Page 619 - TaxAdviser_2022

TAX CLINIC

or extraction of products of a character
The lack of with respect to which a deduction is Shareholders may
allowable under Sec. 613 or 613A; and
guidance and any business of operating a hotel, motel, not have access to
regulations and restaurant, or similar business. all of the information
Since there is little direct guidance
the unwillingness of from the IRS regarding Sec. 1202 needed to determine
some companies to definitions of terms such as services whether their stock
provide information and consulting — which can have wide sale qualifies for Sec.
or narrow interpretations — tax return
to shareholders preparers often face uncertainty when 1202 exclusion, and
places taxpayers determining whether a sale of stock they and their tax
qualifies for Sec. 1202 exclusion, even
and tax practitioners when they have cooperation from the return preparers are
in a difficult situation. corporation. For a deeper discussion of finding that some
these issues, see Andersson, “Qualified
Small Business Stock Exclusion: Who’s companies are not
However, often, information will not Eligible?,” 52 The Tax Adviser 684 (No- willing to provide
be available to employees or investors vember 2021), and Wiener and the necessary
to prove that not only has the company Gottschalk, “What Does ‘Consulting’
been an eligible corporation engaged in Mean for Purposes of Sec. 1202?” 50 information.
a qualified trade or business under Sec. The Tax Adviser 237 (April 2020).
1202(e)(3) during substantially all of the Since the Sec. 1202 exclusions often
shareholder’s holding period but also involve millions of dollars, a reporting one of the factors considered is if the tax
that the requirement under Sec. 1202(e) error is likely to result in a substantial return preparer relied on the advice of
(1) has been met, that at least 80% of the underpayment of income tax. Taxpayers others. Under Regs. Sec. 1.6694-2(e)(5),
corporation’s gross assets have been used are potentially subject to penalties under a tax return preparer may rely without
in the active conduct of one or more Sec. 6662 for any substantial understate- verification upon advice and informa-
qualified trades or businesses and that ment of tax, and tax return preparers tion furnished by the taxpayer, another
no disqualifying redemptions occurred are potentially subject to penalties adviser, another tax return preparer, or
that would taint any of the shares of the under Sec. 6694 for the understatement another party. However, the preparer
investor or employee. So, what is a tax of a tax liability due to an unreason- cannot rely on the information if one of
practitioner to do? able position. Under Sec. 6664(c)(1), the following applies:
Whether the corporation cooperates taxpayers will not be subject to such ■ The advice or information is unrea-
or not, tax return preparers have faced penalties if, considering all the facts and sonable on its face;
the issue of determining whether a circumstances, it is determined that the ■ The tax return preparer knew or
company is engaged in a qualified trade understatement was due to reasonable should have known that the other
or business. Sec. 1202(e)(3) defines a cause and the taxpayer acted in good party providing the advice or infor-
qualified trade or business as a trade or faith. Likewise, under Sec. 6694(a)(3), mation was not aware of all relevant
business other than one that involves tax return preparers will not be subject facts; or
the performance of services in the fields to penalties if there is reasonable cause ■ The tax return preparer knew or
of health, law, engineering, architecture, for the understatement and the tax should have known (given the nature
accounting, actuarial science, perform- return preparer acted in good faith. of the tax return preparer’s practice),
ing arts, consulting, athletics, financial Regs. Sec. 1.6694-2(d) also allows for at the time the return or claim for
services, brokerage services, or any the preparer penalty to be waived if the refund was prepared, that the advice
trade or business of which the principal position taken has a reasonable basis or information was no longer reliable
asset is the reputation or skill of one or and is adequately disclosed. But does the due to developments in the law since
more employees; any banking, insur- lack of information fit into these pen- the time the advice was given.
ance, financing, leasing, investing, or alty exceptions? Since the tax return preparer knows
similar business; any farming business; When the IRS is determining or should know whether the taxpayer
any business involving the production whether to impose Sec. 6694 penalties, has access to the information required

10 December 2022 The Tax Adviser