Interpretations of SSTS No. 1, tax return positions.

• Author: Gardner, John C.
• Position: Statements on Standards for Tax Services

The Statements on Standards for Tax Services (SSTS) are based on [euro] 1 the AICPAs Statements on Responsibilities in Tax Practice (SRTP), which were originally issued between 1964 and 1977 The SRTP, considered advisory in nature, delineated members' responsibilities to taxpayers, the public, the government, and the profession. In 2001, the AICPA's Tax Executive Committee (TEC), designated as a standard-setting body, issued enforceable standards of tax practice. Although the substance of SSTS Nos. 1-8 and Interpretation 1-1, "Realistic Possibility Standard," remained the same as in the SRTP, the language was revised to clarify them and reflect the enforceable nature of the SSTS. These documents then applied to all levels of tax practice, and a second interpretation, 1-2, "Tax Planning," was issued in 2003 to deal with tax shelters.

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By 2008, it became apparent that the SSTS needed further revisions to eliminate some duplication and to update them in light of additional changes to tax law in various jurisdictions, including revisions to Sec. 6694 and Treasury Circular 230. (1) Effective January 2010, the TEC issued seven SSTS to supersede former SSTS Nos. 1-8. Proposed changes to the two existing interpretations to SSTS No. 1 were released on Feb. 3, 2011. Following a comment period, the revised interpretations became effective Jan. 31, 2012. (2)

SSTS No. 1, Tax Return Positions, prescribes that a member should not recommend or take a position on a tax return unless the position satisfies applicable reporting and disclosure standards. Interpretation 1-1, renamed "Reporting and Disclosure Standards," interprets SSTS No. 1. Together, they cover an AICPA member's compliance with standards imposed by applicable taxing authorities related to recommending a tax return position or preparing or signing a tax return. Interpretation 1-2, "Tax Planning," aims to clarify existing standards regarding a member's responsibilities related to tax planning. This article selectively reviews and analyzes these revised interpretations, presents examples, and discusses the newly codified economic substance doctrine as it relates to the interpretations.

Professional Standard of Care

A brief overview of standards of care can help establish a framework for understanding a member's professional obligations. When providing tax planning, practitioners must comply with a variety of regulations, ethical rules, and professional standards that govern their conduct. Besides the standards in the federal rules and regulations governing tax practice, such as those found in the Code and Circular 230, they include local, state, and professional conduct regulations. These vary based on the particular jurisdiction. Failure to comply can result in penalties and/or professional sanctions, including loss of license.

In addition, standards of care and standards of conduct guide the formulation of the basis for a tax position. The underpinning to these standards is reasonableness. A reasonable position taken on a tax return is "well grounded in fact, supported by the law, and satisfies the applicable standards of care." (3) Substantiating a reasonable position is especially important to tax practitioners because one strategy the government uses to improve tax compliance rates is to "expand the scope of the tax preparer penalty statute, increase the applicable penalties, and raise the standard of care." (4) This strategy continues to evolves and is evidenced by the strict liability imposed in the codification of the economic substance rules that will be discussed later. Selected examples of standards of conduct and what constitutes a breach of those standards are provided in the exhibit on page 320.

Preface to the Interpretations

A preface has been added to the revised Interpretations 1-1 and 1-2 of SSTS No. 1. It contains a valuable and useful overview of the most common tax return reporting standards and issues for determining whether a tax return position meets applicable reporting standards and disclosure requirements. These standards range from the "more likely than not" (MLTN) standard at the high end of the reporting spectrum to "reasonable basis" (RB) at the lower end.

The MLTN standard is normally satisfied if one can reasonably conclude that there is a greater than 50% likelihood the position will be upheld on its merits. The second level, substantial authority (SA), is an objective reporting standard and is satisfied if the weight of authorities supporting a particular position is substantial in relation to the weight of authorities supporting a contrary position. In practice, SA normally requires at least an approximately 40% likelihood that the position will be upheld on its merits. For federal tax purposes and those of many other jurisdictions, any transaction classified as a tax shelter or reportable transaction must satisfy the subjective MLTN standard as well as the objective SA standard.

The remaining reporting standard levels include the "realistic possibility of success" (RPOS) and RB standards. The RPOS standard (6) normally requires a one-third likelihood that the position will be sustained on its merits. The RB standard is lower than RPOS, but it is "significantly higher than not frivolous or not patently improper ... [and] is not satisfied by a return position that is merely arguable or that is merely a colorable claim." (7) A position normally satisfies the RB standard if it is reasonably based on one or more authorities, considering the relevance and persuasiveness of those authorities. In practice, RB normally requires at least an approximately 20% likelihood that the position will be upheld on its merits.

All facts and circumstances, as well as authorities relevant to the tax treatment at issue, should be considered when determining whether a reporting standard has been satisfied. The weight given to a particular authority will depend upon its relevance and persuasiveness. For example, a ruling or case with facts similar to those at issue--especially one that provides an analysis of the facts and law--carries more weight than one whose facts differ significantly. Additionally, an appellate court decision carries more weight than one of a lower court within its jurisdiction, as does a revenue ruling over a private letter ruling issued to a third party. (8)

It should be noted that what qualifies as "authority" for analysis purposes can vary. In determining whether the RPOS and RB standards under paragraph 5 of SSTS No. 1 are satisfied, a member may consider well-reasoned articles or treatises, or pronouncements issued by the applicable taxing authority, even if these materials would not be treated as authority for purposes of satisfying the SA or MLTN standards under Sec. 6662. (9)

The preface also discusses the disclosure requirements. A member can satisfy the disclosure requirements of SSTS No. 1 if the tax position at issue is appropriately disclosed. The member should consider the facts and circumstances of the particular case and follow the laws and regulations of the applicable taxing authority in determining whether a position has been appropriately disclosed. In the case of a nonsigning preparer, the preface notes that, if a member advises the taxpayer regarding appropriate disclosure, the disclosure requirement is satisfied. CPAs may wish to review SSTS No. 7, Form and Content of Advice to Taxpayers, when communicating disclosure or tax return reporting matters with taxpayers.

Both signing and nonsigning preparers must follow provisions of Sec. 6694 to satisfy the disclosure requirement. A signing preparer satisfies the requirement if the tax return position is disclosed on Form 8275, Disclosure Statement, or Form 8275-R, Regulation Disclosure Statement, as appropriate, or on the tax return in accordance with the annual revenue procedure requirements for disclosure; or if the preparer provides the taxpayer with a return that includes adequate disclosure.

A nonsigning preparer satisfies the requirement if the tax return position is disclosed on Form 8275 or Form 8275-R, as appropriate, or on the tax return in accordance with the annual revenue procedure requirements for disclosure; or, if...