SERVICE CLARIFIES THAT ANNOUNCEMENTS AND NOTICES MAY BE RELIED UPON LIKE REVENUE RULINGS AND REVENUE PROCEDURES.

Rev. Rul. 87-138 ¹

ISSUE

Are Notices and Announcements released by the Internal Revenue Service authority for purposes of applying the penalty imposed by section 6661 of the Internal Revenue Code?

LAW AND ANALYSIS

Section 6661(a) of the Code provides for an addition to the tax in the case of a substantial understatement of income tax for any taxable year.

Section 6661(b)(2) of the Code defines the term "understatement" as the excess of: (1) the amount of the tax required to be shown on the return for the taxable year, over (2) the amount of tax imposed which is shown on the return, reduced by any rebate (within the meaning of section 6211(b)(2)).

Section 6661(b)(2)(B) of the Code provides, in part, that the amount of any understatement shall be reduced by any portion of the understatement which is attributable to the tax treatment of any item by the taxpayer if there is or was substantial authority for such treatment.

Section 1.6661-3(b)(2) of the Income Tax Regulations states the types of authority that will be considered in determining whether substantial authority exists. Section 1.6661-3(b)(2) states that "administrative pronouncements (including revenue rulings and revenue procedures)" are considered authority.

The Internal Revenue Service publishes a number of items in the Internal Revenue Bulletin. Generally, it is the Service's policy to publish in the Bulletin all substantive rulings (revenue rulings) necessary to promote a uniform application of the tax laws. In addition, procedures (revenue procedures) are published that affect the rights and duties of taxpayers.

Notices and Announcements are also published in the Internal Revenue Bulletin. These items may also contain substantive guidance regarding a position of the Service involving the tax laws or contain guidance to taxpayers of a procedural nature. Generally, Notices and Announcements are used when expeditious guidance is needed. Since Notices and Announcements that contain substantive or procedural guidance are intended to be relied on by taxpayers, they are the equivalent of revenue rulings and revenue procedures and, therefore, are "administrative pronouncements" as that term is used in section 1.6661-3(b)(2) of the regulations.

HOLDING

Notices and Announcements are authority for purposes of applying section 6661 of the Code. Furthermore, the Service will be bound by substantive or procedural guidance provided in Notices and Announcements to the same extent it would be bound if the same guidance were contained in a revenue ruling or revenue procedure.

All Notices and Announcements issued on or after December 28, 1987 will include specific reliance language in them if the Service intends that they function as "administrative pronouncements" as that term is used in section 1.6661-3(b)(2) of the regulations.

DRAFTING INFORMATION

The principal author of this revenue ruling is John McGreevy of the Individual Tax Division. For further information regarding this revenue ruling contact Mr. McGreevy on (202) 566-3466 (not a toll- free call).

¹ Also released as News Release IR-87-175, dated December 11, 1987.