Thursday, March 20, 2014

Offer in compromise - effective tax administration

An IRS Appeals officer, during a Collection Due Process hearing, abused his discretion in rejecting an offer in compromise (OIC) based on effective tax administration (ETA) because he failed to adequately consider public policy and equity issues. The taxpayers, a married couple that operated an S corporation, agreed that the assessed tax liabilities were correct but submitted a proposed ETA OIC on the basis that their tax problems stemmed from the criminal conduct (embezzlement) of their former bookkeeper. Although the taxpayers’ contention that the Appeals officer was obligated, as a matter of law, to accept the ETA OIC was rejected, the Appeals officer improperly failed to give any consideration to the public policy and equity grounds alleged by the couple. At trial, the IRS contended that the taxpayers’ circumstances did not conform with the examples provided in the regulations. However, those examples are not the exclusive circumstances under which the IRS may accept an OIC for public policy or equity reasons. The case was remanded for further consideration by the Appeals office.

Stacey L. Bogart and Timothy P. Bogart v. Commissioner, U.S. Tax Court, Dkt. No. 4568-12L, TC Memo. 2014-46, March 18, 2014..


MEMORANDUM OPINION

KROUPA, Judge: This collection review matter is before the Court on the parties' cross-motions for summary judgment filed pursuant to Rule 121(a). 1 [*2] Petitioners' Federal tax troubles stem from the criminal conduct of their former bookkeeper. Petitioners submitted an offer-in-compromise (OIC) of $10,000 2 to resolve deficiencies of $69,309 plus interest on the grounds that the OIC promoted effective tax administration (ETA OIC). Respondent rejected the ETA OIC and issued a determination notice sustaining a final notice of intent to levy (proposed levy action).See sec. 6330(d)(1).
Respondent contends that he acted within his discretion when he rejected the ETA OIC. Petitioners contend that respondent was obligated to accept the ETA OIC as a matter of law. Petitioners alternatively contend that we should remand the matter because respondent failed to adequately consider the ETA OIC on public policy and equity grounds. We conclude that respondent has yet to adequately consider the ETA OIC on those grounds. We will therefore deny the cross-motions for summary judgment without prejudice and remand the matter for respondent to consider the ETA OIC on public policy and equity grounds.
The Commissioner may determine that an OIC would promote effective tax administration when collection in full would create economic hardship. See sec. 301.7122-1(b)(3)(i), (iii), Proced. & Admin. Regs. If collection would not cause economic hardship, the Commissioner may still compromise a tax liability to promote effective tax administration when the taxpayer identifies compelling public policy or equity considerations. See sec. 301.7122-1(b)(3)(ii), Proced. & Admin. Regs.
Petitioners do not challenge the liabilities or their ability to satisfy them. Respondent determined, and petitioners acknowledge, that the ETA OIC did not meet the economic hardship standard.See sec. 301.6343-1, Proced. & Admin. Regs. Thus, the cross-motions focus on the rejection of the ETA OIC under only public policy and equity considerations. See sec. 301.7122-1(b)(3)(ii), Proced. & Admin. Regs.
[*10] The Commissioner will accept an OIC for public policy or equity reasons only if the taxpayer demonstrates that “exceptional circumstances” exist and meets three requirements. Sec. 301.7122-1(b)(3)(ii), (c)(3)(ii), Proced. & Admin. Regs.; Internal Revenue Manual (IRM) pt. 5.8.11.2.2(4) (Sept. 23, 2008). First, the taxpayer must have remained in compliance since incurring the liability and must not have an overall compliance history that weighs against compromise. IRM pt. 5.8.11.2.2(4). Second, the taxpayer must also show he or she acted reasonably and responsibly in incurring the liability. Id. Third, the Commissioner must also determine that other taxpayers would view the compromise as fair and equitable. Id. The Commissioner must base his determination on all facts and circumstances. Sec. 301.7122-1(c)(1), Proced. & Admin. Regs.
 
b. Petitioners' Motion for Summary Judgment
We now turn to petitioners' arguments in support of their summary judgment motion. First, petitioners claim that they satisfied the requirements as a matter of law for respondent to accept the ETA OIC. See IRM pt. 5.8.11.2.2. We disagree. It is undeniable that Ms. Sanak perpetrated a fraud against petitioners. The Commissioner maintains, however, wide discretion when evaluating an OIC and determining whether a taxpayer demonstrated exceptional circumstances. The record does not establish as a matter of law that respondent was obligated to accept the ETA OIC.
[*13] Next, petitioners argue that respondent abused his discretion when the SO rejected the ETA OIC without forwarding it to respondent's NEH-ETA group. 5 See id. pt. 5.8.11.2.2(1). Again, we disagree. The Appeals officer maintains discretion to accept an OIC that promotes effective tax administration and forward only those OICs to the NEH-ETA group. Id. The IRM does not require the Appeals officer to forward every OIC based on public policy or equity grounds to the NEH-ETA group. Thus, the Appeals officer could have rejected the ETA OIC without forwarding it to the NEH-ETA group. See id. pt. 1.2.44.2.1 (Jan. 6, 2009).
Last, petitioners contend that the matter should be remanded for further consideration because respondent did not adequately consider the ETA OIC. We agree. Notwithstanding respondent's wide discretion, he still must review the issues petitioners raised during the hearing. The undeveloped record demonstrates that respondent has not fully considered the ETA OIC as required. The record does not allow for meaningful review. See Hoyle v. Commissioner, 131 T.C. 197, 205 (2008). Thus, we will deny the cross-motions for summary judgment without prejudice and remand the matter for further consideration.
[*14] We have considered all arguments made in reaching our decision, and, to the extent not mentioned, we conclude that they are moot, irrelevant, or without merit.
To reflect the foregoing,
An appropriate order will be issued.

    Footnotes

     
     
     
    4
    Example (1) contemplates a taxpayer that was assessed a large deficiency because the taxpayer could not manage his own financial affairs because of serious illness. Sec. 301.7122-1(c)(3)(iv), Example ( 1), Proced & Admin. Regs. The taxpayer in Example (2) has a deficiency that results from the taxpayer's actions based on erroneous advice from the Commissioner.Id.
     
     
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    Monday, February 24, 2014

    offer in compromise form 656 - irs tax levy





    2014ARD 034-1

    Internal Revenue Service: Interim guidance: Federal contractor levies

    DEPARTMENT OF THE TREASURY
    INTERNAL REVENUE SERVICE
    WASHINGTON, D.C. 20224
    SMALL BUSINESS/SELF-EMPLOYED DIVISION
    February 10, 2014
    Control Number: SBSE-05-0214-0007
    Expiration: February 10, 2015
    Impacted: IRM 5.11.1
    IRM 5.7.9
    MEMORANDUM FOR DIRECTORS, FIELD COLLECTION AREA OPERATIONS DIRECTOR, ADVISORY AND INSOLVENCY
    FROM: Dretha Barham /s/ Dretha Barham
    Director, Collection Policy
    SUBJECT: Interim Guidance Memorandum for Federal Contractor Levies Issued by Field Collection
    The purpose of this memorandum is to provide guidance for Field Collection revenue officers about federal contractor levies (referred to as FEDCON levies) and related Collection Due Process (CDP) issues. Please ensure this information is distributed to all affected employees within your organization.
    Background
    The Small Business Jobs Act of 2010 amended IRC section 6330(f) and (h), to permit the IRS to issue any levy on a taxpayer prior to providing them with their Collection Due Process (CDP) notice and hearing if the taxpayer is a federal contractor. In addition, FEDCON levies may be served during a timely requested pre- or post-levy CDP hearing or judicial review of such hearing to collect liabilities for all outstanding balance due periods including periods that are the subject of the hearing.
    Federal contractors are any person or entity who currently has a contract with the federal government to sell or lease property, goods or services. This does not include a taxpayer who was in the past a federal contractor but currently is not involved in any contractual relationship with the federal government. A contract is a mutually binding legal relationship obligating a person or entity to furnish property, goods, or services and the federal executive agency to pay for those property, goods, or services. Attached are guidelines for FEDCON levy and CDP issues for status 26 cases.
    ICS Considerations:
    Field Collection (FC) revenue officers may begin to issue FEDCON levies in ICS on the issuance date of this memorandum to collect any IMF or BMF liability, for which the IRC 6331(d), Notice of Intent to Levy (CP 504 notice) period has expired, if the taxpayer is a federal contractor.
    • ICS Cases in which there is an unreversed Federal Contractor Indicator (FCI) are flagged with a red literal (FCA) on the Case Summary screen.
    • ICS will block revenue officer issuance of the FEDCON levy unless the revenue officer answers “yes” when ICS prompts with the following: “Final Notice Delivery Date is not 30 days prior to levy. Is this a FEDCON levy? (Yes or No)?” This is a requirement because there would be no TC 971 AC 069 on the module.
    • See changes listed in ICS User Guide.
    See the following attachments for additional information on Federal Contractor Levies issued by Field Collection:
    • Attachment 1, Guidance to be included in IRM 5.7.9, Federal Contractors.
    • Attachment 2, Guidance to be included in IRM 5.11.1, Background, Pre-Levy Actions, Restrictions on Levy & Post-Levy Actions.
    IRM 5.11.1 and 5.7.9 will be updated to incorporate these guidelines. If you have any questions, please contact me, or a member of your staff may contact Kathleen Morton, Senior Program Analyst or James Maslanka, Senior Program Analyst. Territory personnel should direct any questions, through their management staff, to the appropriate Area contact.
    Attachments
    cc: Director, Enterprise Collection Strategy
    Director, Field Collection
    www.irs.gov
    Attachment 1, Guidance to be included in IRM 5.7.9, Federal Contractors
    Decision Point: How to Recognize a Federal Contractor for FEDCON Levy Purposes:
    If there is an unreversed TC 971 AC 647, also known as a Federal Contractor Indicator (FCI), on the taxpayer's Master File (MF) record, and the taxpayer has a current federal contract consider the taxpayer a federal contractor. See IRM 5.7.9.2.1, Federal Contractor Indicator (FCI). Often, this indicator is systemically input based on a Form 8596, Information Return for Federal Contracts , filed with the IRS. The indicator may also be manually input. If you determine during a case investigation that a taxpayer is a federal contractor and has been awarded a contract, request input of the TC 971 AC 647.
    Conditions, which support a RO finding that a taxpayer is a federal contractor subject to FEDCON levy, include:
    1.
    Unreversed TC 971 AC 647 and current federal contract.
    2.
    Taxpayer interview confirms they are currently a federal contractor. See IRM 5.7.9.2.3, Federal Contractors Identified Through Case Investigation . Request input of the TC 971 AC 647.
    3.
    Certain FPLP cases annotated with TC 971 AC 062. The FPLP TC 971 AC 062 DLN may indicate if the taxpayer is currently receiving federal contractor or vendor payments. See IRM 5.7.9.2.2, further research may be necessary to confirm whether the taxpayer is a current contractor or vendor. Request input of TC 971 AC 647 if confirmed.
    4.
    Taxpayer answers “yes” to question 55, Is the business a Federal Contractor on Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals or question 15, Is the business a Federal Government Contractor , on Form 433-B, Collection Information Statement for Businesses. Request input of the TC 971 AC 647.
    Manual Input of TC 971 AC 647 (FCI):
    Revenue officers should request input of TC 971 AC 647 (FCI) if the case investigation reflects that a taxpayer is currently in a contractual relationship with the federal government and:
    • You have confirmed that the TP has been awarded a federal contract.
    • The master file does not yet contain an unreversed FCI.
    Exception: TC 971 AC 647 should not be input for Medicare providers/suppliers. This is because these providers/suppliers are not federal contractors under IRC section 6330.
    Use the Form 4844 template in ICS to request input of the FCI. The input requires an entry in the field for “contract end date.” If the contract end date is known, request input of that date. If the contract end date is not known, select a date 1 year from the input request date. Conduct further research to ascertain the correct end date.
    Note: There is no requirement that an unreversed TC 971 AC 647 be present on an account before a FEDCON levy is issued but the taxpayer must currently be a federal contractor when the levy is initiated. Request input prior to issuing levy.
    Reversing the TC 971 AC 647 :
    A systemic process posts reversals of the FCI to the Master File once a year for BMF accounts (January) and twice a year for IMF accounts (January and June) based on the expiration of the contract end date. TC 972 AC 647 is posted when the FCI indicator is reversed. Reversals may also be manually input at any time by requesting input of TC 972 AC 647.
    A manual reversal would be appropriate if you determine that the taxpayer federal contract has been completed or the end date has expired. For example:
    • Case investigation and verification supports a finding that the taxpayer has not received any federal payments during the current year.
    • Most recent contract end date has expired.
    • RO determines that the FCI was erroneously input because the taxpayer was never a federal contractor.
    Federal Payment Levy Program (FPLP) Considerations/FPLP Block:
    FPLP incorporated the post-levy CDP FEDCON levy process starting in January 2012. See IRM 5.11.7.2.3.4(4), Levy Service Process , for more information about those cases. FPLP systemically identifies accounts with unreversed FCI annotations, including those accounts in stats 22, 24 and 26. This automated levy program may issue FEDCON levies on cases that are in ACS, the Queue and in RO inventories.
    Generally it may be more effective to allow FPLP to levy the federal payment source under the provisions of IRC 6331(h)(3) rather than using a paper levy under the provisions of IRC 6331(a) because, in federal contractor cases, levies under IRC 6331(a) are not likely to be of continuing effect. FPLP would be the more effective method since IRC section 6331(h)(3) allows for continuous levy of up to one hundred percent (100%) of any specified payment due to a vendor of property, goods or services sold or leased to the Federal government
    Even if FPLP remains in place, consider using a paper FEDCON levy to reach other sources.
    If you contemplate using the FPLP block see IRM 5.11.2.2, Releasing Levies , for guidance about when levy release is appropriate. Document the ICS case history with the reasons when an FPLP block is requested. Current procedures require GM approval of FPLP block requests. See IRM 5.11.7.2.6(1 ) Blocking or Releasing FPLP Levy.
    Collection Statute Considerations:
    When taxpayers file a timely request for CDP hearing, the collection statute is suspended on the periods that are the subject of the CDP even if FEDCON levy action continues for those periods.
    Attachment 2, Guidance to be included in IRM 5.11.1, Background, Pre-Levy Actions, Restrictions on Levy & Post-Levy Actions
    Post-Levy Action - Federal Contractor Levy
    (1) This section contains guidance on post-levy actions for Stat 26 federal contractor levy cases in Field Collection.
    Levy Authority Amended
    The Small Business Jobs Act of 2010 (SBJA) section 2104, amended IRC section 6330(f) and (h)(2) to allow the collection due process (CDP) notice and hearing to occur post-levy with respect to “federal contractor levies.” This term is defined in section 6330(h)(2) as “…any levy if the person whose property is subject to levy is a Federal contractor.”
    Federal Contractor Levy
    (1) IRC section 6330(h)(2) describes a federal contractor (FEDCON) Levy, as any levy if the person whose property is subject to levy is a Federal contractor. When a FEDCON levy is served, the taxpayer will be given post-levy CDP rights. The taxpayer may seek Tax Court judicial review of the determination resulting from the post-levy hearing.
    (2) Federal contractors are any person or entity who currently has a contract with the federal government to sell or lease property, goods or services. This does not include a taxpayer who was in the past a federal contractor but currently is not involved in any contractual relationship with the federal government. A contract is a mutually binding legal relationship obligating the person or entity to furnish property, goods, or services and the federal executive agency to pay for those property, goods, or services.
    (3) Our computer systems identify some federal contractor cases on the Individual Master File (IMF) and the Business Master File (BMF). Indicators that a person or entity is a federal contractor may include the following:
    • Federal Contractor Indicator. See IRM 5.7.9.2.1, Federal Contractor Indicator (FCI) (unreversed TC 971 AC 647).
    • Federal Payment Levy Program (FPLP), TC 971 AC 062 Document Location Number (DLN). See IRM 5.7.9.2.2 and Exhibit 5.11.7-5, TC 971 AC 062 (Document Locator Number (DLN) Format, Miscellaneous Field, XREF Field).
    • The Federal Payment Levy Program (FPLP) can also issue Federal Contractor (FEDCON) Levies and can be identified by a TC 971 AC 677 posted to the module. See IRM 5.11.7.2.3.4(4).
    Note: Revenue officers can also identify federal contractor cases. See Attachment 1, Identification and General Instructions for FEDCON Levy. This information will be included in IRM 5.7.9.
    Note: The TC 971 AC 062 DLN positions 11 and 12 are also designated with a ‘03’ in the payment position for Medicare payments, and positions 7, 8 &9 will show the federal agency code of ‘0306’ for HHS Medicare match, which are not FEDCON eligible.
    (4) Only the federal contractor may be listed on the FEDCON levy. For federal payments other than Social Security or RRB benefit payments, a FEDCON levy may be issued to any payment source on all BMF tax modules and IMF tax modules if the entity is identified as a Federal contractor with an unreversed TC 971 AC 647 posted on the entity. For BMF tax modules do not include or list the general partners and members of a LLC on the FEDCON levy. For IMF tax modules only include the spouse identified as the federal contractor on filing status 2, married filing joint modules.
    (5) A FEDCON levy may have previously been issued by FPLP. A TC 971 AC 677 will post on the module with the literals “SAL, OTH” displayed in the Miscellaneous Field. This will generate a post-levy CDP notice CP 90C (or 297C) and post a TC 971 AC 069. The taxpayer is provided their CDP appeal rights after the levy. See IRM 5.11.7.2.3.3, FPLP Notice Process (TC 971 AC 069 or AC 169).
    (6) The FEDCON (TC 971 AC 677) levy processes occur after the expiration of the 30-day notice required by IRC 6331(d). The issuance of the CP 504 meets the 30-day pre-levy requirement of IRC 6331(d)
    Issuing Notice of Intent to Levy and Notice of Your Right to a Hearing in Field Collection FEDCON Case
    (1) When warranted, the Service may exercise its discretion to issue a pre-levy CDP notice on modules eligible for FEDCON levy based upon the unique case factors.
    Examples of unique case factors:
    • The issuance of a pre-levy notice might be advisable if there no contact with the taxpayer within the last 180 days. See IRM 5.11.1.2.2.7, Timeliness of Notice.
    • When the Letter 1058 is issued on initial contact with a BMF or combination BMF/IMF taxpayer when a deadline is set for the taxpayer to take specific action. See IRM 5.11.1.2.2(3), Satisfying the Notice Requirement.
    • When the Letter 1058 will be issued during initial contact on IMF case but a FEDCON levy is not yet appropriate. See IRM 5.11.1.2.2(4).
    Note: The federal contractor exception in IRC 6330(f) applies to a FEDCON levy. Similar to a DETL levy, a FEDCON levy can be served during a timely requested pre or post-levy CDP hearing or judicial review of such hearing to collect tax liabilities (FEDCON tax periods) subject to the hearing. Prior to levying, you are required to determine if Appeals or Counsel has information that prohibits levy (OIC, IA etc.) or may affect the decision to levy. Follow the guidance in IRM 5.1.9.3.15(7) for contacting Appeals or Counsel. FEDCON levies may be issued for any levy source, not just federal payments.
    (2) If the tax period meets the criteria for issuing a FEDCON levy and levy action is determined to be appropriate:
    • Make sure the IRC 6331(d), Notice of Intent to Levy, was properly issued at least 30 days prior to levy action
    Note: This refers to the CP 504 notice or the “Status 58” notice. If the CP 504 notice was not issued, issue the pre-levy CDP notice, L1058. This meets the IRC 6331(d) and IRC 6330 requirement. FEDCON levy can only be issued 30 days after issuance of the L1058 per IRC 6331(d).
    • Document the ICS case history regarding the FEDCON determination.
    Note: When there is no TC 971 AC 069 on the module, ICS will block revenue officer issuance of the FEDCON unless the revenue officer answers yes when ICS prompts with the following: “Final Notice Delivery Date is not 30 days prior to levy. Is this a FEDCON levy? (Yes or No)?”
    (3) Include Letter 1058-F, Post Levy Federal Contractor Collection Due Process with the taxpayer's copy of a FEDCON levy for post-levy CDP notices.
    Caution: If the taxpayer was issued a pre-levy CDP notice (L1058) for the FEDCON tax period(s) being levied, do not issue a post-levy CDP notice (L1058-F).
    (4) Both the post-levy or pre-levy CDP notice must be:
    • Given in person,
    • Left at the taxpayer's home or business, or
    • Sent to the taxpayer's last known address by certified or registered mail return receipt requested.
    Note: Use registered mail only if the taxpayer is outside the United States. There is no international certified mail.
    Note: Where L1058-F has been correctly sent to the taxpayer's last known address and another address is subsequently found, do not send an additional L1058-F, relating to the same tax liability, to the new address.
    Note: If L1058-F is mistakenly sent to an address other than the last known address, immediately send a new L1058-F to the correct last known address.
    (5) Include a copy of the levy, Publication 594, Publication 1660 and Form 12153 with the L1058-F.
    (6) If the L1058-F is issued more than 10-days after issuing the FEDCON, document the reason in the ICS history.
    (7) FEDCON post-levy hearing requests are processed similarly to other hearing requests. Refer to IRM 5.1.9 , Collection Appeal Rights , for guidance in processing hearing requests.
     
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    Sunday, February 23, 2014

    www.offerincompromiseform656 doubt as to collectibility

    1. Doubt as to Collectibility (DATC) offers the decision to accept or reject usually rests on whether the amount offered reflects the reasonable collection potential (RCP). The exception to this rule would be for offers not accepted based on public policy reasons as defined in IRM 5.8.7.7.2, Public Policy Rejection. RCP is defined as the amount that can be collected from all available means, including administrative and judicial collection remedies. Generally, the components of collectibility outlined in IRM 5.8.4.3.1 below, will be included in calculating the total RCP. .
    2. Offers should not be accepted where the tax can be paid in full as a lump sum or can be paid under current installment agreement (IA) guidelines, unless special circumstances are identified that warrant consideration of a lesser amount. The offer should be recommended for rejection based on the taxpayer's ability to full pay under current IA guidelines.

      An offer in compromise is a legitimate alternative to a protracted installment agreement. A protracted installment agreement is defined as an agreement that extends beyond the Collection Statute Expiration Date (CSED)


    www.offerincompromiseform656.com

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    Section 7701(o) codification of the economic substance doctring Notice 2010-62


    Part III - Administrative, Procedural, and Miscellaneous




    Interim Guidance under the Codification of the Economic Substance Doctrine and
    Related Provisions in the Health Care and Education Reconciliation Act of 2010


    Notice 2010-62

    PURPOSE

    This notice provides interim guidance regarding the codification of the economic
    substance doctrine under section 7701(o) and the related amendments to the penalties
    under sections 6662, 6662A, 6664, and 6676 by section 1409 of the Health Care and
    Education Reconciliation Act of 2010 (Act), Pub. L. No. 111-152. The notice applies
    with respect to transactions entered into on or after March 31, 2010, which is the
    effective date for the amendments made by section 1409 of the Act.
    BACKGROUND
     Section 1409 of the Act added new section 7701(o) to the Code. Section
    7701(o)(1) provides that, in the case of any transaction to which the economic
    substance doctrine is relevant, the transaction shall be treated as having economic
    substance only if (i) the transaction changes in a meaningful way (apart from Federal
    income tax effects) the taxpayer’s economic position, and (ii) the taxpayer has a
    substantial purpose (apart from Federal income tax effects) for entering into the  2
    transaction. Section 7701(o)(5)(A) states that the term “economic substance doctrine”
    means the common law doctrine under which tax benefits under subtitle A with respect
    to a transaction are not allowable if the transaction does not have economic substance
    or lacks a business purpose.
     that the determination of whether the economic
    substance doctrine is relevant to a transaction shall be made in the same manner as if
    section 7701(o) had never been enacted. With respect to individuals, however, section
    7701(o)(5)(B) states that the two-prong analysis in section 7701(o)(1) shall apply only to
    a transaction entered into in connection with a trade or business or an activity engaged
    in for the production of income. In addition, section 7701(o)(5)(D) states that the term
    “transaction” as used in section 7701(o) includes a series of transactions.
     Section 7701(o)(2)(A) provides that a transaction’s potential for profit shall be
    taken into account in determining whether the requirements of section 7701(o)(1) are
    met only if the present value of the reasonably expected pre-tax profit is substantial in
    relation to the present value of the claimed net tax benefits. For purposes of computing
    pre-tax profit, section 7701(o)(2)(B) provides that the Secretary shall issue regulations
    treating foreign taxes as a pre-tax expense in appropriate cases.
    The Act also added section 6662(b)(6), which provides that the accuracy-related
    penalty imposed under section 6662(a) applies to any underpayment attributable to any
    disallowance of a claimed tax benefit because of a transaction lacking economic
    substance (within the meaning of section 7701(o)) or failing to meet any similar rule of
    law (collectively a section 6662(b)(6) transaction). The Act also added section 6662(i),  3
    which increases the accuracy-related penalty from 20 to 40 percent for any portion of an
    underpayment attributable to one or more section 6662(b)(6) transactions with respect
    to which the relevant facts affecting the tax treatment are not adequately disclosed in
    the return or in a statement attached to the return. Furthermore, new section 6662(i)(3)
    provides that certain amended returns or any supplement to a return shall not be taken
    into consideration for purposes of section 6662(i).
    The Act amended section 6664(c) so that the reasonable cause exception for
    underpayments found in section 6664(c)(1) shall not apply to any portion of any
    underpayment attributable to a section 6662(b)(6) transaction. The Act similarly
    amended section 6664(d) so that the reasonable cause exception found in section
    6664(d)(1) shall not apply to any reportable transaction understatement (within the
    meaning of section 6662A(b)) attributable to a section 6662(b)(6) transaction. The Act
    also amended section 6676 so that any excessive amount (within the meaning of
    section 6676(b)) attributable to any section 6662(b)(6) transaction shall not be treated
    as having a reasonable basis.
    APPLICATION OF THE ECONOMIC SUBSTANCE DOCTRINE WITH RESPECT TO
    TRANSACTIONS ENTERED INTO AFTER THE EFFECTIVE DATE OF THE ACT
    A. Application of the Conjunctive Test
     For transactions entered into on or after March 31, 2010, to which the economic
    substance doctrine is relevant, section 7701(o)(1) mandates the use of a conjunctive
    two-prong test to determine whether a transaction shall be treated as having economic
    substance. The first prong, found in section 7701(o)(1)(A), requires that the transaction  4
    change in a meaningful way (apart from Federal income tax effects) the taxpayer’s
    economic position. The second prong, found in section 7701(o)(1)(B), requires that the
    taxpayer have a substantial purpose (The second prong, found in section 7701(o)(1)(B), requires that the
    taxpayer have a substantial purpose (apart from Federal income tax effects) for entering
    into the transaction.
     The IRS will continue to rely on relevant case law under the common-law
    economic substance doctrine in applying the two-prong conjunctive test in section
    7701(o)(1). Accordingly, in determining whether a transaction sufficiently affects the
    taxpayer’s economic position to satisfy the requirements of section 7701(o)(1)(A), the
    IRS will apply cases under the common-law economic substance doctrine (as identified
    in section 7701(o)(5)(A)) pertaining to whether the tax benefits of a transaction are not
    allowable because the transaction does not satisfy the economic substance prong of the
    economic substance doctrine. Similarly, in determining whether a transaction has a
    sufficient nontax purpose to satisfy the requirements of section 7701(o)(1)(B), the IRS
    will apply cases under the common-law economic substance doctrine pertaining to
    whether the tax benefits of a transaction are not allowable because the transaction
    lacks a business purpose.
    The IRS will challenge taxpayers who seek to rely on prior case law under the
    common-law economic substance doctrine for the proposition that a transaction will be
    treated as having economic substance merely because it satisfies either section
    7701(o)(1)(A) (or its common-law corollary) or section 7701(o)(1)(B) (or its common-law
    corollary). For all transactions subject to section 1409 of the Act that otherwise would
    have been subject to a common-law economic substance analysis that treated a  5
    transaction as having economic substance merely because it satisfies either section
    7701(o)(1)(A) (or its common-law corollary) or section 7701(o)(1)(B) (or its common-law
    corollary) the IRS will apply a two-prong conjunctive test consistent with section
    7701(o).
    B. Determination of Economic Substance Transactions
     Section 7701(o)(5)(C) provides that the determination of whether a transaction is
    subject to the economic substance doctrine shall be made in the same manner as if
    section 7701(o) had never been enacted. In addition, section 7701(o)(1) only applies in
    the case of any transaction to which the economic substance doctrine is relevant.
    Consistent with these provisions, the IRS will continue to analyze when the economic
    substance doctrine will apply in the same fashion as it did prior to the enactment of
    section 7701(o). If authorities, prior to the enactment of section 7701(o), provided that
    the economic substance doctrine was not relevant to whether certain tax benefits are
    allowable, the IRS will continue to take the position that the economic substance
    doctrine is not relevant to whether those tax benefits are allowable. The IRS anticipates
    that the case law regarding the circumstances in which the economic substance
    doctrine is relevant will continue to develop. Consistent with section 7701(o)(5)(C),
    codification of the economic substance doctrine should not affect the ongoing
    development of authorities on this issue. The Treasury Department and the IRS do not
    intend to issue general administrative guidance regarding the types of transactions to
    which the economic substance doctrine either applies or does not apply.
     C. Calculating Net Present Value of the Reasonably Expected Pre-tax Profit.
     In determining whether the requirements of section 7701(o)(1)(A) and (B) are
    met, the IRS will take into account the taxpayer’s profit motive only if the present value
    of the reasonably expected pre-tax profit is substantial in relation to the present value of
    the expected net tax benefits that would be allowed if the transaction were respected for
    Federal income tax purposes. In performing this calculation, the IRS will apply existing
    relevant case law and other published guidance.
    D. Treatment of Foreign Taxes as Expenses in Appropriate Cases.
    Section 7701(o)(2)(B) provides that the Secretary shall issue regulations
    requiring foreign taxes to be treated as expenses in determining pre-tax profit in
    appropriate cases. The Treasury Department and the IRS intend to issue regulations
    pursuant to section 7701(o)(2)(B). In the interim, the enactment of the provision does
    not restrict the ability of the courts to consider the appropriate treatment of foreign taxes
    in economic substance cases.
    ACCURACY-RELATED PENALTIES
    Unless the transaction is a reportable transaction, as defined in Treas. Reg.
    § 1.6011-4(b), the adequate disclosure requirements of section 6662(i) will be satisfied
    if a taxpayer adequately discloses on a timely filed original return (determined with
    regard to extensions) or a qualified amended return (as defined under Treas. Reg.
    § 1.6664-2(c)(3)) the relevant facts affecting the tax treatment of the transaction. If a
    disclosure would be considered adequate for purposes of section 6662(d)(2)(B) (without
    regard to section 6662(d)(2)(C)) prior to the enactment of section 1409 of the Act, then it  7
    will be deemed to be adequate for purposes of section 6662(i). The disclosure will be
    considered adequate only if it is made on a Form 8275 or 8275-R, or as otherwise
    prescribed in forms, publications, or other guidance subsequently published by the IRS
    consistent with the instructions and other guidance associated with those subsequent
    forms, publications, or other guidance. Disclosures made consistent with the terms of
    Rev. Proc. 94-69 also will be taken into account for purposes of section 6662(i). If a
    transaction lacking economic substance is a reportable transaction, as defined in Treas.
    Reg. § 1.6011-4(b), the adequate disclosure requirement under section 6662(i)(2) will
    be satisfied only if the taxpayer meets the disclosure requirements described earlier in
    this paragraph and the disclosure requirements under the section 6011 regulations.
    Similarly, a taxpayer will not meet the disclosure requirements for a reportable
    transaction under the section 6011 regulations by only attaching Form 8275 or 8275-R
    to an original or qualified amended return.
    EFFECT ON OTHER DOCUMENTS
     The IRS will not issue a private letter ruling or determination letter pursuant to
    section 3.02 (1) of Rev. Proc. 2010-3, 2010-1 I.R.B. 110 (or subsequent guidance),
    regarding whether the economic substance doctrine is relevant to any transaction or
    whether any transaction complies with the requirements of section 7701(o).
    Accordingly, Rev. Proc. 2010-3 is modified.
    REQUEST FOR COMMENTS
     The IRS is interested in comments concerning the disclosure requirements set
    forth in this notice with regard to section 6662(i), especially with regard to the interplay  8
    between Rev. Proc. 94-69, proposed Schedule UTP, and the LMSB compliance
    assurance process (CAP) program. Interested parties are invited to submit comments
    on this notice by December 3, 2010. Comments should be submitted to: Internal
    Revenue Service, CC:PA:LPD:PR (Notice 2010-62), Room 5205, P.O. Box 7604, Ben

    Franklin Station, Washington, DC 20224. 


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