What Is the Definition of a Listed Transaction?

A listed transaction is a financial arrangement that the Internal Revenue Service (IRS) has officially identified as a tax avoidance scheme. This designation means a transaction is structured to achieve favorable tax results that are inconsistent with the law’s intent. When the IRS labels a transaction as “listed,” it signals that participation is highly scrutinized. This classification triggers disclosure requirements for any taxpayer who engages in such a transaction, and failure to comply can lead to substantial penalties.

The Reportable Transaction Framework

The concept of a listed transaction exists within a broader regulatory structure known as the reportable transaction framework. This system, outlined in Treasury Regulation Section 1.6011-4, requires taxpayers to disclose certain transactions that have the potential for tax avoidance. A listed transaction is one of several types of reportable transactions that mandate disclosure to the IRS.

Other categories of reportable transactions provide context. These include confidential transactions, where an advisor limits the disclosure of the tax strategy, and transactions with contractual protection, where a taxpayer can get a refund of fees if the tax benefits are not sustained. Another category is a loss transaction, which involves claiming a significant loss under Section 165. For an individual, the threshold is a loss of at least $2 million in a single tax year or $4 million over a combination of years. For corporations, the amounts are $10 million in a single year or $20 million across a combination of years.

Each of these categories flags a transaction for IRS review, but a listed transaction is unique because it is one the IRS has already formally identified as a tax avoidance scheme. This hierarchy places participants in listed transactions under the most intense level of scrutiny.

Identifying a Listed Transaction

The IRS designates a transaction as “listed” through official published guidance, such as IRS Notices, Revenue Rulings, or Treasury Regulations. This occurs after the agency analyzes an arrangement and concludes that it, or any “substantially similar” transaction, is structured for tax avoidance. A transaction is substantially similar if it is expected to obtain similar tax consequences and is factually similar or based on the same tax strategy.

One historical example is the “Son of BOSS” (Bond and Option Sales Strategy) transaction, identified in IRS Notice 2000-44. This scheme artificially inflated the basis of a partnership interest to generate large, artificial tax losses to offset other income without any corresponding economic loss. The intended benefit was a significant reduction in tax liability through manufactured paper losses.

Another example is the “CARDS” (Custom Adjustable Rate Debt Structure) transaction, from Notice 2002-21. These arrangements used a series of steps to improperly inflate a taxpayer’s basis in an asset. The taxpayer would then sell the asset and claim a loss based on the inflated basis, creating a tax benefit without a genuine economic outlay.

Taxpayer Disclosure Requirements

Participation in a listed transaction requires filing Form 8886, Reportable Transaction Disclosure Statement, for each year of participation. The taxpayer must provide a detailed narrative of the transaction, including all steps from inception to completion and the identity of all parties involved, including any material advisors who promoted or assisted with the transaction.

The form also requires a description of the expected tax benefits in quantifiable terms, such as the amount of a deduction or the reduction in gain, and the tax years affected. When completing the form, the taxpayer must enter the name and number of the published guidance that identified the transaction as listed. The instructions warn against vague statements like “See Attached” in the main fields, requiring that all information be entered directly onto the form itself.

The Filing Process for Form 8886

Taxpayers must follow a specific dual-filing procedure for Form 8886. The primary step is to attach a copy of the form to the relevant federal income tax return for each year the taxpayer participates. This includes original returns, amended returns, and applications for tentative refunds if the transaction results in a loss carried back to a prior year.

In addition to attaching the form to the tax return, a separate copy of the initial Form 8886 must be mailed or faxed to the IRS Office of Tax Shelter Analysis (OTSA). The mailing address is Internal Revenue Service, OTSA Mail Stop 4915, 1973 Rulon White Blvd., Ogden, UT 84201, and the fax number is 844-253-2553.

After filing, taxpayers should retain proof of mailing or a fax transmission log. Submission of the form alerts the IRS to the participation, which may lead to an examination of the associated tax return.

Penalties for Non-Compliance

Failing to properly disclose a listed transaction by filing Form 8886 carries consequences under Internal Revenue Code Section 6707A. The penalty is 75% of the tax decrease resulting from the transaction, subject to specific minimums and maximums. The minimum penalty is $5,000 for an individual and $10,000 for any other entity. The maximum penalty is capped at $100,000 for individuals and $200,000 for other entities.

This is a “strict liability” penalty, meaning it applies automatically for failure to disclose, even if the transaction resulted in no tax underpayment. This penalty is separate from and in addition to any other penalties that may apply, such as accuracy-related penalties on an underpayment of tax.

Failing to disclose also extends the statute of limitations for the IRS to assess tax. Under Internal Revenue Code Section 6501, the assessment period remains open until one year after the required disclosure information is provided to the IRS.