A recent Ninth Circuit Court of Appeals case—May v. United States—highlights the importance of filing Form 8886 and strictly complying with all IRS instructions when disclosing participation in listed and other reportable transactions. Recent additions to the list of transactions to be reported are conservation easement donations by syndicated entities and certain captive insurance companies.

The May case involved the extended assessment period for penalties under Internal Revenue Code (“IRC”) § 6501(c)(10). Even though the taxpayer failed to file Form 8886, the trial court denied the IRS's attempt to assess a penalty because the assessment was time-barred. The trial court reasoned that the form in which the IRS received the disclosed information was not critical when the IRS had, in fact, received the substantive information necessary to complete its assessment functions. The IRS conceded that it had the information necessary to assess a penalty under IRC § 6707A.

The Court of Appeals disagreed and instead found that use of the prescribed form—Form 8886—was required before the IRS could be time-barred from assessing the penalty. According to this decision, taxpayers—or at least those in the Ninth Circuit—must use Form 8886 when disclosing listed (and presumably other reportable) transactions and comply with all of the IRS's regulatory requirements.

The penalties under IRC § 6707A for failing to disclose listed or other reportable transactions on the specified form in the manner required by Treasury Regulations are draconian. IRC § 6501(c)(10) perpetually extends the time in which the IRS can assess the penalty, if Form 8886 is not used.

Taxpayers who have invested in listed or other reportable transactions should keep in mind that some due dates relevant to Form 8886 have already passed and others are rapidly approaching. Below we have provided the Form 8886 deadlines for Notice 2017-10, as revised by Notice 2017-29 (syndicated conservation easements) and Notice 2016-66, as revised by Notice 2017-08 (micro-captive insurance transactions).

Syndicated Conservation Easements:

Taxpayers who claimed deductions related to an investment in certain syndicated conservation easements in years 2010 through 2015 are required to file Form 8886 with the Office of Tax Shelter Analysis (“OTSA”) by October 2, 2017, but only if the period of limitations on assessment for such a year remained open as of December 23, 2016.

Taxpayers claiming such deductions in 2016 (and for all prospective years) are required to attach Form 8886 to their timely filed income tax returns and to file Form 8886 with OTSA at the same time. The deadline to file with OTSA was extended until May 1, 2017 for any tax returns filed prior to May 1, 2017. A timely extension to file a taxpayer's income tax return correspondingly extends the due date for Form 8886 to be filed with OTSA.

Micro-Captive Transactions:

Taxpayers who claimed deductions related to investments in micro-captive insurance companies in tax years 2006 through 2015 were required to file Form 8886 with the OTSA by May 1, 2017, but only if the period of limitations on assessment for such a year remained open.

Taxpayers claiming such deductions in 2016 (and for all prospective years) are required to attach Form 8886 to their timely filed income tax returns and to file Form 8886 with OTSA at the same time. The deadline to file with OTSA was extended until May 1, 2017 for any tax returns filed prior to May 1, 2017. A timely extension to file a taxpayer's income tax return correspondingly extends the due date for Form 8886 to be filed with OTSA.

We recommend that you talk to your tax advisor to determine if any of these deadlines apply to you, or if you otherwise need help filing Form 8886.