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University of Miami Business Law Review

Document Type

Article

Abstract

The Internal Revenue Code (“IRC”) § 6662(a) permits the IRS to impose a twenty-percent (20%) accuracy-related penalty to an underpayment of tax, and there are several different defenses to this penalty depending on the facts of the case and the reason for the penalty.3 One of the most common accuracy-related penalties is the negligence penalty.4 Although there are multiple different reasons for the application of an accuracy-related penalty, only one penalty may be applied for each understatement.5 If a taxpayer faces the negligence penalty, one common defense is that the taxpayer’s return position has a reasonable basis under the relevant authorities.6 Until recently, most courts simply proceeded through a discussion on whether the authorities supported the taxpayer’s return position, and did not even reach whether the taxpayer actually relied on relevant authorities when forming a return position.7 However, over the past few years, several courts have begun to require a subjective actual reliance component to the reasonable basis standard, in addition to the other requirements described under the regulations.

This article explores these concepts more in detail in six parts. Part II introduces the statutory reasonable basis defense, reviewing the applicable regulations9 and the circumstances when the negligence penalty is applied.10 Next, Part III introduces prior case law analyzing the reasonable basis defense, ranging from cases applying a more objective reasonable basis defense, and several courts applying a subjective11 component to the reasonable basis defense. Until recently, many courts did not examine whether a taxpayer actually relied on the authorities listed to support its position, but instead looked to if the taxpayer’s return position was objectively supported by the relevant authorities. Part IV examines Wells Fargo & Co. v. United States in detail including the facts of the case, the holding on the tax in which the court struck down Wells Fargo’s STARS transaction12, and the court’s reasoning that actual reliance is required as part of the reasonable basis defense.13 The court looked at the broader statutory and case law framework, as well as the definition of “base,” and determined the reasonable basis standard also required a subjective actual reliance component.14 Further, the court determined that a part of the STARS transaction did not have any purpose other than tax savings.15 Part V examines how other courts may view this holding going forward and discusses how the majority incorrectly concluded that under the reasonable basis defense a taxpayer’s return position must not only be supported by one or more relevevant authorities, but the taxpayer must also rely on those authorities when contemplating tax decisions.16 In circuits requiring an actual reliance on one or more relevant authorities, taxpayers must document or be able to show that they actually relied on the authorities cited in support of their case, and the return position cannot be a position taken after the return is filed to support the return position. Lastly, Part VI provides an overview of the conclusions reached in this article.

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