Note: The views expressed herein represent only those of the District of Columbia Bar Taxation Section and not those of the District of Columbia Bar or its Board of Governors. The Section of Taxation is comprised of approximately 1,500 members. These materials were prepared by an ad hoc committee of the District of Columbia Bar Taxation Section. The members of the ad hoc committee are Andrea M. Whiteway (Chair), Rachel Cantor, Michael Cooper, Michael Desmond, Jeanne Falstrom, Bruce Larsen, Mark Liniado, Kelly Murray, Steven Rosenthal, Michael Rufkahr, and Charlie Temkin.

Executive Summary of Comments on Temporary and Proposed Regulations Regarding the Requirement to Maintain a List of Investors in Potentially Abusive Tax Shelters submitted by the D.C. Bar Taxation Section

On October 22, 2002, the Treasury Department issued new temporary and proposed tax shelter listing regulations obligating "material advisors" to maintain lists of persons they advise about potentially abusive tax shelter transactions. See Treas. Reg. § 301.6112-1T. The lists must include the names of the participants and describe the transaction. The material advisor must retain the list for ten years and furnish it upon request by the IRS (subject to claims of privilege).
     On behalf of the D.C. Bar Taxation Section 1, we propose changes to the new regulations to fix three problems: (1) tax lawyers will not need to maintain lists of most tax audit and controversy matters (the "after-the-fact" problem); (2) material advisors will not need to maintain lists retroactively (the "retroactivity" problem); and (3) material advisors will not need to maintain lists of information that would be unreasonably difficult to obtain (the "unlimited information gathering" problem).

The new regulations apply a knowledge/timing requirement only to reportable transactions. Therefore, a person advising a participant about a listed or registered transaction would be a material advisor even if he had did not know (or have reason to know) about the transaction when the participant entered into it, which seems to include lawyers who advise tax audit or controversy clients.

To fix the after-the-fact problem, we propose applying the knowledge/timing requirement to all transactions by moving the requirement to the section defining "material advisor." Limiting the list maintenance obligation to those who knew or should have known about the participant’s shelter transaction when it was sold is consistent with Code section 6112, which imposes a list maintenance obligation only on those who "organize" and "sell" tax shelters.

This change also fixes the retroactivity problem. Under our proposal, because the advisor must have known (or had reason to know) the transaction was listed at the time the participant entered into the transaction, the rules cannot apply retroactively. Several factors support making these rules prospective only. It is not clear what type of transaction fails to qualify for list maintenance today but might in the future. Prospective application is also consistent with the former list maintenance rules. See Former Temp. Treas. Reg. § 301.6112-1T, Q&A-22 (emphasis added). In any event, the IRS will receive notice of these transactions directly from participants under the new disclosure rules, which require taxpayers to disclose past transactions that later become listed or reportable. See Temp. Treas. Reg. § 1.6011-4T(e)(1).

To fix the unlimited information gathering problem, we would add a provision that a material advisor who makes reasonable efforts to gather the required information satisfies the list maintenance obligation. We also propose adding language so that if one material advisor reasonably designates another material advisor to maintain the list, the designator only has to list whatever required information the designator already possesses to satisfy the list maintenance obligation.

A reasonableness standard is appropriate because material advisors may have limited access to the required information. Clients may regard certain information as confidential and refuse to provide it even upon request. Certain Code provisions also impose a reasonableness standard. For example, Code Section 857(f) requires real estate investment trusts annually to confirm their ownership of any outstanding shares or certificates of beneficial interest, but does not impose penalties if failure to satisfy this requirement is due to reasonable cause.

Material advisors should also be able to shift the requirement to obtain the required information (and thus limit their own obligation). Where the designated material advisor is competent to obtain the required information, the rules should not obligate the designator to obtain the same information, which may be costly to maintain. Regulations elsewhere authorize record-keepers to shift record-keeping responsibility through designation arrangements. See, e.g., Treas. Reg. § 1.6045-4(e)(5).

Notes

1. The views expressed herein represent only those of the District of Columbia Bar Taxation Section and not those of the District of Columbia Bar or its Board of Governors. The Section of Taxation is comprised of approximately 1,500 members. These materials were prepared by an ad hoc committee of the District of Columbia Bar Taxation Section. The members of the ad hoc committee are Andrea M. Whiteway (Chair), Rachel Cantor, Michael Cooper, Michael Desmond, Jeanne Falstrom, Bruce Larsen, Mark Liniado, Kelly Murray, Steven Rosenthal, Michael Rufkahr, and Charlie Temkin.