Chief Counsel Recommends Nonacquiescence in U.G. Patel (AOD-2012-05)

IRS Chief Counsel has recommended nonacquiescence to the Tax Court’s decision in U.G. Patel, 138 TC—, No. 23, Dec. 59,100 . Chief Counsel disagrees with the court’s conclusion that the uncertain state of the law is a factor that supports a finding of reasonable cause and good faith, without any consideration of a taxpayer’s investigation of the contemporaneous state of the law, including the failure to obtain competent professional advice. Accordingly, the IRS will not follow Patel insofar as it holds that the uncertain state of the law, without a finding regarding a taxpayer’s efforts to determine the state of the law, is a factor in determining whether a taxpayer has demonstrated reasonable cause and good faith for purposes of avoiding accuracy-related penalties.

In Patel , the donors claimed a noncash charitable contribution for a house destroyed on their property through a special program in which their local fire department conducted training exercises by burning houses and extinguishing the fires. The IRS disallowed the deduction and determined an income tax deficiency and accuracy-related penalty under Code Sec. 6662 . In Tax Court, the IRS contended that the taxpayers were not entitled to the charitable deduction and were liable for the accuracy-related penalty on the alternative grounds of negligence or substantial understatement of income tax. The taxpayers stated that they complied with the tax law and, with respect to the penalty, they had acted with reasonable cause and good faith by relying on M.N. Scharf, Dec. 32,243(M) , TC Memo. 1973-265. The Tax Court agreed with the IRS on the contribution issue, but did not uphold the penalty, finding that the taxpayers fell within the “reasonable cause exception” under Code Sec. 6664(c) .

AOD-2012-05, 2013FED ¶46,246

Other References:

Code Sec. 6662

CCH Reference – 2013FED ¶39,651D.25

Code Sec. 6664

CCH Reference – 2013FED ¶39,661.657

Tax Research Consultant

CCH Reference – TRC PENALTY: 3,116.10



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