Additional Comments Concerning Temporary and Proposed Regulations
Under Sections 6011, 6111, and 6112 of the Internal Revenue Code of 1986
T.D. 8875, 8876, and 8877
February 21, 2001

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III. Amendment of “No Reasonable Basis for Denial” Exception

Section 1.6011-4T(b)(3)(ii)(C) of the tax return disclosure regulations provides that a transaction will not be a "reportable transaction" within the meaning of the disclosure regulations if the taxpayer reasonably determines that there is no reasonable basis for denial of any significant portion of the expected tax benefits from the transaction. Similarly, section 301.6111-2T(b)(5)(i) of the tax shelter registration regulations provides that tax avoidance or evasion will not be considered a significant purpose of a transaction and, therefore, the transaction will not be required to be registered, if the tax shelter promoter reasonably determines that there is no reasonable basis for denial of any significant portion of the expected tax benefits from the transaction.

After several informal discussions with Treasury Department and IRS officials regarding the corporate tax shelter regulations, we would like to reiterate our recommendation that the "no reasonable basis for denial" exception in both the tax return disclosure and the registration regulations be amended to provide instead that disclosure and registration, respectively, are not required if the IRS lacks substantial authority to support a challenge to the taxpayer’s claimed treatment of the transaction. Such an objective exception not only would provide taxpayers with a workable standard with respect to which there are well-developed rules and regulations but also would eliminate disclosure and registration of many transactions in which the IRS should have little interest, which would make it easier for the IRS to enforce the disclosure and registration regulations and any penalties imposed for noncompliance with the regulations. Moreover, the objective "no substantial authority" rule would eliminate the need for inquiries into the adequacy of legal opinions and better encourage disclosure and registration in circumstances in which the state of legal authorities is uncertain.

If the IRS declines to adopt the "no substantial authority" exception, we recommend, in the alternative, that the "no reasonable basis for denial" exception be amended to provide that disclosure is not required if the IRS would have "no realistic possibility of success" on the merits against the taxpayer. We believe that the "no realistic possibility of success" standard also would be easier for both taxpayers and the IRS to apply because an existing provision of the Treasury regulations describes such standard (see Treas. Reg. § 1.6694-2(b)). No provision of the Code or the Treasury regulations or any other precedential guidance defines or describes the "no reasonable basis for denial" standard. In addition, the "no realistic possibility of success" standard is a more objective standard that should assist the IRS in enforcing the regulations and any penalties imposed for noncompliance with the regulations.

We propose the following language for the revision of Section 1.6011-4T(b)(3)(ii)(C) of the disclosure regulations:

(C) The IRS lacks substantial authority to support a challenge to the taxpayer’s claimed treatment of the transaction under Federal tax law, taking into account the entirety of the transaction, any combination of tax consequences that are expected to result from any component steps of the transaction, and all relevant aspects of Federal tax law, including the statute and legislative history, treaties, authoritative administrative guidance, and judicial decisions that establish principles of general application in the tax law (e.g., Gregory v. Helvering, 293 U.S. 465 (1935)), and disregarding any unreasonable or unrealistic factual assumptions.

In addition, we propose the following language for the revision of Section 1.6011-4T(b)(3)(ii)(C) of the disclosure regulations and section 301.6111-2T(b)(5)(i) of the registration regulations:

(i) In the case of a transaction other than a transaction described in paragraph (b)(2) of this section, the IRS lacks substantial authority to support a challenge to the taxpayer’s claimed treatment of the transaction under Federal tax law, taking into account the entirety of the transaction, any combination of tax consequences that are expected to result from any component steps of the transaction, and all relevant aspects of Federal tax law, including the statute and legislative history, treaties, authoritative administrative guidance, and judicial decisions that establish principles of general application in the tax law (e.g., Gregory v. Helvering, 293 U.S. 465 (1935)), and disregarding any unreasonable or unrealistic factual assumptions.

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