Rev. Rul. 80-28, 1980-1 CB 304


Section 6694.--Understatement of Taxpayer's Liability by Income Tax Return Preparer

26 CFR 1.6694-1: Understatement of taxpayer's liability by income tax return preparer.

Return preparers; negligence penalty; failure to report minimum tax liability.--

Factual situations illustrate application of the penalty imposed by section 6694(a) of the Code to an income tax return preparer's failure to report a taxpayer's minimum tax liability.


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ISSUE


Does the penalty for negligent or intentional disregard of rules and regulations under section 6694(a) of the Internal Revenue Code apply where income tax return preparers failed to report the taxpayers' minimum tax on tax preference items in the situations described below?


Situation 1. An income tax return preparer failed to report on an individual taxpayer's income tax return for 1978, a minimum tax liability of $300 resulting from a net capital gain deduction shown on the taxpayer's return. The failure to report the minimum tax is an understatement of tax liability defined in section 6694(e).


The explanation given by the preparer for the failure to report the minimum tax was that the preparer believed the taxpayer would have some basis in the asset sold which would offset any minimum tax due. The preparer was unable to confirm a basis in the asset before filing the return.


Situation 2. The facts are the same as in situation 1, but the explanation given by the preparer for failure to report the minimum tax was that the failure was due to an oversight. The preparer contended that the oversight was not a deliberate understatement of the liability, and should not be considered as negligent or intentional disregard of rules and regulations.


Situation 3. The facts are the same in situation 1, but the explanation given by the preparer for failure to report the minimum tax was that the preparer was not aware of the minimum tax provisions. For this reason the preparer contended that the penalty for negligent or intentional disregard of rules and regulations should not apply.


LAW AND ANALYSIS


Section 56(a) of the Code provides for the imposition of an income tax on certain items of tax preference. Section 57(a)(9)(A) treats as a tax preference item an amount equal to the net capital gain deduction for the taxable year determined under section 1202, and for taxable years ending prior to January 1, 1979, such item was taxed under section 56(a). For years beginning after December 31, 1978, such item is taxed under section 55 (relating to thealternative minimum tax).


Section 6694(a) of the Code provides that if any part of any understatement of liability with respect to any return is due to the negligent or intentional disregard of rules and regulations by any person who is an income tax return preparer with respect to such return, such person shall pay a penalty of $100 with respect to such return.


Under section 1.6694-1(a)(1) of the Income Tax Regulations, a preparer is not considered to have negligently or intentionally disregarded a rule or regulation if the preparer exercises due diligence in an effort to apply the rules and regulations to the information given to the preparer to determine the taxpayer's correct liability for tax.


Section 1.6694-1(a)(5) of the regulations places the burden of proof on the preparer when there is a question as to whether the preparer has negligently or intentionally disregarded a rule or regulation.


The penalty in section 6694(a) of the Code shall be applied in a manner similar to the penalty under section 6653. The section of the Conference Report on the Revenue Act of 1978 relating to Technical Corrections to the Tax Reform Act of 1976 states that the Internal Revenue Service shall reasonably interpret section 6694(a) according to the standards of section 6653(a) and in the light of all the facts and circumstances of each case, taking into account any and all mitigating factors. H.R. Rep. No. 95-1800, 95th Cong., 2d Sess. 284 (1978), 1978-3 C.B. (Vol. 1) 521, 618.


Under section 6653(a), negligence has been defined as the lack of due care in failing to do what a reasonable and ordinarily prudent person would do under the circumstances. Marcello v. Commissioner, 380 F. 2d 499, 506 (5th Cir. 1967).


In Situation 1, the preparer was aware of the minimum tax provisions but nevertheless failed to report the minimum tax based on an unsupported belief that the taxpayer's basis for the capoital asset would offset the minimum tax due. This was not supported by the facts and circumstances because the preparer did not use a basis in the computation of the capital gain. Therefore, the preparer's belief that the taxpayer's basis for the capital asset would offset the minimum tax due is not sufficient to establish that the failure to report the minimum tax was not negligence.


In Situation 2, the preparer was aware of the minimum tax provisions and correctly claimed a capital gain deduction under section 1202 of the Code. Therefore, the preparer's explanation of oversight is not sufficient to establish that the omission was not negligence. A deliberate act is not a necessary factor in considering negligence under sector 6694(a); it is, however, a factor in determining an intentional disregard of rules and regulations within the meaning of section 6694(a).


In Situation 3, the preparer did not do what a reasonably diligent preparer would have done under the circumstances. The minimum tax computation is not an unusual item. It is encountered frequently by return preparers. The instructions for an individual income tax return indicated the existence of the minimum tax provisions including the fact that capital gains were an item of tax preference. Therefore, it is clear that an adequate investigation into the tax consequences of the sale would have disclosed the minimum tax liability. An omission was clearly made by the preparer, and defense of error or ignorance of the law is not sufficient to establish that the omission was not negligence.


HOLDING


In all three situations, the preparers failed to exercise due diligence in applying the minimum tax provisions to the information provided. Therefore, the penalty for negligent or intentional disregard of rules and regulations under section 6694(a) of the Code applies in these situations.