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Tax Exempt Entity Transaction
Treasury and IRS Issue Guidance
on S Corporation,
Tax Exempt Entity Transaction
IR-2004-44, April 1, 2004
WASHINGTON — The Treasury Department and the Internal Revenue
Service today issued guidance on certain kinds of abusive tax avoidance
transactions involving S corporations and tax-exempt entities, such
as charities. These transactions are structured to improperly shift
taxation away from taxable S corporation shareholders to an exempt
party, for the purpose of deferring or avoiding taxes.
In Notice 2004-30, the IRS says it intends to challenge these transactions
on a number of grounds. It further declares that these abusive transactions
are considered "listed transactions." Participants in
a listed transaction who are required to file tax returns must disclose
their participation to the IRS. In addition, promoters of listed
transactions must keep lists of investors and, in certain cases,
register those transactions with the IRS.
This notice is the first time the IRS has exercised its authority
under the tax shelter regulations to specifically designate a tax-exempt
party as a "participant" in a tax avoidance transaction.
"The participation of tax-exempt entities in these abusive
transactions is a worrisome trend," said Mark W. Everson, Commissioner
of Internal Revenue. "We are acting today to ensure the integrity
of our charities. We don't want Americans to lose faith in a unique
and vital part of our nation's social fabric."
"These transactions are structured to eliminate tax on certain
S corporation shareholders by inappropriately shifting income to
a tax-exempt organization. This abuses the special status that the
law gives to tax-exempt organizations," said Gregory F. Jenner,
Acting Assistant Secretary (Tax Policy). "Use of tax-exempt
organizations as mere accommodation parties should not be permitted."
In addition, the IRS will amend Form 8886, Reportable Transaction
Disclosure Statement, to require parties filing the forms to identify
the names of all parties to a listed transaction. This includes
any tax-exempt parties that facilitate the transaction.
The tax-exempt area is one of the IRS's four top service-wide priorities.
The IRS will discourage and deter non-compliance within tax-exempt
and government entities, and the misuse of such entities by third
parties for tax avoidance or other unintended purposes.
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