The substantial authority standard of conduct

Tax return preparers bear the burden of proving substantial authority. Norgaard v. Commissioner, 939 F.2d 874, 877-78 (9th Cir. 1999);Custom Chrome, Inc. v. Commissioner, 217 F.3d 1117, 1127-28 (9th Cir. 2000). Substantial authority for tax treatment exists "only if the weight of the authorities supporting the treatment is substantial in relation to the weight of authorities supporting contrary treatment." Reg. §1.6662-4(d)(3)(i). Pertinent authorities for a substantial authority analysis include the Internal Revenue Code, other statutory provisions, regulations, revenue rulings, and court decisions, but not opinions rendered by tax professionals. Treas. Reg. §1.6662- 4(d)(3)(iii).

That is your standard of conduct for undisclosed positions. There has to be more authority and better quality authority than an opposing position. Frankly, guys & gals, I see not difference from the "substantial authority" standard than the more likely than not standard.

Reg. §1.6662-4(d)(2) states that substantial authority is an "objective standard involving an analysis of the law and application of the law to relevant facts."
That statement, although in the regulations is incorrect. Can anyone reading this blog tell me how "substantial authority" is objective? I think the final 6694 regulations should eliminate this SUBJECTIVE guidance. This regulation is wrong based on all elements of semantics. I do not think it would help if the final regulations conclude that the standard is met if the return preparer is 40% correct. It is still a subjective standard and the 40% or some other percent is meaningless.

Although you have this "victory" in eliminating the more likely than not standaqrd, it was a waste of time by the AICPA, the ABA and the NAEA associations. The court cases that I have read on the application of "substantial authority" have not attempted to quantify this standard based on any objective measures. I find the new standard at a high level of technical authority. It means that return prepares are required to :

1. Have the ability to do tax research and be on top of current changes in all of the tax law.
2. Be competent to "analyze" tax law, including the case law.
3. Be competent to select relevant "authority" to support the position taken, as selected from all of the applicable tax law.
4. You have to have technical writing skills.
5. Any it means that you have to have been paid sufficiently to put the time needed into this technical research, analysis and writing.

You do not understand your vulnerability to $1,000 or $5,000 penalties or the higher of 50% of your fees, unless you realize that the IRS is holding you to the standards of an experienced tax attorney.

I believe that you have little choice but to make full disclosures of the complex factual and legal issues to the IRS to take avantage of the "reasonable basis" standard and also attach a written support memorandum from a competent tax attorney. The "reasonable basis" standard is still subjective, but the points 1 - 5 above are still applicable. You need to suppy more technical support than required by the "reasonable basis" standard to minimize the risk of an audit examination. You need to educate your clients now that the complex positions will have to be disclosed.

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