§4965 — Excise tax on certain tax-exempt entities entering into prohibited tax shelter transactions
1 citing cases
Statute Text — 26 U.S.C. §4965
If a transaction is a prohibited tax shelter transaction at the time any tax-exempt entity described in paragraph (1), (2), or (3) of subsection (c) becomes a party to the transaction, such entity shall pay a tax for the taxable year in which the entity becomes such a party and any subsequent taxable year in the amount determined under subsection (b)(1).
If any tax-exempt entity described in paragraph (1), (2), or (3) of subsection (c) is a party to a subsequently listed transaction at any time during a taxable year, such entity shall pay a tax for such taxable year in the amount determined under subsection (b)(1).
If any entity manager of a tax-exempt entity approves such entity as (or otherwise causes such entity to be) a party to a prohibited tax shelter transaction at any time during the taxable year and knows or has reason to know that the transaction is a prohibited tax shelter transaction, such manager shall pay a tax for such taxable year in the amount determined under subsection (b)(2).
In the case of a tax-exempt entity—
Except as provided in subparagraph (B), the amount of the tax imposed under subsection (a)(1) with respect to any transaction for a taxable year shall be an amount equal to the product of the highest rate of tax under section 11, and the greater of—
the entity’s net income (after taking into account any tax imposed by this subtitle (other than by this section) with respect to such transaction) for such taxable year which—
in the case of a prohibited tax shelter transaction (other than a subsequently listed transaction), is attributable to such transaction, or
in the case of a subsequently listed transaction, is attributable to such transaction and which is properly allocable to the period beginning on the later of the date such transaction is identified by guidance as a listed transaction by the Secretary or the first day of the taxable year, or
75 percent of the proceeds received by the entity for the taxable year which—
in the case of a prohibited tax shelter transaction (other than a subsequently listed transaction), are attributable to such transaction, or
in the case of a subsequently listed transaction, are attributable to such transaction and which are properly allocable to the period beginning on the later of the date such transaction is identified by guidance as a listed transaction by the Secretary or the first day of the taxable year.
In the case of a tax-exempt entity which knew, or had reason to know, a transaction was a prohibited tax shelter transaction at the time the entity became a party to the transaction, the amount of the tax imposed under subsection (a)(1)(A) with respect to any transaction for a taxable year shall be the greater of—
100 percent of the entity’s net income (after taking into account any tax imposed by this subtitle (other than by this section) with respect to the prohibited tax shelter transaction) for such taxable year which is attributable to the prohibited tax shelter transaction, or
75 percent of the proceeds received by the entity for the taxable year which are attributable to the prohibited tax shelter transaction.
This subparagraph shall not apply to any prohibited tax shelter transaction to which a tax-exempt entity became a party on or before the date of the enactment of this section.
In the case of each entity manager, the amount of the tax imposed under subsection (a)(2) shall be $20,000 for each approval (or other act causing participation) described in subsection (a)(2).
For purposes of this section, the term “tax-exempt entity” means an entity which is—
described in section 501(c) or 501(d),
described in section 170(c) (other than the United States),
an Indian tribal government (within the meaning of section 7701(a)(40)),
described in paragraph (1), (2), or (3) of section 4979(e),
a program described in section 529,
an eligible deferred compensation plan described in section 457(b) which is maintained by an employer described in section 457(e)(1)(A),
an arrangement described in section 4973(a), or
a program described in section 529A.
For purposes of this section, the term “entity manager” means—
in the case of an entity described in paragraph (1), (2), or (3) of subsection (c)—
the person with authority or responsibility similar to that exercised by an officer, director, or trustee of an organization, and
with respect to any act, the person having authority or responsibility with respect to such act, and
in the case of an entity described in paragraph (4), (5), (6), or (7) of subsection (c), the person who approves or otherwise causes the entity to be a party to the prohibited tax shelter transaction.
For purposes of this section—
The term “prohibited tax shelter transaction” means—
any listed transaction, and
any prohibited reportable transaction.
The term “listed transaction” has the meaning given such term by section 6707A(c)(2).
The term “prohibited reportable transaction” means any confidential transaction or any transaction with contractual protection (as defined under regulations prescribed by the Secretary) which is a reportable transaction (as defined in section 6707A(c)(1)).
The term “subsequently listed transaction” means any transaction to which a tax-exempt entity is a party and which is determined by the Secretary to be a listed transaction at any time after the entity has become a party to the transaction. Such term shall not include a transaction which is a prohibited reportable transaction at the time the entity became a party to the transaction.
The Secretary is authorized to promulgate regulations which provide guidance regarding the determination of the allocation of net income or proceeds of a tax-exempt entity attributable to a transaction to various periods, including before and after the listing of the transaction or the date which is 90 days after the date of the enactment of this section.
The tax imposed by this section is in addition to any other tax, addition to tax, or penalty imposed under this title.
Treasury Regulations
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Treas. Reg. §53.4965-1Overview
(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.
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Treas. Reg. §53.4965-1(a)Entity-level excise tax.
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.
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Treas. Reg. §53.4965-1(b)Manager-level excise tax.
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).
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Treas. Reg. §53.4965-1(c)Effective/applicability dates.
Effective/applicability dates. See § 53.4965-9 for the discussion of the relevant effective and applicability dates.
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Treas. Reg. §53.4965-2Covered tax-exempt entities
(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.
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Treas. Reg. §53.4965-2(a)In general.
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.
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Treas. Reg. §53.4965-2(b)Non-plan entities.
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).
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Treas. Reg. §53.4965-2(c)Plan entities.
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—
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Treas. Reg. §53.4965-2(d)Effective/applicability dates.
Effective/applicability dates. See § 53.4965-9 for the discussion of the relevant effective and applicability dates.
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Treas. Reg. §53.4965-2(i)§53.4965-2(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
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Treas. Reg. §53.4965-2(v)Arrangements described in section 223(d) (health savings accounts (HSAs)).
Arrangements described in section 223(d) (health savings accounts (HSAs)).
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Treas. Reg. §53.4965-3Prohibited tax shelter transactions
(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.
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Treas. Reg. §53.4965-3(a)In general.
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)—
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Treas. Reg. §53.4965-3(b)Subsequently listed transactions.
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.
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Treas. Reg. §53.4965-3(c)Cross-reference.
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).
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Treas. Reg. §53.4965-3(d)Effective/applicability dates.
Effective/applicability dates. See § 53.4965-9 for the discussion of the relevant effective and applicability dates.
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Treas. Reg. §53.4965-3(i)Confidential transactions, as described in § 1.
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.
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Treas. Reg. §53.4965-4Definition of tax-exempt party to a prohibited tax shelter transaction
(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.
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Treas. Reg. §53.4965-4(a)In general.
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.
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Treas. Reg. §53.4965-4(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.
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.
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Treas. Reg. §53.4965-4(c)Example.
Example. The following example illustrates the principle of paragraph (a)(1) of this section:
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Treas. Reg. §53.4965-4(d)Effective/applicability dates.
Effective/applicability dates. See § 53.4965-9 for the discussion of the relevant effective and applicability dates.
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Treas. Reg. §53.4965-5Entity managers and related definitions
(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.
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Treas. Reg. §53.4965-5(a)Entity manager of a non-plan entity—(1) In general.
Entity manager of a non-plan entity—(1) In general. Under section 4965(d)(1), an entity manager of a non-plan entity is—
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Treas. Reg. §53.4965-5(b)Entity manager of a plan entity—(1) In general.
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.
1 Citing Cases
I find further support for this interpretation of section 6707A in Congress’ subsequent enactment of section 4965 two years later.