410 Federal Register / Vol. 60, No. 2 / Wednesday, January 4, 1995 / Proposed Rules

(c) Reliance on opinion or advice—(1)

Facts and circumstances; minimum

requirements. All facts and

circumstances must be taken into

account in determining whether a

taxpayer has reasonably relied in good

faith on advice (including the opinion of

a professional tax advisor) as to the

treatment of the taxpayer (or any entity,

plan or arrangement) under Federal tax

law. However, in no event will a

taxpayer be considered to have

reasonably relied in good faith on

advice unless the requirements of this

paragraph (c)(1) are satisfied. The fact

that these requirements are satisfied will

not necessarily establish that the

taxpayer reasonably relied on the advice

(including the opinion of a professional

tax advisor) in good faith. For example,

reliance may not be reasonable or in

good faith if the taxpayer knew, or

should have known, that the advisor

lacked knowledge in the relevant

aspects of Federal tax law.

(i) All facts and circumstances

considered. The advice must be based

upon all material facts and

circumstances, including, for example,

the taxpayer’s purposes (and the relative

weight of such purposes) for entering

into a transaction and for structuring a

transaction in a particular manner.

(ii) No unreasonable assumptions.

The advice must not be based on

unreasonable factual or legal

assumptions (including assumptions as

to future events) and must not

unreasonably rely on the

representations, statements, findings or

agreements of the taxpayer or any other

person. For example, the advice must

not be based upon a representation or

assumption which the taxpayer knows

or has reason to know is unlikely to be

true, such as an inaccurate

representation or assumption as to the

taxpayer’s purposes for entering into a

transaction or for structuring a

transaction in a particular manner.

(iii) Law is related to actual facts. The

advice must be based on the law as it

relates to the actual facts.

(2) Definitions—(i) Advice. Advice is

any communication, including the

opinion of a professional tax advisor,

setting forth the analysis or conclusion

of a person, other than the taxpayer,

provided to (or for the benefit of) the

taxpayer and on which the taxpayer

relies, directly or indirectly, with

respect to the imposition of the section

6662 accuracy-related penalty. Advice

does not have to be in any particular

form.

(ii) Material. A fact is material if it

reasonably could be expected, based

upon information available at the time

the advice is given, to be relevant to the

proper tax treatment of the item or the

taxpayer’s exposure to the accuracyrelated penalty under section 6662.

(d) Pass-through items. The

determination of whether a taxpayer

acted with reasonable cause and in good

faith with respect to an underpayment

that is related to an item reflected on the

return of a pass-through entity shall be

made on the basis of all pertinent facts

and circumstances, including the

taxpayer’s own actions, as well as the

actions of the pass-through entity.

(e) Special rules for substantial

understatement penalty attributable to

tax shelter items of corporations—(1) In

general; facts and circumstances. The

determination of whether a corporation

acted with reasonable cause and in good

faith in its treatment of a tax shelter

item (as defined in § 1.6662–4(g)(3)) is

based on all pertinent facts and

circumstances. Paragraphs (e)(2), (3) and

(4) of this section set forth rules which

apply, in the case of a penalty

attributable to a substantial

understatement of income tax (within

the meaning of section 6662(d)), in

determining whether a corporation

acted with reasonable cause and in good

faith with respect to a tax shelter item.

(2) Reasonable cause based on legal

justification—(i) Minimum

requirements. A corporation’s legal

justification (as described in paragraph

(e)(2)(ii) of this section) may be taken

into account, as appropriate, in

establishing that the corporation acted

with reasonable cause and in good faith

in its treatment of a tax shelter item only

if the authority requirement of

paragraph (e)(2)(i)(A) of this section and

the belief requirement of paragraph

(e)(2)(i)(B) of this section are satisfied

(the minimum requirements). Thus, a

failure to satisfy the minimum

requirements will preclude a finding of

reasonable cause and good faith based

(in whole or in part) on the

corporation’s legal justification.

(A) Authority requirement. The

authority requirement is satisfied only if

there is substantial authority (within the

meaning of § 1.6662–4(d)) for the tax

treatment of the item.

(B) Belief requirement. The belief

requirement is satisfied only if, based on

all facts and circumstances, the

corporation reasonably believed, at the

time the return was filed, that the tax

treatment of the item was more likely

than not the proper treatment. For

purposes of the preceding sentence, a

corporation is considered reasonably to

believe that the tax treatment of an item

is more likely than not the proper tax

treatment if (without taking into account

the possibility that a return will not be

audited, that an issue will not be raised

on audit, or that an issue will be

settled)—

(1) The corporation analyzes the

pertinent facts and authorities in the

manner described in § 1.6662–

4(d)(3)(ii), and in reliance upon that

analysis, reasonably concludes in good

faith that there is a greater than 50-

percent likelihood that the tax treatment

of the item will be upheld if challenged

by the Internal Revenue Service; or

(2) The corporation reasonably relies

in good faith on the opinion of a

professional tax advisor, if the opinion

is based on the tax advisor’s analysis of

the pertinent facts and authorities in the

manner described in § 1.6662–4(d)(3)(ii)

and unambiguously states that the tax

advisor concludes that there is a greater

than 50-percent likelihood that the tax

treatment of the item will be upheld if

challenged by the Internal Revenue

Service. (See paragraph (c) of this

section for certain rules governing

reliance upon the opinion of a

professional tax advisor.)

(ii) Legal justification defined. For

purposes of this paragraph (e), legal

justification includes any justification

relating to the treatment or

characterization under the Federal tax

law of the tax shelter item or of the

entity, plan or arrangement that gave

rise to the item. Thus, a taxpayer’s belief

(whether independently formed or

based on the advice of others) as to the

merits of the taxpayer’s underlying

position is a legal justification.

(3) Minimum requirements not

dispositive. Satisfaction of the minimum

requirements of paragraph (e)(2) of this

section is an important factor to be

considered in determining whether a

corporation acted with reasonable cause

and in good faith, but is not necessarily

dispositive.

(4) Other factors. Facts and

circumstances other than a corporation’s

legal justification may be taken into

account, as appropriate, in determining

whether the corporation acted with

reasonable cause and in good faith with

respect to a tax shelter item regardless

of whether the minimum requirements

of paragraph (e)(2) of this section are

satisfied.

* * * * *

Margaret Milner Richardson,

Commissioner of Internal Revenue.

[FR Doc. 95–120 Filed 1–3–95; 8:45 am]

BILLING CODE 4830–01–U