SERVICE REVISES REVENUE PROCEDURE FOR ADEQUATE DISCLOSURE ON RETURNS; THREE FOREIGN TAX ITEMS DELETED FROM 'SAFE' LIST.

Rev. Proc. 89-11

SECTION 1. PURPOSE

01 This revenue procedure updates Rev. Proc. 88-37, 1988-30 I.R.B. 31, 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 under section 6661 of the Internal Revenue Code.

02 This procedure applies to 1988 tax forms filed for all taxable years beginning in 1988. It also applies to 1988 forms filed in 1989 for short taxable years beginning in 1989.

SEC. 2. CHANGES FROM PREVIOUS YEAR

01 Section 4(b) has been revised to include certain expenses related to the rental of property as trade or business expenses for purposes of this revenue procedure.

02 Section 4(d)(1) reflects the change in the name of Form 2119 from Sale or Exchange of Principal Residence to Sale of Your Home.

03 Section 4(d)(4) reflects the change in the name of Form 4136 from Computation of Credit for Federal Tax on Gasoline and Special Fuels to Computation of Credit for Federal Tax on Fuels.

04 Section 4(e)(2), relating to subpart F income shown on Form 5471, Information Return with Respect to a Foreign Corporation, has been deleted.

05 Section 4(e)(3), relating to intercompany transactions shown on Form 5471, Schedule M, has been deleted.

06 Section 4(e)(4), relating to Form 1116, Computation of Foreign Tax Credit, in the case of individuals, and Form 1118, Computation of Foreign Tax Credit, Corporations, has been deleted.

SEC. 3. BACKGROUND

01 Section 6661(a) of the Code imposes a penalty in situations in which there is a substantial understatement of income tax. The rate is 25 percent for penalties assessed after October 21, 1986. Section 6661(b)(1) 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 6661(b)(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)).

02 In the case of an item not attributable to a tax shelter, section 6661(b)(2)(B) of the Code provides that the amount of the understatement is reduced by the amount of the understatement attributable to any item if the taxpayer discloses, in the return or in an attachment, 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 does not reduce an understatement.

03 Section 6661(c) of the Code allows the Secretary to waive all or part of the penalty provided by section 6661(a) if the taxpayer shows that there was reasonable cause for all or part of the understatement and that the taxpayer acted in good faith.

04 In general, rules providing guidance on the adequacy of disclosure for purposes of reducing an understatement under section 6661 of the Code are set forth in the regulations under section 6661. Section 1.6661-4(c) of the Income Tax Regulations gives the Commissioner authority to prescribe by revenue procedure the circumstances under which information provided on the return, in accordance with the applicable forms and instructions, is adequate disclosure for purposes of section 6661. 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. This revenue procedure provides guidance in determining when such disclosure is adequate. Guidance for returns filed in 1983, 1984, 1985, 1986, 1987, and 1988 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, and Rev. Proc. 88-37, 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 tax under section 6661 of the Code, provided, however, that the forms and attachments are completed in a clear manner and in accordance with the 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 for purposes of section 6661 of the Code 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 paid 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 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 must be stated.

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

(c) Form 1120, Schedule M-1, Reconciliation of Income Per Books With Income Per Return:

An item clearly identified on Form 1120, Schedule M-1, but 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 7, 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 is effective for returns filed on 1988 tax forms for all taxable years beginning in 1988, and 1988 forms filed in 1989 for short taxable years beginning in 1989.

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).