounts, and
similar tax-favored savings arrangements,
contact Cathy Pastor at (202) 622–6090
(not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in these final regulations has been
reviewed and approved by the Office of
Management and Budget in accordance
with the Paperwork Reduction Act of
1995 (44 U.S.C. 3507(d)) under control
number 1545–2079. The collection of
information in these final regulations is
in §301.6011(g)–1. The collection of information in §301.6011(g)–1 flows from
section 6011(g), which requires a taxable
party to a prohibited tax shelter transaction to disclose to any tax-exempt entity
that is a party to the transaction that the
transaction is a prohibited tax shelter
transaction. The likely recordkeepers are
taxable entities or individuals that participate in prohibited tax shelter transactions.
The estimated number of recordkeepers
is between 1,250 and 6,500. The information that is required to be collected for
purposes of §301.6011(g)–1 is a subset
of information that is required to be collected in order to complete and file Form
8886, “Reportable Transaction Disclosure
Statement.” The estimated paperwork burden for taxpayers filling out Form 8886 is
approved under OMB number 1545–1800.
An agency may not conduct or sponsor,
and a person is not required to respond to, a
collection of information unless it displays

242

a valid control number assigned by the Office of Management and Budget.
Books and records relating to the collection of information must be retained as
long as their contents may become material in the administration of any internal
revenue law. Generally, returns and return
information are confidential, as required
by section 6103.
Background
The Tax Increase Prevention and Reconciliation Act of 2005, Public Law
109–222 (120 Stat. 345) (TIPRA), enacted
on May 17, 2006, defines certain transactions as prohibited tax shelter transactions
and imposes excise taxes and disclosure
requirements with respect to prohibited tax
shelter transactions to which a tax-exempt
entity is a party. Section 516 of TIPRA
added new section 4965 and amended sections 6033(a)(2) and 6011(g) of the Code.
On July 6, 2007, the IRS and the
Treasury Department published final and
temporary regulations under sections
6011 and 6071 (T.D. 9334, 2007–2 C.B.
382) and temporary regulations under
section 6033 (T.D. 9335, 2007–2 C.B.
380) in the Federal Register (72 FR
36869; 72 FR 36871). Also on July
6, 2007, the IRS and the Treasury
Department issued a notice of proposed
cross-referencing
those
rulemaking
temporary regulations (REG–142039–06,
2007–2 C.B. 415; REG–139268–06,
2007–2 C.B. 715) in the Federal Register
(72 FR 36927). This notice of proposed
rulemaking also included proposed
regulations under sections 4965 and
6011(g). On August 16, 2007, and August
31, 2007, the IRS and the Treasury
Department issued corrections to T.D.
9334 (72 FR 45894; 72 FR 50211). On
August 16, 2007, the IRS and the Treasury
Department issued corrections to T.D.
9335 (72 FR 45890).
The IRS did not receive any comments
or requests for a public hearing. Accordingly, the proposed regulations are adopted
as final by this Treasury decision with certain revisions described below.

August 16, 2010

Explanation of Provisions
Definition of Party to a Prohibited Tax
Shelter Transaction
The proposed regulations set forth a
three-part definition of the term “party to
a prohibited tax shelter transaction.” Under the proposed regulations, a tax-exempt
entity is a party to a prohibited tax shelter transaction if it: (1) facilitates a prohibited tax shelter transaction by reason of
its exempt, tax indifferent or tax-favored
status; (2) enters into a listed transaction
and reflects on its tax return (whether an
original or an amended return) a reduction
or elimination of its liability for applicable
Federal employment, excise or unrelated
business income taxes that is derived directly or indirectly from tax consequences
or tax strategy described in the published
guidance that lists the transaction; or (3) is
identified in published guidance, by type,
class or role, as a party to a prohibited
tax shelter transaction. The final regulations eliminate the second part of this definition; therefore, a tax-exempt entity that
enters into a transaction to reduce or eliminate its own tax liability generally will not
be considered a party to a prohibited tax
shelter transaction under these regulations.
However, under the third part of the definition in the proposed regulations, which
is retained in the final regulations, the IRS
and the Treasury Department may identify in published guidance specific transactions or circumstances in which a tax-exempt entity that enters into a transaction
to reduce or eliminate its own tax liability
will be treated as a party to a prohibited tax
shelter transaction for purposes of section
4965.
A variety of circumstances may arise in
which an entity generally exempt from tax
may nevertheless be subject to some form
of Federal taxation. When such circumstances arise, some tax-exempt entities
may seek ways to reduce or eliminate the
Federal tax as would a similarly situated
entity that is not exempt from tax. In
general, exempt status does not provide
additional opportunities or incentives for
a tax-exempt entity to engage in a listed
transaction to reduce or eliminate taxes
imposed upon it. Further, a tax-exempt
entity that engages in such transactions
is subject to the same disclosure rules
and increased penalties as other similarly

August 16, 2010

situated taxpayers (for example, sections
6011, 6707A, 6662, 6662A and 6663).
Accordingly, the IRS and the Treasury
Department believe that, as a general rule,
a tax-exempt entity that engages in a listed
transaction to reduce or eliminate its own
tax liability should not be considered a
party to a prohibited tax shelter transaction
for purposes of section 4965. The IRS and
the Treasury Department have retained the
ability to provide exceptions to this general
rule through published guidance that identifies, by type, class or role, a tax-exempt
entity as a party to a prohibited tax shelter
transaction, including a tax-exempt entity
that enters into a particular transaction to
reduce or eliminate its own tax liability.
Because the IRS and the Treasury Department have eliminated the second part
of the definition of the term “party,” certain other conforming changes were made
to the regulations.
Timing for Disclosure by Taxable Party
to Tax-Exempt Party
The proposed regulations required a
taxable party to a prohibited tax shelter
transaction to disclose by statement to
each tax-exempt entity that the taxable
party knows or has reason to know is a
party to such transaction that the transaction is a prohibited tax shelter transaction.
The proposed regulations required the taxable party to make the disclosure within
60 days after the last to occur of (1) the
date the person becomes a taxable party to
the transaction, or (2) the date the taxable
party knows or has reason to know that the
tax-exempt entity is a party to the transaction. The proposed regulations provided
an exception if the person does not know
or have reason to know that the tax-exempt entity is a party to the transaction
on or before the first date on which the
transaction is required to be disclosed by
the person under section 6011.
These final regulations modify the rule
governing the timing of this disclosure.
The taxable party now must make the disclosure within 60 days after the last to occur of (1) the date the person becomes a
taxable party to the transaction, (2) the
date the taxable party knows or has reason to know that the tax-exempt entity is
a party to the transaction, or (3) July 6,
2010. These final regulations retain the exception for persons who do not know or

243

have reason to know that a tax-exempt entity is a party to the transaction on or before
the first date on which the transaction is required to be disclosed by the person under
section 6011.
Special Analyses
It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order
12866. Therefore, a regulatory assessment
is not required. It has also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter
5) does not apply to these regulations. It is
hereby certified that the collection of information in §301.6011(g)–1 will not have a
significant economic impact on a substantial number of small entities. Accordingly,
a regulatory flexibility analysis under the
Regulatory Flexibility Act (5 U.S.C. 601)
(RFA) is not required. The effect of these
regulations on small entities flows directly
from the statutes these regulations implement. Section 6011(g), as amended by
TIPRA, requires any taxable party to a prohibited tax shelter transaction to notify any
tax-exempt entity that is a party to such
transaction that the transaction is a prohibited tax shelter transaction. In implementing this statute, §301.6011(g)–1 of the regulations requires every taxable party to a
prohibited tax shelter transaction (or a single taxable party acting by designation on
behalf of other taxable parties) to provide
to every tax-exempt entity that the taxable
party knows or has reason to know is a
party to the transaction a single statement
disclosing that the transaction is a prohibited tax shelter transaction within 60 days
after the last to occur of: (1) the date the
taxable person becomes a taxable party to
the transaction; (2) the date the taxable
party knows or has reason to know that the
tax-exempt entity is a party to the transaction; or (3) July 6, 2010. These final regulations retain the exception for persons
who do not know or have reason to know
that a tax-exempt entity is a party to the
transaction on or before the first date on
which the transaction is required to be disclosed by the person under section 6011.
Moreover, it is unlikely that a significant
number of small businesses will engage in
transactions that are subject to disclosure
under §301.6011(g).

2010–33 I.R.B.

Pursuant to section 7805(f) of the 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.
Drafting Information
The principal authors of these regulations are Benjamin Akins and Cathy Pastor, Office of Division Counsel/Associate
Chief Counsel (Tax Exempt and Government Entities). However, other personnel
from the IRS and the Treasury Department
participated in their development.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 1, 53, 54,
301, and 602 are 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 * * *
Par. 2. Section 1.6033–5 is added to
read as follows:
§1.6033–5 Disclosure by tax-exempt
entities that are parties to certain
reportable transactions.
(a) In general. Every tax-exempt entity
(as defined in section 4965(c)) shall file
with the IRS on Form 8886–T, “Disclosure by Tax-Exempt Entity Regarding Prohibited Tax Shelter Transaction” (or a successor form), in accordance with this section and the instructions to the form, a disclosure of—
(1) Such entity’s being a party (as defined in §53.4965–4 of this chapter) to a
prohibited tax shelter transaction (as defined in section 4965(e)); and
(2) The identity of any other party
(whether taxable or tax-exempt) to such
transaction that is known to the tax-exempt entity.
(b) Frequency of disclosure. A single
disclosure is required for each prohibited
tax shelter transaction.
(c) By whom disclosure is made—(1)
Tax-exempt entities referred to in section
4965(c)(1), (2) or (3). In the case of
tax-exempt entities referred to in section

2010–33 I.R.B.

4965(c)(1), (2) or (3), the disclosure required by this section must be made by the
entity.
(2) Tax-exempt entities referred to in
section 4965(c)(4), (5), (6) or (7). In the
case of tax-exempt entities referred to in
section 4965(c)(4), (5), (6) or (7), including a fully self-directed qualified plan,
IRA, or other savings arrangement, the
disclosure required by this section must be
made by the entity manager (as defined in
section 4965(d)(2)) of the entity.
(d) Time and place for filing—(1) In
general. The disclosure required by this
section shall be filed on or before May 15
of the calendar year following the close
of the calendar year during which the taxexempt entity entered into the prohibited
tax shelter transaction.
(2) Subsequently listed transactions. In
the case of subsequently listed transactions
(as defined in section 4965(e)(2)), the disclosure required by this section shall be
filed on or before May 15 of the calendar year following the close of the calendar year during which the transaction was
identified by the Secretary as a listed transaction.
(3) Transition rule. If a tax-exempt entity entered into a prohibited tax shelter
transaction after May 17, 2006, and before
January 1, 2007, the disclosure required
by this section shall be filed on or before
November 2, 2007.
(4) No disclosure. Disclosure is not required with respect to any prohibited tax
shelter transaction entered into by a tax-exempt entity on or before May 17, 2006.
(e) Penalty for failure to provide disclosure statement. See section 6652(c)(3) for
the penalty applicable to the failure to disclose a prohibited tax shelter transaction in
accordance with this section.
(f) Effective date/applicability date.
This section applies with respect to transactions entered into by a tax-exempt entity
after May 17, 2006.
§1.6033–5T [Removed].
Par. 3. Section 1.6033–5T is removed.
PART 53—FOUNDATION AND
SIMILAR EXCISE TAXES
Par. 4. The authority citation for part
53 continues to read, in part, as follows:
Authority: 26 U.S.C. 7805 * * *

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Par. 5. Sections 53.4965–1 through
53.4965–9 are added to subpart K to read
as follows:
§53.4965–1 Overview.
(a) Entity-level excise tax. Section 4965
imposes two excise taxes with respect to
certain tax shelter transactions to which
tax-exempt entities are parties. Section
4965(a)(1) imposes an entity-level excise
tax on certain tax-exempt entities that are
parties to “prohibited tax shelter transactions,” as defined in section 4965(e). See
§53.4965–2 for the discussion of covered
tax-exempt entities. See §53.4965–3 for
the definition of prohibited tax shelter
transactions. See §53.4965–4 for the definition of tax-exempt party to a prohibited
tax shelter transaction. The entity-level
excise tax under section 4965(a)(1) is imposed on a specified percentage of the
entity’s net income or proceeds that are
attributable to the transaction for the relevant tax year (or a period within that
tax year). The rate of tax depends on
whether the entity knew or had reason to
know that the transaction was a prohibited tax shelter transaction at the time the
entity became a party to the transaction.
See §53.4965–7(a) for the discussion of
the entity-level excise tax under section
4965(a)(1). See §53.4965–6 for the discussion of “knowing or having reason to
know.” See §53.4965–8 for the definition of net income and proceeds and the
standard for allocating net income and proceeds that are attributable to a prohibited
tax shelter transaction to various periods.
(b) Manager-level excise tax. Section
4965(a)(2) imposes a manager-level excise tax on “entity managers,” as defined
in section 4965(d), of tax-exempt entities
who approve the entity as a party (or otherwise cause the entity to be a party) to a prohibited tax shelter transaction and know
or have reason to know, at the time the
tax-exempt entity enters into the transaction, that the transaction is a prohibited tax
shelter transaction. See §53.4965–5 for
the definition of entity manager and the
meaning of “approving or otherwise causing,” and §53.4965–6 for the discussion
of “knowing or having reason to know.”
See §53.4965–7(b) for the discussion of
the manager-level excise tax under section
4965(a)(2).

August 16, 2010

(c) Effective/applicability dates. See
§53.4965–9 for the discussion of the relevant effective and applicability dates.
§53.4965–2 Covered tax-exempt entities.
(a) In general. Under section 4965(c),
the term “tax-exempt entity” refers to entities that are described in sections 501(c),
501(d), or 170(c) (other than the United
States), Indian tribal governments (within
the meaning of section 7701(a)(40)), and
tax-qualified pension plans, individual retirement arrangements and similar tax-favored savings arrangements that are described in sections 4979(e)(1), (2) or (3),
529, 457(b), or 4973(a). The tax-exempt
entities referred to in section 4965(c) are
divided into two broad categories, nonplan entities and plan entities.
(b) Non-plan entities. Non-plan entities
are—
(1) Entities described in section 501(c);
(2) Religious or apostolic associations or corporations described in section
501(d);
(3) Entities described in section 170(c),
including states, possessions of the United
States, the District of Columbia, political
subdivisions of states and political subdivisions of possessions of the United States
(but not including the United States); and
(4) Indian tribal governments within the
meaning of section 7701(a)(40).
(c) Plan entities. Plan entities are—
(1) Entities described in section
4979(e)(1) (qualified plans under section
401(a), including qualified cash or deferred arrangements under section 401(k)
(including a section 401(k) plan that allows designated Roth contributions));
(2) Entities described in section
4979(e)(2) (annuity plans described in
section 403(a));
(3) Entities described in section
4979(e)(3) (annuity contracts described in
section 403(b), including a section 403(b)
arrangement that allows Roth contributions);
(4) Qualified tuition programs described in section 529;
(5) Eligible deferred compensation
plans under section 457(b) that are maintained by a governmental employer as
defined in section 457(e)(1)(A);
(6) Arrangements described in section
4973(a) which include—

August 16, 2010

(i) Individual retirement plans defined
in section 408(a) and (b), including—
(A) Simplified employee pensions
(SEPs) under section 408(k);
(B) Simple individual retirement accounts (SIMPLEs) under section 408(p);
(C) Deemed individual retirement accounts or annuities (IRAs) qualified under
a qualified plan (deemed IRAs) under section 408(q); and
(D) Roth IRAs under section 408A.
(ii) Arrangements described in section
220(d) (Archer Medical Savings Accounts
(MSAs));
(iii) Arrangements described in section
403(b)(7) (custodial accounts treated as
annuity contracts);
(iv) Arrangements described in section 530 (Coverdell education savings
accounts); and
(v) Arrangements described in section
223(d) (health savings accounts (HSAs)).
(d) Effective/applicability dates. See
§53.4965–9 for the discussion of the relevant effective and applicability dates.
§53.4965–3 Prohibited tax shelter
transactions.
(a) In general. Under section 4965(e),
the term prohibited tax shelter transaction
means—
(1) Listed transactions within the meaning of section 6707A(c)(2), including subsequently listed transactions described in
paragraph (b) of this section; and
(2) Prohibited reportable transactions,
which consist of the following reportable
transactions within the meaning of section
6707A(c)(1)—
(i) Confidential transactions, as described in §1.6011–4(b)(3) of this chapter;
or
(ii) Transactions with contractual protection, as described in §1.6011–4(b)(4) of
this chapter.
(b) Subsequently listed transactions.
A subsequently listed transaction for purposes of section 4965 is a transaction that
is identified by the Secretary as a listed
transaction after the tax-exempt entity
has entered into the transaction and that
was not a prohibited reportable transaction (within the meaning of section
4965(e)(1)(C) and paragraph (a)(2) of this
section) at the time the entity entered into
the transaction.

245

(c) Cross-reference. The determination
of whether a transaction is a listed transaction or a prohibited reportable transaction for section 4965 purposes shall be
made under the law applicable to section
6707A(c)(1) and (c)(2).
(d) Effective/applicability dates. See
§53.4965–9 for the discussion of the relevant effective and applicability dates.
§53.4965–4 Definition of tax-exempt party
to a prohibited tax shelter transaction.
(a) In general. For purposes of sections
4965 and 6033(a)(2), a tax-exempt entity
is a party to a prohibited tax shelter transaction if the entity—
(1) Facilitates a prohibited tax shelter
transaction by reason of its tax-exempt, tax
indifferent or tax-favored status; or
(2) Is identified in published guidance,
by type, class or role, as a party to a prohibited tax shelter transaction.
(b) Published guidance may identify
which tax-exempt entities, by type, class
or role, will not be treated as a party to a
prohibited tax shelter transaction.
(c) Example. The following example
illustrates the principle of paragraph (a)(1)
of this section:
Example. A tax-exempt entity enters into a transaction (Transaction A) with an S corporation. Transaction A is the same as or substantially similar to
the transaction identified by the Secretary as a listed
transaction in Notice 2004–30, 2004–1 C.B. 828. The
tax-exempt entity’s role in Transaction A is similar to
the role of the tax-exempt party, as described in Notice 2004–30. Under the terms of the transaction, as
described in Notice 2004–30, the tax-exempt entity
receives the S corporation stock and purports to aid
the S corporation and its shareholders in avoiding taxable income. The tax-exempt entity facilitates Transaction A by reason of its tax-exempt, tax indifferent
or tax-favored status. Accordingly, the tax-exempt
entity is a party to Transaction A for purposes of sections 4965 and 6033(a)(2). See §601.601(d)(2)(ii)(b)
of this chapter.

(d) Effective/applicability dates. See
§53.4965–9 for the discussion of the relevant effective and applicability dates.
§53.4965–5 Entity managers and related
definitions.
(a) Entity manager of a non-plan
entity—(1) In general.
Under section 4965(d)(1), an entity manager of a
non-plan entity is—
(i) A person with the authority or responsibility similar to that exercised by an

2010–33 I.R.B.

officer, director, or trustee of an organization (that is, the non-plan entity); and
(ii) With respect to any act, the person
who has final authority or responsibility
(either individually or as a member of a
collective body) with respect to such act.
(2) Definition of officer. For purposes
of paragraph (a)(1)(i) of this section, a person is considered to be an officer of the
non-plan entity (or to have similar authority or responsibility) if the person—
(i) Is specifically designated as such
under the certificate of incorporation,
by-laws, or other constitutive documents
of the non-plan entity; or
(ii) Regularly exercises general authority to make administrative or policy decisions on behalf of the non-plan entity.
(3) Exception for acts requiring approval by a superior. With respect to any
act, any person is not described in paragraph (a)(2)(ii) of this section if the person
has authority merely to recommend particular administrative or policy decisions, but
not to implement them without approval
of a superior.
(4) Delegation of authority. A person
is an entity manager of a non-plan entity
within the meaning of paragraph (a)(1)(ii)
of this section if, with respect to any prohibited tax shelter transaction, such person
has been delegated final authority or responsibility with respect to such transaction (including by transaction type or dollar amount) by a person described in paragraph (a)(1)(i) of this section or the governing board of the entity. For example,
an investment manager is an entity manager with respect to a prohibited tax shelter transaction if the non-plan entity’s governing body delegated to the investment
manager the final authority to make certain
investment decisions and, in the exercise
of that authority, the manager committed
the entity to the transaction. To be considered an entity manager of a non-plan entity
within the meaning of paragraph (a)(1)(ii)
of this section, a person need not be an employee of the entity. A person is not described in paragraph (a)(1)(ii) of this section if the person is merely implementing
a decision made by a superior.
(b) Entity manager of a plan entity—(1)
In general. Under section 4965(d)(2), an
entity manager of a plan entity is the person who approves or otherwise causes the
entity to be a party to the prohibited tax
shelter transaction.

2010–33 I.R.B.

(2) Special rule for plan participants
and beneficiaries who have investment
elections—(i) Fully self-directed plans
or arrangements. In the case of a fully
self-directed qualified plan, IRA, or other
savings arrangement (including a case
where a plan participant or beneficiary is
given a list of prohibited investments, such
as collectibles), if the plan participant or
beneficiary selected a certain investment
and, therefore, approved the plan entity to
become a party to a prohibited tax shelter transaction, the plan participant or the
beneficiary is an entity manager.
(ii) Plans or arrangements with limited
investment options. In the case of a qualified plan, IRA, or other savings arrangement where a plan participant or beneficiary is offered a limited number of investment options from which to choose,
the person responsible for determining the
pre-selected investment options is an entity manager and the plan participant or the
beneficiary generally is not an entity manager.
(c) Meaning of “approves or otherwise
causes”—(1) In general. A person is
treated as approving or otherwise causing
a tax-exempt entity to become a party to
a prohibited tax shelter transaction if the
person has the authority to commit the entity to the transaction, either individually
or as a member of a collective body, and
the person exercises that authority.
(2) Collective bodies. If a person shares
the authority described in paragraph (c)(1)
of this section as a member of a collective body (for example, board of trustees
or committee), the person will be considered to have exercised such authority if the
person voted in favor of the entity becoming a party to the transaction. However, a
member of the collective body will not be
treated as having exercised the authority
described in paragraph (c)(1) of this section if he or she voted against a resolution that constituted approval or an act that
caused the tax-exempt entity to be a party
to a prohibited tax shelter transaction, abstained from voting for such approval, or
otherwise failed to vote in favor of such approval.
(3) Exceptions—(i) Successor in interest. If a tax-exempt entity that is a party to
a prohibited tax shelter transaction is dissolved, liquidated, or merged into a successor entity, an entity manager of the successor entity will not, solely by reason of

246

the reorganization, be treated as approving
or otherwise causing the successor entity
to become a party to a prohibited tax shelter transaction, provided that the reorganization of the tax-exempt entity does not result in a material change to the terms of
the transaction. For purposes of this paragraph (c)(3)(i), a material change includes
an extension or renewal of the agreement
(other than an extension or renewal that results from another party to the transaction
unilaterally exercising an option granted
by the agreement) or a more than incidental change to any payment under the
agreement. A change for the sole purpose
of substituting the successor entity for the
original tax-exempt party is not a material
change.
(ii) Exercise or nonexercise of options.
Nonexercise of an option pursuant to a
transaction involving the tax-exempt entity generally will not constitute an act of
approving or causing the entity to be a
party to the transaction. If, pursuant to a
transaction involving the tax-exempt entity, the entity manager exercises an option
(such as a repurchase option), the entity
manager will not be subject to the entity
manager-level tax if the exercise of the option does not result in the tax-exempt entity
becoming a party to a second transaction
that is a prohibited tax shelter transaction.
(4) Example. The following example illustrates the principles of paragraph
(c)(3)(ii) of this section:
Example. In a sale-in, lease-out (SILO) transaction described in Notice 2005–13, 2005–1 C.B. 630,
X, which is a non-plan entity, has purported to sell
property to Y, a taxable entity and lease it back for a
term of years. At the end of the basic lease term, X
has the option of “repurchasing” the property from Y
for a predetermined purchase price, with funds that
have been set aside at the inception of the transaction
for that purpose. The entity manager, by deciding to
exercise or not exercise the “repurchase” option is not
approving or otherwise causing the non-plan entity
to become a party to a second prohibited tax shelter
transaction. See §601.601(d)(2)(ii)(b) of this chapter.

(5) Coordination with the reason-to-know standard. The determination
that an entity manager approved or caused
a tax-exempt entity to be a party to a prohibited tax shelter transaction, by itself,
does not establish liability for the section
4965(a)(2) tax. For rules on determining
whether an entity manager knew or had
reason to know that the transaction was
a prohibited tax shelter transaction, see
§53.4965–6(b).

August 16, 2010

(d) Effective/applicability dates. See
§53.4965–9 for the discussion of the relevant effective and applicability dates.
§53.4965–6 Meaning of “knows or has
reason to know”.
(a) Attribution to the entity. An entity
will be treated as knowing or having reason to know for section 4965 purposes if
one or more of its entity managers knew
or had reason to know that the transaction
was a prohibited tax shelter transaction at
the time the entity manager(s) approved
the entity as (or otherwise caused the entity to be) a party to the transaction. The
entity shall be attributed the knowledge or
reason to know of any entity manager described in §53.4965–5(a)(1)(i) even if that
entity manager does not approve the entity
as (or otherwise cause the entity to be) a
party to the transaction.
(b) Determining whether an entity manager knew or had reason to know—(1) In
general. Whether an entity manager knew
or had reason to know that a transaction
is a prohibited tax shelter transaction is
based on all facts and circumstances. In
order for an entity manager to know or
have reason to know that a transaction is
a prohibited tax shelter transaction, the entity manager must have knowledge of sufficient facts that would lead a reasonable
person to conclude that the transaction is
a prohibited tax shelter transaction. An
entity manager will be considered to have
“reason to know” if a reasonable person in
the entity manager’s circumstances would
conclude that the transaction was a prohibited tax shelter transaction based on all the
facts reasonably available to the manager
at the time of approving the entity as (or
otherwise causing the entity to be) a party
to the transaction. Factors that will be considered in determining whether a reasonable person in the entity manager’s circumstances would conclude that the transaction was a prohibited tax shelter transaction include, but are not limited to—
(i) The presence of tax shelter indicia
(see paragraph (b)(2) of this section);
(ii) Whether the entity manager received a disclosure statement prior to the
consummation of the transaction indicating that the transaction may be a prohibited tax shelter transaction (see paragraph
(b)(3) of this section); and

August 16, 2010

(iii) Whether the entity manager made
appropriate inquiries into the transaction
(see paragraph (b)(4) of this section).
(2) Tax-shelter indicia. The presence
of indicia that a transaction is a tax shelter
will be treated as an indication that the entity manager knew or had reason to know
that the transaction was a prohibited tax
shelter transaction. Tax shelter indicia include but are not limited to—
(i) The transaction is extraordinary for
the entity considering prior investment activity;
(ii) The transaction promises an economic return for the organization that is exceptional considering the amount invested
by, the participation of, or the absence of
risk to the organization; or
(iii) The transaction is of significant
size relative to the receipts of the entity.
(3) Effect of disclosure statements. Receipt by an entity manager of a statement,
including a statement described in section
6011(g), in advance of a transaction that
the transaction may be a prohibited tax
shelter transaction (or a statement that a
partnership, hedge fund or other investment conduit may engage in a prohibited
tax shelter transaction in the future) is
a factor relevant in the determination of
whether the entity manager knew or had
reason to know that the transaction is a
prohibited transaction. However, an entity
manager will not be treated as knowing or
having reason to know that the transaction
was a prohibited tax shelter transaction
solely because the entity manager receives
such a disclosure.
(4) Appropriate inquiries. What inquiries are appropriate will be determined
from the facts and circumstances of each
case. For example, if one or more tax shelter indicia are present or if an entity manager receives a disclosure statement described in paragraph (b)(3) of this section,
an entity manager has a responsibility to
inquire further whether the transaction is a
prohibited tax shelter transaction.
(c) Reliance on professional advice—(1) In general. An entity manager
is not required to obtain the advice of
a professional tax advisor to establish
that the entity manager made appropriate
inquiries. Moreover, not seeking professional advice, by itself, shall not give rise
to an inference that the entity manager
had reason to know that a transaction is a
prohibited tax shelter transaction.

247

(2) Reliance on written opinion of professional tax advisor. An entity manager
may establish that he or she did not have
a reason to know that a transaction was
a prohibited tax shelter transaction at the
time the tax-exempt entity entered into
the transaction if the entity manager reasonably, and in good faith, relied on the
written opinion of a professional tax advisor. Reliance on the written opinion
of a professional tax advisor establishes
that the entity manager did not have reason to know if, taking into account all
the facts and circumstances, the reliance
was reasonable and the entity manager
acted in good faith. For example, the entity manager’s education, sophistication,
and business experience will be relevant
in determining whether the reliance was
reasonable and made in good faith. In no
event will an entity manager be considered
to have reasonably relied in good faith
on an opinion unless the requirements of
this paragraph (c)(2) are satisfied. The
fact that these requirements are satisfied,
however, will not necessarily establish
that the entity manager reasonably relied
on the opinion in good faith. For example, reliance may not be reasonable or in
good faith if the entity manager knew, or
reasonably should have known, that the
advisor lacked knowledge in the relevant
aspects of Federal tax law.
(i) All facts and circumstances considered. The advice must be based upon all
pertinent facts and circumstances and the
law as it relates to those facts and circumstances. The requirements of this paragraph (c)(2) are not satisfied if the entity manager fails to disclose a fact that it
knows, or reasonably should know, is relevant to determining whether the transaction is a prohibited tax shelter transaction.
(ii) No unreasonable assumptions. The
advice must not be based on unreasonable
factual or legal assumptions (including assumptions as to future events) and must
not unreasonably rely on the representations, statements, findings, or agreements
of the entity manager or any other person
(including another party to the transaction
or a material advisor within the meaning of
sections 6111 and 6112).
(iii) “More likely than not” opinion.
The written opinion of the professional tax
advisor must apply the appropriate law to
the facts and, based on this analysis, must
conclude that the transaction was not a pro-

2010–33 I.R.B.

hibited tax shelter transaction at a “more
likely than not” level of certainty at the
time the entity manager approved the entity (or otherwise caused the entity) to be a
party to the transaction.
(3) Special rule. An entity manager’s
reliance on a written opinion of a professional tax advisor will not be considered
reasonable if the advisor is, or is related to
a person who is, a material advisor with respect to the transaction within the meaning
of sections 6111 and 6112.
(d) Subsequently listed transactions.
An entity manager will not be treated as
knowing or having reason to know that
a transaction (other than a prohibited reportable transaction as defined in section
4965(e)(1)(C) and §53.4965–3(a)(2)) is
a prohibited tax shelter transaction if the
entity enters into the transaction before the
date on which the transaction is identified
by the Secretary as a listed transaction.
(e) Effective/applicability dates. See
§53.4965–9 for the discussion of the relevant effective and applicability dates.
§53.4965–7 Taxes on prohibited tax
shelter transactions.
(a) Entity-level taxes—(1) In general.
Entity-level excise taxes apply to non-plan
entities (as defined in §53.4965–2(b)) that
are parties to prohibited tax shelter transactions.
(i) Prohibited tax shelter transactions
other than subsequently listed transactions—(A) Amount of tax if the entity did
not know and did not have reason to know.
If the tax-exempt entity did not know
and did not have reason to know that the
transaction was a prohibited tax shelter
transaction at the time the entity entered
into the transaction, the tax is the highest
rate of tax under section 11 multiplied by
the greater of—
(1) The entity’s net income with respect
to the prohibited tax shelter transaction (after taking into account any tax imposed by
Subtitle D, other than by this section, with
respect to such transaction) for the taxable
year; or
(2) 75 percent of the proceeds received
by the entity for the taxable year that are
attributable to such transaction.
(B) Amount of tax if the entity knew or
had reason to know. If the tax-exempt
entity knew or had reason to know that
the transaction was a prohibited tax shelter

2010–33 I.R.B.

transaction at the time the entity entered
into the transaction, the tax is the greater
of—
(1) 100 percent of the entity’s net income with respect to the transaction (after taking into account any tax imposed by
Subtitle D, other than by this section, with
respect to such transaction) for the taxable
year; or
(2) 75 percent of the proceeds received
by the entity for the taxable year that are
attributable to such transaction.
(ii) Subsequently listed transactions—(A) In general. In the case of a
subsequently listed transaction (as defined
in section 4965(e)(2) and §53.4965–3(b)),
the tax-exempt entity’s income and proceeds attributable to the transaction are
allocated between the period before the
transaction became listed and the period
beginning on the date the transaction
became listed. See §53.4965–8 for the
standard for allocating net income or proceeds to various periods. The tax for each
taxable year is the highest rate of tax under
section 11 multiplied by the greater of—
(1) The entity’s net income with respect
to the subsequently listed transaction (after taking into account any tax imposed by
Subtitle D, other than by this section, with
respect to such transaction) for the taxable
year that is allocable to the period beginning on the later of the date such transaction is identified by the Secretary as a listed
transaction or the first day of the taxable
year; or
(2) 75 percent of the proceeds received
by the entity for the taxable year that are
attributable to such transaction and allocable to the period beginning on the later of
the date such transaction is identified by
the Secretary as a listed transaction or the
first day of the taxable year.
(B) No increase in tax. The 100 percent tax under section 4965(b)(1)(B) and
§53.4965–7(a)(1)(i)(B) does not apply
to any subsequently listed transaction
(as defined in section 4965(e)(2) and
§53.4965–3(b)) entered into by a tax-exempt entity before the date on which the
transaction is identified by the Secretary
as a listed transaction.
(2) Taxable year. The excise tax imposed under section 4965(a)(1) applies for
the taxable year in which the entity becomes a party to the prohibited tax shelter transaction and any subsequent taxable
year for which the entity has net income

248

or proceeds attributable to the transaction.
A taxable year for tax-exempt entities is
the calendar year or fiscal year, as applicable, depending on the basis on which the
tax-exempt entity keeps its books for Federal income tax purposes. If a tax-exempt
entity has not established a taxable year for
Federal income tax purposes, the entity’s
taxable year for the purpose of determining the amount and timing of net income
and proceeds attributable to a prohibited
tax shelter transaction will be deemed to be
the annual period the entity uses in keeping
its books and records.
(b) Manager-level taxes—(1) Amount
of tax. If any entity manager approved
or otherwise caused the tax-exempt entity to become a party to a prohibited tax
shelter transaction and knew or had reason to know that the transaction was a
prohibited tax shelter transaction, such
entity manager is liable for the $20,000
tax. See §53.4965–5(d) for the meaning
of approved or otherwise caused. See
§53.4965–6 for the meaning of knew or
had reason to know.
(2) Timing of the entity manager tax. If
a tax-exempt entity enters into a prohibited tax shelter transaction during a taxable year of an entity manager, then the
entity manager that approved or otherwise
caused the tax-exempt entity to become a
party to the transaction is liable for the entity manager tax for that taxable year if
the entity manager knew or had reason to
know that the transaction was a prohibited
tax shelter transaction.
(3) Example. The application of paragraph (b)(2) of this section is illustrated by
the following example:
Example. The entity manager’s taxable year is the
calendar year. On December 1, 2006, the entity manager approved or otherwise caused the tax-exempt entity to become a party to a transaction that the entity
manager knew or had reason to know was a prohibited tax shelter transaction. The tax-exempt entity entered into the transaction on January 31, 2007. The
entity manager is liable for the entity manager level
tax for the entity manager’s 2007 taxable year, during
which the tax-exempt entity entered into the prohibited tax shelter transaction.

(4) Separate liability. If more than one
entity manager approved or caused a taxexempt entity to become a party to a prohibited tax shelter transaction while knowing (or having reason to know) that the
transaction was a prohibited tax shelter
transaction, then each such entity manager
is separately (that is, not jointly and sever-

August 16, 2010

ally) liable for the entity manager-level tax
with respect to the transaction.
(c) Effective/applicability dates. See
§53.4965–9 for the discussion of the relevant effective and applicability dates.
§53.4965–8 Definition of net income and
proceeds and standard for allocating net
income or proceeds to various periods.
(a) In general. For purposes of section 4965(a), the amount and the timing of
the net income and proceeds attributable to
the prohibited tax shelter transaction will
be computed in a manner consistent with
the substance of the transaction. In determining the substance of listed transactions, the IRS will look to, among other
items, the listing guidance and any subsequent guidance published in the Internal
Revenue Bulletin relating to the transaction.
(b) Definition of net income and proceeds—(1) Net income. A tax-exempt entity’s net income attributable to a prohibited tax shelter transaction is its gross income derived from the transaction reduced
by those deductions that are attributable to
the transaction and that would be allowed
by chapter 1 of the Internal Revenue Code
if the tax-exempt entity were treated as a
taxable entity for this purpose, and further
reduced by taxes imposed by Subtitle D,
other than by this section, with respect to
the transaction.
(2) Proceeds—(i) Tax-exempt entities
that facilitate the transaction by reason of
their tax-exempt, tax indifferent or tax-favored status. Solely for purposes of section 4965, in the case of a tax-exempt entity that is a party to the transaction by
reason of §53.4965–4(a)(1) of this chapter, the term proceeds means the gross
amount of the tax-exempt entity’s consideration for facilitating the transaction, not
reduced for any costs or expenses attributable to the transaction. Published guidance with respect to a particular prohibited
tax shelter transaction may designate additional amounts as proceeds from the transaction for section 4965 purposes.
(ii) Treatment of gifts and contributions. To the extent not otherwise included
in the definition of proceeds in paragraph
(b)(2)(i) of this section, any amount that
is a gift or a contribution to a tax-exempt
entity and is attributable to a prohibited
tax shelter transaction will be treated as

August 16, 2010

proceeds for section 4965 purposes, unreduced by any associated expenses.
(c) Allocation of net income and proceeds—(1) In general.
For purposes
of section 4965(a), the net income and
proceeds attributable to a prohibited tax
shelter transaction must be allocated in
a manner consistent with the tax-exempt
entity’s established method of accounting
for Federal income tax purposes. If the
tax-exempt entity has not established a
method of accounting for Federal income
tax purposes, solely for purposes of section
4965(a) the tax-exempt entity must use the
cash receipts and disbursements method
of accounting (cash method) provided for
in section 446 of the Internal Revenue
Code to determine the amount and timing
of net income and proceeds attributable to
a prohibited tax shelter transaction.
(2) Special rule. If a tax-exempt entity has established a method of accounting other than the cash method, the taxexempt entity may nevertheless use the
cash method of accounting to determine
the amount of the net income and proceeds—
(i) Attributable to a prohibited tax shelter transaction entered into prior to the effective date of section 4965(a) tax and allocable to pre- and post-effective date periods; or
(ii) Attributable to a subsequently listed
transaction and allocable to pre- and postlisting periods.
(d) Transition year rules. In the case of
the taxable year that includes August 16,
2006 (the transition year), the IRS will
treat the period beginning on the first
day of the transition year and ending on
August 15, 2006, and the period beginning
on August 16, 2006, and ending on the last
day of the transition year as short taxable
years. This treatment is solely for purposes
of allocating net income or proceeds under
section 4965.
The tax-exempt entity
continues to file tax returns for the full
taxable year, does not file tax returns with
respect to these deemed short taxable
years and does not otherwise take the short
taxable years into account for Federal tax
purposes. Accordingly, the net income
or proceeds that are properly allocated to
the transition year in accordance with this
section will be treated as allocable to the
period—
(1) Ending on or before August 15,
2006 (and accordingly not subject to tax

249

under section 4965(a)) to the extent such
net income or proceeds would have been
properly taken into account in accordance
with this section by the tax-exempt entity in the deemed short year ending on
August 15, 2006; and
(2) Beginning after August 15, 2006
(and accordingly subject to tax under section 4965(a)) to the extent such income or
proceeds would have been properly taken
into account in accordance with this section by the tax-exempt entity in the short
year beginning August 16, 2006.
(e) Allocation to pre- and post-listing periods. If a transaction other than
a prohibited reportable transaction (as
defined in section 4965(e)(1)(C) and
§53.4965–3(a)(2)) to which the tax-exempt entity is a party is subsequently
identified in published guidance as a listed
transaction during a taxable year of the
entity (the listing year) in which it has
net income or proceeds attributable to the
transaction, the net income or proceeds are
allocated between the pre- and post-listing
periods. The IRS will treat the period
beginning on the first day of the listing
year and ending on the day immediately
preceding the date of the listing, and the
period beginning on the date of the listing
and ending on the last day of the listing
year as short taxable years. This treatment
is solely for purposes of allocating net income or proceeds under section 4965. The
tax-exempt entity continues to file tax returns for the full taxable year, does not file
tax returns with respect to these deemed
short taxable years and does not otherwise
take the short taxable years into account
for Federal tax purposes. Accordingly, the
net income or proceeds that are properly
allocated to the listing year in accordance
with this section will be treated as allocable to the period—
(1) Ending before the date of the listing
(and accordingly not subject to tax under
section 4965(a)) to the extent such net income or proceeds would have been properly taken into account in accordance with
this section by the tax-exempt entity in the
deemed short year ending on the day immediately preceding the date of the listing;
and
(2) Beginning on the date of the listing
(and accordingly subject to tax under section 4965(a)) to the extent such income or
proceeds would have been properly taken
into account in accordance with this sec-

2010–33 I.R.B.

tion by the tax-exempt entity in the short
year beginning on the date of the listing.
(f) Examples. The following examples
illustrate the allocation rules of this section:
Example 1. (i) In 1999, X, a calendar year nonplan entity using the cash method of accounting, entered into a lease-in/lease-out transaction (LILO) substantially similar to the transaction described in Notice 2000–15, 2000–1 C.B. 826 (describing Rev. Rul.
99–14, 1999–1 C.B. 835, superseded by Rev. Rul.
2002–69, 2002–2 C.B. 760). In 1999, X purported to
lease property to Y pursuant to a “head lease,” and
Y purported to lease the property back to X pursuant
to a “sublease” of a shorter term. In form, X received $268M as an advance payment of head lease
rent. Of this amount, $200M had been, in form, financed by a nonrecourse loan obtained by Y. X deposited the $200M with a “debt payment undertaker.”
This served to defease both a portion of X’s rent obligation under its sublease and Y’s repayment obligation under the nonrecourse loan. Of the remainder of
the $268M advance head lease rent payment, X deposited $54M with an “equity payment undertaker.”
This served to defease the remainder of X’s rent obligation under the sublease as well as the exercise price
of X’s end-of-sublease term purchase option. This
amount inures to the benefit of Y and enables Y to
recover its investment in the transaction and a return
on that investment. In substance, the $54M is a loan
from Y to X. X retained the remaining $14M of the
advance head lease rent payment. In substance, this
represents a fee for X’s participation in the transaction. See §601.601(d)(2)(ii)(b) of this chapter.
(ii) According to the substance of the transaction,
the head lease, sublease and nonrecourse debt will be
ignored for Federal income tax purposes. Therefore,
any net income or proceeds resulting from these elements of the transaction will not be considered net income or proceeds attributable to the LILO transaction
for purposes of section 4965(a). The $54M deemed
loan from Y to X and the $14M fee are not ignored
for Federal income tax purposes.
(iii) Under X’s established cash basis method of
accounting, any net income received in 1999 and attributable to the LILO transaction is allocated to X’s
December 31, 1999, tax year for purposes of section
4965. The $14M fee received in 1999, which constitutes proceeds of the transaction, is likewise allocated
to that tax year. Because the 1999 tax year is before
the effective date of the section 4965 tax, X will not
be subject to any excise tax under section 4965 for the
amounts received in 1999.
(iv) Any earnings on the amount deposited with
the equity payment undertaker that constitute gross
income to X will be reduced by X’s original issue
discount deductions with respect to the deemed loan
from Y, in determining X’s net income from the transaction.
Example 2. B, a non-plan entity using the cash
method of accounting, has an annual accounting period that ends on December 31, 2006. B entered into a
prohibited tax shelter transaction on March 15, 2006.
On that date, B received a payment of $600,000 as
a fee for its involvement in the transaction. B received no other proceeds or income attributable to
this transaction in 2006. Under B’s method of accounting, the payment received by B on March 15,

2010–33 I.R.B.

2006, is taken into account in the deemed short year
ending on August 15, 2006. Accordingly, solely for
purposes of section 4965, the payment is treated as
allocable solely to the period ending on or before August 15, 2006, and is not subject to the excise tax imposed by section 4965(a).
Example 3. The facts are the same as in Example
2, except that B received an additional payment of
$400,000 on September 30, 2006. Under B’s method
of accounting, the payment received by B on September 30, 2006, is taken into account in the deemed short
year beginning on August 16, 2006. Accordingly,
solely for purposes of section 4965, the $400,000
payment is treated as allocable to the period beginning after August 15, 2006, and is subject to the excise tax imposed by section 4965(a).
Example 4. C, a non-plan entity using the cash
method of accounting, has an annual accounting period that ends on December 31. C entered into a prohibited tax shelter transaction on May 1, 2005. On
March 15, 2007, C received a payment of $580,000
attributable to the transaction. On June 1, 2007, the
transaction is identified by the IRS in published guidance as a listed transaction. On June 15, 2007, C
received an additional payment of $400,000 attributable to the transaction. Under C’s method of accounting, the payments received on March 15, 2007,
and June 15, 2007, are taken into account in 2007.
The IRS will treat the period beginning on January 1,
2007, and ending on May 31, 2007, and the period beginning on June 1, 2007, and ending on December 31,
2007, as short taxable years. The payment received
by C on March 15, 2007, is taken into account in the
deemed short year ending on May 31, 2007. Accordingly, solely for purposes of section 4965, the payment is treated as allocable solely to the pre-listing
period, and is not subject to the excise tax imposed
by section 4965(a). The payment received by C on
June 15, 2007, is taken into account in the deemed
short year beginning on June 1, 2007. Accordingly,
solely for purposes of section 4965, the payment is
treated as allocable to the post-listing period, and is
subject to the excise tax imposed by section 4965(a).

(g) Effective/applicability dates. See
§53.4965–9 for the discussion of the relevant effective and applicability dates.
§53.4965–9 Effective/applicability dates.
(a) In general. The taxes under section
4965(a) and §53.4965–7 are effective for
taxable years ending after May 17, 2006,
with respect to transactions entered into
before, on or after that date, except that no
tax under section 4965(a) applies with respect to income or proceeds that are properly allocable to any period ending on or
before August 15, 2006.
(b) Applicability of the regulations. As
of July 6, 2010, except as provided in
paragraph (c) of this section, §§53.4965–1
through 53.4965–8 of this chapter will
apply to taxable years ending after
July 6, 2007. A tax-exempt entity may rely
on the provisions of §§53.4965–1 through

250

53.4965–8 for taxable years ending on or
before July 6, 2007.
(c) Effective/applicability date with
respect to certain knowing transactions—(1) Entity-level tax. The 100 percent tax under section 4965(b)(1)(B) and
§53.4965–7(a)(1)(i)(B) does not apply to
prohibited tax shelter transactions entered
into by a tax-exempt entity on or before
May 17, 2006.
(2) Manager-level tax. The IRS will
not assert that an entity manager who approved or caused a tax-exempt entity to
become a party to a prohibited tax shelter
transaction is liable for the entity manager tax under section 4965(b)(2) and
§53.4965–7(b)(1) with respect to the transaction if the tax-exempt entity entered into
such transaction prior to May 17, 2006.
Par. 6. Section 53.6071–1, paragraphs
(g) and (h) are revised to read as follows:
§53.6071–1 Time for filing returns.
*****
(g) Taxes imposed with respect to prohibited tax shelter transactions to which
tax-exempt entities are parties—(1) Returns by certain tax-exempt entities. A
Form 4720, “Return of Certain Excise
Taxes Under Chapters 41 and 42 of the
Internal Revenue Code,” required by
§53.6011–1(b) for a tax-exempt entity
described in section 4965(c)(1), (c)(2) or
(c)(3) that is a party to a prohibited tax
shelter transaction and is liable for tax imposed by section 4965(a)(1) shall be filed
on or before the due date (not including extensions) for filing the tax-exempt entity’s
annual information return under section
6033(a)(1). If the tax-exempt entity is
not required to file an annual information
return under section 6033(a)(1), the Form
4720 shall be filed on or before the 15th
day of the fifth month after the end of
the tax-exempt entity’s taxable year or,
if the entity has not established a taxable
year for Federal income tax purposes, the
entity’s annual accounting period.
(2) Returns by entity managers of
tax-exempt entities described in section
4965(c)(1), (c)(2) or (c)(3). A Form 4720,
required by §53.6011–1(b) for an entity
manager of a tax-exempt entity described
in section 4965(c)(1), (c)(2) or (c)(3)
who is liable for tax imposed by section
4965(a)(2) shall be filed on or before the
15th day of the fifth month following the

August 16, 2010

close of the entity manager’s taxable year
during which the entity entered into the
prohibited tax shelter transaction.
(3) Transition rule. A Form 4720, for a
section 4965 tax that was due on or before
October 4, 2007, will be deemed to have
been filed on the due date if it was filed
by October 4, 2007, and if all section 4965
taxes required to be reported on that Form
4720 were paid by October 4, 2007.
(h) Effective/applicability date. Paragraph (g) of this section is applicable on
July 6, 2007.
§53.6071–1T [Amended].
Par. 7. Section 53.6071–1T(g) & (h)
are removed.
PART 54—PENSION EXCISE TAXES
Par. 8. The authority citation for part
54 continues to read, in part, as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 9. Section 54.6011–1, paragraphs
(c) and (d) are revised to read as follows:
§54.6011–1 General requirement of
return, statement or list.
*****
(c) Entity manager tax on prohibited
tax shelter transactions—(1) In general.
Any entity manager of a tax-exempt entity described in section 4965(c)(4), (c)(5),
(c)(6), or (c)(7) who is liable for tax under section 4965(a)(2) shall file a return on
Form 5330, “Return of Excise Taxes Related to Employee Benefit Plans,” on or before the 15th day of the fifth month following the close of such entity manager’s taxable year during which the entity entered
into the prohibited tax shelter transaction,
and shall include therein the information
required by such form and the instructions
issued with respect thereto.
(2) Transition rule. A Form 5330, “Return of Excise Taxes Related to Employee
Benefit Plans,” for an excise tax under section 4965 that was due on or before October 4, 2007, will be deemed to have been
filed on the due date if it was filed by October 4, 2007, and if the section 4965 tax that
was required to be reported on that Form
5330 was paid by October 4, 2007.
(d) Effective/applicability date. Paragraph (c) of this section is applicable on
July 6, 2007.

August 16, 2010

§54.6011–1T [Amended].
Par. 10. Section §54.6011–1T(c) & (d)
are removed.
PART 301—PROCEDURE AND
ADMINISTRATION
Par. 11. The authority citation for part
301 continues to read, in part, as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 12. Section 301.6011(g)–1 is
added to read as follows:
§301.6011(g)–1 Disclosure by taxable
party to the tax-exempt entity.
(a) Requirement of disclosure—(1) In
general. Except as provided in paragraph
(d)(2) of this section, any taxable party (as
defined in paragraph (c) of this section) to
a prohibited tax shelter transaction (as defined in section 4965(e) and §53.4965–3 of
this chapter) must disclose by statement to
each tax-exempt entity (as defined in section 4965(c) and §53.4965–2 of this chapter) that the taxable party knows or has reason to know is a party to such transaction
(as defined in paragraph (b) of this section)
that the transaction is a prohibited tax shelter transaction.
(2) Determining whether a taxable
party knows or has reason to know.
Whether a taxable party knows or has reason to know that a tax-exempt entity is a
party to a prohibited tax shelter transaction
is based on all the facts and circumstances.
If the taxable party knows or has reason to
know that a prohibited tax shelter transaction involves a tax-exempt, tax indifferent
or tax-favored entity, relevant factors for
determining whether the taxable party
knows or has reason to know that a specific tax-exempt entity is a party to the
transaction include—
(i) The extent of the efforts made to determine whether a tax-exempt entity is facilitating the transaction by reason of its
tax-exempt, tax indifferent or tax-favored
status (or is identified in published guidance, by type, class or role, as a party to
the transaction); and
(ii) If a tax-exempt entity is facilitating
the transaction by reason of its tax-exempt,
tax indifferent or tax-favored status (or is
identified in published guidance, by type,
class or role, as a party to the transaction),
the extent of the efforts made to determine
the identity of the tax-exempt entity.

251

(b) Definition of tax-exempt party to a
prohibited tax shelter transaction. For purposes of section 6011(g), a tax-exempt entity is a party to a prohibited tax shelter
transaction if the entity is defined as such
under §53.4965–4 of this chapter.
(c) Definition of taxable party—(1) In
general. For purposes of this section, the
term taxable party means—
(i) A person who has entered into and
participates or expects to participate in the
transaction under §§1.6011–4(c)(3)(i)(A),
(B), or (C), 20.6011–4, 25.6011–4,
31.6011–4, 53.6011–4, 54.6011–4, or
56.6011–4 of this chapter; or
(ii) A person who is designated as a
taxable party by the Secretary in published
guidance.
(2) Special rules—(i) Certain listed
transactions. If a transaction that was
otherwise not a prohibited tax shelter
transaction becomes a listed transaction
after the filing of a person’s tax return
(including an amended return) reflecting
either tax consequences or a tax strategy
described in the published guidance listing
the transaction (or a tax benefit derived
from tax consequences or a tax strategy
described in the published guidance listing
the transaction), the person is a taxable
party beginning on the date the transaction is described as a listed transaction in
published guidance.
(ii) Persons designated as non-parties.
Published guidance may identify which
persons, by type, class or role, will not
be treated as a party to a prohibited tax
shelter transaction for purposes of section
6011(g).
(d) Time for providing disclosure statement—(1) In general. A taxable party to
a prohibited tax shelter transaction must
make the disclosure required by this section to each tax-exempt entity that the taxable party knows or has reason to know is
a party to the transaction within 60 days after the last to occur of—
(i) The date the person becomes a taxable party to the transaction within the
meaning of paragraph (c) of this section;
(ii) The date the taxable party knows or
has reason to know that the tax-exempt entity is a party to the transaction within the
meaning of paragraph (b) of this section;
or
(iii) July 6, 2010.
(2) Termination of a disclosure obligation. A person shall not be required

2010–33 I.R.B.

to provide the disclosure otherwise required by this section if the person does
not know or have reason to know that
the tax-exempt entity is a party to the
transaction within the meaning of paragraph (b) of this section on or before
the first date on which the transaction is
required to be disclosed by the person
under §§1.6011–4, 20.6011–4, 25.6011–4,
31.6011–4, 53.6011–4, 54.6011–4, or
56.6011–4 of this chapter.
(3) Disclosure is not required with respect to any prohibited tax shelter transaction entered into by a tax-exempt entity on
or before May 17, 2006.
(e) Frequency of disclosure. One disclosure statement is required per tax-exempt entity per transaction. See paragraph
(h) of this section for rules relating to designation agreements.
(f) Form and content of disclosure statement. The statement disclosing to the taxexempt entity that the transaction is a prohibited tax shelter transaction must be a
written statement that—
(1) Identifies the type of prohibited
tax shelter transaction (including the published guidance citation for a listed transaction); and
(2) States that the tax-exempt entity’s
involvement in the transaction may subject
either it or its entity manager(s) or both to
excise taxes under section 4965 and to disclosure obligations under section 6033(a)
of the Internal Revenue Code.
(g) To whom disclosure is made. The
disclosure statement must be provided—
(1) In the case of a non-plan entity as
defined in §53.4965–2(b) of this chapter,
to—

(i) Any entity manager of the tax-exempt entity with authority or responsibility similar to that exercised by an officer,
director or trustee of an organization; or
(ii) If a person described in paragraph
(g)(1)(i) of this section is not known, to the
primary contact on the transaction.
(2) In the case of a plan entity as defined
in §53.4965–2(c) of this chapter, including
a fully self-directed qualified plan, IRA, or
other savings arrangement, to any entity
manager of the plan entity who approved
or otherwise caused the entity to become a
party to the prohibited tax shelter transaction.
(h) Designation agreements. If more
than one taxable party is required to disclose a prohibited tax shelter transaction
under this section, the taxable parties may
designate by written agreement a single
taxable party to disclose the transaction.
The transaction must then be disclosed in
accordance with this section. The designation of one taxable party to disclose the
transaction does not relieve the other taxable parties of their obligation to disclose
the transaction to a tax-exempt entity that
is a party to the transaction in accordance
with this section, if the designated taxable
party fails to disclose the transaction to the
tax-exempt entity in a timely manner.
(i) Penalty for failure to provide disclosure statement. See section 6707A for the
penalty applicable to the failure to disclose
a prohibited tax shelter transaction in accordance with this section.
(j) Effective date/applicability date.
This section will apply with respect to
transactions entered into by a tax-exempt
entity after May 17, 2006.

Par. 13. Section 301.6033–5 is added
to read as follows:
§301.6033–5 Disclosure by tax-exempt
entities that are parties to certain
reportable transactions.
(a) In general. For provisions relating
to the requirement of the disclosure by a
tax-exempt entity that it is a party to certain
reportable transactions, see §1.6033–5 of
this chapter (Income Tax Regulations).
(b) Effective date/applicability date.
This section applies with respect to transactions entered into by a tax-exempt entity
after May 17, 2006.
§301.6033–5T [Removed].
Par. 14. Section 301.6033–5T is removed.
PART 602—OMB CONTROL
NUMBERS UNDER THE PAPERWORK
REDUCTION ACT
Par. 15. The authority citation for part
602 continues to read, in part, as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 16. In §602.101, paragraph (b)
is amended by adding the following entry
in numerical order to the table to read as
follows:
§602.101 OMB Control Numbers.
*****
(b) * * *

CFR part or section where
Identified and described
*****
301.6011(g)–1
*****

Current OMB
Control No.
...........................................................

Steven T. Miller,
Deputy Commissioner for
Services and Enforcement.

Michael Mundaca,
Secretary
of the Treasury (Tax Policy).

1545–2079

(Filed by the Office of the Federal Register on July 2, 2010,
8:45 a.m., and published in the issue of the Federal Register
for July 6, 2010, 75 F.R. 38700)

Approved June 29, 2010.

2010–33 I.R.B.

252

August 16, 2010