HB467 By Representatives Scott and Knight RFD Ways and Means Education Rd 1 09-APR-15

SYNOPSIS: This bill would add Article 7 to Chapter 29 of Title 40, to the Code of Alabama 1975, to provide for reportable tax avoidance transactions.

This bill would provide definitions; taxpayer responsibility for disclosure of reportable tax avoidance transactions; time and manner of disclosure; imposition and amount of penalties, assessment date, and waiver; penalties related to understatement of tax resulting from a reportable tax avoidance transaction, interest penalty, and waiver; extension of statute of limitations for assessments; material advisor responsibility for disclosure; penalty for failure to disclose a reportable tax avoidance transaction or to maintain advisee list and waiver; penalty for tax shelters; and injunction of certain conduct related to reportable tax avoidance transactions and tax shelters.

A BILL TO BE ENTITLED AN ACT

To add Article 7, relating to Reportable Tax Avoidance Transactions and Penalties, to Chapter 29 of Title 40 of the Code of Alabama 1975.

BE IT ENACTED BY THE LEGISLATURE OF ALABAMA:

Section 1. Article 7 of Chapter 29, Title 40, consisting of Sections 40-29-121 to 40-29-130, inclusive, is added to the Code of Alabama 1975, to read as follows:

Title 40, Chapter 29, Article 7.

Disclosure of Reportable Tax Avoidance Transactions.

§40-29-121.

As used in this article, the following words shall have the following meanings:

(1) DISQUALIFIED OPINION. An opinion that does any of the following:

a. Is based on unreasonable factual or legal assumptions, including assumptions as to future events.

b. Unreasonably relies on representations, statements, findings, or agreements of the taxpayer or any other person.

c. Does not identify and consider all relevant facts.

d. Fails to meet any other requirement as prescribed by either the U.S. Secretary of the Treasury for purposes of the Internal Revenue Code or the commissioner.

(2) DISQUALIFIED TAX ADVISOR. A tax advisor that meets any of the following conditions:

a. A material advisor who participates in the organization, management, promotion, or sale of the transaction or is related, within the meaning of Internal Revenue Code Section 267(b) or 707(b)(1), to any person who so participates.

b. Is compensated directly or indirectly by a material advisor with respect to the transaction.

c. A fee arrangement with respect to the transaction which is contingent on all or part of the intended tax benefits from the transaction being sustained.

d. As determined under regulations prescribed by either the Secretary of the Treasury for purposes of the Internal Revenue Code or by the commissioner, has a disqualifying financial interest with respect to the transaction.

(3) LISTED TRANSACTION. A reportable tax avoidance transaction that is the same as, or substantially similar to any of the following: (a) a transaction or arrangement specifically identified by the commissioner as a tax avoidance transaction through notice, regulation, bulletin, or other form of official department guidance; (b) any reportable tax avoidance transaction that is the same as, or substantially similar to, a transaction or arrangement specifically identified by the U.S. Secretary of the Treasury as a tax avoidance transaction for purposes of Internal Revenue Code Section 6011; or (c) a transaction or arrangement defined as a listed transaction by Section 6707A of the Internal Revenue Code.

(4) MATERIAL ADVISOR. Any person who does any of the following:

a. Provides any material aid, assistance, or advice with respect to organizing, managing, promoting, selling, implementing, insuring, or carrying out any reportable tax avoidance transaction.

b. Directly or indirectly derives gross income in excess of the threshold amount, or the other amount as may be prescribed by the U.S. Secretary of the Treasury for purposes of the Internal Revenue Code, for the advice or assistance. For purposes of this article, the threshold amount includes the following:

1. Fifty thousand dollars ($50,000) in the case of a reportable tax avoidance transaction substantially all of the tax benefits from which are provided to natural persons.

2. Two hundred fifty thousand dollars ($250,000) in any other case.

(5) NON-ECONOMIC SUBSTANCE TRANSACTION. Any transaction or arrangement that lacks economic substance, as defined by state or federal law, including a transaction or arrangement in which an entity is disregarded as lacking a valid non-tax state business purpose.

(6) REPORTABLE TAX AVOIDANCE TRANSACTION. Any transaction or arrangement with respect to which information is required to be included with a state return or statement because, as determined under regulations prescribed pursuant to this article, the transaction or arrangement is of a type which includes all of the following:

a. The commissioner determines as having a potential for avoidance or evasion of the tax imposed by Chapter 16 or 18 of this title, whether through deduction or credit, the excludability or omission of any income, the manipulation of any allocation or apportionment rule, or the securing of any other tax benefit.

b. Is carried out through or invested in by at least one entity or person that is organized in this state, doing business in this state, deriving income from sources in this state, subject to tax, or is otherwise subject to the jurisdiction of this state. A reportable tax avoidance transaction includes, but is not limited to, any transaction or arrangement described in the U.S. Treasury Regulations Section 1.6011-4(b), a listed transaction as defined in this article, or a non-economic substance transaction as defined in this article. A "reportable tax avoidance transaction" does not include any transaction identified by the commissioner through notice, regulation, bulletin, or other form of official department guidance as not constituting a tax avoidance transaction.

(7) TAX SHELTER. A partnership or any other entity, any investment plan or arrangement, or any other plan or arrangement, if a significant purpose of the partnership, entity, plan, or arrangement is the avoidance of state or federal income tax.

§40-29-122.

(a) For each tax year in which a taxpayer, or a member of a federal consolidated group of which a taxpayer is a member, has participated in a reportable tax avoidance transaction, including a listed transaction, the taxpayer shall disclose the transaction as provided in this section. In addition, for each tax year in which a taxpayer, or a member of a federal consolidated group of which a taxpayer is a member, is required to make a disclosure statement under Treasury Regulations Section 1.6011-4 with respect to a reportable tax avoidance transaction, including a listed transaction, in which the taxpayer participated, the taxpayer shall file a copy of the disclosure with the department as provided in subsection (b).

(b) Reportable tax avoidance transactions, including listed transactions, shall be disclosed in the manner prescribed in Treasury Regulations Section 1.6011-4 and department rules and regulations. With respect to a reportable tax avoidance transaction, including a state or federal listed transaction, entered into after December 31, 2014, disclosure shall be attached to the taxpayer's original and any amended state income tax return for the tax year during which the transaction was entered into and to the original and any amended state income tax return for any later tax year which reflects a reduction in tax resulting from the reportable or listed transaction, including a loss, deduction, or credit which is being carried forward or back and which resulted from the transaction. Disclosure of a reportable tax avoidance transaction entered into after December 31, 2014, shall also be attached to any amended state income tax return filed after December 31, 2014, where the filing reflects a determination by the Internal Revenue Service of the federal tax treatment of the reportable tax avoidance transaction.

c. The provisions of this article shall apply to any reportable tax avoidance transaction entered into after December 31, 2014, for any tax year or years for which the transaction remains undisclosed, and for which the statute of limitations on assessment, taking into account the extension provided under Section 40-29-125, has not expired as of 60 days after the effective date of this article.

§40-29-123.

(a) Any person who fails to include on any return or statement any information with respect to a reportable tax avoidance transaction which is required pursuant to Section 40-29-122, to be included with the return or statement shall pay a penalty, in addition to any other penalty imposed, in the amount determined under subparagraph 2.

1. Except as provided in subparagraph 2, the amount of the penalty imposed pursuant to this subsection shall be ten thousand dollars ($10,000) in the case of a natural person, and fifty thousand dollars ($50,000) in any other case. After imposition of the penalties, the commissioner may impose additional penalties up to and including 10 percent of the taxpayer's tax benefit from the reportable or listed transaction as determined by the commissioner.

2. The amount of penalty under subparagraph 1 with respect to a listed transaction shall be one hundred thousand dollars ($100,000) in the case of a natural person, and two hundred thousand dollars ($200,000) in any other case. After imposition of the penalties, the commissioner may impose additional penalties up to and including 10 percent of the taxpayer's tax benefit from the reportable or listed transaction as determined by the commissioner.

(b) The penalty imposed pursuant to subparagraph 1 shall be deemed assessed on the due date of the state income tax return upon or attached to which the disclosure of the reportable tax avoidance transaction was required pursuant to Section 40-29-122 and department rules and regulations.

(c)(1) The commissioner may waive or abate all or any portion of any penalty imposed by this section with respect to any violation if:

a. The violation is with respect to a reportable tax avoidance transaction other than a listed transaction.

b. Rescinding the penalty would promote compliance with the requirements of Chapters 16 and 18 of Title 40, and effective tax administration.

(2) Notwithstanding any other law to the contrary, any determination under this subsection may not be reviewed in any judicial, quasi-judicial, or administrative proceeding.

(d) The penalty imposed under this section shall apply to any failure to disclose any listed transaction entered into after December 31, 2014, or any other reportable tax avoidance transaction entered into after the effective date of this article, as required by Section 40-29-122 for any tax year or years for which the transaction remains undisclosed, and for which the statute of limitations on assessment, taking into account the extension provided under Section 40-29-125, has not expired as of 60 days after the effective date of this article.

§40-29-124.

(a) If a taxpayer has a reportable tax avoidance transaction understatement for any taxable year, there shall be added to the tax an amount equal to 20 percent of the amount of the understatement.

(1) For purposes of this section, the term "reportable tax avoidance transaction understatement" means the sum of the following:

a. The product of all of the following:

1. The highest rate of tax imposed under Chapter 16 or 18 of Title 40.

2. The amount of increase, if any, in state taxable income which results from a difference between the proper tax treatment of an item to which subsection (a) of Section 40-29-122 applies and the taxpayer's treatment of the items as shown on the taxpayer's return of tax, including an amended return, provided the amended return is filed prior to the date the taxpayer is first contacted by the department regarding the examination of the tax year for which the amended return is filed. The amount of the increase in state taxable income for a particular tax year shall include the restatement for another tax year to which a loss or deduction is carried forward or carried back that is attributable to the reportable tax avoidance transaction for that year in which the carry forward or carry back of the loss or deduction applies.

b. The amount of the decrease, if any, in the aggregate amount of credits which results from a difference between the taxpayers treatment of an item to which this section applies, as shown on the taxpayer's return of tax, and the proper tax treatment of the item.

(2) Subsection (a) shall apply to any item which is attributable to all of the following:

a. Any listed transaction.

b. Any reportable tax avoidance transaction, other than a listed transaction, if a significant purpose of the transaction is the avoidance of evasion of federal or state income tax.

(3) Subsection (a) shall be applied by substituting "30 percent" for "20 percent" with respect to the portion of any reportable tax avoidance transaction understatement with respect to which the requirements of subsection (a) are not met.

(4) Except as provided in regulations, in no event shall any tax treatment included with an amendment or supplement to a return of tax be taken into account in determining the amount of any reportable tax avoidance transaction understatement if the amendment or supplement is filed after the earlier of the date the taxpayer is first contacted by the commissioner regarding the examination of the return or another date as is specified by the commissioner.

(5) The penalty imposed under this section shall be deemed assessed on the due date of the state income tax return which shows the understatement of tax resulting from a reportable tax avoidance transaction to which the penalty relates.

(b)(1) For any amended return filed after this article becomes law and before the taxpayer is contacted by the Internal Revenue Service or the department regarding a reportable tax avoidance transaction, there shall be added to any reportable tax avoidance transaction understatement, as determined under subdivision (1) of subsection (a), a penalty in addition to any other applicable penalties, equal to 50 percent of the interest assessed under Section 40-1-44 on the reportable tax avoidance transaction understatement for the period beginning on the last date prescribed by law for the payment of the tax, determined without regard to extensions, and ending on the date of payment.

(2) If the taxpayer has been contacted by the Internal Revenue Service or the department regarding a reportable tax avoidance transaction, there shall be added to any reportable tax avoidance transaction understatement, as determined under subdivision (1) of subsection (a), a penalty in addition to any other applicable penalties, equal to 100 percent of the interest assessed under Section 40-1-44 on the reportable tax avoidance transaction understatement for the period beginning on the last date prescribed by law for the payment of the tax, determined without regard to extensions, and ending on the date the notice of proposed assessment is mailed.

(3) The penalty imposed under subsection (b) shall be deemed assessed upon the assessment of the interest by which the penalty is calculated and shall be collected and paid in the same manner as the interest.

(c)(1) Except as provided in subdivision (2), the commissioner may waive or abate all or any portion of any penalty imposed by this section with respect to any portion of a reportable tax avoidance transaction understatement if it is shown that the taxpayer had reasonable cause for the portion and acted in good faith with respect to the portion. Notwithstanding any other law to the contrary, any determination by the commissioner pursuant to this subdivision may not be reviewed in any judicial, quasi-judicial, or administrative proceeding.

(2) Subdivision (1) shall not apply to any reportable tax avoidance transaction understatement unless:

a. The relevant facts affecting the tax treatment of the item are adequately disclosed in accordance with all requirements of Section 40-29-122 and department rules and regulations. A taxpayer failing to fully disclose shall be treated as meeting the requirements of this paragraph if the penalty for that failure to disclose was waived pursuant to subsection (c) of Section 40-29-123.

b. There is or was substantial authority for the treatment.

c. The taxpayer reasonably believed that the treatment was more likely than not the proper treatment. A taxpayer shall be treated as having a reasonable belief with respect to the tax treatment of an item only if the belief includes all of the following:

1. Is based on the facts and law that exist at the time the return which includes the tax treatment is filed.

2. Is related solely to the taxpayer's chances of success on the merits of the treatment and does not take into account the possibility that a return will not be audited, the treatment will not be raised on audit, or the treatment will be resolved through settlement if it is raised.

3. Does not rely upon the opinion of a disqualified tax advisor or a disqualified opinion.

(d) The penalty imposed under 40-29-124 shall apply to any understatement of tax resulting from a listed transaction entered into after December 31, 2014, or from any other reportable tax avoidance transaction entered into after the effective date of this article, in any tax year or years for which the statute of limitations on assessment, taking into account the extension provided under Section 40-29-125, has not expired as of the effective date of this article.

§40-29-125.

If a taxpayer fails to include on any return or statement for any taxable year any information with respect to a listed transaction as required under Section 40-29-122, the time for assessment of any tax imposed by Chapters 16 and 18 of Title 40 with respect to the transaction shall not expire before the date which is two years after the earlier of any of the following:

(1) The date on which the commissioner is furnished the information so required.

(2) The date that a taxpayer meets the requirements of Section 40-29-127 with respect to a request by the commissioner under subsection (d) of Section 40-29-126 relating to the transaction with respect to the taxpayer.

§40-29-126.

(a) Each material advisor with respect to any reportable tax avoidance transaction shall make a return in the form as the commissioner may prescribe setting forth all of the following:

(1) Information identifying and describing the transaction.

(2) Information describing any potential tax benefits expected to result from the transaction.

(3) All other information as the commissioner may prescribe.

In addition, each material advisor who is required to disclose a reportable tax avoidance transaction pursuant to Internal Revenue Code Section 6111 shall file a copy of the disclosure with the department. The return and disclosure shall be filed no later than the date specified by the commissioner.

(b) The commissioner may prescribe regulations which provide all of the following:

(1) That only one person shall be required to meet the requirements of subsection (a) in cases in which two or more persons would otherwise be required to meet the requirements.

(2) Exemptions from the requirements of this section.

(c) Each material advisor with respect to any reportable tax avoidance transaction whether or not required to file a return pursuant to this section shall maintain a list identifying each state taxpayer and member of a consolidated return of a state taxpayer with respect to whom the advisor acted as a material advisor with respect to the transaction. This list shall include the same information, and shall be maintained in the same form and manner, as required under the Internal Revenue Code Section 6112, Treasury Regulations Section 301.6112-1, and any additional information or maintenance requirements as the commissioner may by regulation require.

(d) Any person required to maintain a list pursuant to subsection (c) shall do all of the following:

(1) Make the list available to the commissioner upon written request by the commissioner.

(2) Except as otherwise provided by the commissioner by regulation, shall retain any information which is required to be included on the list for seven years.

(e) The commissioner may by regulation provide that in cases in which two or more persons are required under subsection (c) to maintain the same list, or portion thereof, only one person shall be required to maintain the list or portion.

§40-29-127.

(a) If a person who is required to file a return or disclosure pursuant to Section 40-29-126 with respect to any reportable tax avoidance transaction (1) fails to file the return or disclosure on or before the date prescribed therefor, or (2) files false or incomplete information with the commissioner with respect to the transaction, the person shall pay a penalty with respect to the return or disclosure in the amount determined pursuant to subsections (b) and (c).

(b) Except as provided in subsection (c), the penalty imposed under subsection (a) with respect to any failure shall be fifty thousand dollars ($50,000).

(c) The penalty imposed under subsection (a) with respect to any listed transaction shall be an amount equal to the greater of two hundred thousand dollars ($200,000) or 50 percent of the gross income derived by the person with respect to aid, assistance, or advice provided with respect to the listed transaction before the date of the return. Additionally, if the disclosure is filed under Section 40-29-126, the penalty pursuant to subdivision (1) of subsection (b) of Section 40-29-124 shall be applied by substituting 75 percent for 50 percent in the case of an intentional failure to act as described in subsection (a).

(d) If any person who is required to maintain a list pursuant to Section 40-29-126 fails to make the list available to the commissioner upon written request in accordance with subsection (d) of Section 40-29-126 within 20 business days after the date of the request, the person shall pay a penalty of ten thousand dollars ($10,000) for each day of failure after the 20th day.

(e) Each of the penalties imposed by this section shall be in addition to any other applicable penalties.

(f) The commissioner may waive all or any portion of any penalty imposed pursuant to this section with respect to any violation of Section 40-29-126 if the violation is with respect to a reportable tax avoidance transaction other than a listed transaction, and waiver of the penalty would promote compliance with the requirements of Chapters 16 and 18 of Title 40 and effective tax administration.

(g) Notwithstanding any other law to the contrary, any determination by the commissioner under this section may not be reviewed in any judicial, quasi-judicial, or administrative proceeding.

(h)(1) Section 40-29-126 and this section shall apply to reportable tax avoidance transactions, other than listed transactions, with respect to which material aid, assistance, or advice referred to in Sections 6 and 7 is provided after the date of the enactment of this article.

(2) Section 40-29-126 and this section shall apply to listed transactions with respect to which material aid, assistance, or advice referred to in this section is provided and which were entered into on or after December 31, 2014, if those transactions become listed transactions at any time. Reporting required under Section 40-29-126 and this section shall be furnished to the commissioner on or before the later of any of the following:

a. Sixty days after entering into the transaction.

b. Sixty days after the transaction becomes a listed transaction.

c. The effective date of this article.

§40-29-128.

(a) Any person who does all of the following:

(1) Organizes or assists in the organization of any of the following:

1. Any partnership or other entity.

2. Any investment plan or arrangement.

3. Any other plan or arrangement.

(2) Participates, directly or indirectly, in the sale of any interest in an entity or plan or arrangement referred to in paragraph a.

(3) Makes or furnishes or causes another person to make or furnish in connection with the organization or sale any of the following:

a. A statement with respect to the allowability of a deduction or credit, the excludability of any income, the manipulation of any allocation or apportionment rule, the securing of any other tax benefit by reason of holding an interest in the entity, or participation in the plan or arrangement which the person knows or has reason to know is false or fraudulent as to any material matter shall pay 50 percent of the gross income derived or to be derived from the activity by the person on which the penalty is imposed.

b. A gross valuation overstatement as to any material matter shall pay, with respect to each activity described in paragraph a., subdivision (1) of subsection (a), and in addition to any other penalty provided by law, a penalty equal to one thousand dollars ($1,000) or, if the person establishes that is lesser, 100 percent of the gross income derived or to be derived by the person from the activity. For purposes of the preceding sentence, activities described in paragraph a. of subdivision (1) of subsection (a) with respect to each entity or arrangement shall be treated as a separate activity and participation in each sale described in paragraph b. of subdivision (1) of subsection (a) shall be so treated.

(b) The commissioner may waive all or any part of the penalty provided by this section with respect to any gross valuation overstatement on a showing that there was a reasonable basis for the valuation and that the valuation was made in good faith. Notwithstanding any other law to the contrary, any determination by the commissioner pursuant to this subsection may not be reviewed in any judicial, quasi-judicial, or administrative proceeding.

(c) No privilege of confidentiality shall apply to any written communication which is:

(1) Between a tax practitioner and all of the following:

a. Any person.

b. Any director, officer, employee, agent, or representative of the person.

c. Any other person holding a capital or profits interest in the person.

(2) In connection with the promotion of the direct or indirect participation of the person in any tax shelter.

(d) The provisions of this section shall apply to activities after the date of the enactment of this article.

§40-29-129.

(a) Notwithstanding the provisions of Chapter 2A, Title 40, a civil action in the name of the state to enjoin any persons from further engaging in specified conduct may be commenced at the request of the commissioner. Any action under this section shall be brought in the Circuit Court of Montgomery County, Alabama. The court may exercise its jurisdiction over the action separate and apart from another action brought by the state against the person.

(b) In any action under this section, if the court finds that the person has engaged in any specified conduct, and that injunctive relief is appropriate to prevent recurrence of the conduct, the court may enjoin the person from engaging in the conduct or in any other activity subject to penalty under this article.

(c) For purposes of this section, the term "specified conduct" means any action or failure to take action, which is any of the following:

(1) Subject to penalty of this article.

(2) In violation of any requirement under regulations issued pursuant to this article.

§40-29-130.

The provisions of this article, including all internal effective date provisions, shall become effective upon the Governor's signature or this bill, or its otherwise becoming law.

Section 2. This act shall become effective on the first day of the third month following its passage and approval by the Governor, or its otherwise becoming law.

Taxation

Income Tax

Revenue Commissioner

Reportable Transactions