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tion has a realistic possibility of being sus- Tax Shelter Analysis as required under Comments and Requests for a Public tained on the merits as a defense to the § 1.6011-4T (or as may be otherwise pro- Hearing penalty imposed under section 6662(b)(1). vided in any successor regulations). The taxpayer instead would be required to
Before these proposed regulations are satisfy the adequate disclosure exception unProposed Effective Date
adopted as final regulations, consideration
will be given to any written (a signed origider § 1.6662–3(c)(1), including the disclo
These regulations are proposed to apsure of the reportable transaction under ply to returns filed after December 30, 2002,
nal and eight (8) copies) or electronic com
ments that are submitted timely to the IRS. § 1.6011-4T. with respect to transactions entered into on
The IRS and Treasury Department request The proposed regulations also clarify and or after January 1, 2003, to coincide with
comments on the clarity of the proposed modify the standards for, and limits on, the the temporary regulations relating to dis- regulations and how they can be made use of opinions and advice to satisfy the closure, promulgated under section 6011 and
easier to understand. All comments will be reasonable cause and good faith excep- applicable for transactions entered into on
available for public inspection and copytion under section 6664(c) as a defense to or after January 1, 2003. The IRS, how
ing. A public hearing may be scheduled if the imposition of the accuracy-related pen- ever, cautions taxpayers and tax practitio- requested in writing by any person that alty under section 6662. The proposed regu
ners that it will rigorously apply the existing timely submits written comments. If a publations, for instance, clarify that a taxpayer's facts and circumstances standard under
lic hearing is scheduled, notice of the date, education, sophistication and business ex- § 1.6664–4(c) regarding a taxpayer's rea
time, and place for the public hearing will perience will be relevant in determining sonable reliance in good faith on advice
be published in the Federal Register. whether the taxpayer's reliance on the opin
from a tax professional, as well as the other ion or advice was reasonable and made in
provisions of the regulations under sec- Drafting Information good faith. The IRS currently takes these
tions 6662 and 6664, including § 1.6664facts and circumstances into account in de4(c) relating to special rules for the
The principal authors of these regulasubstantial understatement penalty attribtermining whether a taxpayer has satis
tions are Jamie G. Bernstein and Heather utable to tax shelter items of a corporafied the reasonable cause and good faith
L. Dostaler of the Office of Associate Chief exception under section 6664(c). tion. In addition to the modifications
Counsel (Procedure and Administration), These proposed regulations amend contained in these proposed regulations, and
Administrative Provisions and Judicial Prac§ 1.6664-4(c) to specify when a taxpayer regardless of when a transaction was en
tice Division. cannot rely upon an opinion or advice to
tered into, the IRS, in appropriate circumsatisfy the reasonable cause and good faith
stances, may consider a taxpayer's failure exception. Taxpayers who do not disclose to disclose a reportable transaction or fail- Proposed Amendments to the
Regulations positions based upon a regulation being in
ure to disclose a position that a regulavalid (see § 1.6662–3(c)(2)) cannot use an tion is invalid as a factor in determining
Accordingly, 26 CFR part 1 is proposed opinion or advice concerning the invalidwhether the taxpayer has satisfied the rea
to be amended as follows: ity of the regulation as a basis for satisfy
sonable cause and good faith exception un-
PART 1 INCOME TAXES
Paragraph 1. The authority citation for larly, the proposed regulations prohibit taxSpecial Analyses
part 1 continues to read in part as follows: payers from using an opinion or advice as
Authority: 26 U.S.C. 7805 * * * a basis for satisfying the reasonable cause It has been determined that this notice
Par. 2. Section 1.6662–3 is amended by: and good faith exception under section of proposed rulemaking is not a signifi
1. Revising paragraph (a). 6664(c) with respect to a reportable trans- cant regulatory action as defined in Ex
2. Revising the last sentence of paraaction that the taxpayer did not disclose in ecutive Order 12866. Therefore, a regulatory graph (b)(2). accordance with $ 1.6011-4T. assessment is not required. It has also been
3. Revising the first sentence of paraUnder these proposed regulations, a tax- determined that section 553(b) of the Ad
graph (c)(1). payer, in order to properly disclose a trans- ministrative Procedure Act (5 U.S.C. chap- The revisions read as follows: action, may be required to file with the
ter 5) does not apply to these regulations, taxpayer's return more than one disclo
and because the regulation does not im- $ 1.6662–3 Negligence or disregard of sure form for the same transaction in or
pose a collection of information on small rules or regulations. der to satisfy the requirements in the entities, the Regulatory Flexibility Act (5 regulations under sections 6662 and 6664 U.S.C. chapter 6) does not apply. Pursu
(a) In general. If any portion of an un(as modified by these proposed regula- ant to section 7805(f) of the Internal Rev- derpayment, as defined in section 6664(a) tions), and section 6011. The IRS and Treaenue Code, this notice of proposed
and § 1.6664–2, of any income tax imsury may consider permitting taxpayers to rulemaking will be submitted to the Chief posed under subtitle A of the Internal Revuse a single disclosure document to sat- Counsel for Advocacy of the Small Busi
enue Code that is required to be shown on isfy those regulations, provided that all re- ness Administration for comment on their
a return is attributable to negligence or disquired information is provided by the impact on small businesses.
regard of rules or regulations, there is added taxpayer and provided that the taxpayer files
to the tax an amount equal to 20 percent a copy of the document with the Office of
of such portion. The penalty for disre
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(1) * * *
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(b) * * *
garding rules or regulations does not ap- The additions read as follows:
have known, that the advisor lacked knowlply, however, if the requirements of para
edge in the relevant aspects of Federal tax graph (c)(1) of this section are satisfied and $ 1.6664–0 Table of contents.
law. the position in question is adequately dis
(i) * * * In addition, the requirements closed as provided in paragraph (c)(2) of
of this paragraph (C)(1) are not satisfied if this section (and, if the position relates to $ 1.6664-4 Reasonable cause and good the taxpayer fails to disclose a fact that it a reportable transaction as defined in faith exception to section 6662 penalties. knows, or reasonably should know, to be $ 1.6011-4T(b), the transaction is disclosed
relevant to the proper tax treatment of an in accordance with $ 1.6011-4T), or to the
item. extent that the reasonable cause and good faith exception to this penalty set forth in
(iii) Reliance on the invalidity of a regu§ 1.6664_4 applies. In addition, if a posi
(iii) Reliance on the invalidity of a regu
lation. A taxpayer may not rely on an opinlation. tion with respect to an item (other than with
ion or advice that a regulation is invalid to respect to a reportable transaction, as de- (2) Opinions or advice relating to re
establish that the taxpayer acted with reafined in § 1.6011-4T(b)) is contrary to a portable transactions.
sonable cause and good faith unless the taxrevenue ruling or notice (other than a no
payer adequately disclosed, in accordance tice of proposed rulemaking) issued by the Par. 4. Section 1.6664_4 is amended by: with § 1.6662–3(c)(2), including the disInternal Revenue Service and published in
1. Revising paragraph (c)(1) introduc- closure of the position that the regulation the Internal Revenue Bulletin (see tory text.
in question is invalid, and, if the position § 601.601(d)(2) of this chapter), this pen- 2. Revising the last sentence of para- relates to a reportable transaction as dealty does not apply if the position has a regraph (c)(1)(i).
fined in § 1.6011-4T(b), the transaction is alistic possibility of being sustained on its
3. Adding paragraph (c)(1)(iii).
disclosed in accordance with $ 1.6011– merits. See § 1.6694–2(b) of the income tax
4. Redesignating paragraphs (c)(2) and 4T. return preparer penalty regulations for a de
(c)(3) as paragraphs (c)(3) and (c)(4), re- (2) Opinions or advice relating to rescription of the realistic possibility stan- spectively.
portable transactions. Taxpayers may not dard.
5. Adding a new paragraph (c)(2).
reasonably rely on an opinion or advice of The revision and additions read as
a tax advisor if the opinion or advice is dis(2) * * * Nevertheless, a taxpayer who follows:
qualified under this paragraph. An opintakes a position (other than with respect to
ion or advice is disqualified if it relates to a reportable transaction, as defined in $ 1.6664-4 Reasonable cause and good
the appropriate tax treatment of a report$ 1.6011-4T(b)) contrary to a revenue rul- faith exception to section 6662 penalties.
able transaction, as defined in § 1.6011ing or a notice has not disregarded the rul
(c) Reliance on opinion or advice — (1)
4T(b), and the taxpayer does not disclose ing or notice if the contrary position has a Facts and circumstances; minimum re
the transaction in accordance with § 1.6011realistic possibility of being sustained on its
4T. quirements. All facts and circumstances merits.
must be taken into account in determin
ing whether a taxpayer has reasonably re(c) *** (1) *** No penalty under sec- lied in good faith on advice (including the
David A. Mader, tion 6662(b)(1) may be imposed on any opinion of a professional tax advisor) as to
Assistant Deputy Commissioner portion of an underpayment that is attrib- the treatment of the taxpayer (or any en
of Internal Revenue. utable to a position contrary to a rule or tity, plan, or arrangement) under Federal tax
(Filed by the Office of the Federal Register on December 30, regulation if the position is disclosed in ac- law. For example, the taxpayer's educa
2002, 8:45 a.m., and published in the issue of the Federal Regcordance with the rules of paragraph (c)(2) tion, sophistication and business experi- ister for December 31, 2002, 67 F.R. 79894) of this section (and, if the position relates ence will be relevant in determining whether to a reportable transaction as defined in the taxpayer's reliance on the advice was § 1.6011-4T(b), the transaction is disclosed reasonable and made in good faith. In no Notice of Proposed Rulemakin accordance with $ 1.6011-4T) and, in event will a taxpayer be considered to have ing by Cross-Reference to case of a position contrary to a regula- reasonably relied in good faith on advice Temporary Regulation and tion, the position represents a good faith (including an opinion) unless the require
Notice of Public Hearing challenge to the validity of the regula- ments of this paragraph (c)(1) are satistion.
fied and the advice is not disqualified under Section 6038—Returns Par. 3. Section 1.6664-0 is amended by: paragraph (c)(2) of this section. The fact that Required With Respect to
1. Adding an entry for $ 1.6664- these requirements are satisfied, however, Controlled Foreign 4(c)(1)(iii). will not necessarily establish that the tax
Partnerships 2. Redesignating the entries for payer reasonably relied on the advice (in§ 1.6664-4(c)(2) and (c)(3) as $ 1.6664- cluding the opinion of a professional tax REG-124069-02 4(c)(3) and (c)(4), respectively.
advisor) in good faith. For example, reli3. Adding a new entry for $ 1.6664– ance may not be reasonable or in good faith AGENCY: Internal Revenue Service (IRS), 4(c)(2).
if the taxpayer knew, or reasonably should Treasury.
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ACTION: Notice of proposed rulemak- Treasury, Office of Information and Regu
Treasury, Office of Information and Regu- Background and Explanation of ing by cross-reference to temporary regu- latory Affairs, Washington, DC 20503, with Provisions lation and notice of public hearing. copies to the Internal Revenue Service, Attn: IRS Reports Clearance Officer,
The temporary regulation in this issue SUMMARY: In this issue of the Bulletin,
of the Bulletin amends 26 CFR part 1. If the IRS is issuing a temporary regulation Comments on the collection of informaW:CAR:MP:FP:S, Washington, DC 20224.
a foreign partnership files Form 1065 or (T.D. 9033) relating to controlled foreign
Form 1065-B and a United States partner tion should be received by February 21, partnerships. That document requires that
is required to file Form 8865 with respect 2003. Comments are specifically requested the United States partner must follow the
to that partnership, the temporary regulafiling requirements that are specified in the concerning:
tion amends Treas. Reg. § 1.6038–3 to proinstructions for Form 8865. The text of that
Whether the proposed collection of in
vide that the United States partner must regulation also serves as the text of this
formation is necessary for the proper perpro
follow the filing requirements that are speciposed regulation. This document also proformance of the functions of the Internal
fied in the instructions for Form 8865. The vides notice of a public hearing on these Revenue Service, including whether the in
text of the temporary regulation also serves proposed regulations.
formation will have practical utility; as the text of this proposed regulation. The The accuracy of the estimated burden as
preamble to the temporary regulation exDATES: Written or electronic comments
sociated with the proposed collection of in- plains the temporary regulation and this promust be received by March 24, 2003. Out- formation (see below);
posed regulation. lines of topics to be discussed at the pub
How the quality, utility, and clarity of the lic hearing scheduled for March 12, 2003,
Special Analyses information to be collected may be enat 10 a.m., must be received by February hanced;
It has been determined that this notice 19, 2003.
How the burden of complying with the of proposed rulemaking is not a signifiADDRESSES: Send submissions to:
proposed collection of information may be cant regulatory action as defined in ExCC:ITA:RU (REG-124069-02), room 5226,
minimized, including through the applica- ecutive Order 12866. Therefore, a regulatory Internal Revenue Service, POB 7604, Ben
tion of automated collection techniques or assessment is not required. It has also been Franklin Station, Washington, DC 20044.
other forms of information technology; and determined that section 553(b) of the AdSubmissions may be hand delivered Mon
Estimates of capital or start-up costs and
ministrative Procedure Act (5 U.S.C. chapday through Friday between the hours of costs of operation, maintenance, and pur- ter 5) does not apply to these regulations 8 a.m. and 5 p.m. to: CC:ITA:RU (REG
chase of service to provide information. and because this regulation does not im124069–02), Courier's Desk, Internal Rev
The collection of information in this pose a collection of information on small enue Service, 1111 Constitution Avenue, regulation is in § 1.6038–31. This infor- entities, a Regulatory Flexibility Analysis NW, Washington, DC. Alternatively, tax
mation is required by the IRS to identify under the Regulatory Flexibility Act (5 payers may submit electronic comments di- foreign partnerships which are controlled by U.S.C. chapter 6) does not apply. Pursurectly to the IRS internet site at www.irs.gov/ United States persons and verify amounts ant to section 7805(f) of the Internal Revregs. The public hearing will be held in the reported by the partners. The collection of enue Code, this notice of proposed Auditorium, Internal Revenue Building,
information is mandatory. The likely re- rulemaking will be submitted to the Chief 1111 Constitution Avenue, NW, Washing- spondents will be individuals and busi- Counsel for Advocacy of the Small Busiton, DC.
ness or other for-profit organizations. ness Administration for comment on its im
The burden of complying with the col- pact on small businesses. FOR FURTHER INFORMATION CON- lection of information required to be re- Comments and Public Hearing TACT: Concerning the proposed regula- ported on Form 8865 is reflected in the tions, Tasheaya Warren, (202) 622–3860; burden for Form 8865. The estimated num- Before this proposed regulation is concerning submissions and the hearing, ber of respondents is 5000. The estimated adopted as a final regulation, considerLaNita Van Dyke, (202) 622–7180 (not toll- burden for the 2001 Form 8865 per re- ation will be given to any written (a signed free numbers). spondent is 89 hours.
original and eight (8) copies) or electronic
An agency may not conduct or spon- comments that are submitted timely to the SUPPLEMENTARY INFORMATION:
sor, and a person is not required to re- IRS. The IRS and Treasury Department rePaperwork Reduction Act
spond to, a collection of information unless quest comments on the clarity of the pro
it displays a valid control number assigned posed rules and how they can be made The collection of information contained by the Office of Management and Bud- easier to understand. All comments will be in this notice of proposed rulemaking has get.
available for public inspection and copybeen submitted to the Office of Manage- Books or records relating to a collec- ing ment and Budget for review in accordance tion of information must be retained as long A public hearing has been scheduled for with the Paperwork Reduction Act of 1995 as their contents may become material in March 12, 2003, at 10 a.m., in the Audi(44 U.S.C. 3507(d)). Comments on the col- the administration of any internal revenue torium, Internal Revenue Building, 1111 lection of information should be sent to the law. Generally, tax returns and tax return Constitution Avenue, NW, Washington, DC. Office of Management and Budget, Attn: information are confidential, as required by Because of access restrictions, visitors will Desk Officer for the Department of the 26 U.S.C. 6103.
not be admitted beyond the immediate en
trance area more than 30 minutes before the (Filed by the Office of the Federal Register on December 20, shareholders”, is corrected to read “loss (or hearing starts. For information about hav2002, 8:45 a.m., and published in the issue of the Federal Reg
gain, as appropriate). The respondents are ister for December 23, 2002, 67 E.R. 78202) ing your name on the building access list
shareholders.” to attend the hearing, see the For Further Information Contact portion of this pre
§ 1.302–5 [Corrected] amble. The rules of 26 CFR 601.601(a)(3) Redemptions Taxable as
2. On page 64339, column 1, § 1.302–5, apply to the hearing. Persons who wish to Dividends; Correction
paragraph (d)(8), line 4 from the bottom of present oral comments must submit writ
the paragraph “accelerated inclusion date ten or electronic comments and an out- Announcement 2003-9
shall be made” is corrected to read “accelline of the topics to be discussed and the
erated loss inclusion date shall be made”. time to be devoted to each topic (a signed AGENCY: Internal Revenue Service (IRS),
3. On page 64340, column 3, § 1.302–5, original and eight (8) copies) by Febru- Treasury.
paragraph (f)(9), of Example 7, lines 6 and ary 19, 2003. A period of 10 minutes will be allotted to each person for making com
ACTION: Correction to notice of proposed 7, the language “equal to PS's basis in the ments. An agenda showing the schedulrulemaking and notice of public hearing. corporation Z stock, ($50 after applica
tion of section 301(c)(2)), is”, is corrected ing of the speakers will be prepared after
SUMMARY: This document contains cor- to read “(equal to PS's basis in the corpothe deadline for receiving outlines has
rections to a notice of proposed rulemak- ration Z stock, ($50 after application of secpassed. Copies of the agenda will be avail
ing and notice of public hearing (REG- tion 301(c)(2)) is”. able free of charge at the hearing.
150313–01, 2002—44 I.R.B. 777) which was
published in the Federal Register on FriDrafting Information
$ 1.304–3 [Corrected] day, October 18, 2002 (67 FR 64331). This
4. On page 64342, column 3, § 1.304–3, The principal author of this regulation regulation provides guidance regarding the
treatment of the basis of redeemed stock is Tasheaya Warren, Office of the Associ
paragraph (a), lines 21 through 24, the lanwhen a distribution in redemption of such ate Chief Counsel (International). How
guage "For the treatment of the redeemed
shareholder's basis in the redeemed stock ever, other personnel from the IRS and stock is treated as a dividend, as well as
in such cases, see § 1.302–5.” is removed. Treasury Department participated in their guidance regarding certain acquisitions of development stock by related corporations that are treated
Cynthia E. Grigsby, as distributions in redemption of stock.
Chief, Regulations Unit, FOR FURTHER INFORMATION CON
Associate Chief Counsel Proposed Amendments to the Regulations TACT: Lisa K. Leong at (202) 622–7530
(Income Tax and Accounting). (not a toll-free number).
(Filed by the Office of the Federal Register on December 24, Accordingly, 26 CFR part 1 is proposed
2002, 8:45 a.m., and published in the issue of the Federal Regto be amended as follows: SUPPLEMENTARY INFORMATION:
ister for December 26, 2002, 67 F.R. 78761)
Paragraph 1. The authority citation for The proposed regulations that are the Foundations Status of Certain part 1 continues to read in part as follows:
subject of these corrections are under sec- Organizations Authority: 26 U.S.C. 7805 * * * tions 302, 304, 704, 861, 1371, 1374, and Par. 2. Section 1.6038–3 is amended by
1502 of the Internal Revenue Code. Announcement 2003-10 revising paragraph (j) to read as follows: Need for Correction
The following organizations have failed $ 1.6038–3 Information returns required
to establish or have been unable to mainof certain United States persons with
As published, this notice of proposed
tain their status as public charities or as oprulemaking contains errors that may prove respect to controlled foreign partnerships
erating foundations. Accordingly, grantors to be misleading and are in need of clari(CFPs).
and contributors may not, after this date, fication.
rely on previous rulings or designations in Correction of Publication
the Cumulative List of Organizations (Pub(j) [The text of the proposed amend
lication 78), or on the presumption arisment to § 1.6038–3(j) is the same as the
Accordingly, the publication of the no- ing from the filing of notices under section text for § 1.6038–3T(j) published else
tice of proposed rulemaking and notice of 508(b) of the Code. This listing does not where in this issue of the Federal Regis- public hearing (REG-150303–01, 2002–44 indicate that the organizations have lost their ter.]
I.R.B. 777), which is the subject of FR. status as organizations described in sec-
1. On page 64332, column 1, in the pre- ible contributions.
of Internal Revenue. 12, the language “loss. The respondents are as organizations that are not private foun
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dations described in section 509(a) of the Career Access California, Inc.,
Carolina Family Alliance, Spartanburg, SC
Center for Advanced Transportation
Technologies, Monroeville, PA
Center for Scientific Visualization, Ltd.,
New York, NY
Center for Social Ministry, Berkeley, CA
Charanjit Singh Batth Foundation,
Chennai Educational Foundation, Inc.,
Cherrie Williams Foundation, Gardena, CA
Childcare International, Inc., Miami, FL
Children of Peace, Inc., Buffalo, NY
Christian Business & Consumer
Ministries Corporation, Fairhope, AL
Christian Family, Greeley, CO
Circuit Foundation, Brooklyn, NY
Citizens for Buckeye Basin Parks, Inc.,
Commanchees Retreat Organization,
Communities With Vision, Inc.,
Community Development Corporation of
LaFourche, Raceland, LA
Community Resources Technology, Inc.,
Community Revival Corporation,
Spring Valley, NY
Corporation, Inc., Riviera Beach, FL Newton, MA
Copernicus Foundation, Inc., Boston, MA
Council International Study Programs, Inc.,
Crusaders Community Development
Corporation, Philadelphia, PA
David Merrick and Natalie Lloyd
Foundation, Inc., New York, NY
Port Washington, NY
Deliverance Outreach Center,
New Haven, CT
D.E.R.E.K. Program, Minneapolis, MN
Foundation, Kenansville, NC
Los Angeles, CA
Eagle Vision Society, Oklahoma City, OK
ment, Inc., West Palm Beach, FL
Foundation, Eufaula, AL
Center, Inc., Thomasville, NC
Council Bluffs, IA
Development, Reno, NV
Corporation, Santa Ana, CA
Company, Pittsburgh, PA
Yourself, Inc., Huntington Beach, CA
Organization, Inc., Suffern, NY
Coordinating Council, Inc., Cairo, GA
Education HOPE, Sebastapol, CA