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Son of Boss Settlement Initiative FAQs
Section 2(b) — Terms of Initiative: Application of Penalties

Q-2b.1. If the taxpayer made a proper and timely disclosure under Announcement 2002-2, will the Service assert that the taxpayer is subject to penalties if the taxpayer does not elect to participate in the settlement initiative?

A-2b.1. In general, a taxpayer that made a proper and timely disclosure (for which the taxpayer was eligible) under Announcement 2002-2 will not be subject to accuracy-related penalty as provided in that announcement, regardless of whether the taxpayer elects to participate in the settlement initiative.

Q-2b.2. Which penalty will apply to taxpayers that failed to disclose the Son of Boss transaction before the issue was raised on examination, and therefore were not eligible under Announcement 2002-2?

A-2b.2. Taxpayers that were not eligible under Announcement 2002-2 cannot qualify for the penalty of 0 percent. A penalty of 10 percent will apply if the taxpayer was involved in only one Son of Boss transaction and no other listed transactions, and a penalty of 20 percent will apply if the taxpayer was involved in more than one Son of Boss transaction or involved in one or more other listed transactions. 

Q-2b.3. If the taxpayer did not properly disclose the Son of Boss tax shelter in accordance with Announcement 2002-2, and the taxpayer participated in one Son of Boss tax shelter with tax consequences in multiple tax years, but did not participate in any other Son of Boss tax shelter or other listed tax shelter, is the 10 percent penalty applicable?

A-2b.3. Yes, see section 2(b)(2)(i) of the Announcement 2004-46.

Q-2b.4. If the taxpayer did not properly disclose the Son of Boss tax shelter in accordance with Announcement 2002-2, and the taxpayer participated in the same Son of Boss tax shelter promotion involving multiple entities, but did not participate in any other Son of Boss tax shelter or other listed tax shelter, is the 10 percent penalty applicable?

A-2b.4. Yes, see section 2(b)(2)(i) of Announcement 2004-46.

Q-2b.5. If the taxpayer claimed the tax benefits from more than one Son of Boss transaction or another listed transaction in a current, prior or subsequent year return, whether or not the statute of limitations is still open, does the 20 percent penalty apply?

A-2b.5. Yes, see section 2(b)(2)(ii) of Announcement 2004-46.

Q-2b.6. A taxpayer did not disclose under Announcement 2002-2; however, the taxpayer attached a disclosure to the return. Is the taxpayer eligible for the 0 percent penalty?

A-2b.6. No, only those taxpayers who filed a proper disclosure under Announcement 2002-2 are eligible for the 0 percent penalty. Disclosure with the return does not provide penalty relief for tax shelter items.

Q-2b.7. Does the fact that a tax shelter registration number was shown on the return give penalty waiver?

A-2b.7. No, only taxpayers who disclosed under Announcement 2002-2 qualify for the 0 percent penalty.

Q-2b.8. If the taxpayer claimed the tax benefits of one Son of Boss transaction and also claimed the tax benefits of another listed transaction and the taxpayer was not required to disclose the other listed transaction under section 6011, does the 20 percent penalty apply?

A-2b.8. Yes, see section 2(b)(2)(ii) of Announcement 2004-46.

Q-2b.9. Will the Service consider changing the settlement terms regarding penalties as listed in Announcement 2004-46 on a case-by-case basis depending on the taxpayer’s specific circumstances?

A-2b.9. No.

Q-2b.10. If a taxpayer filed a qualified amended return but did not disclose the transaction under Announcement 2002-2 is the taxpayer eligible for the settlement initiative?

A-2b.10. If a taxpayer filed a qualified amended return with respect to the Son of Boss transaction and the taxpayer is otherwise eligible for the settlement initiative, the taxpayer is eligible for the settlement initiative. In determining the amount of the underpayment attributable to the Son of Boss transaction on which the penalty described in Section 2(b) will be calculated, the amount shown as the tax by the taxpayer on his return will include the amount shown as additional tax on the taxpayer's qualified amended return. See Treas. Reg. § 1.6664-2(c)(3) and Notice 2004-38, 2004-21 I.R.B. 949 (May 24, 2004), for the definition of qualified amended return.

Q-2b.11. If the taxpayer is under examination for another listed transaction and properly disclosed the Son of Boss transaction under Announcement 2002-2, does the taxpayer qualify for the zero, ten, or twenty percent penalty?

A-2b.11. Under Section 2(b)(1), the taxpayer is eligible for the zero percent penalty because the taxpayer properly disclosed the Son of Boss transaction.

Q-2b.12. If a taxpayer entered into two Son of Boss transactions in the same year, does the taxpayer qualify for the 10 percent penalty under Section 2(b)(2)?

A-2b.12. No. Under Section 2(b)(2), the taxpayer claimed tax benefits from another listed transaction, the other Son of Boss transaction.

Q-2b.13. If the taxpayer could not properly disclose the Son of Boss transaction under Announcement 2002-2 and participated in another listed transaction that the taxpayer disclosed under Announcement 2002-2, does the taxpayer qualify for the ten percent penalty?

A-2b.13. No. Under Section 2(b)(2), the taxpayer does not qualify for the ten percent penalty because the taxpayer claimed benefits from another listed transaction.

Q-2b.14. If a taxpayer has filed a qualified amended return completely removing another listed transaction from his return, can the taxpayer get the benefit of the 10 percent penalty provision under section 2(b)(2)(i) of Announcement 2004-46 rather than the 20 percent penalty under section 2(b)(2)(ii)?

A-2b.14. For purposes of section 2(b)(2), the Service will consider the taxpayer as not claiming tax benefits from any other listed transaction because of the qualified amended return only if the taxpayer agrees to sign a closing agreement fully conceding the tax benefits on the other listed transaction. 

Q-2b.15. Are amended returns filed after the release of Announcement 2004-46 eligible to be “qualified amended returns” within the meaning of Treas. Reg. § 1.6664-2(c), if they otherwise satisfy the conditions of a qualified amended return?

A-2b.15. Announcement 2004-46 does not affect whether an amended return is eligible to be a qualified amended return. Whether an amended return is a qualified amended return is determined under Treas. Reg. §1.6664-2(c) and Notice 2004-38, 2004-21 I.R.B. 949. 

Q-2b.16. If a taxpayer participated in a Son of Boss transaction, did not disclose the transaction under Announcement 2002-2, and has not yet disposed of the inflated basis asset(s) to claim the loss, what penalty will apply to the taxpayer’s transaction under the terms of Announcement 2004-46?

A-2b.16. The penalty under the Announcement applies to any underpayment attributable to the Son of Boss transaction. Because the taxpayer has no underpayment attributable to the Son of Boss transaction, the taxpayer who settles pursuant to the settlement initiative will not owe a penalty.

Q-2b.17. A taxpayer participated in two Son of Boss transactions, neither of which the taxpayer disclosed under Announcement 2002-2. In one transaction, the taxpayer sold assets in which the taxpayer claimed an inflated basis and, in the other transaction, the taxpayer has not yet disposed of the assets with the inflated basis. What penalty applies to the taxpayer under the settlement initiative?

A-2b.17. Because the taxpayer participated in more than one Son of Boss transaction, the taxpayer must pay a penalty of 20 percent on the underpayment attributable to the Son of Boss transaction in which the taxpayer sold the inflated basis assets.

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Page Last Reviewed or Updated: 18-Aug-2012