SERVICE RELEASES GUIDANCE FOR NEW DISCLOSURE PENALTIES.

Rev. Proc. 90-16

SECTION 1. PURPOSE

01 This revenue procedure updates Rev. Proc. 89-11, 1989-1 C.B. 797, and identifies circumstances under which the disclosure on a taxpayer's return of an item or a position taken is adequate disclosure for the purpose of reducing the understatement of income tax under section 6662(d) of the Internal Revenue Code, as enacted by the Revenue Reconciliation Act of 1989 (the Act), Pub. L. No. 101- 239, section 7721, 103 Stat. 2106 (1989), applicable to returns the due date of which (determined without regard to extensions) is after December 31, 1989. This revenue procedure applies only to disclosures of an item or position taken for purposes of reducing the understatement of income tax for purposes of the penalty for substantial understatement of income tax under section 6662(d) (and, to the extent indicated in section 1.02 below, former section 6661). This revenue procedure does not apply with respect to any other penalty provision.

02 This revenue procedure applies under section 6662 of the Code to any taxpayer filing a return on 1989 tax forms for a taxable year beginning in 1989, the due date for which is after December 31, 1989 (determined without regard to extensions), and to any taxpayer filing on 1989 tax forms in 1990 for short taxable years beginning in 1990. This revenue procedure also applies under former section 6661 to any taxpayer filing a return on 1989 tax forms for a taxable year that began and ended in 1989, the due date for which was before January 1, 1990 (determined without regard to extensions).

SEC. 2. CHANGES FROM PREVIOUS YEAR

Although no substantive changes relating to forms or line items have been made from the previous year, the references to Code provisions in this revenue procedure have been revised to reflect the enactment of new section 6662 of the Code.

SEC. 3. BACKGROUND

01 The Act consolidated the major penalties relating to the accuracy of a return, including the penalty under former section 6661 of the Code for substantial understatements of income tax, into new section 6662 and repealed the various sections of the Code that formerly imposed those penalties, including former section 6661, effective for returns the due date for which is after December 31, 1989 (determined without regard to extensions). For further information, see Notice 90-20, 1990-10 I.R.B., published concurrently with this revenue procedure.

02 If section 6662 of the Code applies to any portion of an underpayment of tax required to be shown on a return, an amount equal to 20 percent of the portion of the underpayment to which the section applies shall be added to the tax. Under section 6662(b)(2), section 6662 applies to the portion of any underpayment that is attributable to any substantial understatement of income tax.

03 Section 6662(d)(1) of the Code provides that there is a substantial understatement of income tax if the amount of the understatement 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). Section 6662(d)(2) defines an understatement as the difference between the amount of tax required to be shown on the return for the taxable year and the amount of the tax that is actually shown on the return (reduced by any rebate within the meaning of section 6211(b)(2)).

04 In the case of an item not attributable to a tax shelter, section 6662(d)(2)(5)(ii) of the Code provides that the amount of the understatement is reduced by the portion of the understatement attributable to any item with respect to which the relevant facts affecting the item's tax treatment are adequately disclosed in the return or in a statement attached to the return.

05 In general, this revenue procedure provides guidance in determining when disclosure is adequate for purposes of section 6662(d) of the Code. For purposes of this revenue procedure, the taxpayer must furnish all required information in accordance with the applicable forms and instructions, and the money amounts entered on these forms must be verifiable. Guidance under section 6661 for returns filed in 1983, 1984, 1985, 1986, 1987, 1988, and 1989 is provided in Rev. Proc. 83-21, 1983-1 C.B. 680, Rev. Proc. 84-19, 1984-1 C.B. 433, Rev. Proc. 85-19, 1985-1 C.B. 520, Rev. Proc. 86-22, 1986-1 C.B. 562, Rev. Proc. 87-48, 1987-2 C.B. 645, Rev. Proc. 88-37, 1988-2 C.B. 560, and Rev. Proc. 89-11, respectively.

SEC. 4. PROCEDURE

Additional disclosure of facts relevant to, or positions taken with respect to, issues involving any of the items set forth below is unnecessary for purposes of reducing any understatement of income tax under section 6662(d) of the Code (or section 6661 of prior law, to the extent indicated in section 1.02 of this revenue procedure) provided that the forms and attachments are completed in a clear manner and in accordance with their instructions. Pursuant to the forms and instructions, items must not be combined but must be separately stated on the appropriate line. The money amounts entered on the forms must be verifiable, and the information on the return must be disclosed in the manner described below. For purposes of this revenue procedure, a number is verifiable if, on audit, the taxpayer can demonstrate the origin of the number (even if that number is not ultimately accepted by the Internal Revenue Service) and the taxpayer can show good faith in entering that number on the applicable form.

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

(1) Medical and Dental Expenses: Complete lines 1-4 supplying all required information. Line 1b must list each item and the amount paid.

(2) Taxes: Complete lines 5-8 supplying all required information. Line 7 must list each type of tax and the amount paid.

(3) Interest Expense: Complete lines 9-13 supplying all required information. This section of the procedure does not apply to (i) amounts disallowed under section 163(d) of the Code unless Form 4952, Investment Interest Expense Deduction, is completed, or (ii) any amounts disallowed under section 265 of the Code.

(4) Contributions: Complete lines 14-17 supplying all required information. Merely entering the name of an organization to which the taxpayer makes a donation and the amount of the donation on Schedule A, however, will not constitute adequate disclosure if the taxpayer receives a substantial benefit from the donation shown. If a contribution of property other than cash is made and the amount claimed as a deduction exceeds $500, a properly completed Form 8283, Noncash Charitable Contributions, must be attached to the return.

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

(6) Moving Expenses: Complete Form 3903, Moving Expenses, or Form 3903F, Foreign Moving Expenses, and attach to the return.

(b) Certain Trade or Business Expenses (which, for purposes of this revenue procedure, include the following six expenses as they relate to the rental of property):

(1) Casualty and Theft Losses: The procedure outlined in (a)(5) above must be followed.

(2) Legal Fees: The amount claimed must be stated.

(3) Specific Bad Debt Charge-off: The amount written off must be stated.

(4) Reasonableness of Officers' Compensation: Form 1120, Schedule E, must be completed when required by instructions. The time devoted to business must be expressed as a percentage as opposed to "part" or "as needed." This section 4(b)(4) does not apply to "golden parachute" compensation prohibited by section 280G of the Code.

(5) Repair as Opposed to Capital Expenditure: The amount of repairs claimed must be stated.

(6) Taxes (other than foreign taxes): The amount of taxes claimed must be stated.

(c) An item clearly identified on Form 1120, Schedule M-1, Reconciliation of Income Per Books With Income Per Return, is adequately disclosed only if:

(1) The amount of the deviation from the financial books and records is not the result of a computation that includes the netting of items; and

(2) The information provided reasonably may be expected to apprise the Service of the nature of the potential controversy concerning the tax treatment of the item.

(d) Other:

(1) Sale or Exchange of Your Main Home: Complete Form 2119, Sale of Your Home, and attach to the return.

(2) Employee Business Expenses: Complete Form 2106, Employee Business Expenses, and attach to the return.

(3) General Business Credit Carryforwards: Amounts shown on Line 10, Form 3800, General Business Credit.

(4) Fuels Credit: Amounts shown on Form 4136, Computation of Credit for Federal Tax on Fuels.

(5) Investment Credit: Complete Form 3468, Computation of Investment Credit, and attach to the return.

(e) Foreign Tax Items:

(1) International Boycott Transactions: Transactions disclosed on Form 5713, International Boycott Report.

(2) Intercompany Transactions: Transactions and amounts shown on Form 5471, Schedule G.

SEC. 5. EFFECTIVE DATE

This revenue procedure applies under section 6662 of the Code to any taxpayer filing a return on 1989 tax forms for a taxable year beginning in 1989, the due date for which is after December 31, 1989 (determined without regard to extensions), and to any taxpayer filing on 1989 tax forms in 1990 for short taxable years beginning in 1990. This revenue procedure also applies under former section 6661 to any taxpayer filing a return on 1989 tax forms for a taxable year that began and ended in 1989, the due date for which was before January 1, 1990 (determined without regard to extensions).

SEC. 6. DRAFTING INFORMATION

The principal author of this revenue procedure is Mary Jane Kossar of the Office of Assistant Chief Counsel (Income Tax and Accounting). For further information regarding this revenue procedure, contact Ms. Kossar on (202) 566-3453 (not a toll-free call).