[Federal Register Volume 63, Number 231 (Wednesday, December 2, 1998)]
[Rules and Regulations]
[Pages 66433-66435]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-31985]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 8790]
RIN 1545-AU38
Definition of Reasonable Basis
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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SUMMARY: This document contains final regulations relating to the
accuracy-related penalty. These amendments are necessary to define
reasonable basis and to make conforming changes to existing
regulations. These regulations affect any taxpayer that files a tax
return.
DATES: Effective date. These regulations are effective December 2,
1998.
Applicability date. For dates of applicability, see Secs. 1.6662-
2(d) and 1.6664-1(b)(2).
FOR FURTHER INFORMATION CONTACT: Beverly A. Baughman, 202-622-4940 (not
a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
On September 1, 1995, the IRS issued final regulations [TD 8617 (60
FR 45661)], relating to the accuracy-related penalty under chapter 1 of
the Internal Revenue Code. Those regulations provided guidance
concerning the reasonable basis standard for purposes of (1) the
negligence penalty under section 6662(b)(1), and (2) the disclosure
exception to the penalties for disregarding rules or regulations under
section 6662(b)(1) and the substantial understatement of income tax
under section 6662(b)(2). In the preamble to the final regulations, the
IRS and Treasury Department requested comments and suggestions on
providing further guidance on the reasonable basis standard. On
November 12, 1996, proposed regulations [IA-42-95 (1996-49 I.R.B. 21)
(see Sec. 601.601(d)(2)(ii)(b) of this chapter)] defining reasonable
basis and making conforming changes to the final regulations relating
to the accuracy-related penalty were published in the Federal Register
(61 FR 58020).
Written comments responding to the notice of proposed rulemaking
were received. A public hearing was held on February 25, 1997. After
consideration of all the comments, the proposed regulations under
section 6662 relating to the definition of reasonable basis for
purposes of the accuracy-related penalty are adopted as revised by this
Treasury decision.
In addition, on August 5, 1997, the Taxpayer Relief Act (TRA) of
1997, Pub. L. 105-34 (111 Stat. 788), was enacted. The Act added a
restriction regarding whether or not a corporation has a reasonable
basis for its tax treatment of an item for purposes of reducing the
amount of the substantial understatement penalty. This restriction has
been incorporated into the final regulations.
Explanation of Provisions and Summary of Comments
These final regulations provide that a return position will have a
reasonable basis for purposes of the accuracy-related penalties if it
is reasonably based on one or more certain authorities. Also, if the
return position does not satisfy the reasonable basis standard, a
reasonable cause and good faith exception may still apply.
One commentator suggested that the substantial authority standard
in Sec. 1.6662-4(d)(3)(ii) of existing regulations and the reasonable
basis standard in Sec. 1.6662-3(b)(3) of the proposed regulations be
expanded to include as authority a well-reasoned construction of the
applicable regulatory provisions in addition to the statutory
provisions. The substantial authority standard in Sec. 1.6662-
4(d)(3)(ii) has not been expanded to reflect this comment. However, the
definition of reasonable basis in Sec. 1.6662-3(b)(3) has been
clarified to include an explicit cross-reference to the nature of the
analysis discussion in Sec. 1.6662-4(d)(3)(ii) of the substantial
authority regulations.
Several commentators suggested that the final regulations explain
where the reasonable basis standard ranks in the hierarchy of return
position standards. This suggestion was not adopted. The final
regulations do not rank the standards formally because such a
comparison would change the focus of the reasonable basis regulations
from the taxpayer's obligation to determine his or her tax liability in
accordance with the internal revenue laws to the probability of the
return position prevailing in litigation.
Several commentators supported the exclusion of a numerical
qualification of the reasonable basis standard in the proposed
regulations because they believed that such a qualification would
encourage arbitrary and mechanical application of the standards and
create bad precedent outside the scope of the reasonable basis
standard. The final regulations do not include a numerical
qualification.
One commentator requested that the final regulations refer
specifically to Rev. Rul. 59-60 (1959-1 C.B. 237) (see
Sec. 601.601(d)(2)(ii)(b) of this chapter), which provides guidance
regarding the valuation of stock of closely held corporations for
estate and gift tax purposes. The final regulations do not adopt this
suggestion. It is not necessary to include a reference to a specific
revenue ruling because Sec. 1.6662-4(d)(3)(iii) of the existing
regulations already lists revenue rulings as an acceptable type of
authority.
One commentator requested that the final regulations clarify the
effect of the Omnibus Budget Reconciliation Act of 1993, Pub. L. 103-66
(107 Stat. 312), and the reasonable cause and good faith exception
under section 6664 on a taxpayer's access to prepayment litigation in
Tax Court. The final regulations do not adopt this suggestion. It is
not necessary to clarify that a taxpayer has access to prepayment
litigation in Tax Court because under section 6665 the Tax Court has
jurisdiction to redetermine additions to tax in the same manner as the
underlying tax.
Pursuant to the Taxpayer Relief Act of 1997, Pub. L. 105-34 (111
Stat. 788), Sec. 1.6662-4(e)(3) has been added to the final
regulations. That section provides that for purposes of reducing the
amount of the substantial understatement penalty by making an adequate
disclosure, a corporation will not be treated as having a reasonable
basis for its tax treatment of an item attributable to a multi-party
financing transaction entered into after August 5, 1997, if the
treatment does not clearly reflect the income of the corporation.
The Chief Counsel for Advocacy of the Small Business Administration
requested that the preamble to the regulations explain why the IRS has
concluded that this regulation is not subject to the Regulatory
Flexibility Act (5 U.S.C. chapter 6). The Chief Counsel for Advocacy
submits that the regulations tighten the definition of reasonable basis
and, thus, impose a de facto recordkeeping requirement because they may
require small businesses to keep and maintain records (such as the
documents referred to in Sec. 1.6662-4(d)(3)(iii)) to support tax
reporting decisions.
After carefully considering these comments, the IRS and Treasury
have
[[Page 66434]]
concluded that this regulation is not subject to the Regulatory
Flexibility Act, 5 U.S.C. Sec. 603 (1994). That section requires a
regulatory flexibility analysis for an interpretative rule involving
the internal revenue laws only to the extent the interpretative rule
imposes a collection of information requirement on small entities. A
collection of information requirement is defined in 5 U.S.C.
Sec. 601(7) (1994) to mean the obtaining, causing to be obtained,
soliciting, or requiring the disclosure to third parties or the public,
of facts or opinions by or for an agency, regardless of form or format,
calling for either (i) answers to identical questions posed to, or
identical reporting or recordkeeping requirements imposed on, ten or
more persons, other than agencies, instrumentalities, or employees of
the United States, or (ii) answers to questions posed to agencies,
instrumentalities, or employees of the United States that are to be
used for general statistical purposes.
Furthermore, the phrase, recordkeeping requirement, is defined in 5
U.S.C. 601(8) (1994) as a requirement imposed by an agency on persons
to maintain specified records. Ever since this term was first used in
the Paperwork Reduction Act of 1980 (44 U.S.C. chapter 35), the IRS and
Treasury have consistently interpreted the phrase as applying only when
Treasury regulations directly require persons to maintain specified
records. We believe this interpretation is consistent with the explicit
statutory language as well as Congressional intent to apply the law
only to situations in which government agencies require persons to
maintain particular records.
Thus, we believe the final regulations do not impose a
recordkeeping requirement or other collection of information
requirement, as defined in 5 U.S.C. 601(7), (8) (1994). The regulations
do not impose on taxpayers additional requirements to either report
information to the IRS or to keep specified records. Because the
regulations do not contain a reporting requirement or other collection
of information requirement, the provisions of the Regulatory
Flexibility Act do not apply.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in EO 12866. Therefore, a
regulatory assessment is not required. It also has been determined that
section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5)
does not apply to these regulations. Pursuant to section 7805(f) of the
Internal Revenue Code, the notice of proposed rulemaking preceding
these regulations was submitted to the Chief Counsel for Advocacy of
the Small Business Administration for comment on the impact of the
proposed regulations on small business. The Chief Counsel for Advocacy
submitted comments on these regulations, which are discussed above.
Drafting Information: The principal author of these regulations is
Beverly A. Baughman, Office of the Assistant Chief Counsel (Income Tax
& Accounting). 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.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 is 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:
1. Adding the entry for Sec. 1.6662-2(d)(4).
2. Removing the entries for Sec. 1.6662-3(b)(3)(i) and (ii).
3. Adding the entry for Sec. 1.6662-4(e)(3).
4. Revising the entry for Sec. 1.6662-7(d).
5. Removing the entries for Sec. 1.6662-7(d)(1) and (2).
The revision and additions read as follows:
Sec. 1.6662-0 Table of contents.
* * * * *
Sec. 1.6662-2 Accuracy-related penalty.
* * * * *
(d) * * *
(4) Special rule for reasonable basis.
* * * * *
Sec. 1.6662-4 Substantial understatement of income tax.
* * * * *
(e) * * *
(3) Restriction for corporations.
* * * * *
Sec. 1.6662-7 Omnibus Budget Reconciliation Act of 1993 changes
to the accuracy-related penalty.
* * * * *
(d) Reasonable basis.
Par 3. Section 1.6662-2 is amended by:
1. Revising the second sentence in paragraph (d)(1).
2. Revising the first sentence in paragraph (d)(2).
3. Adding paragraph (d)(4).
The addition and revisions read as follows:
Sec. 1.6662-2 Accuracy-related penalty.
* * * * *
(d) * * * (1) * * * Except as provided in the preceding sentence
and in paragraphs (d)(2), (3), and (4) 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, but before January 1, 1994. * * *
(2) Returns due after December 31, 1993. Except as provided in
paragraphs (d)(3) and (4) of this section and the last sentence of this
paragraph (d)(2), the provisions of Secs. 1.6662-1 through 1.6662-4 and
Sec. 1.6662-7 (as revised to reflect the changes made to the accuracy-
related penalty by the Omnibus Budget Reconciliation Act of 1993) and
of Sec. 1.6662-5 apply to returns the due date of which (determined
without regard to extensions of time for filing) is after December 31,
1993. * * *
* * * * *
(4) Special rules for reasonable basis. Section 1.6662-3(b)(3)
applies to returns filed on or after December 2, 1998.
Par. 4. Section Sec. 1.6662-3 is amended by:
1. Revising the third sentence in paragraph (b)(1) introductory
text.
2. Revising paragraph (b)(3).
The revisions read as follows:
Sec. 1.6662-3 Negligence or disregard of rules or regulations.
* * * * *
(b)* * * (1) * * * A return position that has a reasonable basis as
defined in paragraph (b)(3) of this section is not attributable to
negligence. * * *
* * * * *
(3) Reasonable basis. Reasonable basis is a relatively high
standard of tax reporting, that is, significantly higher than not
frivolous or not patently improper. The reasonable basis standard is
not satisfied by a return position that is merely arguable or that is
merely a colorable claim. If a return position is reasonably based on
one or more of the authorities set forth in Sec. 1.6662-4(d)(3)(iii)
(taking into account the relevance and persuasiveness of the
authorities, and subsequent developments), the return position will
generally satisfy the reasonable basis standard even though it may not
satisfy the substantial authority standard as defined in Sec. 1.6662-
4(d)(2). (See Sec. 1.6662-4(d)(3)(ii) for rules with
[[Page 66435]]
respect to relevance, persuasiveness, subsequent developments, and use
of a well-reasoned construction of an applicable statutory provision
for purposes of the substantial understatement penalty.) In addition,
the reasonable cause and good faith exception in Sec. 1.6664-4 may
provide relief from the penalty for negligence or disregard of rules or
regulations, even if a return position does not satisfy the reasonable
basis standard.
* * * * *
Par. 5. Section 1.6662-4 is amended by:
1. Revising the second sentence in paragraph (d)(2).
2. Adding paragraph (e)(3).
The addition and revision reads as follows:
Sec. 1.6662-4 Substantial understatement of income tax.
* * * * *
(d) * * *
(2) * * * The substantial authority standard is less stringent than
the more likely than not standard (the standard that is met when there
is a greater than 50-percent likelihood of the position being upheld),
but more stringent than the reasonable basis standard as defined in
Sec. 1.6662-3(b)(3). * * *
* * * * *
(e) * * *
(3) Restriction for corporations. For purposes of paragraph
(e)(2)(i) of this section, a corporation will not be treated as having
a reasonable basis for its tax treatment of an item attributable to a
multi-party financing transaction entered into after August 5, 1997, if
the treatment does not clearly reflect the income of the corporation.
* * * * *
Par. 6. In Sec. 1.6662-7, paragraph (d) is revised to read as
follows:
Sec. 1.6662-7 Omnibus Budget Reconciliation Act of 1993 changes to the
accuracy-related penalty.
* * * * *
(d) Reasonable basis. For purposes of Secs. 1.6662-3(c) and 1.6662-
4(e) and (f) (relating to methods of making adequate disclosure), the
provisions of Sec. 1.6662-3(b)(3) apply in determining whether a return
position has a reasonable basis.
Par. 7. Section 1.6664-0 is amended by:
1. Revising the entry for Sec. 1.6664-4(c)(2).
2. Removing the entries for Secs. 1.6664-4(c)(1)(iii), (c)(2)(i),
and (c)(2)(ii).
3. Adding the entry for Sec. 1.6664-4(g)(3).
The revision and addition reads as follows:
Sec. 1.6664-0 Table of contents.
* * * * *
Sec. 1.6664-4 Reasonable cause and good faith exception to
section 6662 penalties.
* * * * *
(c) * * *
(2) Advice defined.
* * * * *
(g) * * *
(3) Special rules.
* * * * *
Par. 8. In Sec. 1.6664-4, paragraph (g) is revised to read as
follows:
Sec. 1.6664-4 Reasonable cause and good faith exception to section
6662 penalties.
* * * * *
(g) Valuation misstatements of charitable deduction property--(1)
In general. There may be reasonable cause and good faith with respect
to a portion of an underpayment that is attributable to a substantial
(or gross) valuation misstatement of charitable deduction property (as
defined in paragraph (g)(2) of this section) only if--
(i) The claimed value of the property was based on a qualified
appraisal (as defined in paragraph (g)(2) of this section) by a
qualified appraiser (as defined in paragraph (g)(2) of this section);
and
(ii) In addition to obtaining a qualified appraisal, the taxpayer
made a good faith investigation of the value of the contributed
property.
(2) Definitions. For purposes of this paragraph (g):
Charitable deduction property means any property (other than money
or publicly traded securities, as defined in Sec. 1.170A-13(c)(7)(xi))
contributed by the taxpayer in a contribution for which a deduction was
claimed under section 170.
Qualified appraisal means a qualified appraisal as defined in
Sec. 1.170A-13(c)(3).
Qualified appraiser means a qualified appraiser as defined in
Sec. 1.170A-13(c)(5).
(3) Special rules. The rules of this paragraph (g) apply regardless
of whether Sec. 1.170A-13 permits a taxpayer to claim a charitable
contribution deduction for the property without obtaining a qualified
appraisal. The rules of this paragraph (g) apply in addition to the
generally applicable rules concerning reasonable cause and good faith.
Michael P. Dolan,
Deputy Commissioner of Internal Revenue.
Approved: November 17, 1998.
Donald C. Lubick,
Acting Assistant Secretary of the Treasury.
[FR Doc. 98-31985 Filed 12-1-98; 8:45 am]
BILLING CODE 4830-01-u
