IRC Section 6662
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Taxpayers Should Prepare for the Next Penalty Battleground

The IRS is using a new tool from its arsenal to enforce compliance for tax refund and credit claims: the Internal Revenue Code Section 6676 penalty. Taxpayers and their advisers need to be aware of the mechanics of this penalty and how best to avoid it being sustained.

Andrew R. Roberson, Kevin Spencer and Evan Walters authored a comprehensive article on IRC Section 6676. They discuss:

  • The origins of IRC Section 6676
  • How to contest the penalty and privilege concerns
  • What taxpayers who are considering filing—or have already filed—refund claims should keep in mind now that the penalty is the IRS’s favorite new compliance tool

Read the article here.




A Notice of Deficiency Is Not Set in Stone

A recent case decided by the United States Court of Appeals of the Tenth Circuit reminds taxpayers to be aware that the Internal Revenue Service (IRS) is not necessarily locked in to the positions and arguments stated in the Notice of Deficiency. In particular, the IRS is allowed to revise penalty determinations, or to make penalty determinations for the first time, during litigation in the Tax Court, notwithstanding any arguably inconsistent determination in the Notice of Deficiency.

In Roth v. Commissioner, 123 AFTR.2d 2019-1676 (10th Cir. 2019) , the taxpayers owned 40 acres of land in Prowers County, Colorado. In 2007, the taxpayers donated to the Colorado Natural Land Trust a conservation easement, which prohibited them from mining gravel upon the land. The taxpayers valued the easement at $970,000 and claimed charitable contribution deductions with respect to this amount on their 2007 and 2008 income tax returns.

The IRS examined the position, and determined that the easement was worth only $40,000. The revaluation resulted in underpayments of tax. The IRS revenue agent assigned to the case imposed an enhanced 40% gross valuation misstatement penalty pursuant to Internal Revenue Code (IRC) section 6662(h), because the claimed value of the easement had exceeded 200% of its actual value. The 40% penalty was approved on IRS administrative review, but due to an alleged clerical error, the Notice of Deficiency sent to the taxpayers listed only the standard 20% accuracy-related penalty under IRC section 6662(a).

The taxpayers filed a Petition in the US Tax Court. In its Answer, the IRS reasserted the 40% penalty. The taxpayers challenged the imposition of the enhanced penalty, citing IRC section 6751(b), which provides that a penalty can only be assessed pursuant to an approved “initial determination.” The taxpayers argued that the Notice of Deficiency was the “initial determination,” and because the enhanced penalty was not stated in the Notice of Deficiency, the IRS did not have the authority to impose a penalty in excess of the amount indicated thereon. The Tax Court ruled in favor of the IRS, considering itself bound by its decision Greav v. Commissioner (Graev III), 149 T.C. 485 (2017), which allows the IRS to assert additional penalties in an Answer to a taxpayer’s Tax Court petition.

The Tenth Circuit affirmed the Tax Court’s ruling. The Tenth Circuit rejected the taxpayers’ argument that the “initial determination” of a penalty was the amount shown on a Notice of Deficiency. The Tenth Circuit noted that IRC section 6212(a) provides that the IRS is authorized to send a Notice of Deficiency after having determined a tax deficiency, suggesting that the “initial determination” of a tax deficiency or penalty can occur prior to the sending of a Notice of Deficiency. The Tenth Circuit concluded that the 40% penalty determined by the IRS revenue agent was the “initial determination” for purposes of IRC section 6751(b).

The Tenth Circuit also cited Graev III for the proposition that an IRC section 6751(b) initial determination can be made by an IRS attorney in [...]

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Fifth Circuit Rejects Substantial Authority Defense to Penalties

Prudent taxpayers analyze the relevant tax law while structuring and implementing transactions.  The most obvious reason to do so is to ensure that the taxpayer’s proposed tax treatment is accepted by the Internal Revenue Service (IRS).  Another reason is to ensure that, if such treatment is not accepted, the taxpayer will not be subjected to penalties.

The most common penalty asserted by the IRS in this regard is the accuracy-related penalty under IRC Section 6662.  Among the many defenses to this penalty is the “substantial authority” defense, which looks at whether the weight of authorities supporting the return position is substantial in relation to the weight of authority supporting contrary treatment.  The types of authorities that may be considered is broad, and includes the Internal Revenue Code, Treasury Regulations (proposed, temporary and final), other IRS published guidance, case law, tax treaties, legislative materials and certain IRS private guidance.

The U.S. Court of Appeals for the Fifth Circuit’s recent decision in Chemtech Royalty Associates, L.P. provides some guidance on how courts view the substantial authority defense.  In Chemtech, the taxpayer argued that it had substantial authority for its position based on two U.S. Tax Court cases, a published Tax Court opinion from 1949 and an unpublished memorandum opinion from 1990.  The Fifth Circuit found that both cases, even if not materially distinguishable, were not substantial authority because a 1989 Fifth Circuit opinion was more apposite than the two Tax Court opinions.  The court also noted that the published Tax Court opinion was “old” and the memorandum opinion was “unpublished.”

The Fifth Circuit’s opinion illustrates the difficulties that taxpayers may face when relying on the substantial authority defense.  Although the applicable Treasury Regulations on the substantial authority defense do not distinguish between published and unpublished cases or the age of the authorities, the court’s approach indicates that these are relevant factors to consider.  Taxpayers that intend to rely on the substantial authority defense should review the Fifth Circuit’s opinion in Chemtech, as well as the applicable authority in their relevant circuit.




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