CCA 1047022: The pre-AJCA section 6707 penalty is not subject to the section 6501 limitations period

Plain-English summary

Chief Counsel Advice considered whether the three-year assessment period in IRC § 6501 applies to the pre-AJCA penalty for failing to register a tax shelter under former IRC § 6707(a)(1). The advice concluded that it does not, because the tax shelter registration form is not a tax return and the penalty is triggered by failing to register or registering improperly before the shelter is offered for sale. The penalty may therefore be assessed at any time, whether or not the organizer later files a registration. The advice distinguished the post-AJCA rules, under which the disclosure filed under IRC § 6111 is expressly a return and the related section 6707 penalty is subject to section 6501.

Ruling snapshot

• Question: Does IRC § 6501 limit assessment of the pre-AJCA IRC § 6707(a)(1) penalty for failing to register a tax shelter?
• Outcome: Advice given
• Key authorities: IRC §§ 6111, 6501, 6665, 6671, 6707, 6724, and 7701; Treas. Reg. § 301.7701-15(b)(4); Beard v. Commissioner, 82 T.C. 766 (1984), aff'd per curiam, 793 F.2d 139 (6th Cir. 1986); Sage v. United States, 908 F.2d 18 (5th Cir. 1990).

Full text (IRS public release)

       Office of Chief Counsel
       Internal Revenue Service
       memorandum
       Number: 201047022
       Release Date: 11/26/2010
       CC:PA:02:MDLucey
       POSTN-126537-10

UILC: 6707.01-01, 6501.04-00

date:

 to:   Cathy A. Goodson
       Associate Area Counsel (Seattle)
       (Large & Mid-Size Business)

       Attention: Yvonne M. Walker and Melanie E. Senick

from: Matthew S. Cooper
Senior Technician Reviewer, Branch 2
(Procedure & Administration)

subject: Pre-AJCA Section 6707 Statute of Limitations

       This Chief Counsel Advice responds to your request for assistance. This advice may
       not be used or cited as precedent.

       ISSUE

       Whether the statute of limitations under section 6501 applies to assessment of the
       penalty for failure to register a tax shelter under the pre-American Jobs Creation Act of
       2004 (AJCA) version of section 6707(a)(1).

       CONCLUSION

       The section 6501 statute of limitations does not apply to assessment of the pre-AJCA
       section 6707(a)(1) penalty.

       LAW AND ANALYSIS

       Pre-AJCA section 6111(a) provides that “[a]ny tax shelter organizer shall register the tax
       shelter with the Secretary (in such form and in such manner as the Secretary may
       prescribe) not later than the day on which the first offering for sale of interests in such
       tax shelter occurs.” Pre-AJCA section 6707(a)(1) imposes a penalty for the failure to
       register a tax shelter “if a person who is required to register a tax shelter under section
       6111(a)” either “fails to register such tax shelter on or before the date described in
       section 6111(a)(1), or files false or incomplete information with the Secretary with
       respect to such registration.” See Pub. L. 98-369, Div. A, Title I, § 141(a), July 18,
       1984, 98 Stat. 680, and amendments in 1986 and 1997.

Section 6665(a)(1) states that penalties provided in chapter 68 "shall be assessed,
collected and paid in the same manner as taxes... ." Section 6671 redundantly provides
that penalties provided for in Subchapter B of Chapter 68 “shall be assessed and collected
in the same manner as taxes.” The pre-AJCA section 6707 penalty is housed in
Subchapter B.

Section 6501(a) provides that an assessment of tax must be made “within 3 years after the
return was filed.” For purposes of section 6501 (and the remainder of Chapter 61 of
Subtitle F), the term “return” means the return required to be filed by the taxpayer.
I.R.C. § 6501(a). The statutory language of section 6501(a), thus, provides that the
applicability of section 6501 “depends on the filing of a tax return to begin the running of
the limitations period.” Sage v. United States, 908 F.2d 18, 25 (5th Cir. 1990) (holding
that no period of limitations applies to the assessment of section 6700 penalties
because a section 6700 penalty assessment does not depend on the filing of a tax return).

Accordingly, for purposes of determining the applicability of section 6501, the relevant
inquiry here is whether the form upon which the tax shelter is registered is a “return.”
Courts have generally accepted a four-part test for determining whether a document is a
valid “tax return”: “First, there must be sufficient data to calculate tax liability; second,
the document must purport to be a return; third, there must be an honest and
reasonable attempt to satisfy the requirements of the tax law; and fourth, the taxpayer
must execute the return under penalties of perjury.” Beard v. Commissioner, 82 T.C.
766, 777 (1984), aff'd per curiam, 793 F.2d 139 (6th Cir. 1986). A tax shelter
registration statement does not contain the information necessary to calculate a tax
liability and, therefore, does not constitute a tax return under the Beard test.

The Internal Revenue Code provides for types of information returns other than tax
returns. Form 8264, the form that a tax shelter organizer used to make a tax shelter
registration in compliance with pre-AJCA section 6111, however, is not identified as an
information return by the Internal Revenue Code (cf. I.R.C. § 6724(a); current I.R.C.
§§ 6111(a) & 6707(a)). Therefore, the tax shelter organizer filing the registration
statement could not purport to file an information return when submitting a registration
statement because the form is not identified as a return under the governing provisions
of the Internal Revenue Code, regulations, or other published guidance.

The current regulations under section 7701 provide that a return of tax is a return
“reporting the liability of the taxpayer” or “any information return or other document
identified in published guidance in the Internal Revenue Bulletin and that reports
information that is or may be reported on another taxpayer's return under the Code if the
information reported on the information return or other document constitutes a
substantial portion of the taxpayer's return within the meaning of paragraph (b)(3) of this
section.” Treas. Reg. § 301.7701-15(b)(4). Although these regulations are not directly
controlling, they are consistent with the general proposition that a document must either
report a liability or be identified as an information return to be considered a return by the
IRS.

Given the foregoing, the form upon which a tax shelter registration is made is not a
return. The triggering event for the assessment of the pre-AJCA section 6707(a)
penalty is the non-registration or improper registration of a tax shelter prior to the
offering of the shelter for sale, not the filing of a return. Accordingly, the section 6501
statute of limitations does not apply to the assessment of the pre-AJCA section
6707(a)(1) penalty and the penalty under pre-AJCA section 6707(a)(1) may be
assessed at any time. We note that our office has consistently taken this position for at
least the past 10 years.

Your incoming request for advice inquires whether, for statute of limitations purposes,
there is a difference between the situation when a registration is made untimely and
when no registration is made at all. As discussed above, the application of section 6501
hinges on whether the document to be filed constitutes a return in the first instance.
Because the form to be filed under pre-AJCA section 6707(a)(1) does not constitute a
return, section 6501 does not apply. Whether the tax shelter organizer subsequently
registers the tax shelter after the due date is irrelevant for statute of limitations
purposes. If the Form 8264 is not filed by the due date, the pre-AJCA penalty applies
and may be assessed at anytime whether or not a registration is ultimately filed.

In the AJCA, Congress replaced former section 6111 with a new disclosure obligation
for a material advisor and replaced former section 6707 with a new related penalty for
failure to comply with the new disclosure obligation. See Pub. L. 108-357 (118 Stat.
1418), §§ 815, 816. The assessment of the post-ACJA section 6707 penalty on a material
advisor’s “failure to file a return under section 6111 with respect to any reportable
transaction” is subject to the section 6501 statute of limitations. As enacted by the AJCA,
section 6111 requires a material advisor to “make a return” setting forth certain
information about the reportable transaction in which the material advisor was involved.
Concomitantly, section 6707, as enacted by the AJCA, imposes a penalty on the person
“who is required to file a return under section 6111 with respect to any reportable
transaction.” Congress clearly identified in the AJCA that the material advisor’s new
disclosure obligation is provided to the IRS on an information return. A Form 8264 filed
pursuant to post-AJCA section 6111, therefore, constitutes a return. The same reasoning
applies to Form 8264’s successor, Form 8918. Accordingly, the assessment of the
post-AJCA section 6707(a)(1) penalty is subject to the statute of limitations in section 6501.

It is true that the Form 8264 required to be filed by the tax shelter organizer under pre-
AJCA sections 6111 and 6707 and the Form 8918 required to be filed by the material
advisor under current sections 6111 and 6707 are comparable forms. The forms,
however, are filed under substantively different provisions of the Internal Revenue Code.
Current sections 6111 and 6707 specifically refer to the disclosure statement filed by a
material advisor as a return. In contrast, there is no indication that a person filing a
registration statement in compliance with pre-AJCA sections 6111 and 6707 is filing a
return under the governing provisions of the Internal Revenue Code, regulations, or
published guidance. In sum, the entirely new statutory language in both sections 6111
and 6707, and the specific references to the requirement to file a return, account for the
differential treatment afforded to the former and current versions of section 6707 with
respect to the statute of limitations on assessment. The IRM reflects this distinction at
20.1.6.1.8 and 20.1.6.10.6.

CASE DEVELOPMENT, HAZARDS AND OTHER CONSIDERATIONS

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This writing may contain privileged information. Any unauthorized disclosure of this
writing may undermine our ability to protect the privileged information. If disclosure is
determined to be necessary, please contact this office for our views.

Please call Matthew D. Lucey at (202) 622-4940 if you have any further questions.