CCA 1129035: Section 6707A penalties use the reported tax decrease

Plain-English summary

Chief Counsel Advice addressed how to calculate section 6707A penalties for failing to disclose reportable transactions. For one scenario, it advised treating the tax decreases shown on multiple returns as one total decrease covered by a single required disclosure, then applying the 75 percent rate and the statutory maximum and minimum. The advice stated that the calculation uses the decrease shown on the return, even if the claimed decrease is later disallowed or settled, and the penalty can apply even when the transaction is valid. It also addressed penalties for an S corporation and a dissolved C corporation, concluding that the S corporation's penalty was the statutory minimum because its return showed no income tax liability, while the dissolved corporation had no later return or disclosure obligation.

Ruling snapshot

• Question: How should section 6707A penalties be calculated when reportable-transaction disclosures are missing across multiple returns or entities?
• Outcome: Advice given
• Key authorities: IRC §§ 6011 and 6707A; Form 8886; the section 6011 regulations

Full text (IRS public release)

ID: CCA_2011030814471764 Number: 201129035
Release Date: 7/22/2011
Office: --------------
UILC: 6707A.00-00

From: ------------------
Sent: Tuesday, March 08, 2011 2:47:19 PM
To: ----------------------
Cc: -----------------------------------------------------------------------------------------------------------
Subject: RE: Application of 6707A in DATs

Scenario 1
1) For transactions listed after a taxpayer has filed a return reflecting the benefits of
the transaction, the Form 8886 and the 6011 regulations do not require the taxpayer to
identify each year in which the taxpayer participated in that transaction. In the past,
when a taxpayer has failed to disclose on the next filed return his participation in
previous years, we assessed only one penalty - not a separate penalty for each tax year
in which there was participation. In keeping with that practice of "one penalty per
required disclosure form," we believe the best course to calculate the penalty in your
first scenario is to add the decrease in tax shown on each year's return (for ------ and --
------) to reach the total tax decrease covered by the single required disclosure. After
taking 75% of that amount, the maximum and minimum rules should be applied to
determine the penalty.

2) The decrease used in calculating the penalty is the decrease in tax shown on the
return as filed. It does not matter whether the claimed decrease is allowed or
disallowed or settled in some manner between the two. The penalty would apply for
failure to disclose even if the transaction is valid. The return would still show a tax
decrease resulting from a valid reportable transaction and that decrease is the amount
used in calculating the section 6707A penalty.

Scenario 2
1) and 2). We concur in the advice you propose. Seventy-five percent of the total
amount of the decrease in tax for ------ through ------, when the disclosure was
required, is more than the maximum penalty allowed, so the penalty will be the
maximum of $100,000 for ------. The penalty for ------ will be 75% of the decrease in
tax shown on the ------ return, which is less than the minimum amount, so that the
penalty for ------ will be the $5,000 minimum amount..

Scenario 3

                                     2

The penalty for the ------ failure to disclose is calculated on the decrease in tax
shown on the return of the entity that participated in the transaction. A
subchapter S corporation generally does not have an income tax liability, and
thus, its return does not reflect a decrease in tax. Hence, the section 6707A
penalty on the subchapter S corporation for the ------ year is the statutory
minimum of $10,000. The C corporation that goes out of existence never files
(and is not required to file) a return subsequent to the listing of the transaction
in which it engaged and, therefore, never had an obligation to make a
disclosure.