[Federal Register Volume 61, Number 219 (Tuesday, November 12, 1996)]
[Proposed Rules]
[Pages 58020-58022]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-28558]


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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.

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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