SUBSTANTIAL UNDERSTATEMENT PENALTY AND ADEQUATE DISCLOSURE

SECTION 1. PURPOSE

The purpose of this revenue procedure is to identify, for returns filed in 1984, circumstances under which the disclosure on a taxpayer's return of an item or a position taken, with no specific reference to section 6661 of the Internal Revenue Code, is adequate disclosure for the purpose of reducing the understatement under section 6661.

SECTION 2. BACKGROUND

01 Section 6661 of the Code imposes an addition to the tax for a substantial understatement. A substantial understatement is defined as an understatement of liability for income tax which exceeds the greater of 10 percent of the amount required to be shown on the return or $5,000 ($10,000 in the case of a corporation other than an S corporation or a personal holding company). An understatement is defined as the excess of the amount required to be shown on the return over the amount reported thereon.

02 In the case of an item not attributable to a tax shelter, the amount of the understatement is reduced if the taxpayer discloses in the return or an attachment thereto the identity and amount of the item as well as the specific facts or the position taken relevant to the tax treatment of the item. Disclosure on a return of items attributable to a tax shelter will not reduce an understatement.

03 In general, rules providing guidance on the adequacy of disclosure for purposes of reducing an understatement under section 6661 of the Code will be set forth in regulations. The Commissioner has determined that in certain circumstances described in section 3 of this revenue procedure, disclosure of an item on the return with no further statement is adequate disclosure for purposes of section 6661, provided the taxpayer furnishes all required information in accordance with the applicable forms and instructions. This revenue procedure provides guidelines as to when such disclosure is adequate.

SECTION 3. PROCEDURE

Additional disclosure of facts relevant to, or positions with respect to, issues involving any of the items set forth below is unnecessary for purposes of reducing any understatement of tax under section 6661 of the Code provided, however, the forms and attachments are completed in a clear manner and in accordance with the instructions thereto, and the information on the return is disclosed in the manner described below.

(1) Schedule A, Form 1040, Itemized Deductions:

(a) Medical Expenses: Complete lines 1-7 supplying all required information. Line 4c must be itemized listing each item and its cost.

(b) Taxes: Complete lines 8-12 supplying all required information. Line 11 must list each type of tax and amount paid.

(c) Interest Expense: Complete lines 13-16 supplying all required information. Line 15 must list each payee and amount paid to same.

(d) Contributions: Complete lines 17-20 supplying all required information. If a contribution of property other than cash is made, the statement required by section 1.170A-1(a)(2)(ii) of the Income Tax Regulations must be attached to return.

(e) Casualty and Theft Losses: Form 4684, Casualties and Thefts, must be completed and attached to return. Each item or article for which a casualty or theft loss is claimed must be listed on Form 4684.

(2) Trade or Business Expenses:

(a) Casualty and Theft Losses: The procedure outlined in Section 3(1)(e) above, must be followed.

(b) Legal Fees: The name of each payee and the amount paid to same must be listed.

(c) Specific Bad Debt Chargeoff: The name of each debtor and the amount written off must be listed.

(d) Reserve for Bad Debts: Schedule F, Form 1120 or Form 1120S, must be completed, supplying all required information.

(e) Reasonableness of Officers' Compensation: Schedule E, Form 1120 or form 1120S, must be completed. The time devoted to business must be expressed as a percentage as opposed to "part" or "as needed".

(f) Repair as Opposed to Capital Expenditure: The amount of repairs stated.

(g) Taxes (other than foreign taxes): The amount of taxes stated.

(3) Other:

(a) Sale or Exchange of Principal Residence: Complete Form 2119, Sale or Exchange of Principal Residence, and attach to the return.

(b) Employee Business Expenses: Form 2106, Employee Business Expenses, must be attached to return supplying all required information.

(c) Moving Expenses: Form 3903, Moving Expenses Adjustment, must be attached to return supplying all required information.

SECTION 4. EFFECTIVE DATE

This revenue procedure is effective for returns filed in 1984, the due date (regardless of extensions) for filing of which is after December 31, 1983.