Modified Penalty for Failing to Maintain Investor Lists

An organizer or seller of a potentially abusive tax shelter must maintain a list identifying each person who was sold an interest in a shelter for which registration was required under Sec. 6111. Recently issued regulations under Sec. 6112, which outline the list maintenance requirements, generally applied, pre-ACJA, to transactions entered into, or acquired after, Feb. 28, 2003. Under the regulations, a person is an organizer or seller of a potentially abusive tax shelter if he or she is a material advisor with respect to the transaction. A material advisor is a person who is required to register the transaction or expects to receive a fee of at least (1) $250,000 for potentially abusive tax shelter transactions, in which all of the participants are corporations; or (2) $50,000 for all other potentially abusive tax shelter transactions. For listed transactions, the minimum fees are reduced to $25,000 for transactions involving corporations and $10,000 for all other listed transaction arrangements.

A potentially abusive tax shelter is any transaction that (1) must be registered under Sec. 6111; (2) is a listed transaction; or (3) a potential material advisor knows is (or expects will become) a reportable transaction.

Penalty for failing to maintain investor lists: Prior to the ACJA, Sec. 6708 imposed a $50 penalty for each name omitted from an investor list. The maximum penalty was $100,000 per year.

New Law

Investor lists: AJCA Section 817 requires that for each reportable transaction, a material advisor must maintain a list that (1) identifies each person to whom the advisor acted as a material advisor and (2) contains other information as required by Treasury.

Penalty for failing to maintain investor lists: The AJCA modifies the penalty for failing to maintain an investor list, by making it time sensitive. Under the new penalty provision, a material advisor is subject to a $10,000 per-day penalty for failing to make the list available within 20 business days of a written request by Treasury. The penalty applies to a material advisor who fails to maintain a list, maintains an incomplete list or has maintained a list but does not make it available to Treasury. If the failure to make the list available is due to reasonable cause, the penalty may be waived.

Effective Date

The investor list provision applies to transactions for which material aid, assistance or advice is provided after Oct. 22, 2004. The penalty provision applies to requests made after Oct. 22, 2004.

From Paul Manning, Washington, DC