Recent Ninth Circuit Case Highlights Importance of Disclosing Transactions Substantially Similar to "Listed Transactions", September 12, 2019

The IRS identifies certain types of transactions as having the potential for tax avoidance, and thus requires that taxpayers disclose these transactions affirmatively in order to avoid penalties. The IRS can impose penalties for failing to disclose a listed transaction, but also has authority to impose penalties for failure to disclose a transaction that it deems to be "substantially similar" to a transaction that is specifically listed. The case at hand involved a situation where a company participated in a group life insurance term plan in order to fund cash-value life insurance that the sole shareholder and employee owned. While the structure at issue was not specifically listed, the IRS determined that the transaction was substantially similar to other listed transactions and imposed a $10,000 penalty for every year that the taxpayer failed to disclose the transaction. For more information on the exemptions that may apply in cases involving prohibited transactions, visit Tax Facts Online.