When advice of others will avoid penalties.

• Author: Rocen, Don
• Position: Advice of tax professionals

On Jan. 4, 1995, the IRS released revised proposed regulations under Secs. 6662 and 6664 that provide guidance on when a taxpayer may rely on the advice of others as evidence of reasonable cause and good faith for purposes of avoiding the understatement penalty imposed by Sec. 6662. The proposed regulations also implement changes to the Sec. 6662 penalty made by GATT.

Historically, under Sec. 6662, taxpayers were not subject to the substantial understatement penalty for items relating to tax shelters if substantial authority for the tax treatment of that item existed and 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. This standard still applies to noncorporate taxpayers, as well as to corporate taxpayers for transactions occurring before Dec. 9, 1994; however, as the result of a GATT provision, corporate taxpayers can no longer escape imposition of the substantial understatement penalty for tax shelter items under this standard for transactions occurring on or after Dec. 9, 1994, but must instead meet the reasonable cause and good-faith exception to the substantial understatement penalty under Sec. 6664.

Under Sec. 6662, a noncorporate taxpayer is considered to reasonably believe that the tax treatment of an item is more likely than not proper if the taxpayer analyzes the pertinent facts and authorities and reasonably concludes in good faith that there is a greater-than-50% likelihood that the tax treatment of the item will be upheld if challenged by the Service, or if the taxpayer reasonably relies in good faith on the opinion of a professional tax adviser who has unambiguously stated that he has concluded that there is a greater-than-50% likelihood that the tax treatment of the item will be upheld if challenged.

The determination of whether a corporate taxpayer acted with reasonable cause and in good faith under Sec. 6664 in its treatment of a tax shelter item will be based on all pertinent facts and circumstances. To satisfy the reasonable cause requirement, a...