Revised Corporate Tax Shelter Discussion Draft
February 14, 2001

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III. Section 6707A: Penalty for Failure to Include Tax Shelter Information with Return

As stated above, we applaud the staffs for adding a separate penalty for failure to comply with the disclosure requirements under Code section 6011 with respect to a reportable transaction. The amount of the penalty is the greater of (1) 5% (10% for a listed transaction) of any increase in tax resulting from the difference in the taxpayer’s treatment of items attributable to the reportable transaction and the proper tax treatment of such items or (2) $100,000. Although we support a penalty of the greater of 10% or $100,000 in the case of a listed transaction, we believe that a lower penalty should be imposed in the case of a failure to disclose with respect to a non-listed transaction. We recommend that such lower penalty be the lesser of 5% or $50,000.

The Draft provides that the penalty for failure to disclose will not apply if the failure is due to reasonable cause and not to willful neglect. In our comments to the Service on the new disclosure regulations, we stated that disclosure of a transaction only should be required if the Service has substantial authority for a contrary position. We believe that the proposed section 6707A penalty for failure to disclose also should apply only if the Service has substantial authority for a contrary position, because the section 6707A penalty may be imposed in addition to the section 6662 and 6662A understatement penalties and may apply even if the taxpayer prevails on audit.

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