Recent actions by IRS agents to invoke section 6700 ("Promoting Abusive Tax Shelters, Etc.") portends a new area of concern for professionals who render tax advice. This penalty section was added to the Internal Revenue Code in 1982, primarily to provide the Service with an additional means of pursuing promoters of abusive tax shelters who make false or fraudulent statements regarding the tax consequences of their products. Recently, however, revenue agents are applying the section to lawyers and other professionals who provide tax or taxrelated advice with which the Service disagrees or which it considers aggressive. In some cases, it appears that the Service's objective is not to win in court, but rather to create an in terrorem effect, with respect to both the professional whose advice is under examination and the profession as a whole.
Section 6700 imposes a penalty in the case of any person who assists in the organization of a plan or arrangement or participates in its sale and, in connection therewith, makes or furnishes a statement with respect to the allowability of a deduction or credit, the excludability of any income, or the securing of any other tax benefit by reason of participating in the plan or arrangement that "the person knows or has reason to know is false or fraudulent as to any material matter." The IRS has the burden of proof in a section 6700 case.
In order for a penalty under section 6700 to be applied against a professional who renders advice on the tax consequences of a transaction, the IRS must establish that the professional knew or had reason to know that the opinion or advice given was false or fraudulent. It is important to note that this test involves two parts: a "false or fraudulent" statement — not one that is merely erroneous or even negligent — that the author "knows or has reason to know" is false.
Under section 6700, a person must pay the lesser of $1,000 or his collected fees, with respect to each plan or arrangement activity. Initially, a conflict emerged in the courts over what constituted an "activity," but in 1989 Congress clarified that each individual sale of a single interest is a separately punishable activity. Thus, if a lawyer provides tax advice with respect to a limited partnership involving the sale of ten partnership interests at $5,000 apiece, the maximum penalty exposure is $10,000. Similarly, the Service apparently takes the position that if a lawyer provides advice with respect to the tax-exempt status of interest on a bond issue sold in $5,000 denominations, the maximum penalty exposure is $1,000 per bond, subject to the limitation on actual fees received.
The court cases under section 6700 typically involve frivolous, "tax protestor" positions, or representations regarding the tax benefits available from sham transactions lacking economic substance — in short, outlandish tax statements that no "reasonable person" could possibly believe to be true. However, in recent examinations, the Service is asserting or considering asserting the penalty in situations where it simply disagrees with, or views as aggressive, the tax analysis provided by a law or accounting firm. A recent example is in the municipal bond area, where the Service publicly acknowledged that it has begun using section 6700 against bond lawyers who render opinions on the tax-exempt status of interest on municipal bonds. The IRS recently confirmed that it reached a settlement with a bond lawyer in one such case and collected its first-ever section 6700 penalty in this context.
The IRS may be counting on the fact that professionals cannot endure the adverse business consequences of a pending section 6700 examination and will therefore rush to the settlement table. As the Service's expansive use of this penalty continues, however, there will be increased resistance. It is likely that, in the not-too-distant future, this new position will be tested through appeals to higher officials within the IRS and Treasury and in court.
This article is designed to give general information on the developments covered, not to serve as legal advice related to specific situations or as a legal opinion. Counsel should be consulted for legal advice.
