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CCA 202244010: What constitutes adequate disclosure of microinsurance insurance arrangements
Introduction: Disclosure of microinsurance arrangements
Microinsurance arrangements are an area of focus for the IRS. As we discussed in our previous post discussion Avraami v. Commissioner, 149 TC No. 7 (2017), microinsurance arrangements can be abusive if misused. As a result, the IRS requires disclosure of the material facts of a microinsurance arrangement on certain information reporting forms. This disclosure enables the IRS to analyze the underlying microinsurance insurance agreement to determine whether it meets the requirements of section 831(b) and whether the agreement constitutes “insurance” for federal tax purposes. The 40 percent accuracy penalty under section 6662(i) may apply to a taxpayer’s undisclosed noneconomic substance transactions, which includes microinsurance transactions. General Counsel 202244010considered whether taxpayers adequately disclosed a microinsurance arrangement where they disclosed the material facts of the transactions as reportable transactions on Forms 8886, Reportable Transaction Disclosure Statement, but did not separately disclose the transactions on Forms 8275 , “Disclosure Statement” as required by Notice 2010-62.
Section 6662(i) Accuracy-Related Penalties for Undisclosed Transactions of Noneconomic Substance
Taxpayers are liable for 20 percent accuracy penalties under section 6662(b)(6) for denying a tax benefit resulting from a transaction without economic substance. These penalties increase to 40 percent under section 6662(i) when taxpayers fail to adequately disclose transactions of no economic substance on a return or statement attached to a return. As of the date of CCA 202244010, no regulations have been issued under section 6662(i). However, interim guidelines were given in Notice 2010-62.1
Notice 2010-62 Disclosure requirements
In Notice 2010-62, the IRS stated that to avoid the 40 percent accuracy-related penalty under section 6662(i), taxpayers must disclose transactions of noneconomic substance on Form 8275 or 8275-R. The notice also requires that for transactions that are both reportable transactions under section 6011 and transactions without economic substance under section 6662(b)(6), taxpayers must disclose the transaction on both Form 8886 and Form 8275. Notwithstanding Notice 2010-62, on On March 5, 2019, the Treasury Department and the IRS released 2019 Policy Statement on the Tax Regulatory Process which prevents the IRS from asserting that Notice 2010-62 has the force and effect of law.
CCA Analysis of Microinsurance Agreement Disclosure
CCA 202244010 states that the IRS cannot argue that Notice 2010-62 imposes a duty on taxpayers to file Form 8275 because that position would be inconsistent with the March 5, 2019 Policy Statement on the Tax Regulatory Process. As explained in the Policy Statement, “[s]subregulatory guidance is not intended to affect a taxpayer’s rights or obligations regardless of underlying laws or regulations” and that “Treasury and the IRS . . . will not dispute that subregulatory guidance has the force and effect of law.” There are no provisions that require taxpayers to file Form 8275 to disclose transactions with noneconomic content to protect themselves from section 6662(i) penalties.
In the absence of regulations requiring Form 8275 to disclose a transaction with noneconomic content, the IRS relies on section 6662(i)(2) and relevant case law to determine whether the disclosure is adequate. Section 6662(i)(2) defines an “undisclosed noneconomic transaction” as “any part of a transaction described in subsection (b)(6) with respect to which relevant facts affecting the tax treatment are not adequately disclosed in the return nor in a declaration to the declaration’.
The CCA noted that courts have not addressed what constitutes adequate disclosure in the context of section 6662(i)(2); however, case law interpreting similar disclosure requirements has provided useful analogies. The guidance cites several cases that generally support the proposition that disclosure is adequate if the taxpayer has provided data or information regarding the treatment of an item to alert the Commissioner of a potential conflict. Accordingly, CCA 202244010 concludes that when a Form 8886 is timely filed with a return or qualified amended return and provides a complete description of the relevant facts of a noneconomic transaction, “taxpayers have a strong case” that they adequately informed the IRS of the transaction as required under section 6662(i). However, CCA 202244010 notes that if the Form 8886 is incomplete or does not contain material facts about the transaction, it may not satisfy the disclosure requirement under section 6662(i).
In CCA 202244010, the IRS expanded on the statement from the 2019 Policy Statement that subregulatory guidance should not affect the rights or obligations of taxpayers regardless of statutory or regulatory rules, and further, such subregulatory guidance does not have the force and effect of law. Thus, in the context of microinsurance arrangements, a taxpayer is not required to disclose the material facts of a microinsurance arrangement on both Form 8886 and Form 8275. Instead, the taxpayer meets its disclosure requirement under section 6662(i) if the taxpayer properly disclose on Form 8886, all material facts about the microinsurance arrangement to alert the Commissioner of a potential conflict. In other words, the transaction should not be treated as an undisclosed noneconomic transaction for purposes of section 6662(i)(2).
More generally, the 2019 Policy Statement indicated a change in the approach of the Treasury Department and the IRS in using subregulatory guidance and reaffirmed the basic principles of the notice and comment process that is required for regulatory rulemaking. This agency change is also consistent with the Tax Court’s recent opinion in
Green Valley Investors LLC v. Commissioner159 TC No. 5 (Nov. 9, 2022), which was discussed in detail in our previous blog post. in Green Valley Investors LLC, a majority of the Tax Court held that Notice 2017-10, which identified all syndicated conservation easement transactions beginning on January 1, 2010, as “listed transactions” for purposes of Treas. Reg. § 1.6011-4(b)(2) (and therefore subject to sanctions under section 6662A), is a statutory rule improperly promulgated without the notice and comment procedures of the Administrative Procedures Act (“APA”). Moreover, a majority of the Tax Court further held that Notice 2017-10 must be set aside under the APA, rendering the Section 6662A penalties unlawful.
The 2019 Policy Statement, CCA 202244010 and the most recent,
Green Valley Investors, LLC, appear to indicate a philosophical shift on the part of both the Tax Court and the Treasury Department and the IRS, unfavorably using notices to announce new legislative rules that impose new filing obligations and recordkeeping requirements. It is not clear whether the holding in Green Valley Investors LLC will be extended or used in other contexts. However, taxpayers should consider raising similar arguments to challenge other Treasury and IRS notices or subregulatory guidance that implement new legislative rules outside of the APA notice and comment process.
1. (September 13, 2010).
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular circumstances.
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