Page 3 - Can the Code Sec. 6700 Tax Shelter Promoter Penalty Apply to Everyday Tax Advice?

tax position, such that that statement, even though it did not in itself directly relate to tax, was a basis for Code Sec. 6700 penalties. Similarly, in United Energy Corp.,13 a promoter’s false statement that electrical modules were in service was a false statement under Code Sec. 6700 because the eligibility for investment and energy credits depended on the modules being in service. As these cases demonstrate, a statement does not have to refer directly to taxes to trigger the Code Sec. 6700 penalty. Nevertheless, the cases do seem to assume that the alleged promoter fully understood the tax consequences of the statements at issue.
C. Did the Alleged Promoter Know or Have Reason to Know that Its Statements Were False?
The government also must prove that the alleged promoter knew or had reason to know that the statements regarding the allowability of tax benefits were false. In making this determination, courts will consider things such as “(1) the extent of a defendant’s reliance upon knowledgeable professionals; (2) the defendant’s level of sophistication and education; and (3) the defendant’s familiarity with tax matters.”14 Further, Code Sec. 6700 does not impose a duty of inquiry but does allow for the “imputation of knowledge” provided it is “commensurate with the level of comprehension required by the [person’s] role in the Transaction.”15 This requirement means that a tax practi- tioner who presumably would be relatively sophisticated regarding tax matters must be careful to ensure that there is no “reason to know” that the tax advice is incorrect. This is a broad standard that is different from the standards under Code Sec. 6694.
D. Were the False Statements Material?
A statement is material if it would have a “substantial impact” on the decision making process of a reasonably
prudent investor.16 Thus, the materiality requirement is satisfied if statements relevant to the allowability of tax benefits were one of the reasons taxpayers participated in the transactions at issue. In most cases when a taxpayer seeks professional advice regarding the tax treatment of an investment or arrangement, it is likely that the tax advice would be material to the taxpayer; otherwise, there would be no reason to pay for the advice.
E. Conclusion
Although many think of Code Sec. 6700 only in con- nection with mass-marketed abusive tax shelters, the IRS could attempt to use the broad language of Code Sec. 6700 to penalize traditional, but erroneous, tax advice when Code Sec. 6694 penalties are not available or when the IRS wants to extract a penalty that is larger than would be allowed under Code Sec. 6694. However, the legisla- tive history of Code Sec. 6700 indicates that the focus of the statute is on promoters who directly promote the tax
ENDNOTES
1 Section references are to sections of the Internal Revenue Code of 1986, as amended.
2 E.g., J.M. Capozzi, CA-2, 93-1 ustc ¶50,007, 980 F2d 872, 874.
3 Stover, CA-8, 650 F3d 1099, 1112 (2011).
4 A.F. Campbell, CA-5, 90-1 ustc ¶50,215, 897 F2d
1317, 1320.
5 Gleason, CA-6, 432 F3d 678, 684 (2005).
6 Gleason, 432 F3d at 683; Pres. Servs. Est., CA-9,
OCTOBER–NOVEMBER 2016
2000-1 ustc ¶50,203, 202 F3d 1093, 1103.
7 E.g., Stover, 650 F3d at 1110–1111; Gleason, 432
F3d at 683.
8 E.g., Stover, 650 F3d at 1119 (“This element
should be defined broadly and is satisfied simply by ‘selling an illegal method by which to avoid paying taxes.’”) (quoting W.J. Benson, CA-7, 2009-1 ustc ¶50,330, 561 F3d 718, 722).
F2d 1144, 1147 (referring to provisions of the Internal Revenue Code defining a tax shelter as “any investment plan or arrangement whose principal purpose ... is the avoidance or evasion or federal income tax”); see also Stover, 650 F3d at 1108; cf. Chief Counsel Memorandum (CCM) 200402008 (Dec. 12, 2003) (referring to regulations under the tax shelter provisions of the Code for purposes of determining “what
consequences of their plans or arrangements. “The com- mittee believes that the penalty provisions of present law are ineffective to deal with the growing phenomenon of abusive tax shelters. Abusive tax shelters must be attacked at their source: the organizer and salesman ... ”17 It seems unlikely that Congress ever intended Code Sec. 6700 to apply to standard tax advice. Accordingly, courts should be careful to limit the reach of Code Sec. 6700 to the marketing of abusive tax shelters and limit the IRS to the specific technical language of the statute.
9 See e.g., D. Kaun, CA-7, 87-2 ustc ¶9487, 827
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It seems unlikely that Congress ever intended Code Sec. 6700 to apply to standard tax advice. Accordingly, the IRS and courts should be careful to limit Code Sec. 6700 to the specific technical language of the statute.