[Federal Register Volume 60, Number 2 (Wednesday, January 4, 1995)]
[Proposed Rules]
[Pages 406-410]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-120]
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
26 CFR Part 1
[IA-55-94]
RIN 1545-AT13
Accuracy-related Penalty
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
-----------------------------------------------------------------------
SUMMARY: This document contains proposed regulations which provide
guidance as to when a taxpayer may rely upon the advice of others as
evidence of reasonable cause and good faith within the meaning of
section 6664(c) of the Internal Revenue Code of 1986 for purposes of
avoiding the accuracy-related penalty of section 6662, and what
constitutes reasonable cause and good faith within the meaning of
section 6664(c) as it applies to the substantial understatement penalty
of section 6662(b)(2) with respect to tax shelter items of a
corporation. The proposed regulations implement changes to the
accuracy-related penalty under section 6662 that were made by Title VII
of the Uruguay Round Agreements Act (the Act) implementing the Uruguay
Round of the General Agreement on Tariffs and Trade. Finally, this
document provides notice of a public hearing on the proposed amendments
to the regulations.
DATES: Written comments must be received by April 7, 1995. The IRS
intends to hold a public hearing on these proposed regulations on April
28, 1995, beginning at 10 a.m. Persons wishing to speak at the hearing
must submit outlines of their comments by April 7, 1995.
ADDRESSES: Send submissions to: Internal Revenue Service, Attn:
CC:DOM:CORP:T:R (IA-55-94), room 5228, POB 7604, Ben Franklin Station,
Washington, DC 20044. The public hearing will be held in the IRS
Auditorium, Internal Revenue Building, 1111 Constitution Avenue, NW,
Washington, DC.
FOR FURTHER INFORMATION CONTACT: Concerning the regulations, David L.
Meyer, 202-622-6232; concerning submissions, Christina Vasquez, 202-
622-6803. (These are not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
Section 6662 of the Internal Revenue Code (Code) imposes an
accuracy-related penalty on certain underpayments of tax. Section
6664(c) provides that no accuracy-related penalty is imposed with
respect to any portion of an underpayment if it is shown that there was
a reasonable cause for such portion and that the taxpayer acted in good
faith with respect to such portion.
Under current regulations interpreting sections 6662 and 6664, a
taxpayer's good faith reliance on the advice (including an opinion) of
a professional tax advisor may be taken into account for purposes of
determining whether the taxpayer will be subject to an accuracy-related
penalty. See, e.g., Secs. 1.6662-4(g)(4)(ii) and 1.6664-4(b).
Section 6662(b)(2) of the Code imposes a penalty for a substantial
understatement of income tax. An understatement is substantial if it
exceeds the greater of 10 percent of the tax required to be shown on
the taxpayer's return for the taxable year, or $5,000 ($10,000 in the
case of a corporation other than an S corporation or a personal holding
company). An understatement is defined as the excess of (1) the amount
of tax required to be shown on the taxpayer's return, over (2) the
amount of tax imposed which is shown on the return, reduced by any
rebate.
The Code provides that the amount of an understatement is reduced
to the extent that certain conditions are met. For example, section
6662(d)(2), prior to amendment by the Act (Pub. L. 103-465), provided
that an understatement is reduced by the portion of the understatement
attributable to a tax shelter item of the taxpayer (the section 6662
tax shelter rule) if: (1) there is substantial authority for the
taxpayer's treatment of the tax shelter item; and (2) the taxpayer
reasonably believed (at the time its return was filed) that its
treatment of such item was more likely than not the proper treatment.
The substantial understatement penalty was first adopted in section
323 of the Tax Equity and Fiscal Responsibility Act of 1982, Pub. L.
97-248. At that time, Congress believed that the new standards would
``assure that taxpayers who take highly aggressive filing positions are
penalized while those who endeavor in good faith to self-assess are not
penalized'' and that, with respect to tax shelters, ``if the principal
purpose of a transaction is the reduction of tax, it is not
unreasonable to hold participants to a higher standard than ordinary
taxpayers.'' H.R. Conf. Rep. No. 97th Cong., 2d Sess. 575-76 (1982),
1982-2 C.B.650. More recently, Congress has been concerned that the
substantial understatement penalty has not been effectively deterring
corporate tax shelter transactions and thus, in Section 744 of the Act,
eliminated the section 6662 tax shelter rule as it applies to
corporations. As a result of this change, ``the standards applicable to
corporate tax shetlers are tightened'' and ``in no instance [will] this
modification result in a penalty not being imposed where a penalty
would have been imposed under prior law.'' S. Rep. No. 412, 103d Cong.,
2d Sess. 165 (1994); H.R. Rep. No. 826, 103d Cong., 2d Sess. 198-99
(1994). The change is effective for transactions occurring after
December 8, 1994.
The proposed regulations set forth in this document address issues
related to the section 6662 tax shelter rule and the reasonable cause
exception of section 6664. This guidance includes, but is not limited
to, rules that reflect the amendment of section 6662 by the Act.
Explanation of Provisions
Reliance on Tax Advisor
The proposed regulations set forth general rules clarifying when a
taxpayer may be considered to have reasonably relied in good faith upon
advice (including an opinion provided by a professional tax advisor).
These rules apply to all taxpayers and to both tax shelter items and
non-tax shelter items. In particular, the rules apply in determining
whether reasonable cause and good faith exist for purposes of section
6664(c) and also apply in determining whether a taxpayer other than a
corporation is considered to have reasonably relied in good faith on an
opinion in order to satisfy the ``reasonable belief'' requirement of
the section 6662 tax shelter rule.
In general, the proposed regulations require advice to be based on
all material facts (including, for example, the taxpayer's purposes for
entering into a transaction) and to relate applicable law to such facts
in reaching its conclusion. The advice must not be based upon
unreasonable factual or legal assumptions (including assumptions as to
future events), nor [[Page 407]] unreasonably rely on the
representations, findings or agreements of the taxpayer or any other
person.
Reasonable Cause for Tax Shelter Items of a Corporation
The proposed regulations provide additional guidance with respect
to the application of the reasonable cause exception of section 6664(c)
to a substantial understatement penalty attributable to a tax shelter
item of a corporation. These changes apply only to corporations.
Accordingly, no inference is intended with respect to the application
of section 6664(c) to a substantial understatement penalty attributable
to a tax shelter item of a taxpayer other than a corporation. Treasury
and the IRS invite comments as to the need for clarification of the
application of this exception to such items.
The proposed regulations provide that a corporation's legal
justification may be taken into account, as appropriate, in
establishing that the corporation acted with reasonable cause and in
good faith in its treatment of a tax shelter item only if there is
substantial authority for the treatment of the item and the corporation
reasonably believes in good faith that such treatment is more likely
than not the proper treatment. For this purpose, legal justification
includes any justification relating to the treatment or
characterization under the Federal tax law of the tax shelter item or
of the entity, plan or arrangement that gave rise to the item. Thus, a
taxpayer's belief (whether independently formed or based on the advice
of others) as to the merits of the taxpayer's underlying position is a
legal justification. Satisfaction of the substantial authority and
reasonable belief criteria is an important factor to be considered in
determining whether the taxpayer acted with reasonable cause and in
good faith. However, it is not necessarily dispositive. A corporation
will qualify for the reasonable cause and good faith exception only if,
under all pertinent facts and circumstances, it acted with reasonable
cause and in good faith.
The proposed regulations also provide that facts and circumstances
other than a corporation's legal justification may be taken into
account, as appropriate, in determining whether it acted with
reasonable cause and in good faith, regardless of whether the
substantial authority and reasonable belief requirements are satisfied.
The provisions relating to the reasonable cause and good faith
exception with respect to corporate tax shelters apply only for
purposes of the substantial understatement penalty. No inference is
intended with respect to how the reasonable cause exception may apply
to the negligence penalty of section 6662(b)(1). The proposed
regulations do not alter the definitions of tax shelter or tax shelter
items contained in Sec. 1.6662-4(g)(2) and (3).
Conforming Changes
The proposed regulations would amend the existing regulations under
section 6662 to reflect the changes made by the Act and to clarify the
definition of reasonable belief under the section 6662 tax shelter
rule.
In addition, the proposed regulations clarify that the
determination of whether a corporate or non-corporate taxpayer acted
with reasonable cause and in good faith with respect to an underpayment
that is related to an item reflected on the return of a pass-through
entity is made on the basis of all pertinent facts and circumstances,
including the taxpayer's own actions, as well as the actions of the
pass-through entity.
Proposed Effective Date
The amendments contained in this notice are proposed to be
effective for returns the due date of which (determined without regard
to extensions) is after the date on which final regulations are
published in the Federal Register.
Special Analyses
It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in EO 12866. Therefore,
a regulatory assessment is not required. It has also been determined
that section 553(b) of the Administrative Procedure Act (5 U.S.C.
chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do
not apply to these regulations, and therefore, a Regulatory Flexibility
Analysis is not required. Pursuant to section 7805(f) of the Internal
Revenue Code, this notice of proposed rulemaking will be submitted to
the Chief Counsel for Advocacy of the Small Business Administration for
comment on its impact on small business.
Comments and Public Hearing
Before the adoption of these proposed regulations, consideration
will be given to any written comments that are submitted timely (a
signed original and eight (8) copies) to the IRS. All comments will be
available for public inspection and copying in their entirety.
A public hearing will be held on April 28, 1995, in the IRS
Auditorium, Internal Revenue Building, 1111 Constitution Avenue, NW,
Washington, DC. Because of access restrictions, visitors will not be
admitted beyond the building lobby more than 15 minutes before the
hearing starts.
The rules of 26 CFR 601.601(a)(3) apply to the hearing.
Persons who wish to present oral comments at the hearing must
submit written comments, an outline of the topics to be discussed, and
the time to be devoted to each topic by April 7, 1995.
A period of 10 minutes will be allotted to each person for making
comments.
An agenda showing the scheduling of the speakers will be prepared
after the deadline for receiving outlines has passed. Copies of the
agenda will be available free of charge at the hearing.
Drafting Information
The principal author of these proposed regulations is David L.
Meyer, Office of Assistant Chief Counsel, Income Tax and Accounting,
IRS. However, other personnel from the IRS and Treasury Department
participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.6662-0 is amended by revising the entries for
Secs. 1.6662-2(d) and 1.6662-4(g) to read as follows:
Sec. 1.6662-0 Table of contents.
* * * * *
Sec. 1.6662-2 Accuracy related penalty.
* * * * *
(d) Effective date.
(1) In general.
(2) Special rules for tax shelter items.
* * * * *
Sec. 1.6662-4 Substantial understatement of income tax.
* * * * *
(g) Items relating to tax shelters.
(1) In general.
(i) Non-corporate taxpayers.
(ii) Corporate taxpayers.
(A) In general.
(B) Special rule for transactions occurring prior to December 9,
1994.
(iii) Disclosure irrelevant.
(iv) Cross-reference. [[Page 408]]
(2) Tax shelter.
(i) In general.
(ii) Principal purpose.
(3) Tax shelter item.
(4) Reasonable belief.
(i) In general.
(ii) Facts and circumstances; reliance on tax advisor.
* * * * *
Par. 3. Section 1.6662-2 is amended by:
1. Redesignating the text of paragraph (d) following the heading as
paragraph (d)(1), adding a new heading for newly designated paragraph
(d)(1), and revising the second sentence of newly redesignated
paragraph (d)(1).
2. Adding a new paragraph (d)(2).
The additions and revisions read as follows:
Sec. 1.6662-2 Accuracy-related penalty.
* * * * *
(d) Effective date--(1) In general. * * * Except as provided in the
preceding sentence and in paragraph (d)(2) of this section,
Secs. 1.6662-1 through 1.6662-5 apply to returns the due date of which
(determined without regard to extensions of time for filing) is after
December 31, 1989. * * *
(2) Special rules for tax shelter items. Sections 1.6662-4(g)(1)
and 1.6662-4(g)(4) apply to returns the due date of which (determined
without regard to extensions of time for filing) is after the date on
which final regulations are published in the Federal Register. Sections
1.6662-4(g)(1) and (4) (as contained in 26 CFR Part 1 revised April 1,
1994) apply to returns the due date of which (determined without regard
to extensions of time for filing) is on or before the date on which
final regulations are published in the Federal Register and after
December 31, 1989, subject to changes resulting from Section 744 of
Title VII of the Uruguay Round Agreements Act, Pub. L. 103-465 (108
Stat, 4809).
Par. 4. Section 1.6662-4 is amended by revising paragraphs (g)(1),
(g)(4), and (g)(5) to read as follows:
Sec. 1.6662-4 Substantial understatement of income tax.
* * * * *
(g) Items relating to tax shelters--(1) In general--(i) Non-
corporate taxpayers. Tax shelter items (as defined in paragraph (g)(3)
of this section) of a taxpayer other than a corporation are treated for
purposes of this section as if such items were shown properly on the
return for a taxable year in computing the amount of tax shown on the
return, and thus the tax attributable to such items is not included in
the understatement for the year, if--
(A) There is substantial authority (as provided in paragraph (d) of
this section) for the tax treatment of that item; and
(B) The taxpayer reasonably believed at the time the return was
filed that the tax treatment of that item was more likely than not the
proper treatment.
(ii) Corporate taxpayers--(A) In general. Except as provided in
paragraph (g)(1)(ii)(B) of this section, all tax shelter items (as
defined in paragraph (g)(3) of this section) of a corporation are taken
into account in computing the amount of any understatement.
(B) Special rule for transactions occurring prior to December 9,
1994. The tax shelter items of a corporation arising in connection with
transactions occurring prior to December 9, 1994 are treated for
purposes of this section as if such items were shown properly on the
return if the requirements of paragraph (g)(1)(i) are satisfied with
respect to such items.
(iii) Disclosure irrelevant. Disclosure made with respect to a tax
shelter item of either a corporate or non-corporate taxpayer does not
affect the amount of an understatement.
(iv) Cross-reference. See Sec. 1.6664-4(e) for certain rules
regarding the availability of the reasonable cause and good faith
exception to the substantial understatement penalty with respect to tax
shelter items of corporations.
* * * * *
(4) Reasonable belief--(i) In general. For purposes of section
6662(d) and paragraph (g)(1)(i)(B) of this section (pertaining to tax
shelter items of non-corporate taxpayers), a taxpayer is considered
reasonably to believe that the tax treatment of an item is more likely
than not the proper tax treatment if (without taking into account the
possibility that a return will not be audited, that an issue will not
be raised on audit, or that an issue will be settled)--
(A) The taxpayer analyzes the pertinent facts and authorities in
the manner described in paragraph (d)(3)(ii) of this section, and in
reliance upon that analysis, reasonably concludes in good faith that
there is a greater than 50-percent likelihood that the tax treatment of
the item will be upheld if challenged by the Internal Revenue Service;
or
(B) The taxpayer reasonably relies in good faith on the opinion of
a professional tax advisor, if the opinion is based on the tax
advisor's analysis of the pertinent facts and authorities in the manner
described in paragraph (d)(3)(ii) of this section and unambiguously
states that the tax advisor concludes that there is a greater than 50-
percent likelihood that the tax treatment of the item will be upheld if
challenged by the Internal Revenue Service.
(ii) Facts and circumstances; reliance on professional tax advisor.
All facts and circumstances must be taken into account in determining
whether a taxpayer satisfies the requirements of paragraph (g)(4)(i) of
this section. However, in no event will a taxpayer be considered to
have reasonably relied in good faith on the opinion of a professional
tax advisor for purposes of paragraph (g)(4)(i)(B) of this section
unless the requirements of Sec. 1.6664-4(c)(1) are met. The fact that
the requirements of Sec. 1.6664-4(c)(1) are satisfied will not
necessarily establish that the taxpayer reasonably relied on the
opinion in good faith. For example, reliance may not be reasonable or
in good faith if the taxpayer knew, or should have known, that the
advisor lacked knowledge in the relevant aspects of Federal tax law.
(5) Pass-through entities. In the case of tax shelter items
attributable to a pass-through entity, the actions described in
paragraphs (g)(4)(i)(A) and (B) of this section, if taken by the
entity, are deemed to have been taken by the taxpayer and are
considered in determining whether the taxpayer reasonably believed that
the tax treatment of an item was more likely than not the proper tax
treatment.
Par. 5. Section 1.6664-0 is amended by revising the entries for
Secs. 1.6664-1(b) and 1.6664-4 to read as follows:
Sec. 1.6664-0 Table of contents.
* * * * *
Sec. 1.6664-1 Accuracy-related and fraud penalties; definitions
and special rules.
* * * * *
(b) Effective date.
(1) In general.
(2) Reasonable cause and good faith exception to section 6662
penalties.
* * * * *
Sec. 1.6664-4 Reasonable cause and good faith exception to section
6662 penalties.
(a) In general.
(b) Facts and circumstances taken into account.
(1) In general.
(2) Examples.
(c) Reliance on opinion or advice.
(1) Fact and circumstances; minimum requirements.
(i) All facts and circumstances considered.
(ii) No unreasonable assumptions.
(iii) Law is related to actual facts.
(2) Definitions.
(i) Advice. [[Page 409]]
(ii) Material.
(d) Pass-through items.
(e) Special rules for substantial understatement penalty
attributable to tax shelter items of corporations.
(1) In general; facts and circumstances.
(2) Reasonable cause based on legal justification.
(i) Minimum requirements.
(A) Authority requirement.
(B) Belief requirement.
(ii) Legal justification defined.
(3) Minimum requirements not dispositive.
(4) Other factors.
(f) Transactions between persons described in section 482 and net
section 482 transfer price adjustments. [Reserved]
(g) Valuation misstatements of charitable deduction property.
(1) In general.
(2) Definitions.
(i) Charitable deduction property.
(ii) Qualified appraisal.
(iii) Qualified appraiser.
* * * * *
Par. 6. Section 1.6664-1 is amended by:
1. Redesignating the text of paragraph (b) following the heading as
paragraph (b)(1), adding a heading for newly designated paragraph
(b)(1), and revising the text of newly designated paragraph (b)(1).
2. Adding paragraph (b)(2).
The additions and revisions read as follows:
Sec. 1.6664-1 Accuracy-related and fraud penalties; definitions and
special rules.
* * * * *
(b) Effective date--(1) In general. Sections 1.6664-1 through
1.6664-3 apply to returns the due date of which (determined without
regard to extensions of time for filing) is after December 31, 1989.
(2) Reasonable cause and good faith exception to section 6662
penalties. Section 1.6664-4 applies to returns the due date of which
(determined without regard to extensions of time for filing) is after
the date on which the final regulations are published in the Federal
Register. Section 1.6664-4 (as contained in 26 CFR Part 1 revised April
1, 1994) applies to returns the due date of which (determined without
regard to extensions of time for filing) is on or before the date on
which the final regulations are published in the Federal Register and
after December 31, 1989, subject to changes resulting from Section 744
of Title VII of the Uruguay Round Agreements Act, Pub. L. 103-465 (108
Stat. 4809).
Par. 7. Section 1.6664-4 is amended by:
1. Revising the last sentence of paragraph (a).
2. Revising paragraph (b)(1).
3. Revising the introductory language of paragraph (b)(2) and
Example 1.
4. Redesignating paragraphs (c), (d) and (e) as paragraphs (d), (f)
and (g), respectively.
5. Revising newly designated paragraph (d).
6. Adding new paragraphs (c) and (e).
The revisions and additions read as follows:
Sec. 1.6664-4 Reasonable cause and good faith exception to section
6662 penalties.
(a) * * * Rules for determining whether the reasonable cause and
good faith exception applies are set forth in paragraphs (b) through
(g) of this section.
(b) Facts and circumstances taken into account--(1) In general. The
determination of whether a taxpayer acted with reasonable cause and in
good faith is made on a case-by-case basis, taking into account all
pertinent facts and circumstances. (See paragraph (e) of this section
for certain rules relating to a substantial understatement penalty
attributable to tax shelter items of corporations.) Generally, the most
important factor is the extent of the taxpayer's effort to assess the
taxpayer's proper tax liability. Circumstances that may indicate
reasonable cause and good faith include an honest misunderstanding of
fact or law that is reasonable in light of all of the facts and
circumstances, including the experience, knowledge and education of the
taxpayer. An isolated computational or transcriptional error generally
is not inconsistent with reasonable cause and good faith. Reliance on
an information return or on the advice of a professional tax advisor or
an appraiser does not necessarily demonstrate reasonable cause and good
faith. Similarly, reasonable cause and good faith is not necessarily
indicated by reliance on facts that, unknown to the taxpayer, are
incorrect. Reliance on an information return, professional advice or
other facts, however, constitutes reasonable cause and good faith if,
under all the circumstances, such reliance was reasonable and the
taxpayer acted in good faith. (See paragraph (c) of this section for
certain rules relating to reliance on the advice of others.) For
example, reliance on erroneous information (such as an error relating
to the cost or adjusted basis of property, the date property was placed
in service, or the amount of opening or closing inventory)
inadvertently included in data compiled by the various divisions of a
multidivisional corporation or in financial books and records prepared
by those divisions generally indicates reasonable cause and good faith,
provided the corporation employed internal controls and procedures,
reasonable under the circumstances, that were designed to identify such
factual errors. Reasonable cause and good faith ordinarily is not
indicated by the mere fact that there is an appraisal of the value of
property. Other factors to consider include the methodology and
assumptions underlying the appraisal, the appraised value, the
relationship between appraised value and purchase price, the
circumstances under which the appraisal was obtained, and the
appraiser's relationship to the taxpayer or to the activity in which
the property is used. (See paragraph (g) of this section for certain
rules relating to appraisals for charitable deduction property.) A
taxpayer's reliance on erroneous information reported on a Form W-2,
Form 1099 or other information return indicates reasonable cause and
good faith, provided the taxpayer did not know or have reason to know
that the information was incorrect. Generally, a taxpayer knows or has
reason to know that the information on an information return is
incorrect if such information is inconsistent with other information
reported or otherwise furnished to the taxpayer, or with the taxpayer's
knowledge of the transaction. This knowledge includes, for example, the
taxpayer's knowledge of the terms of his employment relationship or of
the rate of return on a payor's obligation.
(2) Examples. The following examples illustrate this paragraph (b).
They do not involve tax shelter items. (See paragraph (e) of this
section for certain rules relating to the substantial understatement
penalty in connection with the tax shelter items of corporations.)
Example 1. A, an individual calendar year taxpayer, engages B, a
professional tax advisor, to give A advice concerning the
deductibility of certain state and local taxes. A provides B with
full details concerning the taxes at issue. B advises A that the
taxes are fully deductible. A, in preparing his own tax return,
claims a deduction for the taxes. Absent other facts, and assuming
the facts and circumstances surrounding B's advice and A's reliance
on such advice satisfy the requirements of paragraph (c) of this
section, A is considered to have demonstrated good faith by seeking
the advice of a professional tax advisor, and to have shown
reasonable cause for any underpayment attributable to the deduction
claimed for the taxes. However, if A had sought advice from someone
that A knew, or should have known, lacked knowledge in the relevant
aspects of Federal tax law, or if other facts demonstrate that A
failed to act reasonably or in good faith, A would not be considered
to have shown reasonable cause or to have acted in good faith.
* * * * * [[Page 410]]
(c) Reliance on opinion or advice--(1) Facts and circumstances;
minimum requirements. All facts and circumstances must be taken into
account in determining whether a taxpayer has reasonably relied in good
faith on advice (including the opinion of a professional tax advisor)
as to the treatment of the taxpayer (or any entity, plan or
arrangement) under Federal tax law. However, in no event will a
taxpayer be considered to have reasonably relied in good faith on
advice unless the requirements of this paragraph (c)(1) are satisfied.
The fact that these requirements are satisfied will not necessarily
establish that the taxpayer reasonably relied on the advice (including
the opinion of a professional tax advisor) in good faith. For example,
reliance may not be reasonable or in good faith if the taxpayer knew,
or should have known, that the advisor lacked knowledge in the relevant
aspects of Federal tax law.
(i) All facts and circumstances considered. The advice must be
based upon all material facts and circumstances, including, for
example, the taxpayer's purposes (and the relative weight of such
purposes) for entering into a transaction and for structuring a
transaction in a particular manner.
(ii) No unreasonable assumptions. The advice must not be based on
unreasonable factual or legal assumptions (including assumptions as to
future events) and must not unreasonably rely on the representations,
statements, findings or agreements of the taxpayer or any other person.
For example, the advice must not be based upon a representation or
assumption which the taxpayer knows or has reason to know is unlikely
to be true, such as an inaccurate representation or assumption as to
the taxpayer's purposes for entering into a transaction or for
structuring a transaction in a particular manner.
(iii) Law is related to actual facts. The advice must be based on
the law as it relates to the actual facts.
(2) Definitions--(i) Advice. Advice is any communication, including
the opinion of a professional tax advisor, setting forth the analysis
or conclusion of a person, other than the taxpayer, provided to (or for
the benefit of) the taxpayer and on which the taxpayer relies, directly
or indirectly, with respect to the imposition of the section 6662
accuracy-related penalty. Advice does not have to be in any particular
form.
(ii) Material. A fact is material if it reasonably could be
expected, based upon information available at the time the advice is
given, to be relevant to the proper tax treatment of the item or the
taxpayer's exposure to the accuracy-related penalty under section 6662.
(d) Pass-through items. The determination of whether a taxpayer
acted with reasonable cause and in good faith with respect to an
underpayment that is related to an item reflected on the return of a
pass-through entity shall be made on the basis of all pertinent facts
and circumstances, including the taxpayer's own actions, as well as the
actions of the pass-through entity.
(e) Special rules for substantial understatement penalty
attributable to tax shelter items of corporations--(1) In general;
facts and circumstances. The determination of whether a corporation
acted with reasonable cause and in good faith in its treatment of a tax
shelter item (as defined in Sec. 1.6662-4(g)(3)) is based on all
pertinent facts and circumstances. Paragraphs (e)(2), (3) and (4) of
this section set forth rules which apply, in the case of a penalty
attributable to a substantial understatement of income tax (within the
meaning of section 6662(d)), in determining whether a corporation acted
with reasonable cause and in good faith with respect to a tax shelter
item.
(2) Reasonable cause based on legal justification--(i) Minimum
requirements. A corporation's legal justification (as described in
paragraph (e)(2)(ii) of this section) may be taken into account, as
appropriate, in establishing that the corporation acted with reasonable
cause and in good faith in its treatment of a tax shelter item only if
the authority requirement of paragraph (e)(2)(i)(A) of this section and
the belief requirement of paragraph (e)(2)(i)(B) of this section are
satisfied (the minimum requirements). Thus, a failure to satisfy the
minimum requirements will preclude a finding of reasonable cause and
good faith based (in whole or in part) on the corporation's legal
justification.
(A) Authority requirement. The authority requirement is satisfied
only if there is substantial authority (within the meaning of
Sec. 1.6662-4(d)) for the tax treatment of the item.
(B) Belief requirement. The belief requirement is satisfied only
if, based on all facts and circumstances, the corporation reasonably
believed, at the time the return was filed, that the tax treatment of
the item was more likely than not the proper treatment. For purposes of
the preceding sentence, a corporation is considered reasonably to
believe that the tax treatment of an item is more likely than not the
proper tax treatment if (without taking into account the possibility
that a return will not be audited, that an issue will not be raised on
audit, or that an issue will be settled)--
(1) The corporation analyzes the pertinent facts and authorities in
the manner described in Sec. 1.6662-4(d)(3)(ii), and in reliance upon
that analysis, reasonably concludes in good faith that there is a
greater than 50-percent likelihood that the tax treatment of the item
will be upheld if challenged by the Internal Revenue Service; or
(2) The corporation reasonably relies in good faith on the opinion
of a professional tax advisor, if the opinion is based on the tax
advisor's analysis of the pertinent facts and authorities in the manner
described in Sec. 1.6662-4(d)(3)(ii) and unambiguously states that the
tax advisor concludes that there is a greater than 50-percent
likelihood that the tax treatment of the item will be upheld if
challenged by the Internal Revenue Service. (See paragraph (c) of this
section for certain rules governing reliance upon the opinion of a
professional tax advisor.)
(ii) Legal justification defined. For purposes of this paragraph
(e), legal justification includes any justification relating to the
treatment or characterization under the Federal tax law of the tax
shelter item or of the entity, plan or arrangement that gave rise to
the item. Thus, a taxpayer's belief (whether independently formed or
based on the advice of others) as to the merits of the taxpayer's
underlying position is a legal justification.
(3) Minimum requirements not dispositive. Satisfaction of the
minimum requirements of paragraph (e)(2) of this section is an
important factor to be considered in determining whether a corporation
acted with reasonable cause and in good faith, but is not necessarily
dispositive.
(4) Other factors. Facts and circumstances other than a
corporation's legal justification may be taken into account, as
appropriate, in determining whether the corporation acted with
reasonable cause and in good faith with respect to a tax shelter item
regardless of whether the minimum requirements of paragraph (e)(2) of
this section are satisfied.
* * * * *
Margaret Milner Richardson,
Commissioner of Internal Revenue.
[FR Doc. 95-120 Filed 1-3-95; 8:45 am]
BILLING CODE 4830-01-U
