CCA 200851073: One disclosure obligation per transaction type, so one penalty however many clients

Plain-English summary

A promoter advised many clients into the same arrangement. The question is whether the failure to disclose it is one penalty or many, and the answer follows from counting filing obligations rather than counting clients.

The disclosure regime works in two linked pieces. Section 6111 requires a material advisor to file a return disclosing a reportable transaction, and section 6707 imposes a penalty for failing to do so. The release starts by tying them together: the penalty is directly related to the obligation to file, so whatever the filing obligation is, the penalty tracks it. That is the hinge of the whole answer.

The writer then concedes the point that pulls the other way. Whether someone is a material advisor at all is determined on a taxpayer by taxpayer basis, which is to say by looking at what they did for each client. So the analysis that establishes the status is client by client, and an examiner who stopped there might expect the filing obligation to be client by client too.

It is not. Once a person is a material advisor, they need file only one return for all transactions of the same type. The reason given is drawn from the form itself: it discloses the type of transaction, not the identity of the clients. Nothing on it would change if the advisor had ten clients rather than one, so a second copy would carry no additional information. A material advisor promoting one type of transaction therefore has one filing obligation, regardless of how many people they promoted it to.

From there the penalty computation follows. Where there is only one obligation to file, there is only one failure to file, and the maximum penalty is the greater of $200,000 or 50 percent of the gross income from all the transactions. The two limbs pull in opposite directions and that is the point of the answer: the promoter is not exposed to a separate maximum for each client, but the percentage limb is measured against the gross income from all of the transactions, so a large practice is still reached through the income figure rather than through multiplication. The result holds as long as the transaction advised on is the same type; different types would be different obligations.

Two things to note about the document. It refers throughout to Form 8919, while the material advisor disclosure statement is Form 8918. Form 8919 is an unrelated form used by workers to report uncollected social security and Medicare tax. The number appears to be a slip, and it is reproduced as released. And the message is a forward of an earlier reply, sent on with "fyi," so the substantive answer here is being circulated rather than delivered.

This is a clean digital release rather than a scan, so no OCR correction was needed. Kept as released: "Form 8919" for the disclosure statement; the abbreviated subject line "Need NO advice on post AJCA IRC 6707," where NO appears to stand for National Office and AJCA for the American Jobs Creation Act of 2004; "he/she"; and the run-together "contact ------------------at".

Ruling snapshot

• Question: Does a material advisor who promoted the same transaction to many clients incur a separate section 6707 penalty for each of them?
• Outcome: Advice given. No. The penalty is directly related to the section 6111 filing obligation. Although material advisor status is determined on a taxpayer by taxpayer basis, once a person is a material advisor they need file only one return for all transactions of the same type, because the form discloses only the type of transaction. With one filing obligation, the maximum penalty is the greater of $200,000 or 50 percent of the gross income from all the transactions, regardless of the number of clients advised.
• Key authorities: IRC section 6707(a); IRC section 6111; the material advisor disclosure statement, cited in the release as Form 8919.

Full text (IRS public release)

ID: CCA_2008091609242364 Number: 200851073
Office: -------------- Release Date: 12/19/2008

UILC: 6707.00-00

From: ------------------
Sent: Tuesday, September 16, 2008 9:24:26 AM
To: --------------------
Cc: ------------------------------------------------------------------------ Subject: FW: Need NO advice on post AJCA IRC 6707 ---------

fyi

From: -------------------
Sent: Tuesday, September 16, 2008 7:37 AM
To: -----------------------
Cc: ------------------
Subject: RE: Need NO advice on post AJCA IRC 6707 ----------

The 6707 penalty is directly related to the obligation in 6111 to file Form 8919. IRC § 6707(a). It is true that in determining if an individual is a material advisor under 6111 analysis is done on a taxpayer by taxpayer basis. However, once a person is a material advisor they only need file one return for all transactions of the same type. See Form 8919 (the form only discloses the type of transaction). Thus, as long as the material advisor was promoting the same type of transaction he/she would only have the obligation to file one Form 8919 regardless of the number of clients he/she promoted the transaction to. Where there is only an obligation to file one Form 8919, the maximum penalty would be the greater of
$200,000 or 50% of the gross income from all the transactions. This would be the result regardless of the total number of advised clients as long as the transaction advised on is the same type of transaction. If you have any additional questions, please contact ------------------at ---------------------.