26 C.F.R. §§ 53.4965-1–53.4965-8

§53.4965-1. Overview.

26 C.F.R. § 53.4965-1

(a)

Entity-level excise tax. Section 4965 imposes two excise taxes with respect to certain tax shelter transactions to which tax-exempt entities are parties. Section 4965(a)(1) imposes an entity-level excise tax on certain tax-exempt entities that are parties to “prohibited tax shelter transactions,” as defined in section 4965(e). See § 53.4965-2 for the discussion of covered tax-exempt entities. See § 53.4965-3 for the definition of prohibited tax shelter transactions. See § 53.4965-4 for the definition of tax-exempt party to a prohibited tax shelter transaction. The entity-level excise tax under section 4965(a)(1) is imposed on a specified percentage of the entity's net income or proceeds that are attributable to the transaction for the relevant tax year (or a period within that tax year). The rate of tax depends on whether the entity knew or had reason to know that the transaction was a prohibited tax shelter transaction at the time the entity became a party to the transaction. See § 53.4965-7(a) for the discussion of the entity-level excise tax under section 4965(a)(1). See § 53.4965-6 for the discussion of “knowing or having reason to know.” See § 53.4965-8 for the definition of net income and proceeds and the standard for allocating net income and proceeds that are attributable to a prohibited tax shelter transaction to various periods.

(b)

Manager-level excise tax. Section 4965(a)(2) imposes a manager-level excise tax on “entity managers,” as defined in section 4965(d), of tax-exempt entities who approve the entity as a party (or otherwise cause the entity to be a party) to a prohibited tax shelter transaction and know or have reason to know, at the time the tax-exempt entity enters into the transaction, that the transaction is a prohibited tax shelter transaction. See § 53.4965-5 for the definition of entity manager and the meaning of “approving or otherwise causing,” and § 53.4965-6 for the discussion of “knowing or having reason to know.” See § 53.4965-7(b) for the discussion of the manager-level excise tax under section 4965(a)(2).

(c)

Effective/applicability dates. See— § 53.4965-9 for the discussion of the relevant effective and applicability dates.

Notes, amendments, and revision history

Amendments

[T.D. 9492, 75 FR 38702, July 6, 2010]

Source

Source: T.D. 8084, 51 FR 16303, May 2, 1986, unless otherwise noted.

Authority

Authority: 26 U.S.C. 7805; 4960, unless otherwise noted. Section 53.6011-1 also issued under 26 U.S.C. 6011; Section 53.6060-1 also issued under 26 U.S.C. 6060(a); Section 53.6081-1 also issued under 26 U.S.C. 6081(a); Section 53.6109-1 also issued under 26 U.S.C. 6109(a); Section 53.6109-2 also issued under 26 U.S.C. 6109(a); Section 53.6695-1 also issued under 26 U.S.C. 6695(b).

Amendments

[T.D. 9492, 75 FR 38702, July 6, 2010]

§53.4965-2. Covered tax-exempt entities.

26 C.F.R. § 53.4965-2

(a)

In general. Under section 4965(c), the term “tax-exempt entity” refers to entities that are described in sections 501(c), 501(d), or 170(c) (other than the United States), Indian tribal governments (within the meaning of section 7701(a)(40)), and tax-qualified pension plans, individual retirement arrangements and similar tax-favored savings arrangements that are described in sections 4979(e)(1), (2) or (3), 529, 457(b), or 4973(a). The tax-exempt entities referred to in section 4965(c) are divided into two broad categories, non-plan entities and plan entities.

(b)

Non-plan entities. Non-plan entities are—

(1)

Entities described in section 501(c);

(2)

Religious or apostolic associations or corporations described in section 501(d);

(3)

Entities described in section 170(c), including states, possessions of the United States, the District of Columbia, political subdivisions of states and political subdivisions of possessions of the United States (but not including the United States); and

(4)

Indian tribal governments within the meaning of section 7701(a)(40).

(c)

Plan entities. Plan entities are—

(1)

Entities described in section 4979(e)(1) (qualified plans under section 401(a), including qualified cash or deferred arrangements under section 401(k) (including a section 401(k) plan that allows designated Roth contributions));

(2)

Entities described in section 4979(e)(2) (annuity plans described in section 403(a));

(3)

Entities described in section 4979(e)(3) (annuity contracts described in section 403(b), including a section 403(b) arrangement that allows Roth contributions);

(4)

Qualified tuition programs described in section 529;

(5)

Eligible deferred compensation plans under section 457(b) that are maintained by a governmental employer as defined in section 457(e)(1)(A);

(6)

Arrangements described in section 4973(a) which include—

(i)

Individual retirement plans defined in section 408(a) and (b), including—

(A)

Simplified employee pensions (SEPs) under section 408(k);

(B)

Simple individual retirement accounts (SIMPLEs) under section 408(p);

(C)

Deemed individual retirement accounts or annuities (IRAs) qualified under a qualified plan (deemed IRAs) under section 408(q); and

(D)

Roth IRAs under section 408A.

(ii)

Arrangements described in section 220(d) (Archer Medical Savings Accounts (MSAs));

(iii)

Arrangements described in section 403(b)(7) (custodial accounts treated as annuity contracts);

(iv)

Arrangements described in section 530 (Coverdell education savings accounts); and

(v)

Arrangements described in section 223(d) (health savings accounts (HSAs)).

(d)

Effective/applicability dates. See § 53.4965-9 for the discussion of the relevant effective and applicability dates.

Notes, amendments, and revision history

Amendments

[T.D. 9492, 75 FR 38702, July 6, 2010; 75 FR 46844, Aug. 4, 2010]

Source

Source: T.D. 8084, 51 FR 16303, May 2, 1986, unless otherwise noted.

Authority

Authority: 26 U.S.C. 7805; 4960, unless otherwise noted. Section 53.6011-1 also issued under 26 U.S.C. 6011; Section 53.6060-1 also issued under 26 U.S.C. 6060(a); Section 53.6081-1 also issued under 26 U.S.C. 6081(a); Section 53.6109-1 also issued under 26 U.S.C. 6109(a); Section 53.6109-2 also issued under 26 U.S.C. 6109(a); Section 53.6695-1 also issued under 26 U.S.C. 6695(b).

Amendments

[T.D. 9492, 75 FR 38702, July 6, 2010; 75 FR 46844, Aug. 4, 2010]

§53.4965-3. Prohibited tax shelter transactions.

26 C.F.R. § 53.4965-3

(a)

In general. Under section 4965(e), the term prohibited tax shelter transaction means—

(1)

Listed transactions within the meaning of section 6707A(c)(2), including subsequently listed transactions described in paragraph (b) of this section; and

(2)

Prohibited reportable transactions, which consist of the following reportable transactions within the meaning of section 6707A(c)(1)—

(i)

Confidential transactions, as described in § 1.6011-4(b)(3) of this chapter; or

(ii)

Transactions with contractual protection, as described in § 1.6011-4(b)(4) of this chapter.

(b)

Subsequently listed transactions. A subsequently listed transaction for purposes of section 4965 is a transaction that is identified by the Secretary as a listed transaction after the tax-exempt entity has entered into the transaction and that was not a prohibited reportable transaction (within the meaning of section 4965(e)(1)(C) and paragraph (a)(2) of this section) at the time the entity entered into the transaction.

(c)

Cross-reference. The determination of whether a transaction is a listed transaction or a prohibited reportable transaction for section 4965 purposes shall be made under the law applicable to section 6707A(c)(1) and (c)(2).

(d)

Effective/applicability dates. See § 53.4965-9 for the discussion of the relevant effective and applicability dates.

Notes, amendments, and revision history

Amendments

[T.D. 9492, 75 FR 38702, July 6, 2010]

Source

Source: T.D. 8084, 51 FR 16303, May 2, 1986, unless otherwise noted.

Authority

Authority: 26 U.S.C. 7805; 4960, unless otherwise noted. Section 53.6011-1 also issued under 26 U.S.C. 6011; Section 53.6060-1 also issued under 26 U.S.C. 6060(a); Section 53.6081-1 also issued under 26 U.S.C. 6081(a); Section 53.6109-1 also issued under 26 U.S.C. 6109(a); Section 53.6109-2 also issued under 26 U.S.C. 6109(a); Section 53.6695-1 also issued under 26 U.S.C. 6695(b).

Amendments

[T.D. 9492, 75 FR 38702, July 6, 2010]

§53.4965-4. Definition of tax-exempt party to a prohibited tax shelter transaction.

26 C.F.R. § 53.4965-4

(a)

In general. For purposes of sections 4965 and 6033(a)(2), a tax-exempt entity is a party to a prohibited tax shelter transaction if the entity—

(1)

Facilitates a prohibited tax shelter transaction by reason of its tax-exempt, tax indifferent or tax-favored status; or

(2)

Is identified in published guidance, by type, class or role, as a party to a prohibited tax shelter transaction.

(b)

Published guidance may identify which tax-exempt entities, by type, class or role, will not be treated as a party to a prohibited tax shelter transaction.

(c)

Example. The following example illustrates the principle of paragraph (a)(1) of this section:

(d)

Effective/applicability dates. See § 53.4965-9 for the discussion of the relevant effective and applicability dates.

Notes, amendments, and revision history

Amendments

[T.D. 9492, 75 FR 38702, July 6, 2010]

Source

Source: T.D. 8084, 51 FR 16303, May 2, 1986, unless otherwise noted.

Authority

Authority: 26 U.S.C. 7805; 4960, unless otherwise noted. Section 53.6011-1 also issued under 26 U.S.C. 6011; Section 53.6060-1 also issued under 26 U.S.C. 6060(a); Section 53.6081-1 also issued under 26 U.S.C. 6081(a); Section 53.6109-1 also issued under 26 U.S.C. 6109(a); Section 53.6109-2 also issued under 26 U.S.C. 6109(a); Section 53.6695-1 also issued under 26 U.S.C. 6695(b).

Amendments

[T.D. 9492, 75 FR 38702, July 6, 2010]

§53.4965-5. Entity managers and related definitions.

26 C.F.R. § 53.4965-5

(a)

Entity manager of a non-plan entity—

(1)

In general. Under section 4965(d)(1), an entity manager of a non-plan entity is—

(i)

A person with the authority or responsibility similar to that exercised by an officer, director, or trustee of an organization (that is, the non-plan entity); and

(ii)

With respect to any act, the person who has final authority or responsibility (either individually or as a member of a collective body) with respect to such act.

(2)

Definition of officer. For purposes of paragraph (a)(1)(i) of this section, a person is considered to be an officer of the non-plan entity (or to have similar authority or responsibility) if the person—

(i)

Is specifically designated as such under the certificate of incorporation, by-laws, or other constitutive documents of the non-plan entity; or

(ii)

Regularly exercises general authority to make administrative or policy decisions on behalf of the non-plan entity.

(3)

Exception for acts requiring approval by a superior. With respect to any act, any person is not described in paragraph (a)(2)(ii) of this section if the person has authority merely to recommend particular administrative or policy decisions, but not to implement them without approval of a superior.

(4)

Delegation of authority. A person is an entity manager of a non-plan entity within the meaning of paragraph (a)(1)(ii) of this section if, with respect to any prohibited tax shelter transaction, such person has been delegated final authority or responsibility with respect to such transaction (including by transaction type or dollar amount) by a person described in paragraph (a)(1)(i) of this section or the governing board of the entity. For example, an investment manager is an entity manager with respect to a prohibited tax shelter transaction if the non-plan entity's governing body delegated to the investment manager the final authority to make certain investment decisions and, in the exercise of that authority, the manager committed the entity to the transaction. To be considered an entity manager of a non-plan entity within the meaning of paragraph (a)(1)(ii) of this section, a person need not be an employee of the entity. A person is not described in paragraph (a)(1)(ii) of this section if the person is merely implementing a decision made by a superior.

(b)

Entity manager of a plan entity—

(1)

In general. Under section 4965(d)(2), an entity manager of a plan entity is the person who approves or otherwise causes the entity to be a party to the prohibited tax shelter transaction.

(2)

Special rule for plan participants and beneficiaries who have investment elections—

(i)

Fully self-directed plans or arrangements. In the case of a fully self-directed qualified plan, IRA, or other savings arrangement (including a case where a plan participant or beneficiary is given a list of prohibited investments, such as collectibles), if the plan participant or beneficiary selected a certain investment and, therefore, approved the plan entity to become a party to a prohibited tax shelter transaction, the plan participant or the beneficiary is an entity manager.

(ii)

Plans or arrangements with limited investment options. In the case of a qualified plan, IRA, or other savings arrangement where a plan participant or beneficiary is offered a limited number of investment options from which to choose, the person responsible for determining the pre-selected investment options is an entity manager and the plan participant or the beneficiary generally is not an entity manager.

(c)

Meaning of “approves or otherwise causes”—

(1)

In general. A person is treated as approving or otherwise causing a tax-exempt entity to become a party to a prohibited tax shelter transaction if the person has the authority to commit the entity to the transaction, either individually or as a member of a collective body, and the person exercises that authority.

(2)

Collective bodies. If a person shares the authority described in paragraph (c)(1) of this section as a member of a collective body (for example, board of trustees or committee), the person will be considered to have exercised such authority if the person voted in favor of the entity becoming a party to the transaction. However, a member of the collective body will not be treated as having exercised the authority described in paragraph (c)(1) of this section if he or she voted against a resolution that constituted approval or an act that caused the tax-exempt entity to be a party to a prohibited tax shelter transaction, abstained from voting for such approval, or otherwise failed to vote in favor of such approval.

(3)

Exceptions—

(i)

Successor in interest. If a tax-exempt entity that is a party to a prohibited tax shelter transaction is dissolved, liquidated, or merged into a successor entity, an entity manager of the successor entity will not, solely by reason of the reorganization, be treated as approving or otherwise causing the successor entity to become a party to a prohibited tax shelter transaction, provided that the reorganization of the tax-exempt entity does not result in a material change to the terms of the transaction. For purposes of this paragraph (c)(3)(i), a material change includes an extension or renewal of the agreement (other than an extension or renewal that results from another party to the transaction unilaterally exercising an option granted by the agreement) or a more than incidental change to any payment under the agreement. A change for the sole purpose of substituting the successor entity for the original tax-exempt party is not a material change.

(ii)

Exercise or nonexercise of options. Nonexercise of an option pursuant to a transaction involving the tax-exempt entity generally will not constitute an act of approving or causing the entity to be a party to the transaction. If, pursuant to a transaction involving the tax-exempt entity, the entity manager exercises an option (such as a repurchase option), the entity manager will not be subject to the entity manager-level tax if the exercise of the option does not result in the tax-exempt entity becoming a party to a second transaction that is a prohibited tax shelter transaction.

(4)

Example. The following example illustrates the principles of paragraph (c)(3)(ii) of this section:

(5)

Coordination with the reason-to-know standard. The determination that an entity manager approved or caused a tax-exempt entity to be a party to a prohibited tax shelter transaction, by itself, does not establish liability for the section 4965(a)(2) tax. For rules on determining whether an entity manager knew or had reason to know that the transaction was a prohibited tax shelter transaction, see § 53.4965-6(b).

(d)

Effective/applicability dates. See— § 53.4965-9 for the discussion of the relevant effective and applicability dates.

Notes, amendments, and revision history

Amendments

[T.D. 9492, 75 FR 38702, July 6, 2010; 75 FR 46844, Aug. 4, 2010]

Source

Source: T.D. 8084, 51 FR 16303, May 2, 1986, unless otherwise noted.

Authority

Authority: 26 U.S.C. 7805; 4960, unless otherwise noted. Section 53.6011-1 also issued under 26 U.S.C. 6011; Section 53.6060-1 also issued under 26 U.S.C. 6060(a); Section 53.6081-1 also issued under 26 U.S.C. 6081(a); Section 53.6109-1 also issued under 26 U.S.C. 6109(a); Section 53.6109-2 also issued under 26 U.S.C. 6109(a); Section 53.6695-1 also issued under 26 U.S.C. 6695(b).

Amendments

[T.D. 9492, 75 FR 38702, July 6, 2010; 75 FR 46844, Aug. 4, 2010]

§53.4965-6. Meaning of “knows or has reason to know”.

26 C.F.R. § 53.4965-6

(a)

Attribution to the entity. An entity will be treated as knowing or having reason to know for section 4965 purposes if one or more of its entity managers knew or had reason to know that the transaction was a prohibited tax shelter transaction at the time the entity manager(s) approved the entity as (or otherwise caused the entity to be) a party to the transaction. The entity shall be attributed the knowledge or reason to know of any entity manager described in § 53.4965-5(a)(1)(i) even if that entity manager does not approve the entity as (or otherwise cause the entity to be) a party to the transaction.

(b)

Determining whether an entity manager knew or had reason to know—

(1)

In general. Whether an entity manager knew or had reason to know that a transaction is a prohibited tax shelter transaction is based on all facts and circumstances. In order for an entity manager to know or have reason to know that a transaction is a prohibited tax shelter transaction, the entity manager must have knowledge of sufficient facts that would lead a reasonable person to conclude that the transaction is a prohibited tax shelter transaction. An entity manager will be considered to have “reason to know” if a reasonable person in the entity manager's circumstances would conclude that the transaction was a prohibited tax shelter transaction based on all the facts reasonably available to the manager at the time of approving the entity as (or otherwise causing the entity to be) a party to the transaction. Factors that will be considered in determining whether a reasonable person in the entity manager's circumstances would conclude that the transaction was a prohibited tax shelter transaction include, but are not limited to—

(i)

The presence of tax shelter indicia (see paragraph (b)(2) of this section);

(ii)

Whether the entity manager received a disclosure statement prior to the consummation of the transaction indicating that the transaction may be a prohibited tax shelter transaction (see paragraph (b)(3) of this section); and

(iii)

Whether the entity manager made appropriate inquiries into the transaction (see paragraph (b)(4) of this section).

(2)

Tax-shelter indicia. The presence of indicia that a transaction is a tax shelter will be treated as an indication that the entity manager knew or had reason to know that the transaction was a prohibited tax shelter transaction. Tax shelter indicia include but are not limited to—

(i)

The transaction is extraordinary for the entity considering prior investment activity;

(ii)

The transaction promises an economic return for the organization that is exceptional considering the amount invested by, the participation of, or the absence of risk to the organization; or

(iii)

The transaction is of significant size relative to the receipts of the entity.

(3)

Effect of disclosure statements. Receipt by an entity manager of a statement, including a statement described in section 6011(g), in advance of a transaction that the transaction may be a prohibited tax shelter transaction (or a statement that a partnership, hedge fund or other investment conduit may engage in a prohibited tax shelter transaction in the future) is a factor relevant in the determination of whether the entity manager knew or had reason to know that the transaction is a prohibited transaction. However, an entity manager will not be treated as knowing or having reason to know that the transaction was a prohibited tax shelter transaction solely because the entity manager receives such a disclosure.

(4)

Appropriate inquiries. What inquiries are appropriate will be determined from the facts and circumstances of each case. For example, if one or more tax shelter indicia are present or if an entity manager receives a disclosure statement described in paragraph (b)(3) of this section, an entity manager has a responsibility to inquire further whether the transaction is a prohibited tax shelter transaction.

(c)

Reliance on professional advice—

(1)

In general. An entity manager is not required to obtain the advice of a professional tax advisor to establish that the entity manager made appropriate inquiries. Moreover, not seeking professional advice, by itself, shall not give rise to an inference that the entity manager had reason to know that a transaction is a prohibited tax shelter transaction.

(2)

Reliance on written opinion of professional tax advisor. An entity manager may establish that he or she did not have a reason to know that a transaction was a prohibited tax shelter transaction at the time the tax-exempt entity entered into the transaction if the entity manager reasonably, and in good faith, relied on the written opinion of a professional tax advisor. Reliance on the written opinion of a professional tax advisor establishes that the entity manager did not have reason to know if, taking into account all the facts and circumstances, the reliance was reasonable and the entity manager acted in good faith. For example, the entity manager's education, sophistication, and business experience will be relevant in determining whether the reliance was reasonable and made in good faith. In no event will an entity manager be considered to have reasonably relied in good faith on an opinion unless the requirements of this paragraph (c)(2) are satisfied. The fact that these requirements are satisfied, however, will not necessarily establish that the entity manager reasonably relied on the opinion in good faith. For example, reliance may not be reasonable or in good faith if the entity manager knew, or reasonably should have known, that the advisor lacked knowledge in the relevant aspects of Federal tax law.

(i)

All facts and circumstances considered. The advice must be based upon all pertinent facts and circumstances and the law as it relates to those facts and circumstances. The requirements of this paragraph (c)(2) are not satisfied if the entity manager fails to disclose a fact that it knows, or reasonably should know, is relevant to determining whether the transaction is a prohibited tax shelter transaction.

(ii)

No unreasonable assumptions. The advice must not be based on unreasonable factual or legal assumptions (including assumptions as to future events) and must not unreasonably rely on the representations, statements, findings, or agreements of the entity manager or any other person (including another party to the transaction or a material advisor within the meaning of sections 6111 and 6112).

(iii)

“More likely than not” opinion. The written opinion of the professional tax advisor must apply the appropriate law to the facts and, based on this analysis, must conclude that the transaction was not a prohibited tax shelter transaction at a “more likely than not” level of certainty at the time the entity manager approved the entity (or otherwise caused the entity) to be a party to the transaction.

(3)

Special rule. An entity manager's reliance on a written opinion of a professional tax advisor will not be considered reasonable if the advisor is, or is related to a person who is, a material advisor with respect to the transaction within the meaning of sections 6111 and 6112.

(d)

Subsequently listed transactions. An entity manager will not be treated as knowing or having reason to know that a transaction (other than a prohibited reportable transaction as defined in section 4965(e)(1)(C) and § 53.4965-3(a)(2)) is a prohibited tax shelter transaction if the entity enters into the transaction before the date on which the transaction is identified by the Secretary as a listed transaction.

(e)

Effective/applicability dates. See § 53.4965-9 for the discussion of the relevant effective and applicability dates.

Notes, amendments, and revision history

Amendments

[T.D. 9492, 75 FR 38702, July 6, 2010]

Source

Source: T.D. 8084, 51 FR 16303, May 2, 1986, unless otherwise noted.

Authority

Authority: 26 U.S.C. 7805; 4960, unless otherwise noted. Section 53.6011-1 also issued under 26 U.S.C. 6011; Section 53.6060-1 also issued under 26 U.S.C. 6060(a); Section 53.6081-1 also issued under 26 U.S.C. 6081(a); Section 53.6109-1 also issued under 26 U.S.C. 6109(a); Section 53.6109-2 also issued under 26 U.S.C. 6109(a); Section 53.6695-1 also issued under 26 U.S.C. 6695(b).

Amendments

[T.D. 9492, 75 FR 38702, July 6, 2010]

§53.4965-7. Taxes on prohibited tax shelter transactions.

26 C.F.R. § 53.4965-7

(a)

Entity-level taxes—

(1)

In general. Entity-level excise taxes apply to non-plan entities (as defined in § 53.4965-2(b)) that are parties to prohibited tax shelter transactions.

(i)

Prohibited tax shelter transactions other than subsequently listed transactions—

(A)

Amount of tax if the entity did not know and did not have reason to know. If the tax-exempt entity did not know and did not have reason to know that the transaction was a prohibited tax shelter transaction at the time the entity entered into the transaction, the tax is the highest rate of tax under section 11 multiplied by the greater of—

(1) The entity's net income with respect to the prohibited tax shelter transaction (after taking into account any tax imposed by Subtitle D, other than by this section, with respect to such transaction) for the taxable year; or

(2) 75 percent of the proceeds received by the entity for the taxable year that are attributable to such transaction.

(B)

Amount of tax if the entity knew or had reason to know. If the tax-exempt entity knew or had reason to know that the transaction was a prohibited tax shelter transaction at the time the entity entered into the transaction, the tax is the greater of—

(1) 100 percent of the entity's net income with respect to the transaction (after taking into account any tax imposed by Subtitle D, other than by this section, with respect to such transaction) for the taxable year; or

(2) 75 percent of the proceeds received by the entity for the taxable year that are attributable to such transaction.

(ii)

Subsequently listed transactions—

(A)

In general. In the case of a subsequently listed transaction (as defined in section 4965(e)(2) and § 53.4965-3(b)), the tax-exempt entity's income and proceeds attributable to the transaction are allocated between the period before the transaction became listed and the period beginning on the date the transaction became listed. See § 53.4965-8 for the standard for allocating net income or proceeds to various periods. The tax for each taxable year is the highest rate of tax under section 11 multiplied by the greater of—

(1) The entity's net income with respect to the subsequently listed transaction (after taking into account any tax imposed by Subtitle D, other than by this section, with respect to such transaction) for the taxable year that is allocable to the period beginning on the later of the date such transaction is identified by the Secretary as a listed transaction or the first day of the taxable year; or

(2) 75 percent of the proceeds received by the entity for the taxable year that are attributable to such transaction and allocable to the period beginning on the later of the date such transaction is identified by the Secretary as a listed transaction or the first day of the taxable year.

(B)

No increase in tax. The 100 percent tax under section 4965(b)(1)(B) and § 53.4965-7(a)(1)(i)(B) does not apply to any subsequently listed transaction (as defined in section 4965(e)(2) and § 53.4965-3(b)) entered into by a tax-exempt entity before the date on which the transaction is identified by the Secretary as a listed transaction.

(2)

Taxable year. The excise tax imposed under section 4965(a)(1) applies for the taxable year in which the entity becomes a party to the prohibited tax shelter transaction and any subsequent taxable year for which the entity has net income or proceeds attributable to the transaction. A taxable year for tax-exempt entities is the calendar year or fiscal year, as applicable, depending on the basis on which the tax-exempt entity keeps its books for Federal income tax purposes. If a tax-exempt entity has not established a taxable year for Federal income tax purposes, the entity's taxable year for the purpose of determining the amount and timing of net income and proceeds attributable to a prohibited tax shelter transaction will be deemed to be the annual period the entity uses in keeping its books and records.

(b)

Manager-level taxes—

(1)

Amount of tax. If any entity manager approved or otherwise caused the tax-exempt entity to become a party to a prohibited tax shelter transaction and knew or had reason to know that the transaction was a prohibited tax shelter transaction, such entity manager is liable for the $20,000 tax. See § 53.4965-5(d) for the meaning of approved or otherwise caused. See § 53.4965-6 for the meaning of knew or had reason to know.

(2)

Timing of the entity manager tax. If a tax-exempt entity enters into a prohibited tax shelter transaction during a taxable year of an entity manager, then the entity manager that approved or otherwise caused the tax-exempt entity to become a party to the transaction is liable for the entity manager tax for that taxable year if the entity manager knew or had reason to know that the transaction was a prohibited tax shelter transaction.

(3)

Example. The application of paragraph (b)(2) of this section is illustrated by the following example:

(4)

Separate liability. If more than one entity manager approved or caused a tax-exempt entity to become a party to a prohibited tax shelter transaction while knowing (or having reason to know) that the transaction was a prohibited tax shelter transaction, then each such entity manager is separately (that is, not jointly and severally) liable for the entity manager-level tax with respect to the transaction.

(c)

Effective/applicability dates. See— § 53.4965-9 for the discussion of the relevant effective and applicability dates.

Notes, amendments, and revision history

Amendments

[T.D. 9492, 75 FR 38702, July 6, 2010]

Source

Source: T.D. 8084, 51 FR 16303, May 2, 1986, unless otherwise noted.

Authority

Authority: 26 U.S.C. 7805; 4960, unless otherwise noted. Section 53.6011-1 also issued under 26 U.S.C. 6011; Section 53.6060-1 also issued under 26 U.S.C. 6060(a); Section 53.6081-1 also issued under 26 U.S.C. 6081(a); Section 53.6109-1 also issued under 26 U.S.C. 6109(a); Section 53.6109-2 also issued under 26 U.S.C. 6109(a); Section 53.6695-1 also issued under 26 U.S.C. 6695(b).

Amendments

[T.D. 9492, 75 FR 38702, July 6, 2010]

§53.4965-8. Definition of net income and proceeds and standard for allocating net income or proceeds to various periods.

26 C.F.R. § 53.4965-8

(a)

In general. For purposes of section 4965(a), the amount and the timing of the net income and proceeds attributable to the prohibited tax shelter transaction will be computed in a manner consistent with the substance of the transaction. In determining the substance of listed transactions, the IRS will look to, among other items, the listing guidance and any subsequent guidance published in the Internal Revenue Bulletin relating to the transaction.

(b)

Definition of net income and proceeds—

(1)

Net income. A tax-exempt entity's net income attributable to a prohibited tax shelter transaction is its gross income derived from the transaction reduced by those deductions that are attributable to the transaction and that would be allowed by chapter 1 of the Internal Revenue Code if the tax-exempt entity were treated as a taxable entity for this purpose, and further reduced by taxes imposed by Subtitle D, other than by this section, with respect to the transaction.

(2)

Proceeds—

(i)

Tax-exempt entities that facilitate the transaction by reason of their tax-exempt, tax indifferent or tax-favored status. Solely for purposes of section 4965, in the case of a tax-exempt entity that is a party to the transaction by reason of § 53.4965-4(a)(1) of this chapter, the term proceeds means the gross amount of the tax-exempt entity's consideration for facilitating the transaction, not reduced for any costs or expenses attributable to the transaction. Published guidance with respect to a particular prohibited tax shelter transaction may designate additional amounts as proceeds from the transaction for section 4965 purposes.

(ii)

Treatment of gifts and contributions. To the extent not otherwise included in the definition of proceeds in paragraph (b)(2)(i) of this section, any amount that is a gift or a contribution to a tax-exempt entity and is attributable to a prohibited tax shelter transaction will be treated as proceeds for section 4965 purposes, unreduced by any associated expenses.

(c)

Allocation of net income and proceeds—

(1)

In general. For purposes of section 4965(a), the net income and proceeds attributable to a prohibited tax shelter transaction must be allocated in a manner consistent with the tax-exempt entity's established method of accounting for Federal income tax purposes. If the tax-exempt entity has not established a method of accounting for Federal income tax purposes, solely for purposes of section 4965(a) the tax-exempt entity must use the cash receipts and disbursements method of accounting (cash method) provided for in section 446 of the Internal Revenue Code to determine the amount and timing of net income and proceeds attributable to a prohibited tax shelter transaction.

(2)

Special rule. If a tax-exempt entity has established a method of accounting other than the cash method, the tax-exempt entity may nevertheless use the cash method of accounting to determine the amount of the net income and proceeds—

(i)

Attributable to a prohibited tax shelter transaction entered into prior to the effective date of section 4965(a) tax and allocable to pre- and post-effective date periods; or

(ii)

Attributable to a subsequently listed transaction and allocable to pre- and post-listing periods.

(d)

Transition year rules. In the case of the taxable year that includes August 16, 2006 (the transition year), the IRS will treat the period beginning on the first day of the transition year and ending on August 15, 2006, and the period beginning on August 16, 2006, and ending on the last day of the transition year as short taxable years. This treatment is solely for purposes of allocating net income or proceeds under section 4965. The tax-exempt entity continues to file tax returns for the full taxable year, does not file tax returns with respect to these deemed short taxable years and does not otherwise take the short taxable years into account for Federal tax purposes. Accordingly, the net income or proceeds that are properly allocated to the transition year in accordance with this section will be treated as allocable to the period—

(1)

Ending on or before August 15, 2006 (and accordingly not subject to tax under section 4965(a)) to the extent such net income or proceeds would have been properly taken into account in accordance with this section by the tax-exempt entity in the deemed short year ending on August 15, 2006; and

(2)

Beginning after August 15, 2006 (and accordingly subject to tax under section 4965(a)) to the extent such income or proceeds would have been properly taken into account in accordance with this section by the tax-exempt entity in the short year beginning August 16, 2006.

(e)

Allocation to pre- and post-listing periods. If a transaction other than a prohibited reportable transaction (as defined in section 4965(e)(1)(C) and § 53.4965-3(a)(2)) to which the tax-exempt entity is a party is subsequently identified in published guidance as a listed transaction during a taxable year of the entity (the listing year) in which it has net income or proceeds attributable to the transaction, the net income or proceeds are allocated between the pre- and post-listing periods. The IRS will treat the period beginning on the first day of the listing year and ending on the day immediately preceding the date of the listing, and the period beginning on the date of the listing and ending on the last day of the listing year as short taxable years. This treatment is solely for purposes of allocating net income or proceeds under section 4965. The tax-exempt entity continues to file tax returns for the full taxable year, does not file tax returns with respect to these deemed short taxable years and does not otherwise take the short taxable years into account for Federal tax purposes. Accordingly, the net income or proceeds that are properly allocated to the listing year in accordance with this section will be treated as allocable to the period—

(1)

Ending before the date of the listing (and accordingly not subject to tax under section 4965(a)) to the extent such net income or proceeds would have been properly taken into account in accordance with this section by the tax-exempt entity in the deemed short year ending on the day immediately preceding the date of the listing; and

(2)

Beginning on the date of the listing (and accordingly subject to tax under section 4965(a)) to the extent such income or proceeds would have been properly taken into account in accordance with this section by the tax-exempt entity in the short year beginning on the date of the listing.

(f)

Examples. The following examples illustrate the allocation rules of this section:

(g)

Effective/applicability dates. See § 53.4965-9 for the discussion of the relevant effective and applicability dates.

Notes, amendments, and revision history

Amendments

[T.D. 9492, 75 FR 38702, July 6, 2010; 75 FR 46844, Aug. 4, 2010]

Source

Source: T.D. 8084, 51 FR 16303, May 2, 1986, unless otherwise noted.

Authority

Authority: 26 U.S.C. 7805; 4960, unless otherwise noted. Section 53.6011-1 also issued under 26 U.S.C. 6011; Section 53.6060-1 also issued under 26 U.S.C. 6060(a); Section 53.6081-1 also issued under 26 U.S.C. 6081(a); Section 53.6109-1 also issued under 26 U.S.C. 6109(a); Section 53.6109-2 also issued under 26 U.S.C. 6109(a); Section 53.6695-1 also issued under 26 U.S.C. 6695(b).

Amendments

[T.D. 9492, 75 FR 38702, July 6, 2010; 75 FR 46844, Aug. 4, 2010]