Definition of Reasonable Basis

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[IA-42-95]

RIN 1545-AU38

Definition of Reasonable Basis

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

-----------------------------------------------------------------------

SUMMARY: This document contains proposed regulations relating to the

accuracy-related penalty regulations under chapter 1 of the Internal

Revenue Code. These amendments are necessary to define reasonable basis

and provide corrections to final regulations relating to the accuracy-

related penalty under chapter 1 of the Internal Revenue Code. The

proposed regulations would affect all taxpayers who file tax returns.

This document also provides notice of a public hearing on these

proposed regulations.

DATES: Written or electronically generated comments must be received by

February 10, 1997. Outlines of topics to be discussed at the public

hearing scheduled for February 25, 1997, must be received by February

4, 1997.

ADDRESSES: Send submissions to: CC:DOM:CORP:R (IA-42-95), room 5226,

Internal Revenue Service, POB 7604, Ben Franklin Station, Washington,

DC 20044. In the alternative, submissions may be hand delivered between

the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (IA-42-95), Courier's

Desk, Internal Revenue

[[Page 58021]]

Service, 1111 Constitution Avenue NW., Washington, DC., or

electronically, via the IRS Internet site at: http://

www.irs.ustreas.gov/prod/tax_regs/comments.html. The public hearing

will be held in room 3313, Internal Revenue Building, 1111 Constitution

Avenue NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Nancy

Romano, 202-622-6232 (not a toll-free number). Concerning submissions

and the public hearing, Michael L. Slaughter, 202-622-7190 (not a toll-

free number).

SUPPLEMENTARY INFORMATION:

Background

On September 1, 1995, the IRS issued Treasury Decision 8617 (60 FR

45663), setting forth final regulations relating to the accuracy-

related penalty under chapter 1 of the Internal Revenue Code. These

regulations provided guidance concerning the reasonable basis standard

for purposes of the negligence penalty (section 6662(b)(1)) and for

purposes of the disclosure exception to the penalties for disregarding

rules or regulations (section 6662(b)(1)) and substantial

understatement of income tax (section 6662(b)(2)). In the preamble to

the final regulations, Treasury requested comments and suggestions on

providing further guidance on the reasonable basis standard. Treasury

has not received any additional comment letters in response to this

request for comments. Previous comments that were addressed in the

preamble to the final regulations published on September 1, 1995 have

been considered in drafting these proposed regulations.

Explanation of Provision

Under the final regulations currently in place, the reasonable

basis standard is ``significantly higher than the not frivolous

standard applicable to preparers under 6694.'' These proposed

regulations provide that the reasonable basis standard is not satisfied

by a return position that is merely arguable or that is merely a

colorable claim. A return position will generally satisfy the

reasonable basis standard if it 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). Additionally, the proposed regulations

clarify that if a return position does not satisfy the reasonable basis

standard, the reasonable cause and good faith exception as set forth in

Sec. 1.6664-4 may still provide relief from the penalty.

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 also has 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 these proposed regulations are adopted as final regulations,

consideration will be given to any comments that are submitted timely

(in the manner described under the ADDRESSES caption) to the IRS. All

comments will be available for public inspection and copying.

A public hearing has been scheduled for February 25, 1997, at 10

a.m., in room 3313, 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 that wish to present oral comments at the hearing must

submit written or electronically generated comments (in the manner

described under the ADDRESSES caption) by February 10, 1997 and submit

an outline of the topics to be discussed and the time devoted to each

topic by February 4, 1997.

A period of 10 minutes will be allotted to each person for making

comments.

An agenda showing the scheduling of 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 regulations is Robert J. Fitzpatrick,

formerly of the Office of the Assistant Chief Counsel (Income Tax &

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:

1. Revising the entry for Sec. 1.6662-2.

2. Removing the entries for Secs. 1.6662-3(b)(3) (i) and (ii).

3. Revising the entry for Sec. 1.6662-7(d).

4. Removing the entries for Secs. 1.6662-7(d) (1) and (2).

The amendments and revisions read as follows:

Sec. 1.6662-0 Table of contents.

* * * * *

Sec. 1.6662-2 Accuracy-related penalty.

* * * * *

Sec. 1.6662-7 Omnibus Budget Reconciliation Act of 1993 changes to the

accuracy-related penalty.

* * * * *

(d) Reasonable basis.

* * * * *

Par. 3. 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

[[Page 58022]]

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). In addition, the reasonable cause and good faith exception, as

set forth in Sec. 1.6664-4, may provide relief from the penalty, even

if a return position does not satisfy the reasonable basis standard.

* * * * *

Par. 4. In Sec. 1.6662-4, the second sentence in paragraph (d)(2)

is revised to read 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). * * *

* * * * *

Par. 5. In 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. 6. Section 1.6664-0 is amended by:

1. Revising the entry for paragraph (c)(2) of Sec. 1.6664-4.

2. Removing the entries for paragraphs (c)(1)(iii), (c)(2)(i), and

(c)(2)(ii) of Sec. 1.6664-4.

The revision 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.

* * * * *

Margaret Milner Richardson,

Commissioner of Internal Revenue.

[FR Doc. 96-28558 Filed 11-8-96; 8:45 am]

BILLING CODE 4830-01-U