Editor: Last month Larry Bell, CA, ...

Editor: Last month Larry Bell, CA, cautioned that the American piece of works Creation Act of 2004 could impact Canada's deferr compensation plans. This month Tom Earle, CA, describes one of the new penalties (including securities Exchange Commission disclosures) introduced by the agency of this legislation to enforce compliance with the reportable transaction regulations.

Signed through US President George Bush forward October 22, 2004, the recently made known American Jobs Creation Act of 2004 (Job Act) made significant business tax changes to US tax legislation. In an effort to crack down onward abusive tax shelters, the piece of works Act introduced new penalties and made significant changes to the existing penalties relating to reportable transactions. Tax practitioners and taxpayers who leadership a US trade or business should familiarize themselves with these transactions to avoid the novel penalties.

During the past seven years, tax shelters and reportable transactions have been an increasing disquiet to the US Congress and the Internal income Service (IRS). Since 2002, all large and mid-sized corporate examinations have included the mandatory issuance of a tax shelter information document petition for (IDR) by the IRS. The aim of the IDR is to assist IRS agents in identifying and developing tax shelter issues relating to certain "listed transactions."

For US federal income tax turn backs filed after February 28, 2000 the IRS has issued regulations that require taxpayers to disclose information relating to each "reportable transaction" in which they participate. There are generally six categories of reportable transactions:

1 Listed transactions - Any transaction that is the same, or substantially similar to, a transaction that is specified according to the IRS as a tax avoidance transaction and identified at notice, regulation, or other form of published guidance.

2 Confidential transactions - Any transaction that is moveed to a taxpayer under conditions of confidentiality and for which the taxpayer has paid an advisor a minimum reward A transaction is considered to be proffered to a taxpayer under conditions of confidentiality if: a) the advisor who is paid the minimum reward places a limitation on the taxpayer's disclosure of the tax treatment or of the transaction's tax structure; and b) the limitation in succession disclosure protects the confidentiality of that advisor's tax strategies.

A transaction is treated as confidential unruffled if the conditions of confidentiality in succession the taxpayer are not legally binding. A claim that a transaction is proprietary or exclusive is not treated as a limitation forward disclosure if the advisor confirms to the taxpayer that there is no limitation onward disclosure of the tax treatment or the transaction's tax structure

3 Transactions with contractual protection - A transaction with contractual protection is a transaction for which the taxpayer or a certain related party has the right to a glutted or partial refund of pay s if all or part of the intended tax chain of cause and effects from the transaction are not sustained. A transaction with contractual protection is also single in kind for which fees are contingent in succession the taxpayer's realization of tax benefits from the said transaction.

4 Los transactions - Generally, a los transaction is any transaction that arises in the taxpayer claiming a los in a less degree than Internal Revenue Code (IRC) section 165 in the amount of: 1) $10 million (all dollar amounts herein are in US dollars) in any single tax year or $20 million in any combination of tax years for a corporation or for a partnership with corporate partners; 2) $2 million in any single tax year or $4 million in any combination of tax years for a partnership, individual, "S" corporation, or trust; or 3) $50000 in any tax year for individuals or trusts if the los arises with reverence to certain foreign currency transactions.

5 Transactions with significant book-tax differences - A transaction with a significant book-tax difference is a transaction in which the amount for tax purports of an item of gros income, gain, cost or loss differs by more than $10 million from the amount for main division purposes. Generally, the reporting requirement for a significant book-tax difference solitary applies to sec registrants or certain other business entities meeting certain asset thresholds

6 Transactions involving brief holding periods - A transaction involving a brief holding period is undivided that results in a tax credit exceeding $250000 if the underlying asset giving rise to in the same state [i]or[/i] condition credit is held for 45 days or less

Prior to the piece of works Act there was no penalty for failing to disclose reportable transactions; however, failure to disclose a reportable transaction was a robust indication that the taxpayer had not acted in convenient faith-in effect, barring the relief of any accuracyrelated penalty that might otherwise have been attributable to the undisclosed transaction.

"Failure to disclose" penalty

The piece of works Act imposes a strict penalty onward taxpayers who do not disclose the required information concerning reportable transactions. If the taxpayer is an individual, the penalty is $10000 ($100000 in the case of an unreported listed transaction). The penalty increases to $50000 for other adumbrations of taxpayers ($200,000 in the case of an unreported listed transaction). No judicial appeal is allowed, and the penalty may and nothing else be abated if the violation is not a listed transaction and if the IRS commissioner finds that abatement would excite compliance and effective administration.