[Code of Federal Regulations]
[Title 26, Volume 13]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR]

[Page 59-68]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
Procedure and Administration--Table of Contents
 
Sec.  1.6011-4  Requirement of statement disclosing participation in 
certain transactions by taxpayers.

    (a) In general. Every taxpayer that has participated, as described 
in paragraph (c)(3) of this section, in a reportable transaction within 
the meaning of paragraph (b) of this section and who is required to file 
a tax return must attach to its return for the taxable year described in 
paragraph (e) of this section a disclosure statement in the form 
prescribed by paragraph (d) of this section. The fact that a transaction 
is a reportable transaction shall not affect the legal determination of 
whether the taxpayer's treatment of the transaction is proper.
    (b) Reportable transactions--(1) In general. A reportable 
transaction is a transaction described in any of the paragraphs (b)(2) 
through (7) of this section. The term transaction includes all of the 
factual elements relevant to the expected tax treatment of any 
investment, entity, plan, or arrangement, and includes any series of 
steps carried out as part of a plan. There are six categories of 
reportable transactions: listed transactions, confidential transactions, 
transactions with contractual protection, loss transactions, 
transactions with a significant book-tax difference, and transactions 
involving a brief asset holding period.
    (2) Listed transactions. A listed transaction is a transaction that 
is the same as or substantially similar to one of

[[Page 60]]

the types of transactions that the Internal Revenue Service (IRS) has 
determined to be a tax avoidance transaction and identified by notice, 
regulation, or other form of published guidance as a listed transaction.
    (3) Confidential transactions--(i) In general. A confidential 
transaction is a transaction that is offered to a taxpayer under 
conditions of confidentiality and for which the taxpayer has paid an 
advisor a minimum fee.
    (ii) Conditions of confidentiality. A transaction is considered to 
be offered to a taxpayer under conditions of confidentiality if the 
advisor who is paid the minimum fee places a limitation on disclosure by 
the taxpayer of the tax treatment or tax structure of the transaction 
and the limitation on disclosure protects the confidentiality of that 
advisor's tax strategies. A transaction is treated as confidential even 
if the conditions of confidentiality are not legally binding on the 
taxpayer. A claim that a transaction is proprietary or exclusive is not 
treated as a limitation on disclosure if the advisor confirms to the 
taxpayer that there is no limitation on disclosure of the tax treatment 
or tax structure of the transaction.
    (iii) Minimum fee. For purposes of this paragraph (b)(3), the 
minimum fee is:
    (A) $250,000 for a transaction if the taxpayer is a corporation.
    (B) $50,000 for all other transactions unless the taxpayer is a 
partnership or trust, all of the owners or beneficiaries of which are 
corporations (looking through any partners or beneficiaries that are 
themselves partnerships or trusts), in which case the minimum fee is 
$250,000.
    (iv) Determination of minimum fee. For purposes of this paragraph 
(b)(3), a minimum fee includes all fees for a tax strategy or for 
services for advice (whether or not tax advice) or for the 
implementation of a transaction. These fees include consideration in 
whatever form paid, whether in cash or in kind, for services to analyze 
the transaction (whether or not related to the tax consequences of the 
transaction), for services to implement the transaction, for services to 
document the transaction, and for services to prepare tax returns to the 
extent that the fees exceed the fees customary for return preparation. 
For purposes of this paragraph (b)(3), a taxpayer also is treated as 
paying fees to an advisor if the taxpayer knows or should know that the 
amount it pays will be paid indirectly to the advisor, such as through a 
referral fee or fee-sharing arrangement. A fee does not include amounts 
paid to a person, including an advisor, in that person's capacity as a 
party to the transaction. For example, a fee does not include reasonable 
charges for the use of capital or the sale or use of property.
    (v) Related parties. For purposes of this paragraph (b)(3), persons 
who bear a relationship to each other as described in section 267(b) or 
707(b) will be treated as the same person.
    (4) Transactions with contractual protection--(i) In general. A 
transaction with contractual protection is a transaction for which the 
taxpayer or a related party (as described in section 267(b) or 707(b)) 
has the right to a full or partial refund of fees (as described in 
paragraph (b)(4)(ii) of this section) if all or part of the intended tax 
consequences from the transaction are not sustained. A transaction with 
contractual protection also is a transaction for which fees (as 
described in paragraph (b)(4)(ii) of this section) are contingent on the 
taxpayer's realization of tax benefits from the transaction. All the 
facts and circumstances relating to the transaction will be considered 
when determining whether a fee is refundable or contingent, including 
the right to reimbursements of amounts that the parties to the 
transaction have not designated as fees or any agreement to provide 
services without reasonable compensation.
    (ii) Fees. Paragraph (b)(4)(i) of this section only applies with 
respect to fees paid by or on behalf of the taxpayer or a related party 
to any person who makes or provides a statement, oral or written, to the 
taxpayer or related party (or for whose benefit a statement is made or 
provided to the taxpayer or related party) as to the potential tax 
consequences that may result from the transaction.
    (iii) Exceptions--(A) Termination of transaction. A transaction is 
not considered to have contractual protection

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solely because a party to the transaction has the right to terminate the 
transaction upon the happening of an event affecting the taxation of one 
or more parties to the transaction.
    (B) Previously reported transaction. If a person makes or provides a 
statement to a taxpayer as to the potential tax consequences that may 
result from a transaction only after the taxpayer has entered into the 
transaction and reported the consequences of the transaction on a filed 
tax return, and the person has not previously received fees from the 
taxpayer relating to the transaction, then any refundable or contingent 
fees are not taken into account in determining whether the transaction 
has contractual protection. This paragraph (b)(4)(iii)(B) does not 
provide any substantive rules regarding when a person may charge 
refundable or contingent fees with respect to a transaction. See 
Circular 230, 31 CFR Part 10, for the regulations governing practice 
before the IRS.
    (5) Loss transactions--(i) In general. A loss transaction is any 
transaction resulting in the taxpayer claiming a loss under section 165 
of at least--
    (A) $10 million in any single taxable year or $20 million in any 
combination of taxable years for corporations;
    (B) $10 million in any single taxable year or $20 million in any 
combination of taxable years for partnerships that have only 
corporations as partners (looking through any partners that are 
themselves partnerships), whether or not any losses flow through to one 
or more partners; or $2 million in any single taxable year or $4 million 
in any combination of taxable years for all other partnerships, whether 
or not any losses flow through to one or more partners;
    (C) $2 million in any single taxable year or $4 million in any 
combination of taxable years for individuals, S corporations, or trusts, 
whether or not any losses flow through to one or more shareholders or 
beneficiaries; or
    (D) $50,000 in any single taxable year for individuals or trusts, 
whether or not the loss flows through from an S corporation or 
partnership, if the loss arises with respect to a section 988 
transaction (as defined in section 988(c)(1) relating to foreign 
currency transactions).
    (ii) Cumulative losses. In determining whether a transaction results 
in a taxpayer claiming a loss that meets the threshold amounts over a 
combination of taxable years as described in paragraph (b)(5)(i) of this 
section, only losses claimed in the taxable year that the transaction is 
entered into and the five succeeding taxable years are combined.
    (iii) Section 165 loss. (A) For purposes of this section, in 
determining the thresholds in paragraph (b)(5)(i) of this section, the 
amount of a section 165 loss is adjusted for any salvage value and for 
any insurance or other compensation received. See Sec.  1.165-1(c)(4). 
However, a section 165 loss does not take into account offsetting gains, 
or other income or limitations. For example, a section 165 loss does not 
take into account the limitation in section 165(d) (relating to wagering 
losses) or the limitations in sections 165(f), 1211, and 1212 (relating 
to capital losses). The full amount of a section 165 loss is taken into 
account for the year in which the loss is sustained, regardless of 
whether all or part of the loss enters into the computation of a net 
operating loss under section 172 or a net capital loss under section 
1212 that is a carryback or carryover to another year. A section 165 
loss does not include any portion of a loss, attributable to a capital 
loss carryback or carryover from another year, that is treated as a 
deemed capital loss under section 1212.
    (B) For purposes of this section, a section 165 loss includes an 
amount deductible pursuant to a provision that treats a transaction as a 
sale or other disposition, or otherwise results in a deduction under 
section 165. A section 165 loss includes, for example, a loss resulting 
from a sale or exchange of a partnership interest under section 741 and 
a loss resulting from a section 988 transaction.
    (6) Transactions with a significant book-tax difference--(i) In 
general. A transaction with a significant book-tax difference is a 
transaction where the amount for tax purposes of any item or items of 
income, gain, expense, or loss from the transaction differs by more

[[Page 62]]

than $10 million on a gross basis from the amount of the item or items 
for book purposes in any taxable year. For purposes of this 
determination, offsetting items shall not be netted for either tax or 
book purposes. For purposes of this paragraph (b)(6), the amount of an 
item for book purposes is determined by applying U.S. generally accepted 
accounting principles (U.S. GAAP) for worldwide income. However, if a 
taxpayer, in the ordinary course of its business, keeps books for 
reporting financial results to shareholders, creditors, or regulators on 
a basis other than U.S. GAAP, and does not maintain U.S. GAAP books for 
any purpose, then the taxpayer may determine the amount of a book item 
for purposes of this paragraph (b)(6) by using the books maintained by 
the taxpayer, provided the books are kept on the same basis consistently 
from year to year. Adjustments to any reserve for taxes are disregarded 
for purposes of determining the book-tax difference.
    (ii) Applicability--(A) In general. This paragraph (b)(6) applies 
only to--
    (1) Taxpayers that are reporting companies under the Securities 
Exchange Act of 1934 (15 U.S.C. 78a) and related business entities (as 
described in section 267(b) or 707(b)); or
    (2) Business entities that have $250 million or more in gross assets 
for book purposes at the end of any financial accounting period that 
ends with or within the entity's taxable year in which the transaction 
occurs (for purposes of this determination, the assets of all related 
business entities (as defined in section 267(b) or 707(b)) must be 
aggregated).
    (B) Consolidated returns. For purposes of this paragraph (b)(6), in 
the case of taxpayers that are members of a group of affiliated 
corporations filing a consolidated return, transactions solely between 
or among members of the group will be disregarded. Moreover, where two 
or more members of the group participate in a transaction that is not 
solely between or among members of the group, items shall be aggregated 
(as if such members were a single taxpayer), but any offsetting items 
shall not be netted.
    (C) Foreign persons. In the case of a taxpayer that is a foreign 
person (other than a foreign corporation that is treated as a domestic 
corporation for Federal tax purposes under section 269B, 953(d), 1504(d) 
or any other provision of the Internal Revenue Code), only assets that 
are U.S. assets under Sec.  1.884-1(d) shall be taken into account for 
purposes of paragraph (b)(6)(ii)(A)(2) of this section, and only 
transactions that give rise to income that is effectively connected with 
the conduct of a trade or business within the United States (or to 
losses, expenses, or deductions allocated or apportioned to such income) 
shall be taken into account for purposes of this paragraph (b)(6).
    (D) Owners of disregarded entities. In the case of an eligible 
entity that is disregarded as an entity separate from its owner for 
Federal tax purposes, items of income, gain, loss, or expense that 
otherwise are considered items of the entity for book purposes shall be 
treated as items of its owner, and items arising from transactions 
between the entity and its owner shall be disregarded, for purposes of 
this paragraph (b)(6).
    (E) Partners of partnerships. In the case of a taxpayer that is a 
member or a partner of an entity that is treated as a partnership for 
Federal tax purposes, items of income, gain, loss, or expense that are 
allocable to the taxpayer for Federal tax purposes, but otherwise are 
considered items of the entity for book purposes, shall be treated as 
items of the taxpayer for purposes of this paragraph (b)(6).
    (7) Transactions involving a brief asset holding period. A 
transaction involving a brief asset holding period is any transaction 
resulting in the taxpayer claiming a tax credit exceeding $250,000 
(including a foreign tax credit) if the underlying asset giving rise to 
the credit is held by the taxpayer for 45 days or less. For purposes of 
determining the holding period, the principles of section 246(c)(3) and 
(c)(4) apply. Transactions resulting in a foreign tax credit for 
withholding taxes or other taxes imposed in respect of a dividend that 
are not disallowed under section 901(k) (including transactions eligible 
for the exception for securities dealers under section 901(k)(4)) are 
excluded from this paragraph (b)(7).

[[Page 63]]

    (8) Exceptions--(i) In general. A transaction will not be considered 
a reportable transaction, or will be excluded from any individual 
category of reportable transaction under paragraphs (b)(3) through (7) 
of this section, if the Commissioner makes a determination by published 
guidance that the transaction is not subject to the reporting 
requirements of this section. The Commissioner may make a determination 
by individual letter ruling under paragraph (f) of this section that an 
individual letter ruling request on a specific transaction or type of 
transaction satisfies the reporting requirements of this section with 
regard to that transaction or type of transaction for the taxpayer who 
requests the individual letter ruling.
    (ii) Special rule for RICs. For purposes of this section, a 
regulated investment company (RIC) as defined in section 851 or an 
investment vehicle that is owned 95 percent or more by one or more RICs 
at all times during the course of the transaction are not required to 
disclose a transaction that is described in any of paragraphs (b)(3) 
through (7) of this section unless the transaction is also a listed 
transaction.
    (iii) Special rule for lease transactions. For purposes of this 
section, leasing transactions of the type excepted from the registration 
requirements under section 6111(d) of the Code and the list maintenance 
requirements under section 6112 as described in Notice 2001-18 (2001-1 
C.B. 731) (see Sec.  601.601(d)(2) of this chapter) are excluded from 
paragraphs (b)(3) through (7) of this section.
    (c) Definitions. For purposes of this section, the following terms 
are defined as follows:
    (1) Taxpayer. The term taxpayer means any person described in 
section 7701(a)(1), including S corporations. Except as otherwise 
specifically provided in this section, the term taxpayer also includes 
an affiliated group of corporations that joins in the filing of a 
consolidated return under section 1501.
    (2) Corporation. When used specifically in this section, the term 
corporation means an entity that is required to file a return for a 
taxable year on any 1120 series form, or successor form, excluding S 
corporations.
    (3) Participation--(i) In general--(A) Listed transactions. A 
taxpayer has participated in a listed transaction if the taxpayer's tax 
return reflects tax consequences or a tax strategy described in the 
published guidance that lists the transaction under paragraph (b)(2) of 
this section. A taxpayer also has participated in a listed transaction 
if the taxpayer knows or has reason to know that the taxpayer's tax 
benefits are derived directly or indirectly from tax consequences or a 
tax strategy described in published guidance that lists a transaction 
under paragraph (b)(2) of this section. Published guidance may identify 
other types or classes of persons that will be treated as participants 
in a listed transaction.
    (B) Confidential transactions. A taxpayer has participated in a 
confidential transaction if the taxpayer's tax return reflects a tax 
benefit from the transaction and the taxpayer's disclosure of the tax 
treatment or tax structure of the transaction is limited in the manner 
described in paragraph (b)(3) of this section. If a partnership's, S 
corporation's or trust's disclosure is limited, and the partner's, 
shareholder's, or beneficiary's disclosure is not limited, then the 
partnership, S corporation, or trust, and not the partner, shareholder, 
or beneficiary, has participated in the confidential transaction.
    (C) Transactions with contractual protection. A taxpayer has 
participated in a transaction with contractual protection if the 
taxpayer's tax return reflects a tax benefit from the transaction and, 
as described in paragraph (b)(4) of this section, the taxpayer has the 
right to the full or partial refund of fees or the fees are contingent. 
If a partnership, S corporation, or trust has the right to a full or 
partial refund of fees or has a contingent fee arrangement, and the 
partner, shareholder, or beneficiary does not individually have the 
right to the refund of fees or a contingent fee arrangement, then the 
partnership, S corporation, or trust, and not the partner, shareholder, 
or beneficiary, has participated in the transaction with contractual 
protection.
    (D) Loss transactions. A taxpayer has participated in a loss 
transaction if the taxpayer's tax return reflects a section 165 loss and 
the amount of the section

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165 loss equals or exceeds the threshold amount applicable to the 
taxpayer as described in paragraph (b)(5)(i) of this section. If a 
taxpayer is a partner in a partnership, shareholder in an S corporation, 
or beneficiary of a trust and a section 165 loss as described in 
paragraph (b)(5) of this section flows through the entity to the 
taxpayer (disregarding netting at the entity level), the taxpayer has 
participated in a loss transaction if the taxpayer's tax return reflects 
a section 165 loss and the amount of the section 165 loss that flows 
through to the taxpayer equals or exceeds the threshold amounts 
applicable to the taxpayer as described in paragraph (b)(5)(i) of this 
section. For this purpose, a tax return is deemed to reflect the full 
amount of a section 165 loss described in paragraph (b)(5) of this 
section allocable to the taxpayer under this paragraph (c)(3)(i)(D), 
regardless of whether all or part of the loss enters into the 
computation of a net operating loss under section 172 or net capital 
loss under section 1212 that the taxpayer may carry back or carry over 
to another year.
    (E) Transactions with a significant book-tax difference. A taxpayer 
has participated in a transaction with a significant book-tax difference 
if the taxpayer's tax treatment of an item from the transaction differs 
from the book treatment of that item as described in paragraph (b)(6) of 
this section. In determining whether a transaction results in a 
significant book-tax difference for a taxpayer, differences that arise 
solely because a subsidiary of the taxpayer is consolidated with the 
taxpayer, in whole or in part, for book purposes, but not for tax 
purposes, are not taken into account.
    (F) Transactions involving a brief asset holding period. A taxpayer 
has participated in a transaction involving a brief asset holding period 
if the taxpayer's tax return reflects items giving rise to a tax credit 
described in paragraph (b)(7) of this section. If a taxpayer is a 
partner in a partnership, shareholder in an S corporation, or 
beneficiary of a trust and the items giving rise to a tax credit 
described in paragraph (b)(7) of this section flow through the entity to 
the taxpayer (disregarding netting at the entity level), the taxpayer 
has participated in a transaction involving a brief asset holding period 
if the taxpayer's tax return reflects the tax credit and the amount of 
the tax credit claimed by the taxpayer exceeds $250,000.
    (G) Shareholders of foreign corporations--(1) In general. A 
reporting shareholder of a foreign corporation participates in a 
transaction described in paragraphs (b)(2) through (5) and (b)(7) of 
this section if the foreign corporation would be considered to 
participate in the transaction under the rules of this paragraph (c)(3) 
if it were a domestic corporation filing a tax return that reflects the 
items from the transaction. A reporting shareholder participates in a 
transaction described in paragraph (b)(6) of this section only if the 
foreign corporation would be considered to participate in the 
transaction under the rules of this paragraph (c)(3) if it were a 
domestic corporation and the transaction reduces or eliminates an income 
inclusion that otherwise would be required under section 551, 951, or 
1293. A reporting shareholder (and any successor in interest) is 
considered to participate in a transaction under this paragraph 
(c)(3)(i)(G) only for its first taxable year with or within which ends 
the first taxable year of the foreign corporation in which the foreign 
corporation participates in the transaction, and for the reporting 
shareholder's five succeeding taxable years.
    (2) Reporting shareholder. The term reporting shareholder means a 
United States shareholder (as defined in section 551(a)) in a foreign 
personal holding company (as defined in section 552), a United States 
shareholder (as defined in section 951(b)) in a controlled foreign 
corporation (as defined in section 957), or a 10 percent shareholder (by 
vote or value) of a qualified electing fund (as defined in section 
1295).
    (ii) Examples. The following examples illustrate the provisions of 
paragraph (c)(3)(i) of this section:

    Example 1. Notice 95-53 (1995-2 C.B. 334) (see Sec.  601.601(d)(2) 
of this chapter), describes a lease stripping transaction in which one 
party (the transferor) assigns the right to receive future payments 
under a lease of tangible property and receives consideration which the 
transferor treats as current income. The transferor later transfers the

[[Page 65]]

property subject to the lease in a transaction intended to qualify as a 
transferred basis transaction, for example, a transaction described in 
section 351. The transferee corporation claims the deductions associated 
with the high basis property subject to the lease. The transferor's and 
transferee corporation's tax returns reflect tax positions described in 
Notice 95-53. Therefore, the transferor and transferee corporation have 
participated in the listed transaction. In the section 351 transaction, 
the transferor will have received stock with low value and high basis 
from the transferee corporation. If the transferor subsequently 
transfers the high basis/low value stock to a taxpayer in another 
transaction intended to qualify as a transferred basis transaction and 
the taxpayer uses the stock to generate a loss, and if the taxpayer 
knows or has reason to know that the tax loss claimed was derived 
indirectly from the lease stripping transaction, then the taxpayer has 
participated in the listed transaction. Accordingly, the taxpayer must 
disclose the transaction and the manner of the taxpayer's participation 
in the transaction under the rules of this section. If a bank lends 
money to the transferor, transferee corporation, or taxpayer for use in 
their transactions, the bank has not participated in the listed 
transaction because the bank's tax return does not reflect tax 
consequences or a tax strategy described in the listing notice (nor does 
the bank's tax return reflect a tax benefit derived from tax 
consequences or a tax strategy described in the listing notice), nor is 
the bank described as a participant in Notice 95-53.
    Example 2. XYZ is a limited liability company treated as a 
partnership for tax purposes. X, Y, and Z are members of XYZ. X is an 
individual, Y is an S corporation, and Z is a partnership. XYZ enters 
into a confidential transaction under paragraph (b)(3) of this section. 
X is bound by the confidentiality agreement, but Y and Z are not bound 
by the agreement. As a result of the transaction, XYZ, X, Y, and Z all 
reflect a tax benefit on their tax returns. Because XYZ's and X's 
disclosure of the tax treatment and tax structure are limited in the 
manner described in paragraph (b)(3) of this section and their tax 
returns reflect a tax benefit from the transaction, both XYZ and X have 
participated in the confidential transaction. Neither Y nor Z has 
participated in the confidential transaction because they are not 
subject to the confidentiality agreement.
    Example 3. Partnership AB has gross assets with a book value of over 
$250 million. Partner A is an SEC reporting company and partner B is an 
individual. AB enters into a transaction that results in a book-tax 
difference for AB of $25 million. The transaction is a reportable 
transaction for AB under paragraph (b)(6) of this section because the 
book-tax difference exceeds $10 million. As a result of A's partnership 
interest in AB and the allocation of items relating to the transaction 
to A, A has a book-tax difference of $11 million. The transaction is a 
reportable transaction for A under paragraph (b)(6) of this section 
because the $11 million book-tax difference exceeds $10 million. 
However, even though $14 million of the book-tax difference would be 
allocated to B, the transaction is not a reportable transaction for B 
under paragraph (b)(6) of this section because B, an individual, is not 
subject to paragraph (b)(6) of this section.
    Example 4. (i) P corporation, the parent corporation of a group of 
corporations that file a consolidated tax return, owns 60% of the stock 
of T corporation. T files its own tax return and is not included as a 
member of the P group on the P group consolidated tax return. For book 
purposes, some or all of T's income is included by the group of 
corporations that includes P. T engages in a transaction that results in 
items of book income but does not result in items of income for tax 
purposes. P and T are SEC reporting companies.
    (ii) T participated in the transaction. T has no items of taxable 
income but has items of book income. If items from the transaction 
result in a book-tax difference determined in accordance with paragraph 
(b)(6) of this section of $10 million in any single year, T will be 
required to file Form 8886. The P group did not participate in the 
transaction, and does not have a book-tax difference for purposes of 
paragraph (b)(6) of this section because, even if the P group included 
$10 million in book income, the book tax difference arises solely 
because T is not part of P's consolidated group for tax purposes.
    (iii) If the facts were changed so that P corporation owned 80% of 
the stock of T and T was a member of the P consolidated group for tax 
purposes, the P group would be the taxpayer that participated in the 
transaction. If, in any single year, the transaction produced items of 
income for book purposes of $10 million but no items of taxable income, 
P would be required to file Form 8886. This result would not change if T 
separately reported its items for book purposes, if P reported none of 
T's items on its consolidated financial statements, or if the P 
consolidated financial statements included only part of a $10 million 
book-tax difference relating to items from T's transaction.

    Example 5. Domestic corporations X and Y each own 50 percent of the 
voting stock of CFC, a controlled foreign corporation. X, Y, and CFC 
each use the calendar year as their taxable year. CFC is not engaged in 
the conduct of a trade or business within the United States and has no 
U.S. source income. Accordingly, CFC is not required to file a U.S. 
Federal income tax return. See Sec.  1.6012-2(g). Under paragraph 
(c)(3)(i)(G)(2) of this section, X and Y are reporting shareholders

[[Page 66]]

with respect to CFC. CFC purchases a Euro-denominated bond on June 1, 
2003, for 104,400,000 Euros. The bond matures on June 7, 2003, and CFC 
collects 104,500,000 Euros, equal to the bond's 100,000,000 Euro face 
amount plus 5,000,000 Euros of accrued but unpaid interest, less a 10% 
foreign withholding tax of 500,000 Euros. The average dollar-Euro 
exchange rate for the year is $.80 = 1 Euro, so CFC adds $400,000 to its 
post-1986 foreign income taxes pool as a result of the transaction. See 
sections 986(a)(1) and 902(c)(2). Under paragraph (c)(3)(i)(G)(1) of 
this section, X and Y have each participated in a transaction involving 
a brief asset holding period described in paragraph (b)(7) of this 
section for their taxable years 2003 through 2008 because both X and Y 
are reporting shareholders of CFC, and CFC would have been considered to 
have participated in a reportable transaction if it were a domestic 
corporation.

    (4) Substantially similar. The term substantially similar includes 
any transaction that is expected to obtain the same or similar types of 
tax consequences and that is either factually similar or based on the 
same or similar tax strategy. Receipt of an opinion regarding the tax 
consequences of the transaction is not relevant to the determination of 
whether the transaction is the same as or substantially similar to 
another transaction. Further, the term substantially similar must be 
broadly construed in favor of disclosure. The following examples 
illustrate situations where a transaction is the same as or 
substantially similar to a listed transaction under paragraph (b)(2) of 
this section. (Such transactions may also be reportable transactions 
under paragraphs (b)(3) through (7) of this section.) The following 
examples illustrate the provisions of this paragraph (c)(4):

    Example 1. Notice 2000-44 (2000-2 C.B. 255) (see Sec.  601.601(d)(2) 
of this chapter), sets forth a listed transaction involving offsetting 
options transferred to a partnership where the taxpayer claims basis in 
the partnership for the cost of the purchased options but does not 
adjust basis under section 752 as a result of the partnership's 
assumption of the taxpayer's obligation with respect to the options. 
Transactions using short sales, futures, derivatives or any other type 
of offsetting obligations to inflate basis in a partnership interest 
would be the same as or substantially similar to the transaction 
described in Notice 2000-44. Moreover, use of the inflated basis in the 
partnership interest to diminish gain that would otherwise be recognized 
on the transfer of a partnership asset would also be the same as or 
substantially similar to the transaction described in Notice 2000-44.
    Example 2. Notice 2001-16 (2001-1 C.B. 730) (see Sec.  601.601(d)(2) 
of this chapter), sets forth a listed transaction involving a seller (X) 
who desires to sell stock of a corporation (T), an intermediary 
corporation (M), and a buyer (Y) who desires to purchase the assets (and 
not the stock) of T. M agrees to facilitate the sale to prevent the 
recognition of the gain that T would otherwise report. Notice 2001-16 
describes M as a member of a consolidated group that has a loss within 
the group or as a party not subject to tax. Transactions utilizing 
different intermediaries to prevent the recognition of gain would be the 
same as or substantially similar to the transaction described in Notice 
2001-16. An example is a transaction in which M is a corporation that 
does not file a consolidated return but which buys T stock, liquidates 
T, sells assets of T to Y, and offsets the gain recognized on the sale 
of those assets with currently generated losses.

    (5) Tax. For purposes of this section, the term tax means Federal 
income tax.
    (6) Tax benefit. A tax benefit includes deductions, exclusions from 
gross income, nonrecognition of gain, tax credits, adjustments (or the 
absence of adjustments) to the basis of property, status as an entity 
exempt from Federal income taxation, and any other tax consequences that 
may reduce a taxpayer's Federal income tax liability by affecting the 
amount, timing, character, or source of any item of income, gain, 
expense, loss, or credit.
    (7) Tax return. For purposes of this section, the term tax return 
means a Federal income tax return and a Federal information return.
    (8) Tax treatment. The tax treatment of a transaction is the 
purported or claimed Federal income tax treatment of the transaction.
    (9) Tax structure. The tax structure of a transaction is any fact 
that may be relevant to understanding the purported or claimed Federal 
income tax treatment of the transaction.
    (d) Form and content of disclosure statement. The IRS will release 
Form 8886, ``Reportable Transaction Disclosure Statement'' (or a 
successor form), for use by taxpayers in accordance with this paragraph 
(d). A taxpayer required to file a disclosure statement

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under this section must file a completed Form 8886 in accordance with 
the instructions to the form. The Form 8886 is the disclosure statement 
required under this section. The form must be attached to the 
appropriate tax returns as provided in paragraph (e) of this section. If 
a copy of a disclosure statement is required to be sent to the Office of 
Tax Shelter Analysis (OTSA) under paragraph (e) of this section, it must 
be sent to: Internal Revenue Service LM:PFTG:OTSA, Large & Mid-Size 
Business Division, 1111 Constitution Ave., NW., Washington, DC 20224, or 
to such other address as provided by the Commissioner.
    (e) Time of providing disclosure--(1) In general. The disclosure 
statement for a reportable transaction must be attached to the 
taxpayer's tax return for each taxable year for which a taxpayer 
participates in a reportable transaction. In addition, the disclosure 
statement for a reportable transaction must be attached to each amended 
return that reflects a taxpayer's participation in a reportable 
transaction. A copy of the disclosure statement must be sent to OTSA at 
the same time that any disclosure statement is first filed by the 
taxpayer. If a reportable transaction results in a loss which is carried 
back to a prior year, the disclosure statement for the reportable 
transaction must be attached to the taxpayer's application for tentative 
refund or amended tax return for that prior year. In the case of a 
taxpayer that is a partnership or S corporation, the disclosure 
statement for a reportable transaction must be attached to the 
partnership's or S corporation's tax return for each taxable year in 
which the partnership or S corporation participates in the transaction 
under the rules of paragraph (c)(3)(i) of this section.
    (2) Special rules--(i) Listed transactions. If a transaction becomes 
a listed transaction after the filing of a taxpayer's tax return 
(including an amended return) reflecting either tax consequences or a 
tax strategy described in the published guidance listing the transaction 
(or a tax benefit derived from tax consequences or a tax strategy 
described in the published guidance listing the transaction) and before 
the end of the period of limitations for the final return (whether or 
not already filed) reflecting the tax consequences, tax strategy, or tax 
benefit, then a disclosure statement must be filed as an attachment to 
the taxpayer's tax return next filed after the date the transaction is 
listed regardless of whether the taxpayer participated in the 
transaction in that year.
    (ii) Loss transactions. If a transaction becomes a loss transaction 
because the losses equal or exceed the threshold amounts as described in 
paragraph (b)(5)(i) of this section, a disclosure statement must be 
filed as an attachment to the taxpayer's tax return for the first 
taxable year in which the threshold amount is reached and to any 
subsequent tax return that reflects any amount of section 165 loss from 
the transaction.
    (3) Multiple disclosures. The taxpayer must disclose the transaction 
in the time and manner provided for under the provisions of this section 
regardless of whether the taxpayer also plans to disclose the 
transaction under other published guidance, for example, Rev. Proc. 94-
69 (1994-2 C.B. 804) (see Sec.  601.601(d)(2) of this chapter).
    (4) Example. The following example illustrates the application of 
this paragraph (e):

    Example. In January of 2004, F, a domestic calendar year 
corporation, enters into a transaction that is not a listed transaction 
when entered into and is not a transaction described in any of the 
paragraphs (b)(3) through (7) of this section. All the tax benefits from 
the transaction are reported on F's 2004 tax return. On March 1, 2008, 
the IRS publishes a notice identifying the transaction as a listed 
transaction described in paragraph (b)(2) of this section. Thus, upon 
issuance of the notice, the transaction becomes a reportable transaction 
described in paragraph (b) of this section. The statute of limitations 
for F's 2004 taxable year is still open. F is required to file Form 8886 
for the transaction as an attachment to F's next filed Federal income 
tax return and must send a copy of Form 8886 to OTSA. If F's 2007 
Federal income tax return has not been filed on or before the date the 
Service identifies the transaction as a listed transaction, Form 8886 
must be attached to F's 2007 return and at that time a copy of Form 8886 
must be sent to OTSA.
    (f) Rulings and protective disclosures--(1) Requests for ruling. A 
taxpayer may,

[[Page 68]]

on or before the date that disclosure would otherwise be required under 
this section, submit a request to the IRS for a ruling as to whether a 
transaction is subject to the disclosure requirements of this section. 
If the request fully discloses all relevant facts relating to the 
transaction, the potential obligation of that taxpayer to disclose the 
transaction will be suspended during the period that the ruling request 
is pending and, if the IRS subsequently concludes that the transaction 
is a reportable transaction subject to disclosure under this section, 
until the 60th day after the issuance of the ruling (or, if the request 
is withdrawn, 60 days after the date that the request is withdrawn). 
Furthermore, in that taxpayer's individual ruling, the Commissioner in 
his discretion may determine that the submission satisfies the 
disclosure rules under this section for that particular transaction or 
type of transaction.
    (2) Protective disclosures. If a taxpayer is uncertain whether a 
transaction must be disclosed under this section, the taxpayer may 
disclose the transaction in accordance with the requirements of this 
section, and indicate on the disclosure statement that the taxpayer is 
uncertain whether the transaction is required to be disclosed under this 
section and that the disclosure statement is being filed on a protective 
basis.
    (3) Rulings on the merits of a transaction. If a taxpayer requests a 
ruling on the merits of a specific transaction on or before the date 
that disclosure would otherwise be required under this section, and 
receives a favorable ruling as to the transaction, the disclosure rules 
under this section will be deemed to have been satisfied by that 
taxpayer with regard to that transaction, so long as the request fully 
discloses all relevant facts relating to the transaction which would 
otherwise be required to be disclosed under this section.
    (g) Retention of documents. In accordance with the instructions to 
Form 8886, the taxpayer must retain a copy of all documents and other 
records related to a transaction subject to disclosure under this 
section that are material to an understanding of the tax treatment or 
tax structure of the transaction. The documents must be retained until 
the expiration of the statute of limitations applicable to the final 
taxable year for which disclosure of the transaction was required under 
this section. (This document retention requirement is in addition to any 
document retention requirements that section 6001 generally imposes on 
the taxpayer.) The documents may include the following: marketing 
materials related to the transaction; written analyses used in decision-
making related to the transaction; correspondence and agreements between 
the taxpayer and any advisor, lender, or other party to the reportable 
transaction that relate to the transaction; documents discussing, 
referring to, or demonstrating the purported or claimed tax benefits 
arising from the reportable transaction; and documents, if any, 
referring to the business purposes for the reportable transaction. A 
taxpayer is not required to retain earlier drafts of a document if the 
taxpayer retains a copy of the final document (or, if there is no final 
document, the most recent draft of the document) and the final document 
(or most recent draft) contains all the information in the earlier 
drafts of the document that is material to an understanding of the 
purported tax treatment or tax structure of the transaction.
    (h) Effective dates. This section applies to Federal income tax 
returns filed after February 28, 2000. However, paragraphs (b)(3), 
(e)(1), and (e)(2)(i) of this section apply to transactions entered into 
on or after December 29, 2003. All the rules in this section may be 
relied upon for transactions entered into on or after January 1, 2003, 
and before December 29, 2003. Otherwise, the rules that apply with 
respect to transactions entered into before December 29, 2003, are 
contained in Sec.  1.6011-4 in effect prior to December 29, 2003, (see 
26 CFR part 1 revised as of April 1, 2003).

[T.D. 9046, 68 FR 10163, Mar. 4, 2003, as amended by T.D. 9108, 68 FR 
75130, Dec. 30, 2003]