[Title 26 CFR 1.6661-3]
[Code of Federal Regulations (annual edition) - April 1, 2002 Edition]
[Title 26 - INTERNAL REVENUE]
[Chapter I - INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY]
[Subchapter A - INCOME TAX (CONTINUED)]
[Part 1 - INCOME TAXES]
[Sec. 1.6661-3 - Substantial authority.]
[From the U.S. Government Printing Office]


26INTERNAL REVENUE122002-04-012002-04-01false1.6661-3Sec. 1.6661-3INTERNAL REVENUEINTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURYINCOME TAX (CONTINUED)INCOME TAXES
Sec. 1.6661-3  Substantial authority.

    (a) General rule--(1) Effect of having substantial authority. If 
there is or was substantial authority for the tax treatment of an item 
(other than a tax shelter item as defined in Sec. 1.6661-5(c)), the item 
is treated as if it were shown properly on the return for the taxable 
year in computing the amount of tax shown on the return. Thus, for 
purposes of section 6661, the tax attributable to the item is not 
included in the understatement for the year. (See paragraph (d)(2) of 
Sec. 1.6661-2.)
    (2) Substantial authority standard. The substantial authority 
standard is less stringent than a ``more likely than not'' standard 
(that is, a greater than 50-percent likelihood of being upheld in 
litigation), but stricter than a reasonable basis standard (the standard 
which, in general, will prevent imposition of the penalty under section 
6653 (a), relating to negligence or international disregard of rules and 
regulations). Thus, a position with respect to the tax treatment of an 
item that is arguable but fairly unlikely to prevail in court would 
satisfy a reasonable basis standard, but not the substantial authority 
standard.
    (b) Determination of whether substantial authority is present--(1) 
Evaluation

[[Page 1028]]

of authorities. There is substantial authority for the tax treatment of 
an item only if the weight of the authorities supporting the treatment 
is substantial in relation to the weight of authorities supporting 
contrary positions. All authorities relevant to the tax treatment of an 
item, including the authorities contrary to the treatment, are taken 
into account in determining whether substantial authority exists and the 
weight of those authorities is determined in light of the pertinent 
facts and circumstances in the manner prescribed in paragraph (b)(3) of 
this section. There may be substantial authority for more than one 
position with respect to the same item. The taxpayer's belief that the 
authorities with respect to the tax treatment of an item constitute 
substantial authority is not taken into account in determining whether 
there is substantial authority.
    (2) Types of authority. In determining whether there is substantial 
authority (other than in cases described in paragraph (b) (4) (i) of 
this section), only the following will be considered authority. 
Applicable provisions of the Internal Revenue Code and other statutory 
provisions; temporary and final regulations construing such statutes; 
court cases; administrative pronouncements (including revenue rulings 
and revenue procedures); tax treaties and regulations thereunder, and 
Treasury Department and other official explanations of such treaties; 
and Congressional intent as reflected in committee reports, joint 
explanatory statements of managers included in conference committee 
reports, and floor statements made prior to enactment by one of a bill's 
managers. Conclusions reached in treatises, legal periodicals, legal 
opinions or opinions rendered by other tax professionals, descriptions 
of statutes prepared after enactment (such as ``General Explanations'' 
prepared by the Staff of the joint Committee on Taxation), general 
counsel memoranda (other than those published in pre-1955 volumes of the 
Cumulative Bulletin), actions on decisions, technical memoranda, written 
determinations (except as provided in paragraph (b)(4)(i) of this 
section), and proposed regulations are not authority. The authorities 
underlying such expressions of opinion where applicable to the facts of 
a particular case, however, may give rise to substantial authority for 
the tax treatment of an item. (See Sec. 1.6661-6(b), however, regarding 
waiver of the penalty when the taxpayer relies on proposed regulations.)
    (3) Nature of analysis. Except as otherwise provided in this 
section, the weight of the authorities for the tax treatment of an item 
is determined by the same analysis that a court would be expected to 
follow in evaluating the tax treatment of the item. Thus, the weight of 
authorities depends on their persuasiveness and relevance as well as 
their source. For example, a case or revenue ruling having some facts in 
common with the tax treatment at issue would not be considered 
particularly relevant if the authority is materially distinguishable on 
its facts, or is otherwise inapplicable to the tax treatment at issue. 
Similarly, an authority that merely states a conclusion ordinarily would 
be given less weight than an authority that reaches its conclusion by 
cogently relating the applicable law to pertinent facts. There may be 
substantial authority for the tax treatment of an item despite the 
absence of certain types of authority. Thus, a taxpayer may have 
substantial authority for a position that is supported only by a well-
reasoned construction of the applicable statutory provision.
    (4) Special rules--(i) Written determinations. There is substantial 
authority for the tax treatment of an item if the treatment is supported 
by the holding of a ruling or a determination letter (as defined in 
Sec. 301.6110-2 (d) and (e)) issued to the taxpayer, by the holding of a 
technical advice memorandum in which the taxpayer is named, or by an 
affirmative statement in a revenue agent's report with respect to a 
prior taxable year of the taxpayer (``written determinations''). The 
preceding sentence shall not apply, however, if there has been a 
misstatement or omission of a material fact, the facts that subsequently 
develop are materially different from the facts on which the written 
determination was based, or

[[Page 1029]]

authority supporting a contrary position has arisen since the date of 
the written determination.
    (ii) Taxpayer's jurisdiction. The applicability of court cases to 
the taxpayer by reason of the taxpayer's residence in a particular 
jurisdiction is not taken into account in determining whether there is 
substantial authority for the tax treatment of an item. Notwithstanding 
the preceding sentence, however there is substantial authority for the 
tax treatment of an item if the treatment is supported by controlling 
precedent of a United States Court of Appeals to which the taxpayer has 
a right of appeal with respect to the item.
    (iii) When substantial authority determined. For purposes of section 
6661, there is substantial authority for the tax treatment of an item if 
there is substantial authority at the time the return containing the 
item is filed or there was substantial authority on the last day of the 
taxable year to which the return relates.

[T.D. 8017, 50 FR 12016, Mar. 27, 1985]