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IRS Narrows Definition of "Reportable Transactions" Subject to Mandatory Disclosure and List-Maintenance Rules

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January 30, 2006


Taxpayers that participate in a reportable transaction must disclose such transaction to the Internal Revenue Service. Material advisors with respect to a reportable transaction must also disclose such transaction to the IRS and, in addition, maintain a list of investors that must be furnished to the IRS upon request. Substantial penalties apply both to taxpayers and material advisors for noncompliance.

Previously, there were six (6) categories of reportable transactions, i.e., (i) “listed” transactions, (ii) confidential transactions, (iii) transactions with contractual protection, (iv) loss transactions, (v) transactions with a significant book-tax difference, and (vi) transactions involving a brief asset holding period.[*] The IRS has prospectively removed the category of transactions with a significant book-tax difference.

Transactions with a significant book-tax difference generally were transactions that resulted in (or were reasonably expected to result in) more than a $10 million difference between federal income tax treatment and GAAP book treatment if either the company was subject to reporting under the Securities and Exchange Act of 1934 or had gross assets of at least $250 million for book purposes. (Certain types of book-tax differences, however, were specifically exempted by the IRS.)

Recently, the IRS released a new “Schedule M-3” that corporations with assets of $10 million or more must complete and file with their annual federal income tax return. The IRS also determined that the Schedule M-3 information would satisfy a taxpayer’s obligation to report transactions with a significant book-tax difference. The removal of the book-tax difference category, however, does not depend upon whether the taxpayer is subject to the Schedule M-3 filing requirement.

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The book-tax difference category could be especially problematic for material advisor reporting. Under current rules, material advisors are required to file reports with the IRS by the end of the month following the calendar quarter in which the reporting obligation arose. Often, taxpayers and their advisors were not able to quantify book-tax differences within this tight timeframe. The removal of the book-tax difference category of reportable transactions will eliminate this difficulty.

The removal of the significant book-tax difference category is effective for transactions that would otherwise have to be disclosed by taxpayers or material advisors on or after January 6, 2006, or for which investor lists should have been prepared and maintained by material advisors beginning on or after that date. However, neither taxpayers nor material advisors are relieved of any disclosure or list-maintenance obligation for transactions that should have been disclosed, or for which investor lists should have been prepared and maintained, prior to that date; nor are taxpayers relieved of any otherwise applicable obligation to file a Schedule M-3.


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