[Federal Register Volume 81, Number 82 (Thursday, April 28, 2016)]
[Rules and Regulations]
[Pages 25328-25339]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-09765]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 301

[TD 9764]
RIN 1545-BF39


Section 6708 Failure To Maintain List of Advisees With Respect to 
Reportable Transactions

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations relating to the 
penalty under section 6708 of the Internal Revenue Code for failing to 
make available lists of advisees with respect to reportable 
transactions. Section 6708 imposes a penalty upon material advisors for 
failing to make available to the Secretary, upon written request, the 
list required to be maintained by section 6112 of the Internal Revenue 
Code within 20 business days after the date of such request. The final 
regulations primarily affect individuals and entities who are material 
advisors, as defined in section 6111 of the Internal Revenue Code.

DATES: Effective Date: These regulations are effective on April 28, 
2016.
    Applicability Date: For date of applicability see Sec.  301.6708-
1(i).

FOR FURTHER INFORMATION CONTACT: Hilary March, (202) 317-5406 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information contained in these final regulations 
has been reviewed and approved by the Office of Management and Budget 
in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3507(d)) under control number 1545-2245.
    The collection of information in the final regulations is in Sec.  
301.6708-1(c)(3)(ii). This information is required for the IRS to 
determine whether good cause exists to allow a person affected by these 
regulations an extension of the legislatively established 20-business-
day period to furnish a lawfully requested list to the IRS. The 
collection of information is voluntary to obtain a benefit. The likely 
respondents are persons (individuals and entities) who qualify as 
material advisors, as defined in section 6111, who are unable to 
respond to a valid and statutorily authorized section 6112 list request 
within the statutory period of time provided by section 6708.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number.
    Books and records relating to a collection of information must be 
retained as long as their contents might become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by section 6103 of 
the Internal Revenue Code.

[[Page 25329]]

Background

    This document contains amendments to the Procedure and 
Administration Regulations (26 CFR part 301) under section 6708 
relating to the penalty for failure by a material advisor to maintain 
and make available a list of advisees with respect to reportable 
transactions. On March 8, 2013, a notice of proposed rulemaking (REG-
160873-04) relating to the penalty under section 6708 was published in 
the Federal Register (78 FR 14939). A public hearing was scheduled for 
July 2, 2013. The IRS did not receive any requests to testify at the 
public hearing, and the hearing was cancelled. Two comments were 
received in response to the notice of proposed rulemaking. After 
considering the comments, the Treasury Department and the IRS are 
adopting the proposed regulations as amended by this Treasury decision. 
The revisions are discussed elsewhere in this document. Additionally, 
minor, non-substantive edits were made to the proposed regulations to 
improve clarity.

Summary of Comments and Explanation of Revisions

    In response to the notice of proposed rulemaking, the IRS received 
and considered two comments. Those comments are available for public 
inspection at www.regulations.gov or upon request.
    The comments covered ten areas: (1) Delivery of the list request by 
leaving it at the material advisor's last and usual place of abode or 
usual place of business; (2) the date the 20-business-day period begins 
in cases where the list request is mailed to the material advisor; (3) 
the imposition of the penalty on the day of compliance when the 
response is untimely; (4) extensions of time for complying with list 
requests; (5) reasonable cause for failure to furnish lists within the 
20-business-day time period in cases where a material advisor's 
employee violates the material advisor's section 6112 list maintenance 
procedures; (6) the ordinary business care standard; (7) reliance on an 
independent tax professional's advice; (8) the accumulation of 
penalties during the IRS agent's review of an incomplete list where the 
material advisor fails to establish that it acted in good faith; (9) 
the examples provided in proposed Sec.  301.6708-1(g) and (h); and (10) 
administrative review of the imposition of the penalty.

1. Comments Relating to Sec.  301.6708-1(b)

    As proposed, Sec.  301.6708-1(b) of the regulations provided that 
the 20-business-day period within which the material advisor must make 
the list available shall begin on the first business day after the 
earliest of the date that the IRS (1) mails a list request by certified 
or registered mail, (2) hand delivers the written list request, or (3) 
leaves the written list request at the material advisor's last and 
usual place of abode or usual place of business.
A. Delivery of the List Request by Leaving It at the Material Advisor's 
Last and Usual Place of Abode or Usual Place of Business
    One commenter recommended deleting proposed Sec.  301.6708-1(b)(3), 
which allows the IRS to leave the written list request at the material 
advisor's last and usual place of abode or usual place of business, 
noting that this method of delivery did not appear in the interim 
guidance issued by the IRS in Notice 2004-80, 2004-2 C.B. 963. The 
commenter expressed a concern that the list request may be left with a 
child or another person who fails to deliver it to the material advisor 
or that it may be left on a door step and lost or destroyed before 
being discovered by the material advisor. If such an incident were to 
occur, the material advisor who did not receive a list request would be 
in the difficult position of proving that they never received the list 
request to qualify for reasonable cause. The commenter also compared 
the list request to a notice of deficiency, which is delivered by 
certified or registered mail, and to collection due process notices, 
which may be given in person, left at the dwelling or usual business 
place of the person to whom the notice is addressed, or sent by 
registered or certified mail. The commenter stated that a list request 
is more similar to a notice of deficiency than a collection due process 
notice because it requires affirmative action.
    There is an important way in which a list request under section 
6112 is dissimilar to a notice of deficiency. A taxpayer who wishes to 
challenge the determination in a notice of deficiency must file a 
petition with the United States Tax Court within 90 days of the notice 
date (150 days if the taxpayer is located outside of the United 
States). This time period cannot be altered. By contrast, if the IRS 
leaves the written list request at the material advisor's usual place 
of business, but the material advisor does not receive the list request 
despite the exercise of ordinary business care, the material advisor 
may, depending on all facts and circumstances, qualify for an extension 
of the 20-business-day period to furnish the list and may have 
reasonable cause for failing to timely furnish the list for the days 
the material advisor was unaware a list request had been made.
    The provision allowing for delivery of the list request to the 
material advisor's usual place of business is necessary to facilitate 
the delivery of a list request. For example, this provision enables the 
Service to leave a list request with the administrative assistant of 
the person required to maintain the list. Further, this provision 
assists in the delivery of a list request to a material advisor who is 
attempting to evade delivery of the request.
    Nonetheless, in light of the commenter's concerns, the final 
regulations narrow the scope of Sec.  301.6708-1(b). The final 
regulations provide that a list request may be left at the material 
advisor's usual place of business and remove the language regarding 
leaving the list request at the material advisor's place of abode. The 
final regulations also provide that a list request can only be left 
with an individual 18 years of age or older.
B. The Date the 20-Business-Day Period Begins in Cases Where the List 
Request Is Mailed to the Material Advisor
    The commenter also objected that, when the IRS mails the list 
request, the time to comply is shorter than in cases where the request 
is hand delivered because under Sec.  301.6708-1(b)(1), the 20-
business-day period is calculated from the date of mailing. The 
commenter also expressed a concern that the material advisor may have 
no way of determining when the IRS mailed the list request. The 
commenter suggested that the regulation require the list request to 
state the date of mailing and suggested that the 20-business-day period 
for making the list available begin the later of three days after the 
stated date of mailing or, if the material advisor can establish the 
date of delivery, the date of actual delivery.
    With respect to the commenter's concern that the material advisor 
may not know the date the IRS mailed the list request, IRS employees 
requesting lists are expected to date the list request with the date it 
is mailed. Additionally, the list requests are sent by certified mail 
and the recipient can use the certified mail number to look up the date 
of mailing if the envelope containing the list request is not itself 
postmarked with the date of mailing.
    Regarding the rule proposed by the commenter, the statutory text of 
section 6708 itself provides for imposition of the penalty if the 
material advisor fails to make the list available upon written request 
``within 20 business days after the date of such request.'' (Emphasis

[[Page 25330]]

added.) Were the regulations to provide for the 20-business-day period 
to begin three days after the date the letter was mailed, in some 
circumstances, the material advisor would receive more than 20 business 
days in which to respond to the list request.
    Where the list request is mailed to the material advisor, the IRS 
has historically interpreted ``the date of such request'' to refer to 
the date of mailing. See Notice 2004-80, 2004-2 CB 963. This 
interpretation is reasonable, particularly given the requirement that 
material advisors maintain the list in a readily accessible form. The 
20-business-day period is sufficient to accommodate normal mailing time 
and to leave sufficient time after receipt, in ordinary circumstances, 
for a material advisor to produce a list that has been maintained in a 
readily accessible form. Adopting the rule suggested by the commenter 
would complicate the rule to accommodate the unusual circumstance in 
which the amount of time it took for the material advisor to receive 
the list request made it impossible for the list to be timely 
furnished. In such a circumstance, however, the material advisor may, 
considering all facts and circumstances, be eligible for an extension 
of the 20-business-day period and may, considering all facts and 
circumstances, have reasonable cause for not providing the list within 
the 20-business-day period. Accordingly, this comment was not adopted.

2. Comment Relating to Sec.  301.6708-1(e)(1) and (2): The Imposition 
of the Penalty on the Day of Compliance When the Response Is Untimely

    As proposed, the penalty was computed under Sec.  301.6708-1(e)(1) 
and (2) from the first calendar day after the period for furnishing a 
list in the form required by section 6112 (either the 20-business-day 
period following a written list request or the extension period, if 
extended) until, and including, the day the person's failure ends. One 
commenter stated that, if the list is furnished after the 20-business-
day period, the day that the list is furnished should not be included 
in the penalty computation. The commenter further explained its 
interpretation that the language of section 6708(a)(1) providing that 
the penalty is imposed for ``each day of such failure after the 20th 
day'' means that the penalty may not be imposed on the day that the 
list is furnished to the IRS because on that day there was no failure 
to respond to the list request.
    Section 6708(a)(1) provides:

    If any person who is required to maintain a list under section 
6112(a) fails to make such list available upon written request to 
the Secretary in accordance with section 6112(b) within 20 business 
days after the date of such request, such person shall pay a penalty 
of $10,000 for each day of such failure after such 20th day.
    The purpose of the section 6708 penalty is to encourage voluntary 
compliance with the requirement to maintain section 6112 lists and 
timely provide those lists to the IRS. Penalizing the material advisor 
on the day of compliance does not significantly promote that purpose. 
Balancing the purpose of the penalty with the size of this particular 
penalty warrants adopting the comment in this case. Accordingly, Sec.  
301.6708-1(e)(1) of the regulations provides that the day the list was 
furnished to the IRS will not be included in the calculation of the 
penalty amount.

3. Comment Relating to Sec.  301.6708-1(c): Manner of and Extensions of 
Time for Making a List Available

    Section 301.6708-1(c)(3) of the regulations permits the IRS, in its 
discretion, to grant an extension of the 20-business-day period upon a 
showing of good cause. Under the regulations as proposed, any request 
for an extension had to, among other requirements, state that to the 
best of the person's knowledge, all information and records relating to 
the list under that person's possession, custody, or control have been 
maintained according to procedures and policies consistent with 
sections 6001 and 6112.
    The proposed regulations contained one example illustrating the 
application of the Sec.  301.6708-1(c)(3) extension provisions. See 
Sec.  301.6708-1(c)(4). The example concerns a large law firm that is a 
material advisor and has educated its attorneys about the firm's 
obligations related to reportable transactions. To ensure compliance, 
the firm has policies in place, under which one professional will 
notify the firm's compliance officer about any tax engagement involving 
a reportable transaction and then direct a subordinate to send the 
documents required to be maintained under section 6112 to the 
compliance officer. In compiling its section 6112 list after receiving 
a request from the IRS, the firm discovers that one of its attorneys, 
who is no longer with the firm, did not provide the documentation 
required by the firm's policies with respect to one reportable 
transaction. Because the firm will have to search for responsive 
documents in its storage facility and contact clients for information, 
it will not be able to respond to the list request within 20 business 
days and requests a 10-day extension. In this example, the IRS grants 
the 10-day extension with respect to the one transaction at issue.
    One commenter suggested that the IRS should also grant an extension 
where one of the firm's professionals failed to disclose one or more 
reportable transactions in contravention of established firm policy, 
and as a result, the firm did not know that it was a material advisor 
with respect to those transactions. In such a situation, the commenter 
suggested that the firm would need additional time to locate 
information. The commenter noted that the example in the proposed 
regulations does not cover such a situation and suggested that an 
additional example covering this situation be added to the regulation. 
To eliminate any confusion regarding the scenario posed by the 
commenter, an additional example addressing the commenter's concern has 
been added to Sec.  301.6708-1(c)(4).
    The commenter also objected to the requirement that a person 
requesting an extension of the 20-business-day period must state that, 
to the best of the person's knowledge, all information and records 
relating to the list under the person's possession, custody, or control 
have been maintained in accordance with procedures and policies that 
are consistent with sections 6001 and 6112. To account for the scenario 
in which one of a firm's professionals has failed to disclose a 
reportable transaction in contravention of its policy, the commenter 
suggested that a person should be able to request an extension under 
Sec.  301.6708-1(c)(3)(ii) either by making the above statement or by 
providing ``a detailed explanation of the procedures such person has in 
place to comply with the requirements of section 6112, its efforts to 
adhere to such procedures, and the reasons why the specific information 
and records sought in the request were not so maintained.''
    In some situations warranting an extension, including the scenario 
described by the commenter and the examples set forth in Sec.  
301.6708-1(c)(4), the person requesting the extension will not be able 
to make the statement required by the proposed regulation. For 
instance, in example one of Sec.  301.6708-1(c)(4), the firm discovers 
after receiving the list request that a subordinate did not provide the 
documentation relating to a reportable transaction to the compliance 
officer, in contravention of the firm's policy. Accordingly, at the 
time of the extension request, the firm is aware that the records 
relating to at least one transaction have not been maintained in 
accordance with its procedures and policies. The firm, therefore, 
cannot state that all records relating to the list have been maintained

[[Page 25331]]

in accordance with its list maintenance procedures and policies, as the 
proposed regulation required. The final regulation is changed so that 
material advisors can make the statements required by Sec.  301.6708-
1(c)(3)(ii) in order to request an extension even if, after receiving a 
list request, they discover a failure to comply with their list 
maintenance procedures, as long as, to the best of their knowledge as 
of the date of the list request, all information and records relating 
to the list had been maintained in accordance with procedures and 
policies consistent with sections 6001 and 6112.
    The specific language suggested by the commenter, however, is very 
broad. Persons who are required to maintain a list under section 6112 
are required and expected to maintain the list in a readily accessible 
form. See Sec.  301.6112-1(d). To comply with section 6112, ordinary 
business care requires a person, upon discovering any failure relating 
to the list, to take immediate steps to correct the failure. The 
commenter's suggested language could allow an extension to be obtained 
by a person who became aware of a failure relating to the list prior to 
a request for the list, but who has not corrected it or has otherwise 
not exercised ordinary business care or made a good-faith effort to 
comply with section 6112 by maintaining the list in a readily 
accessible form.
    Therefore, although the specific language suggested by the 
commenter was not adopted, Sec.  301.6708-1(c)(3)(ii) has been amended 
as set forth in the regulatory text of this rule to account for the 
circumstance identified by the commenter.
    In addition, language is added to section 301.6708-1(c)(2) to 
clarify that making the list available through inspection includes 
allowing the IRS to copy the list. This is consistent with the 
underlying requirement to furnish the list under section 6112. See 
section 301.6112-1(e)(1) (providing that each component of the list 
must be furnished to the IRS in a format that enables the IRS to 
determine without undue delay or difficulty the information required to 
be included in the list). This clarification is also consistent with 
case law concluding that inspecting or examining includes copying 
documents. See, e.g., Westside Ford, Inc. v. United States, 206 F.2d 
627, 634 (9th Cir. 1953) (holding that the right to inspect documents 
under 50 U.S.C. 2155(a) includes the right to make copies); Boren v. 
Tucker, 239 F.2d 767, 771-72 (9th Cir. 1956) (holding that the right to 
examine documents under section 7602 includes the right to make 
copies); McGarry v. Riley, 363 F.2d 421, 424 (1st Cir. 1966) (holding 
that a court order enforcing a summons under section 7602 necessarily 
allowed the Service to make copies, regardless of whether the order 
specifically allowed copying).

4. Comments Relating to Sec.  301.6708-1(g): Reasonable Cause for 
Failure To Furnish Lists Within the 20-Business-Day Time Period

    Section 6708(a)(2) provides an exception to the penalty for any day 
in which the failure to furnish the list is due to reasonable cause. 
Section 301.6708-1(g) describes reasonable cause for purposes of the 
section 6708 penalty. Reasonable cause is determined on a case-by-case 
and day-by-day basis, taking into account all the relevant facts and 
circumstances. Factors considered in determining the existence of 
reasonable cause include, but are not limited to, good-faith efforts to 
comply with section 6112, exercise of ordinary business care, 
supervening events beyond the person's control, and reliance on an 
independent tax professional's advice. Section 301.6708-1(g) also 
provides examples illustrating the application of the reasonable cause 
provisions.
A. Reasonable Cause Where an Employee of the Material Advisor Violates 
the Material Advisor's Section 6112 List Maintenance Procedures
    One commenter stated that the IRS should find reasonable cause 
where an employee of the material advisor failed to disclose one or 
more reportable transactions in contravention of the firm's established 
list maintenance procedures, and as a result, the firm did not know 
that it was a material advisor with respect to those transactions. The 
commenter suggested expanding the illustrations of reasonable cause to 
include this situation.
    Similarly, the other commenter was concerned by a lack of clarity 
as to how the actions of a material advisor's employees, shareholders, 
partners, or agents would affect the material advisor's reasonable 
cause claim when the material advisor is a law firm, accounting firm, 
or similar entity. The commenter noted that, under Sec.  301.6111-
3(b)(2)(iii)(A), these individuals are generally not treated as 
material advisors, and their tax statements are generally attributed to 
their employers, corporations, partnerships, or principals. The 
commenter suggested that proposed Sec.  301.6708-1(g)(3) be revised to 
clarify that a material advisor may still show reasonable cause even if 
one or more employees of the material advisor did not exercise ordinary 
business care and would not have reasonable cause, as long as the 
material advisor had appropriate procedures in place, the failure 
represents an isolated incident, and the material advisor acted 
promptly to correct the error upon learning of the employee's non-
compliance. The commenter also suggested adding an example to proposed 
Sec.  301.6708-1(g) similar to that in proposed Sec.  301.6708-1(c)(4), 
which states that under the given circumstances, a material advisor 
should be granted an extension despite a former subordinate's failure 
to comply with its list maintenance policy.
    Proposed Sec.  301.6708-1(g)(3) stated that ordinary business care 
may be established by showing that the material advisor established and 
adhered to list maintenance procedures reasonably designed and 
implemented to ensure compliance with section 6112. Proposed section 
301.6708-1(g)(3) also stated that, considering all the relevant facts 
and circumstances, a material advisor may still be able to demonstrate 
ordinary business care despite an isolated and inadvertent failure 
related to the list if the material advisor shows that steps were taken 
to correct any such failure upon discovery. Section 301.6708-1(g)(3) is 
intended to capture failures that may be caused by the actions of an 
individual employee, shareholder, partner, or agent of the material 
advisor when the material advisor is a law firm or other entity. 
Depending on the facts and circumstances of the particular case, a 
material advisor in the situations described by the commenters may be 
able to establish that it exercised ordinary business care and made 
good-faith efforts to comply with section 6112, and therefore had 
reasonable cause under the regulations as already proposed. 
Accordingly, the comment was not adopted to the extent that it 
recommended modifying proposed Sec.  301.6708-1(g)(3). To respond to 
the commenter's concerns, however, a new example 5 has been added to 
Sec.  301.6708-1(h)(3), in which a material advisor is determined to 
have reasonable cause despite a former employee's failure to comply 
with its list maintenance procedures.
B. The Ordinary Business Care Standard
    As proposed, Sec.  301.6708-1(g)(3) provides, in relevant part: 
``The exercise of ordinary business care may constitute reasonable 
cause. To show ordinary business care, the person may, for example, 
show that it established, and adhered to, procedures reasonably 
designed and implemented to ensure compliance with the requirements of 
section 6112.'' One commenter stated that, absent extraordinary

[[Page 25332]]

circumstances, establishing and adhering to reasonable compliance 
procedures should always result in a finding of reasonable cause. The 
commenter suggested revising the wording of proposed Sec.  301.6708-
1(g)(3) to provide that ``[t]he exercise of ordinary business care 
shall constitute reasonable cause.''
    Reasonable cause is determined on a case-by-case and day-by-day 
basis, taking into account all the relevant facts and circumstances. A 
material advisor will not be able to establish reasonable cause if the 
material advisor did not exercise ordinary business care. However, 
ordinary business care is not the only factor that must be taken into 
account to determine whether the failure was due to reasonable cause. 
The wording suggested by the commenter does not acknowledge that the 
determination of whether a material advisor establishes reasonable 
cause is based on all relevant facts and circumstances, including not 
only whether the material advisor exercised ordinary business care in 
maintaining a readily producible list but also whether the material 
advisor, upon receiving the list request, tried in good faith to make 
the list available within the 20-business-day period (or extended 
period). In fact, the suggested wording would elevate the exercise of 
ordinary business care above all other facts and circumstances that 
should be taken into account in determining reasonable cause. Although 
exercising ordinary business care is important, standing alone, it is 
not sufficient to demonstrate reasonable cause. Accordingly, this 
comment was not adopted.
C. Reliance on the Advice of an Independent Tax Professional
    Proposed, Sec.  301.6708-1(g)(5) provided in relevant part that a 
person may rely on the advice of an independent tax professional to 
establish reasonable cause. One commenter expressed concern that the 
IRS and courts would interpret this provision in such a way as to 
presume that a material advisor could not establish reasonable cause if 
it did not consult with an independent tax professional. The commenter 
objected to any such presumption on the basis that most material 
advisors have the necessary background and experience to evaluate their 
list maintenance obligations without seeking outside advice. The 
commenter suggested that the proposed regulations be amended to 
explicitly reject any such presumption.
    Under proposed Sec.  301.6708-1(g)(1), the determination of whether 
a material advisor had reasonable cause is made on a case-by-case and 
day-by-day basis, taking into account all the relevant facts and 
circumstances, the most important of which are those that reflect the 
extent of the person's good-faith efforts to comply with section 6112. 
Reasonable cause under proposed Sec.  301.6708-1(g)(5) is not 
conditioned on seeking the advice of an independent tax professional. 
Rather, that section describes how reliance on an independent tax 
professional will be taken into account for purposes of determining 
whether a failure was due to reasonable cause. However, to alleviate 
the concern and clarify that a material advisor is not required to 
obtain advice from an independent tax professional to establish 
reasonable cause, the following sentence has been added to the final 
regulations under Sec.  301.6708-(g)(5)(i): ``Independent tax 
professional advice is not required to establish reasonable cause, and 
the failure to obtain advice from an independent tax professional does 
not preclude a finding of reasonable cause if, based on the totality of 
all of the relevant facts and circumstances, reasonable cause has been 
established.''
    The commenter also suggested supplementing Sec.  301.6708-
1(g)(5)(i) with language indicating that reasonable reliance on the 
advice of an independent tax professional is to be evaluated based on 
the knowledge and good faith of the individual employee or employees 
primarily responsible for compliance procedures for the particular 
transaction at issue, rather than other employees at the firm.
    Proposed, Sec.  301.6708-1(g)(5)(i) provided that, to establish 
reasonable cause, a material advisor's reliance on the advice of an 
independent tax professional must be reasonable and in good faith, in 
light of all the other facts and circumstances. While the knowledge and 
good faith of the individual employees primarily responsible for 
compliance procedures for the particular transaction is certainly 
relevant to the determination of whether the material advisor 
reasonably relied on the advice of an independent tax professional, the 
knowledge and good faith of those employees' supervisors or other 
individuals also may be relevant, depending on the specific facts and 
circumstances. Accordingly, this comment was not adopted.
D. Examples
    Proposed section 301.6708-1(g)(6) contains examples illustrating 
the application of the reasonable cause provisions. Example 3, Example 
5, and Example 6 of proposed Sec.  301.6708-1(g)(6) reference a 
particular technology for saving the data to a CD-ROM, and reference 
sending the paper documents to an off-site storage facility. The 
examples have been updated to remove any implication that any 
particular technology is specifically approved or required under the 
regulations, or that the regulations require storage of original 
records in both electronic and paper format. These changes are not 
intended to change the principles illustrated in by these examples.

5. Comments Relating to Sec.  301.6708-1(h)(2) and (h)(3)

    Section 301.6708-1(h)(2) contains special considerations for 
determining reasonable cause for the period after the material advisor 
has furnished a list and before the IRS has informed the material 
advisor of any identified failures in the list. Section 301.6708-
1(h)(3) provides examples illustrating the application of this 
provision. Some of these examples involve situations where the material 
advisor has omitted information from the list.
A. Period of IRS Review
    Proposed section 301.6708-1(h)(2) provided that if the material 
advisor establishes that it acted in good faith in its efforts to fully 
comply with the requirements of section 6112, the material advisor will 
be deemed to have reasonable cause for the days between when the 
material advisor furnished the list to the IRS and when the IRS informs 
the material advisor of any identified failures in the list. If the 
material advisor does not establish that it acted in good faith, the 
IRS will not consider the time it takes to review a list as a factor in 
determining whether the material advisor has reasonable cause for that 
period. One commenter suggested that the penalty should stop accruing 
once the list has been furnished to the IRS and a specified reasonable 
review period has passed. The commenter also stated that the penalty 
should not start accruing again until the IRS has notified the material 
advisor that the list appears deficient.
    Section 301.6708-1(h)(2) was included in the proposed regulations 
because a material advisor who has acted in good faith and has produced 
what it believes to be a complete and timely list has no reason to 
believe that the list is incomplete until the IRS informs that material 
advisor of any identified failure. Therefore, for a material advisor 
who acted in good faith, the proposed regulations provide that no 
penalty is imposed for the time it takes for the IRS to review the list 
and inform the material advisor of any identified failure, regardless 
of the

[[Page 25333]]

length of time it takes the IRS to complete this process.
    The rule in proposed Sec.  301.6708-1(h)(2) is more favorable to 
material advisors who have acted in good faith than the rule suggested 
by the commenter. Under the commenter's suggestion, a material advisor 
who furnished the list in good faith does not get the benefit of being 
deemed to have reasonable cause for the period of IRS review. However, 
if the commenter's suggestion is adopted, a material advisor who did 
not furnish a list in good faith would have reasonable cause for at 
least some of the time that the IRS is reviewing the list regardless of 
whether the facts and circumstances support reasonable cause. 
Consequently, the comment was not adopted.
    Nevertheless, the Treasury Department and the IRS are sensitive to 
the commenter's concerns. In addition, it is in the IRS's interest to 
review lists furnished by material advisors in a timely manner so that 
information contained on the lists can be used as intended to assist 
the IRS in identifying taxpayers who participated in abusive and 
potentially abusive tax shelters. Therefore, the IRS will take 
reasonable steps to timely review lists and notify material advisors of 
identified failures in a timely manner.
B. Omissions From the List
    In Example 1 of proposed Sec.  301.6708-1(h)(3), a supervisor 
within the material advisor organization carefully reviewed the list 
before furnishing it to the IRS, and in Example 3 of proposed Sec.  
301.6708-1(h)(3), a supervisor within the material advisor organization 
did not review the list. One commenter suggested that these examples be 
modified or supplemented to eliminate what the commenter perceived to 
be an implication that review of a list by a supervisor within the 
material advisor organization would reasonably be expected to detect 
omissions from the list and to specify that a material advisor can 
demonstrate reasonable cause for omitting a transaction or advisee even 
if a supervisor's review did not identify the omissions. While agreeing 
that review of the list before submission to the IRS is appropriate, 
the commenter stated that this review should not be a factor in 
determining whether a material advisor had reasonable cause.
    The commenter also suggested that in many cases in which a material 
advisor omits a transaction or advisee from a list, the omission may be 
due to a mistaken application of the reportable transaction rules or an 
inadvertent failure. The commenter observed that while three of the 
examples in proposed Sec.  301.6708-1(g) and (h) involve the omission 
of specific advisees from a list, none of these examples involves a 
finding that the material advisor had reasonable cause. The commenter 
suggested adding an example to either proposed subsection (g) or (h) in 
which the material advisor had reasonable cause for omitting the 
transaction or advisee from the list.
    In looking at all of the facts and circumstances surrounding a 
material advisor's efforts to comply with section 6112, review of the 
list by a supervisor or some other person of authority or experience 
within the material advisor organization before submission of the list 
to the IRS is merely one factor to be taken into account to determine 
whether the material advisor has demonstrated reasonable cause. A 
failure to detect omissions or other failings in the list does not 
preclude a finding of reasonable cause. That point is already set forth 
in Example 1 of proposed Sec.  301.6708-1(h)(3), in which the 
supervisor's review of the list did not detect that the material 
advisor had furnished a draft copy of a tax opinion rather than the 
final document, but under the facts stated in the example, the material 
advisor was found to have reasonable cause.
    However, to eliminate any confusion and to respond to the concerns 
expressed by the commenter, a new Example 5 has been added to Sec.  
301.6708-1(h)(3), in which the supervisor's review of the list did not 
detect that the material advisor had omitted a transaction from the 
list, and under the facts stated in the example, the material advisor 
was found to have reasonable cause.

6. Comment Relating to Administrative Review

    One commenter recommended that the regulations provide for 
administrative review in IRS Appeals of all issues pertaining to the 
applicability and amount of the penalty, including whether an extension 
should have been granted and whether reasonable cause exists, before 
paying the penalty. There are currently administrative procedures 
providing material advisors with an opportunity for prepayment review 
of the penalty by Appeals. See IRM 4.32.2.11.7.2. Under those 
procedures, the material advisor has 30 days from the date of receipt 
of the notice and demand for payment of the section 6708 penalty to 
request administrative review by IRS Appeals. A material advisor does 
not have to pay any portion of the section 6708 penalty as a condition 
of requesting administrative review. Therefore, because the IRM already 
provides the material advisor with an opportunity for administrative 
review of the assessment of the penalty prior to payment, this comment 
was not adopted.

Special Analyses

    Certain IRS regulations, including this one, are exempt from the 
requirements of Executive Order 12866, as supplemented and reaffirmed 
by Executive Order 13563. Therefore, a regulatory assessment is not 
required. It also has been determined that section 553(b) of the 
Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to 
these regulations.
    It is hereby certified that the collection of information in these 
regulations will not have a significant economic impact on a 
substantial number of small entities. This certification is based on 
the fact that the collection of information described under the heading 
``Paperwork Reduction Act'' only affects persons who qualify as 
material advisors as defined in section 6111, who are statutorily 
required by section 6112 to maintain and furnish the underlying 
documents and information upon which the collection of information is 
based, and who are unable to meet the section 6708 statutorily provided 
period of time for furnishing these documents and information. 
Moreover, the collection of information is voluntary to receive a 
benefit and requiring those persons to report the information described 
above imposes only a minimal burden in time or expense. Therefore, a 
Regulatory Flexibility Analysis under the Regulatory Flexibility Act (5 
U.S.C. Chapter 6) is not required.
    Pursuant to section 7805(f) of the Internal Revenue Code, the 
notice of proposed rulemaking preceding the final regulations was 
submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on its impact on small business, and no 
comments were received.

Drafting Information

    The principal author of these regulations is Hilary March of the 
Office of the Associate Chief Counsel (Procedure and Administration).

List of Subjects in 26 CFR Part 301

    Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income 
taxes, Penalties, Reporting and recordkeeping requirements.

Amendments to the Regulations

    Accordingly, 26 CFR part 301 is amended as follows:

[[Page 25334]]

PART 301--PROCEDURE AND ADMINISTRATION

0
Paragraph 1. The authority citation for part 301 is amended by adding 
an entry in numerical order to read in part as follows:

    Authority:  26 U.S.C. 7805 * * *
    Section 301.6708-1 also issued under 26 U.S.C. 6708 * * *


0
Par. 2. Section 301.6708-1 is added to read as follows:


Sec.  301.6708-1  Failure to maintain lists of advisees with respect to 
reportable transactions.

    (a) In general. Any person who is required to maintain a list under 
section 6112 who, upon written request for the list, fails to make the 
list available to the Secretary within 20 business days after the date 
of the request shall be subject to a penalty in the amount of $10,000 
for each subsequent calendar day on which the person fails to furnish a 
list containing the information and in the form required by section 
6112 and its corresponding regulations. The penalty will not be imposed 
on any particular day or days for which the person establishes that the 
failure to comply on that day is due to reasonable cause.
    (b) Calculation of the 20-business-day period. The 20-business-day 
period shall begin on the first business day after the earliest of the 
date that the IRS--
    (1) Mails a request for the list required to be maintained under 
section 6112(a) by certified or registered mail to the person required 
to maintain the list;
    (2) Hand delivers the written request to the person required to 
maintain the list; or
    (3) Leaves the written request with an individual 18 years old or 
older at the usual place of business of the person required to maintain 
the list.
    (c) Making a list available. (1) A person who is required to 
maintain a list required by section 6112 may make the list available by 
mailing or delivering it to the IRS within 20 business days after the 
date of the list request. Section 7502 and the regulations thereunder 
shall apply to this section.
    (2) A person who is required to maintain a list required by section 
6112 may also make the list available to the IRS by making it available 
for inspection and copying during normal business hours, as provided by 
section 6112, or by another agreed-upon method, on an agreed-upon date 
that falls within the 20-business-day period following the list 
request.
    (3) Extension--(i) In general. Upon a showing of good cause by the 
person prior to the expiration of the 20-business-day period following 
a list request, the IRS may, in its discretion, agree to extend the 
period within which to make all or part of the list available. For 
purposes of this paragraph, ``good cause'' is shown if the person 
establishes that the 20-business-day deadline cannot reasonably be met 
despite diligent efforts by the person to maintain the materials 
constituting a list and to make that list available to the IRS in the 
time and manner required by the Secretary under section 6112.
    (ii) Requesting an extension. Any request for an extension of the 
20-business-day period must be made in writing to the person at the IRS 
who requested the list. The person requesting an extension must briefly 
describe the information and documents that comprise the list as 
required by section 6112; explain the circumstances that would warrant 
additional time; propose a schedule to complete the production of the 
list; state that to the best of the person's knowledge, as of the date 
of the list request, all information and records relating to the list 
under the person's possession, custody, or control had been maintained 
in accordance with procedures and policies that are consistent with 
sections 6001 and 6112 of the Internal Revenue Code; and state that the 
extension request is not being made to avoid the person's list 
maintenance obligations imposed by section 6112 and its corresponding 
regulations. The IRS may, in its discretion, grant the person's 
extension request in full or in part. The IRS will consider whether 
granting an extension may impair its ability to make a timely 
assessment against any of the participants in the transaction 
associated with the requested list. The IRS will not grant an extension 
if it determines that a significant reason for the extension request is 
to delay producing the list. A pending extension request by itself does 
not constitute reasonable cause for purposes of section 6708.
    (4) Examples. The following examples illustrate paragraph (c)(3)(i) 
and (ii) of this section. These examples are intended to illustrate how 
the facts and circumstances in paragraph (c)(3)(i) and (ii) of this 
section may apply; in any given case, however, all of the facts and 
circumstances must be analyzed.

    Example 1. (i) Firm A is a large law firm that is a material 
advisor. Firm A conducts annual sessions to educate its 
professionals about reportable transactions and the firm's 
obligations related to those reportable transactions. Firm A 
instructs its professionals to provide information on tax 
engagements that involve reportable transactions and to provide the 
documents required to be maintained under sections 6001 and 6112 to 
Firm A's compliance officer for list maintenance purposes. Firm A's 
policy provides that, for each engagement involving a reportable 
transaction, one firm professional will send an email to the firm's 
compliance officer about the engagement and then direct a 
subordinate to send the documents required to be maintained to the 
firm's compliance officer. Firm A has policies and procedures in 
place to monitor compliance with these rules and to address non-
compliance.
    (ii) Firm A receives a request from the IRS for a section 6112 
list. In compiling its list to turn over to the IRS during the 20-
business-day period following the list request, Firm A discovers 
that, with respect to one reportable transaction, a subordinate did 
not provide the documentation required by Firm A's policy. In 
addition, Firm A experiences difficulty locating the required 
documents as both the professional and the subordinate who worked on 
the matter are no longer employed by Firm A, requiring the firm to 
undertake an extensive search for the information responsive to the 
list request. Firm A also seeks the information from the firm's 
clients. Despite these efforts, Firm A reasonably determined that it 
will not be able to respond timely to the request. Within the 20-
business-day period, Firm A notifies the IRS, in writing, of the 
difficulties it is experiencing and requests an additional 10 
business days to locate and produce the information for this one 
transaction. Within the 20-business-day period, Firm A makes all 
other required list information available to the IRS, together with 
a description of the information that is being searched for, all 
statements required by these regulations, and a proposed schedule to 
produce the missing information.
    (iii) Under these circumstances, Firm A demonstrated that it 
could not reasonably make the portion of the list relating to the 
one transaction available within the 20-business-day period and thus 
qualified for an extension. Firm A had established policies and 
procedures reasonably designed and implemented to ensure and monitor 
compliance with the requirements of section 6112 and address non-
compliance. Because the facts and circumstances indicate that Firm A 
made diligent efforts to maintain the materials constituting the 
list in a readily accessible form and as otherwise required under 
section 6112, the requested 10-business-day extension with respect 
to the portion of the list relating to the one transaction where 
records were not maintained in accordance with the firm's policies 
and procedures should be granted.
    Example 2. (i) Assume the same facts set forth in example one, 
except that, in the process of compiling the list to comply with the 
list maintenance request, Firm A first becomes aware that a firm 
professional did not send an email to the firm's compliance officer 
about a transaction subject to the list maintenance request and did 
not direct a subordinate to send to the firm's compliance officer 
the information required to be maintained with respect to the 
transaction. Assume further that Firm A had a robust section 6112 
compliance monitoring program

[[Page 25335]]

in place and despite this, the firm did not know that the 
professional did not follow firm policies and procedures with 
respect to this transaction. The professional who worked on the 
matter is no longer employed by Firm A, causing Firm A difficulty in 
locating the required information and in ascertaining whether the 
professional in question failed to comply with Firm A's list 
maintenance policies with respect to any other reportable 
transactions. Firm A is searching its records to locate information 
responsive to the list request and to ensure that no other 
reportable transactions were omitted from the list. Firm A estimates 
that it will take an additional 20 business days after the 20th 
business day to retrieve the missing information and provide IRS 
with the additional information responsive to the list request. 
Within the 20-business-day period, Firm A notifies the IRS, in 
writing, of the difficulties it is experiencing and requests an 
additional 20 business days to locate and produce the information 
for this one transaction and for any other reportable transactions 
omitted from the list as a result of the inaction by the 
professional in question. Within the 20-business-day period, Firm A 
makes all other required list information available to the IRS, 
together with a description of the information that is being 
searched for, all statements required by these regulations, and a 
proposed schedule to produce the missing documents.
    (ii) Under these facts and circumstances, Firm A demonstrated 
that it could not reasonably, within the 20-business-day period, 
make available the portion of the list relating to one or possibly 
more transactions omitted from the list because of the inaction of 
the professional in question. Firm A therefore qualifies for an 
extension. Firm A had established policies and procedures reasonably 
designed and implemented to ensure and monitor compliance with the 
requirements of section 6112 and address non-compliance. Because the 
facts and circumstances indicate that Firm A made diligent efforts 
to maintain the materials constituting the list in a readily 
accessible form and as otherwise required under section 6112, the 
requested 20-business-day extension with respect to the portion of 
the list relating to the one known omitted transaction and to any 
other omitted reportable transactions resulting from the inaction of 
the professional in question should be granted.

    (d) Failure to make list available. A failure to make the list 
available includes any failure to furnish the requested list to the IRS 
in a timely manner and in the form required under section 6112 and its 
corresponding regulations. Examples of failures to make a list 
available include instances in which a person fails to furnish any 
list; furnishes an incomplete list; or furnishes a list, whether or not 
complete, after the time required by this section.
    (e) Computation of penalty--(1) In general. The penalty imposed by 
section 6708 accrues daily, beginning on the first calendar day after 
the expiration of the 20-business-day period following a written list 
request, and continues for each calendar day thereafter until the 
person's failure to furnish a list in the form required by section 6112 
and its corresponding regulations ends. If the list is delivered or 
mailed to the IRS outside of the 20-business-day period, the penalty 
shall not apply on the day the list is delivered to the IRS or, if the 
list is mailed, the day the list is received by the IRS.
    (2) Computation of penalty after grant of extension. If the IRS 
grants an extension of the 20-business-day period pursuant to paragraph 
(c)(3) of this section, the penalty imposed by section 6708 accrues 
daily, beginning on the first calendar day after the extension period 
expires, and continues for each calendar day thereafter until the 
person's failure to furnish a list in the form required by section 6112 
and its corresponding regulations ends. If the list is delivered or 
mailed to the IRS outside of the period of extension, the penalty shall 
not apply on the day the list is delivered to the IRS or, if the list 
is mailed, the day the list is received by the IRS.
    (3) Designation agreements and concurrent application of penalty. 
If material advisors with respect to the same reportable transaction 
enter into a designation agreement pursuant to section 6112(b)(2) and 
Sec.  301.6112-1(f), separate penalties will be imposed on designated 
material advisors and nondesignated material advisors who are parties 
to the designation agreement for their respective periods of failure or 
noncompliance with a list request. A penalty will continue to accrue 
against a material advisor who is a party to a designation agreement 
until such time when a list complying with the requirements of section 
6112 and its corresponding regulations is furnished by that material 
advisor or any other material advisor who is a party to the designation 
agreement.
    (4) Example. The following example illustrates paragraph (e) of 
this section.

    Example. The IRS hand delivers a written request for the list 
required to be maintained under section 6112 to Firm B, a material 
advisor, on Friday, March 10, 2017. Firm B must make the list 
available to the IRS on or before Friday, April 7, 2017, the 20th 
business day after the request was hand delivered. If Firm B fails 
to make the list available to the IRS by that day, absent reasonable 
cause or the IRS's grant of an extension of the response time, the 
$10,000-per-day penalty begins on Saturday, April 8, 2017. The 
$10,000 per day penalty will continue for each subsequent calendar 
day until Firm B makes the complete list available, except for those 
days for which Firm B demonstrates reasonable cause. If Firm B hand 
delivers a complete copy of the requested list to the IRS on the 
morning of Tuesday, April 11, 2017, absent reasonable cause or the 
IRS's prior grant of an extension for the response time, a penalty 
of $30,000 will be imposed upon Firm B (for April 8, 9, and 10). See 
paragraphs (g) and (h) of this section for an explanation of 
reasonable cause.

    (f) Definitions. For purposes of this section, the following 
definitions apply:
    (1) Material advisor means a person described in section 6111 and 
Sec.  301.6111-3(b).
    (2) Business day means every calendar day other than a Saturday, 
Sunday, or legal holiday within the meaning of section 7503.
    (3) Reportable transaction means a transaction described in section 
6707A(c)(1) and section 1.6011-4(b)(1).
    (4) Listed transaction means a transaction described in section 
6707A(c)(2) and Sec.  1.6011-4(b)(2) of this chapter.
    (g) Reasonable cause--general applicability--(1) Overview. The 
section 6708 penalty will not be imposed for any day or days for which 
the person shows that the failure to make a complete list available to 
the IRS was due to reasonable cause. The determination of whether a 
person had reasonable cause is made on a case-by-case and day-by-day 
basis, taking into account all the relevant facts and circumstances. 
Facts and circumstances relevant to a material advisor's reasonable 
cause for failing to make available the list on a specific day include 
facts and circumstances arising after the request for the list. The 
person's showing of reasonable cause should relate to each specific day 
or days for which the person failed to make available the requested 
list. Factors establishing reasonable cause include, but are not 
limited to, factors identified in paragraphs (g) and (h) of this 
section.
    (2) Good-faith factors. The most important factors to establish 
reasonable cause are those that reflect the extent of the person's 
good-faith efforts to comply with section 6112. The following factors, 
which are not exclusive, will be considered in determining whether a 
person has made a good-faith effort to comply with the section 6112 
requirements:
    (i) The person's efforts to determine or assess its status as a 
material advisor as defined by section 6111;
    (ii) The person's efforts to determine the information and 
documentation required to be maintained under section 6112;
    (iii) The person's efforts to meet its obligations to maintain a 
readily

[[Page 25336]]

producible list as required by section 6112;
    (iv) The person's efforts, upon receiving the list request, to make 
the list available to the IRS within the 20-business-day period (or 
extended period) under paragraphs (a), (b), and (c)(3) of this section; 
and
    (v) The person's efforts to ensure that the list furnished to the 
IRS is accurate and complete.
    (3) Ordinary business care. The exercise of ordinary business care 
may constitute reasonable cause. To show ordinary business care, the 
person may, for example, show that the person established, and adhered 
to, procedures reasonably designed and implemented to ensure compliance 
with the section 6112 requirements. In all instances when ordinary 
business care is claimed as constituting reasonable cause, a person 
must show that the person took immediate steps, upon discovering any 
failure relating to the list, to correct the failure. A person's 
failure to take immediate steps to correct a failure related to the 
list upon discovering the failure is a factor weighing against a 
conclusion that the person exercised ordinary business care. 
Notwithstanding the occurrence of an isolated and inadvertent failure, 
a person still may be able to demonstrate that the person exercised 
ordinary business care, considering all the relevant facts and 
circumstances, but only if the person had established and adhered to 
procedures reasonably designed and implemented to ensure compliance 
with the section 6112 requirements.
    (4) Supervening events. A person may establish reasonable cause for 
one or more days for which, considering all the relevant facts and 
circumstances, the failure to timely furnish the list required by 
section 6112 was due solely to a supervening event beyond the person's 
control. Events beyond a person's control may include fire, flood, 
storm, or other casualty; illness; theft; or other similarly unexpected 
event that damages or impairs the person's relevant business records or 
system for processing and providing these records, or that affects the 
person's ability to maintain the section 6112 list or make it available 
to the IRS. Reasonable cause may be established only for the period 
that a person who exercised ordinary business care would need to 
provide the list from alternative records in existence, or make the 
list available, under the specific facts and circumstances.
    (5) Reliance on opinion or advice--(i) In general. A person may 
rely on an independent tax professional's advice to establish 
reasonable cause. The reliance, however, must be reasonable and in good 
faith, in light of all the other facts and circumstances. For a person 
to be considered to have relied on the advice, the advice must have 
been received by the person before the date the list is required to be 
made available to the IRS. If the person received advice from an 
independent tax professional, the person's reliance on that advice will 
be considered reasonable only if the independent tax professional 
reasonably believed that it is more likely than not that the person 
does not have an obligation imposed by section 6112. For example, this 
advice may conclude that the person is not a material advisor; that the 
transaction upon which the person provided material aid, assistance, or 
advice is not a reportable transaction for which a list was required to 
be maintained as of the date of the advice; that the information and 
documents to be produced constitute the required list; or that the 
information or documents withheld by the person are not required to be 
produced. The advice must also take into account and consider all 
relevant facts and circumstances, not rely on unreasonable legal or 
factual assumptions, not rely on or take into account the possibility 
that a list request may not be made, and not rely on unreasonable 
representations or statements of the person seeking the advice. Advice 
from a tax professional who is not independent may be considered in 
determining reasonable cause if, in light of and in relation to all the 
other facts and circumstances, taking into account such advice is 
reasonable. However, by itself, advice from a tax professional who is 
not independent is not sufficient to establish reasonable cause. 
Independent tax professional advice is not required to establish 
reasonable cause and the failure to obtain advice from an independent 
tax professional does not preclude a finding of reasonable cause if, 
based on the totality of all of the relevant facts and circumstances, 
reasonable cause has been established.
    (ii) Independent tax professional. For purposes of this section, an 
independent tax professional is a person who is knowledgeable in the 
relevant aspects of Federal tax law and who is not a material advisor 
with respect to the specific transaction that is the subject of the 
list request. For advice related to a listed transaction, a person who 
is a material advisor with respect to any transaction that is the same 
as or substantially similar to the type of transaction that is the 
subject of the list request will not be considered an independent tax 
professional.
    (6) Examples. The following examples illustrate this paragraph (g). 
These examples are intended to illustrate how the facts and 
circumstances in paragraphs (g)(2) through (g)(5) of this section may 
apply; in any given case, however, all of the facts and circumstances 
must be analyzed.

    Example 1.  On August 11, 2017, the IRS sends a list request via 
certified mail to Firm C, a material advisor. Firm C consists of a 
sole practitioner, X, who is away from the office on vacation on 
this date. X has arranged for a colleague, Y, to review Firm C's 
mail, email, and telephone messages daily during his absence. X 
returns to the office the day after his vacation ends, on September 
5, 2017, and immediately contacts the IRS to notify it of his 
absence. Firm C makes a complete list available to the IRS on 
September 19, 2017, 10 business days after he has returned from 
vacation. Firm C establishes that X was on vacation at the time the 
list request was sent to Firm C, and Firm C promptly furnished the 
requested list in a manner and time period reflecting ordinary 
business care and prudence upon X's return to the office. Under 
these circumstances, Firm C is considered to have made a good-faith 
effort to comply with the section 6112 requirements. Firm C has 
established reasonable cause for the entire period between the 
expiration of the 20-business-day period following the list request 
and the date the list was made available to the IRS. See paragraphs 
(g)(2) and (3) of this section.
    Example 2.  On March 3, 2017, the IRS hand delivers to Firm D, a 
material advisor, a list request related to a transaction believed 
by the IRS to have been implemented in November 2008 by a group of 
Firm D's clients (the advisees). Firm D's involvement in the 
transaction included implementing the transaction on behalf of some 
but not all of the advisees. Firm D timely makes the requested list 
available to the IRS. Upon review, the IRS determines that the 
information furnished by Firm D appears to be accurate, but the IRS 
believes that some of the information is incomplete because it does 
not contain information about certain individuals who were 
identified through other investigative means as Firm D's clients who 
may have engaged in the transaction. In response to a follow-up 
inquiry by the IRS, Firm D establishes, however, that it is not a 
material advisor with respect to these taxpayers. Under these 
circumstances, Firm D has furnished the list as required by section 
6112. Because the list was complete when furnished, Firm D need not 
make a showing of reasonable cause. See paragraph (g)(1) of this 
section.
    Example 3.  The IRS sends a list request by certified mail to 
Firm E, a material advisor. Firm E maintains the materials 
responsive to the list request on a portable data storage device. 
Under Firm E's established procedures for maintaining section 6112 
lists, once the transaction is completed, paper documents are 
scanned and saved electronically according to Firm E's records 
management procedures. Under Firm E's records management procedures, 
after the scanning process is completed, Firm

[[Page 25337]]

E sends the paper documents to an off-site storage facility. Three 
days before the 20th business day following the date of the written 
request, the electronic data is permanently destroyed. Firm E 
contacts the IRS representative listed as a contact person on the 
section 6112 list request to advise him that the relevant data was 
permanently destroyed. Firm E establishes that it exercised ordinary 
business care but that the data was nevertheless destroyed due to 
circumstances outside of its control. Under these circumstances, 
Firm E has reasonable cause for the period of time that Firm E 
cannot respond to the list request due to circumstances out of Firm 
E's control. The reasonable cause exception, however, will only be 
available to Firm E for the period of time that a person who 
exercises ordinary business care would need to obtain the materials 
that are part of the list, including in this case paper documents 
from the off-site storage facility, and furnish the list to the IRS. 
See paragraphs (g)(3) and (4) of section.
    Example 4.  On February 2, 2017, the IRS hand delivers a list 
request to Firm F, a material advisor. Firm F filed with the IRS the 
disclosure statement required by section 6111 for the reportable 
transaction that is the subject of the list request but did not 
maintain the section 6112 list documentation in a readily accessible 
format after filing the section 6111 statement. On March 3, 2017, 
the 20th business day (due to the Presidents' Day holiday) after the 
list request is delivered to Firm F, Firm F contacts the IRS to ask 
for additional time to comply with the list request, stating that it 
could not gather the list information together in 20 business days. 
Because Firm F is not able to show that it made diligent efforts to 
maintain the materials constituting the list in a readily accessible 
form, the IRS should not grant Firm F an extension of time. See 
paragraph (c)(3) of this section. Further, Firm F does not have 
reasonable cause because it has failed to demonstrate a good-faith 
effort to comply with the section 6112 requirements and ordinary 
business care. See paragraphs (g)(2) and (3) of this section.
    Example 5. On August 11, 2017, the IRS sends a list request, via 
certified mail, to Firm G, a material advisor. Firm G consists of a 
sole practitioner, P. Firm G maintains the materials responsive to 
the list request electronically. Generally, under Firm G's records 
management procedures, once a transaction is completed, the 
documents related to that transaction are scanned and then saved 
electronically consistent with IRS guidance on maintaining books and 
records in electronic form. P is aware of the list request but 
ignores it. On September 24, 2017, the 13th calendar day after the 
20-business-day period following the list request (due to the Labor 
Day holiday), P suffers a temporary but debilitating illness that 
lasts 22 days. Following the illness, P immediately returns to work. 
After returning to work, P continues to ignore the list request. In 
this situation, the facts and circumstances indicate that Firm G 
does not have reasonable cause for any day in which there was a 
failure to make the list available to the IRS, including the 22 days 
due to the intervening event, because the failure was not due solely 
to the supervening event occurring on September 24, 2017. Firm G did 
not make a good-faith effort to make the list available to the IRS 
before or after the supervening event occurred. Firm G is liable for 
the $10,000 per day penalty from the first day following the 
expiration of the 20-business-day period until but not including the 
day that Firm G furnishes the list to the IRS. See paragraphs (g)(2) 
and (4) of this section.
    Example 6.  On August 11, 2017, the IRS sends a list request, 
via certified mail, to Firm H, a material advisor. Firm H, consists 
of a sole practitioner, P. Firm H maintains the materials responsive 
to the list request electronically. Generally, under Firm H's 
records management procedures, once the transaction is completed, 
the documents are scanned and then saved electronically consistent 
with IRS guidance on maintaining books and records in electronic 
form. P is aware of the list request and begins compiling the 
documents to respond to the IRS within the 20-business-day period 
ending on September 11, 2017 (due to the Labor Day holiday). Before 
responding to the list request, P suffers a temporary but 
debilitating illness on September 3, 2017, that lasts through 
September 19, 2017. Upon returning to work on September 20, 2017, P 
contacts the IRS to explain that P experienced a temporary but 
debilitating illness from September 3, 2017, through September 19, 
2017, and that P has returned to the office and intends to furnish 
the list to the IRS within a short period of time. Firm H furnishes 
the list to the IRS on September 22, 2017. In this situation, the 
facts and circumstances indicate that Firm H has reasonable cause 
for the period from September 12, 2017 until September 21, 2017, 
attributable to P's illness. The failure to furnish the list in a 
timely fashion was solely attributable to the supervening event 
occurring on September 3, 2017, and Firm H promptly furnished the 
requested list in a manner and time period reflecting ordinary 
business care upon P's return to the office. Firm H is considered to 
have made a good-faith effort to comply with the section 6112 
requirements. Firm H has established reasonable cause for the entire 
period between the expiration of the 20-business-day period 
following the list request and the date Firm H furnished the list to 
the IRS. See paragraphs (g)(2) and (4) of this section.
    Example 7.  Firm I receives a list request for transactions that 
are the same or substantially similar to the listed transaction 
described in Notice 2002-21, 2002-1 CB 730. Firm I will be 
considered a material advisor with respect to a particular 
transaction for which it provided advice if the transaction is the 
same as or substantially similar to the transaction described in 
Notice 2002-21. Firm I, however, is unsure whether the transaction 
is the same as or substantially similar to the transaction described 
in this Notice. Firm I obtains an opinion from Firm L, a law firm, 
on this issue. P, a partner in Firm L, provided tax advice to 
clients who invested in other Notice 2002-21 transactions, including 
how to report the purported tax benefits from the transaction on 
their income tax returns, and Firm L is a material advisor with 
respect to those transactions. Because Firm L is a material advisor 
with respect to the type of transaction that is the same as or 
substantially similar to the transaction described in Notice 2002-
21, Firm L is not considered an independent tax professional under 
paragraph (g)(5)(ii) of this section. Therefore, Firm I cannot rely 
on advice provided by Firm L to establish reasonable cause under 
this paragraph (g). The IRS may consider Firm L's advice in 
determining reasonable cause in light of other facts and 
circumstances, but Firm L's advice, without more, is not sufficient 
to establish reasonable cause because P is not an independent tax 
professional under paragraph (g)(5)(ii) of this section.
    Example 8.  Firm J, a law firm, provides advice to various 
clients of the firm regarding the potential tax benefits of a 
reportable transaction under Sec.  1.6011-4(b)(5) of this chapter 
(involving a section 165 loss) and is a material advisor with 
respect to that transaction. Firm J also provides advice to Firm M, 
an accounting firm, regarding the same transaction. Firm M then 
advises various Firm M clients regarding this same transaction, and 
is a material advisor. The transaction is not a listed transaction. 
Firm N, a law firm that is not associated with Firm J and has not 
provided advice with respect to the same transaction to Firm M, has 
provided advice to its own clients regarding other transactions 
subject to Sec.  1.6011-4(b)(5) of this chapter, but not the 
particular transaction that was the subject of Firm J's advice to 
Firm M. The IRS hand delivers a list request to Firm M, the subject 
of which is the transaction regarding which Firm J provided advice 
to Firm M. Before the expiration of the 20-business-day period, Firm 
M seeks advice from Firm J and Firm N about the propriety of 
withholding certain documents related to the transaction. Because 
Firm J provided advice with respect to the particular transaction 
that is the subject of the list request, Firm J is not an 
independent tax professional under paragraph (g)(5)(ii) of this 
section. Although Firm N has provided advice on a transaction that 
is considered a reportable transaction under Sec.  1.6011-4(b)(5) of 
this chapter, Firm N is considered to be an independent tax 
professional under paragraph (g)(5)(ii) of this section because Firm 
N did not provide material assistance with respect to the particular 
transaction that is the subject of the list request.

    (h) Reasonable cause--special considerations--(1) Material advisor 
no longer in existence. If a material advisor has dissolved, been 
liquidated, or otherwise is no longer in existence, the person required 
by section 6112 to maintain the list (the ``responsible person'') is 
subject to the penalty for failing to make the list available. In 
considering whether a responsible person or successor in interest has 
reasonable cause for any failure to timely make the list available to 
the IRS, the IRS will consider all of the facts and circumstances, 
including those facts and

[[Page 25338]]

circumstances relating to the dissolution, liquidation, and winding up 
of the original material advisor's business and any efforts the 
original material advisor made to comply with the section 6112 
requirements before the dissolution or liquidation. When appropriate or 
applicable, due diligence, if any, performed by a responsible person or 
successor in interest will be considered, and due consideration will be 
given for acts taken by that person to minimize the potential for 
violating the section 6112 requirements.
    (2) Review by IRS. Whether reasonable cause exists for a period of 
time will be determined based on all the relevant facts and 
circumstances, including facts and circumstances arising after the 
request for the list. If a material advisor establishes that, in its 
efforts to comply with the provisions of section 6112 and its 
corresponding regulations, it acted in good faith, as defined in 
paragraph (g)(2) of this section, the material advisor will be deemed 
to have reasonable cause for the periods of time the IRS takes to 
review a furnished list for compliance with the section 6112 
requirements and to inform the material advisor of any identified 
failures in the list. If the material advisor does not establish that 
it acted in good faith the IRS will not consider the time it takes to 
review the list or inform the material advisor of identified failures 
as a factor in determining whether the material advisor has reasonable 
cause for that period.
    (3) Examples. The following examples illustrate paragraph (h)(2) of 
this section.

    Example 1. On February 2, 2017, the IRS hand delivers a list 
request to Firm O, a material advisor. On March 3, 2017, the 20th 
business day (due to the Presidents' Day holiday) after the list 
request is delivered to Firm O, Firm O sends a list to the IRS that 
was contemporaneously prepared after Firm O issued advice with 
respect to the reportable transaction and continuously maintained in 
accordance with the requirements of section 6112 and the related 
regulations. Before sending the list, a supervisor at Firm O 
carefully reviewed the list to verify that it was comprehensive and 
accurate. The IRS completes its review on March 23, 2017, and 
determines that the list is not complete because Firm O furnished a 
draft copy of the tax opinion, rather than the final document, which 
Firm O had mistakenly misfiled. After Firm O is notified of the 
missing information, Firm O immediately furnishes a complete copy of 
the final version of the tax opinion. Firm O made a good-faith 
effort to comply with the section 6112 requirements, including its 
efforts to ensure that the list that was furnished to the IRS was 
accurate and complete. Firm O has reasonable cause for the entire 
period between the expiration of the 20-business-day period 
following the list request and the date it furnished the complete 
list to the IRS.
    Example 2. On February 2, 2017, the IRS hand delivers a list 
request to Firm P, a material advisor. Firm P's involvement in the 
reportable transaction included implementing the transaction on 
behalf of some but not all of Firm P's clients. On March 3, 2017, 
the 20th business day (due to the Presidents' Day holiday) after the 
list request is delivered to Firm P, Firm P sends the list to the 
IRS. The IRS completes its review on March 23, 2017. The IRS 
believes the client list is incomplete because it does not contain 
information about certain individuals who were identified through 
other investigative means as clients of Firm P who may have engaged 
in the transaction. On March 27, 2017, in response to a follow-up 
inquiry by the IRS, Firm P establishes that it is not a material 
advisor with respect to these taxpayers. Therefore, the March 3, 
2017 list was complete and accurate when first furnished. Under 
these circumstances, Firm P has timely furnished the list as 
required by section 6112. Because Firm P complied with the 
requirements of section 6112 no penalty applies, and Firm P does not 
need to establish reasonable cause for the period from March 4, 
2017, through March 27, 2017, when the IRS was reviewing the list.
    Example 3. On February 2, 2017, the IRS hand delivers a list 
request to Firm Q, a material advisor. On March 3, 2017, the 20th 
business day (due to the Presidents' Day holiday) after the list 
request is delivered to Firm Q, Firm Q sends the list to the IRS. 
Firm Q had not maintained a list contemporaneously after issuing the 
advice with respect to the reportable transaction, and created the 
list during the 20 business days before providing the list to the 
IRS. To meet the 20-business-day deadline, a supervisor did not 
review the final list before sending it to the IRS. The IRS 
completes its review on March 23, 2017, and determines that the list 
is not complete because it does not include 15 persons for whom Firm 
Q acted as a material advisor with respect to the reportable 
transaction. Firm Q furnishes the additional information on March 
27, 2017. Because Firm Q is not able to show that it made diligent 
efforts to maintain the materials constituting the list in a readily 
accessible form and that it made a reasonable effort to ensure that 
the list that was furnished to the IRS was accurate and complete, 
Firm Q cannot establish that it exhibited a good-faith effort to 
comply with the section 6112 requirements. Firm Q does not have 
reasonable cause for its failure to furnish the complete list from 
March 4, 2017, through March 26, 2017.
    Example 4. Within the 20-business-day period following a list 
request, Firm R sends four boxes of documents comprising the 
required list to the IRS using a commercial delivery service. The 
IRS receives only three of the boxes because box 4 was erroneously 
self-addressed using Firm R's office address. Box 4 arrives at Firm 
R's office on January 6, 2017, the 2nd calendar day after the 20th 
business day after the list request was made. Firm R immediately 
recognizes its clerical error, promptly contacts the IRS, and 
resends the original and unopened box 4, properly addressed, to the 
IRS together with documentation supporting the error. The IRS 
receives box 4 on January 9, 2017. Under these circumstances, Firm R 
has reasonable cause for the late delivery of box 4 because it made 
a good-faith attempt to timely comply with the list request and 
immediately corrected an inadvertent error upon its discovery. As a 
result, no penalty will be imposed based on the delay in providing 
box 4. If, after inspection, the IRS determines that, even with the 
contents of box 4, the list is incomplete or defective, Firm R must 
establish reasonable cause for the incomplete nature of the list or 
the defect to avoid imposition of a penalty for the period beginning 
January 5, 2017, until but not including the day that Firm R 
furnishes the list to the IRS.
    Example 5. (i) Firm S is a large law firm that is a material 
advisor. Firm S conducts annual sessions to educate its 
professionals about reportable transactions and the firm's 
obligations related to those reportable transactions. Firm S 
instructs its professionals to provide information on tax 
engagements that involve reportable transactions and to provide the 
documents required to be maintained under section 6112 to Firm S's 
compliance officer for list maintenance purposes. Firm S's policy 
provides that, for each engagement involving a reportable 
transaction, one firm professional will send an email to the firm's 
compliance officer about the engagement and then direct a 
subordinate to send to the firm's compliance officer the documents 
required to be maintained.
    (ii) Firm S receives a request from the IRS for a section 6112 
list. In compiling its list to turn over to the IRS during the 20-
business-day period, Firm S asks all professionals to ensure that 
they have reported all engagements involving a reportable 
transaction to the firm's compliance officer. Before submission to 
the IRS, a Firm S supervisor reviews the list to ensure 
completeness. Firm S has no reason to know of any deficiencies, and 
in compiling its list, Firm S discovers no deficiencies.
    (iii) Upon review of the list, the IRS determines that the 
information furnished by Firm S appears to be accurate, but the IRS 
believes that some of the information is incomplete because it does 
not contain information about an individual who may have engaged in 
the transaction and who was identified through other investigative 
means as Firm S's client. In response to a follow-up inquiry by the 
IRS, Firm S immediately reviews its files and discovers that a 
former Firm S professional, who is no longer employed by Firm S, 
provided material advice to the individual with respect to carrying 
out a reportable transaction, but did not send an email to the 
firm's compliance officer about the transaction or direct a 
subordinate to send the documents required to be maintained to the 
firm's compliance officer. Firm S immediately furnishes the missing 
information and documents related to the identified omission to the 
IRS.
    (iv) Firm S establishes that the professional in question 
ordinarily complied with Firm S's list maintenance procedures and 
that

[[Page 25339]]

Firm S had no reason to know of this one omission or to suspect that 
the professional had failed to report any reportable transactions to 
the firm's compliance officer in accordance with the firm's 
policies. Firm S also immediately undertakes a thorough search of 
its electronic and paper files to locate any additional reportable 
transactions relating to the professional in question that may have 
been omitted from the list. Under these circumstances, Firm S has 
demonstrated that it has acted in good faith in its efforts to 
comply with section 6112 and is deemed to have reasonable cause for 
the period of time the IRS took to review the furnished list and to 
inform the material advisor of the identified failure in the list. 
See paragraph (h)(2) of this section. The reasonable cause 
exception, however, will only be available to Firm S with respect to 
the omission identified by the IRS for the period of time that a 
person who exercises ordinary business care would need to obtain the 
information and documents related to the identified omission. See 
paragraph (g)(3) of this section. With respect to any other 
omissions related to the same professional and not identified by the 
IRS, the reasonable cause exception will only be available to Firm S 
for the period of time that a person who exercises ordinary business 
care would need to ascertain whether any other reportable 
transactions were omitted from the list and to obtain the 
information and documents related to any such omissions. See 
paragraph (g)(3) of this section.

    (i) Effective/applicability date. This section applies to all 
requests for lists required to be maintained under section 6112, 
including lists that persons were required to maintain under section 
6112(a) as in effect before October 22, 2004, made on or after April 
28, 2016.

John Dalrymple,
Deputy Commissioner for Services and Enforcement.
    Approved: March 22, 2016.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2016-09765 Filed 4-27-16; 8:45 am]
BILLING CODE 4830-01-P