ABATax: Revised Corporate Tax Shelter Discussion Draft, 2/14/01: I.C

Section of Taxation
Submission to the Federal Legislature

I. Section 6662A: Penalty for Participation in an Abusive Tax Shelter Device

Amount of Penalty and Waiver Thereof
We applaud the elimination of the complex penalty structure that appeared in the prior draft. However, we continue to believe that a 40% penalty is too large, and that a 20% penalty, with a higher degree of certainty of application, would be more appropriate. As we have stated in prior correspondence, in our experience, draconian penalties are administered inconsistently by the Service, because their very size leads to situations in which their application seems inappropriate. In addition, the proposal of an enhanced penalty for abusive tax shelter devices is likely to provide an independent source both of adversarial tension in the audit and of litigation. We also continue to believe that the rules relating to the application of the reasonable cause penalty, if consistently and stringently applied, provide good parameters for determining whether a penalty should apply in a particular case. If the penalty on understatements relating to abusive tax shelter devices were applied at a level of 20% and our other comments relating to proposed section 6662A (i.e., revising the definition of abusive tax shelter device and adding minimum tax reduction thresholds) were incorporated into the final legislation, we could support the elimination of the reasonable cause exception in connection with the enhanced penalty on abusive tax shelter devices.