Attorneys Seek Equal Application of Interest Suspension Under Settlement Initiatives
Attorneys Seek Equal Application of Interest Suspension Under Settlement Initiatives
- AuthorsFischer, David J.Sideman, Richard J.
- Institutional AuthorsBaker & Hostetler LLPSideman & Bancroft LLP
- Cross-Reference
- Code Sections
- Subject Area/Tax Topics
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 2006-3953
- Tax Analysts Electronic Citation2006 TNT 41-11
February 13, 2006
Commissioner Mark W. Everson
Internal Revenue Service
Room 3000
1111 Constitution Ave., N.W.
Washington, D.C. 20224-0002
Donald L. Korb, Esquire
Chief Counsel
Internal Revenue Service
Room 3026
1111 Constitution Avenue, N.W.
Washington, D.C. 20224-0002
Eric Solomon, Esquire
Acting Assistant Secretary for Tax Policy
Department of the Treasury
Room 3120
1500 Pennsylvania Avenue, N.W.
Washington, D.C. 20220
Re: Interest Suspension Period for Listed Transactions in Gulf
Opportunity Zone Act of 2005
Dear Sirs:
The purpose of this letter is to request your active support for a proposed technical amendment to the changes to section 6404(g) of the Internal Revenue Code (the "Code") made by Section 303(a) of the Gulf Opportunity Zone Act of 2005 (the "2005 Act"). Briefly, the 2005 Act allows suspension of interest on tax underpayments as set forth in section 6404(g) of the Code for taxpayers who settle listed transactions in accordance with the global settlement initiative in IRS Announcement 2005-80 released on October 27, 2005, but disallows the interest suspension for taxpayers who settle listed transactions in accordance with other open IRS settlement initiatives proposed by the IRS even before Announcement 2005-80.
We have clients who elected to settle listed transactions in accordance with an unpublished settlement initiative offered by the IRS prior to Announcement 2005-80. I have also spoken with other representatives who represent clients in the same position. We firmly believe that the distinction being drawn between the Announcement 2005-80 settlement initiative and other IRS settlement initiatives creates a result that is unfair to our clients and other similarly situated taxpayers. We do not believe that this unfairness was intended by Congress. In speaking with IRS personnel handling the settlement, we were encouraged to make this unfairness known.
Section 6404(g)(1) of the Code generally suspends the accrual of interest on a tax underpayment for an individual taxpayer for periods after the 18-month period from the date the tax return is filed until the IRS provides a notice of the tax liability and the basis for that liability. Section 903(c) and (d)(2) of the American Jobs Creation Act of (the "2004 Act") amended section 6404(g) of the Code in relevant part to terminate the interest suspension period for interest accruing after October 3, 2004, in connection with a listed transaction. See section 6404(g)(2)(E)of the Code. Section 303(a) of the 2005 Act, however, amended the effective date of the 2004 Act change to section 6404(g) and retroactively terminated the interest suspension period for interest accruing before October 4, 2004, with respect to listed transactions for a taxpayer unless (1) the taxpayer enters into a settlement agreement with respect to the listed transaction in accordance with Announcement 2005-80, (2) on or before December 14, 2005, the taxpayer entered into a closing agreement with respect to the tax liability arising in connection with the listed transaction, or (3) the Secretary of the Treasury allows the interest suspension for a listed transaction for which the Secretary determines the taxpayer acted reasonably and in good faith. Taxpayers generally had to file an election by January 23, 2006, to participate in the global settlement initiative offered in Announcement 2005-80.
By its terms, Announcement 2005-80 specifically excludes listed transactions described in Notices 2002-50 and 2002-65, which the IRS has determined are applicable to transactions entered into by our clients. According to the IRS, the Announcement 2005-80 settlement initiative applies only to 16 of the 31 listed transactions because the other 15 listed transactions are covered by another settlement initiative or all cases are closed. The reason that the transactions described in Notices 2002-50 and 2002-65 were excluded from the Announcement 2005-80 initiative is that the IRS previously developed a settlement initiative for those transactions. Other settlement initiatives are excluded as well, such as the stock option settlement initiative in IRS Announcement 2005-19 released on March 14, 2005.
Taxpayers with transactions described in Notices 2002-50 and 2002-65 were given an August 15, 2005 deadline to elect into the settlement initiative for these transactions. While these transactions may indeed be valid or penalties inapplicable, our clients are like other taxpayers who have participated in IRS settlement initiatives in that they uniformly want to put these transactions behind them. Our clients elected into the IRS settlement initiative for these transactions by the August 15 deadline and promptly responded to IRS requests for information to complete the settlement. Through no fault of the taxpayers, closing agreements were not available to be executed prior to the December 14, 2005, statutory deadline. We doubt closing agreements for all taxpayers participating in other settlement initiatives, such as the stock option settlement initiative, were in place by the statutory deadline. The inequity is certainly not limited to taxpayers who desire to settle the listed transactions described in Notice 2002-50 and 2002-65.
While we believe our clients proceeded reasonably and in good faith, we have been advised informally by the IRS that the good faith exception is not likely to be granted with the stated reason being the 2005 Act requires the Secretary of the Treasury himself, and not a delegate, to grant the exception which is highly unlikely. There may also be an institutional reluctance to grant the good faith exception to any taxpayer when the settlement imposes a penalty. It appears the good faith exception will not be available to our clients or other similarly situated taxpayers.
Thus, it appears that absent technical correction, taxpayers who elected the settlement initiative for transactions described in Notices 2002-50 and 2002-65 will be charged interest prior to October 4, 2004, even though taxpayers who elected the Announcement 2005-80 settlement initiative will not. Taxpayers electing to participate in the settlement initiative for transactions described in Notices 2002-50 and 2002-65 may not technically be covered by Announcement 2005-80, could not timely enter a closing agreement in spite of their cooperation with the IRS to complete their settlements, and are unlikely to receive a good faith determination. As a result, the interest suspension provided generally in section 6404(g) will not apply. We do not believe this result was intended by Congress, and we doubt the Treasury Department or IRS believes this result is appropriate either.
We understand that the 2005 Act change to section 6404(g) was intended by Congress to encourage participation in the IRS settlement initiative offered in Announcement 2005-80. If other IRS settlement initiatives are not included, the 2005 change may actually discourage participation in other, similar, pending IRS settlement initiatives. Moreover, the change is inherently unfair in that similarly situated taxpayers receive drastically different results. Thus, taxpayers who elect into the Announcement 2005-80 initiative by January 23, 2006, would not pay interest accrued before October 4, 2004, while taxpayers who elected into an IRS settlement initiative before Announcement 2005-80 was even released pay interest for that period.
Enclosed is a simple technical correction to Section 303(a) of the 2005 Act. It applies the interest suspension period not only to taxpayers who elected by January 23, 2006, to settle, and eventually settle, their listed transactions in accordance with the settlement initiative in Announcement 2005-80 but also to other taxpayers who elected on or before January 23, 2006, to participate in other IRS settlement initiatives and eventually settle in accordance with those initiatives. It also clarifies that either the Secretary of the Treasury or his delegate has the authority to grant the good faith exception. We trust you will support this technical correction.
David J. Fischer
Richard J. Sideman
Sideman & Bancroft LLP
Washington, DC
cc:
The Honorable Max Baucus
The Honorable Charles E. Grassley
The Honorable Charles B. Rangel
The Honorable William M. Thomas
John Petrella, Jr., Industry Director, Heavy Manufacturing and
Transportation, Internal Revenue Service
Joseph Maselli, Area Counsel, Heavy Manufacturing and Transportation,
Internal Revenue Service
John C. Klotsche, Senior Advisor, Office of the Commissioner,
Internal Revenue Service
Jonathan R. Zelnik, Senior Counsel, Office of the Chief Counsel,
Internal Revenue Service
Sec. 303. MODIFICATION OF EFFECTIVE DATE OF EXCEPTION FROM SUSPENSION RULES FOR CERTAIN LISTED AND REPORTABLE TRANSACTIONS.
(a) Effective Date Modification --
(1) In General. -- Paragraph (2) of section 903(d) of the American Jobs Creation Act of 2004 is amended to read as follows:
"(2) Exception For Reportable Or Listed Transactions. --
"(A) In General. -- The amendments made by subsection (c) shall apply with respect to interest accruing after October 3, 2004.
"(B) Special Rule For Certain Listed And Reportable Transactions. --
"(i) In General. -- Except as provided in clauses (ii), (iii), and (iv), the amendments made by subsection (c) shall also apply with respect to interest accruing on or before October 3, 2004.
"(ii) Participants In Settlement Initiatives. -- Clause (i) shall not apply to any transaction if --
"(I) as of January 23, 2006, the taxpayer is participating in a settlement initiative described in Internal Revenue Service Announcement 2005-80, in another published settlement initiative, or in any Internal Revenue Service written settlement offer or letter with respect to such transaction, and
"(II) the taxpayer enters into a settlement agreement pursuant to such an initiative, offer or letter.
"(iv) Closed Transactions. -- Clause (i) shall not apply to a transaction if --
"(I) as of December 14, 2005, the assessment of all Federal income taxes for the taxable year in which the tax liability to which the interest relates arose is prevented by the operation of any law or rule of law, or
"(II) on or before January 23, 2006, a closing agreement under section 7121 has been entered into with respect to the tax liability arising in connection with the transaction.".
"(v) Hurricane Extension. The dates set forth in clause (i) and clause (iv)(II) shall be extended to February 28, 2006, for eligible taxpayers affected by Hurricanes Katrina, Rita or Wilma and who are entitled to the extensions of time provided in section 7508A and the regulations thereunder in accordance with applicable Internal Revenue Service announcements, notices or information releases.
- AuthorsFischer, David J.Sideman, Richard J.
- Institutional AuthorsBaker & Hostetler LLPSideman & Bancroft LLP
- Cross-Reference
- Code Sections
- Subject Area/Tax Topics
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 2006-3953
- Tax Analysts Electronic Citation2006 TNT 41-11