Modified accuracy-related penalty for listed transactions and other reportable transactions.

• Author: Manning, Paul

Prior to the AJCA, noncorporate taxpayers were able to avoid imposition of the accuracy-related penalty for understatements resulting from their participation in tax shelters, if (1) the treatment of the item was supported by substantial authority and (2) they reasonably believed that the treatment was more likely than not proper for that item. The exception was not available for corporate taxpayers.

New Law

AJCA Section 812 replaces the present-law Sec. 6662A accuracy-related penalty that applies to tax shelters with a new penalty that applies to listed transactions and reportable transactions with a significant tax avoidance purpose (reportable avoidance transactions). The penalty rate and defenses available to avoid the penalty vary depending on whether the transaction was adequately disclosed.

Disclosed transactions: In general, a 20% accuracy-related penalty applies to any understatement resulting from an adequately disclosed listed transaction or reportable avoidance transaction.

The only exception to the penalty is if the taxpayer satisfies a more stringent reasonable cause and good faith exception. The strengthened reasonable cause exception applies only if (1) the taxpayer adequately disclosed the relevant facts affecting the tax treatment; (2) there is or was substantial authority for the claimed tax treatment; and (3) the taxpayer reasonably believed that the tax treatment was more likely than not proper. A belief is reasonable only if it is based on the facts and law in existence at the time the tax return including the item is filed and relates solely to the taxpayer% chances of success on the merits.

A taxpayer cannot rely on a tax advisor's opinion to establish reasonable belief if the opinion (1) is provided by a "disqualified tax advisor" or (2) is a "disqualified opinion." Disqualified tax advisor: Under the provision, a disqualified tax advisor is one who:

1. Is a "material advisor" who participates in the "organization, management, promotion or sale of the transaction" or is related (under Sec. 267(b) or 707(b)(1)) to any such person;

2. Is compensated directly or indirectly by a material advisor for the transaction;

3. Has a fee arrangement for the transaction contingent on all or part of the intended tax benefits from the transaction being sustained; or

4. Has a disqualifying financial interest in the transaction, as determined under regulations.

   The provision defines a "material advisor" as any person who provides any...