IRS UPDATES REVENUE PROCEDURE ON ADEQUATE DISCLOSURE.

Rev. Proc. 94-36

SECTION 1. PURPOSE

.01 This revenue procedure updates Rev. Proc. 92-23, 1992-1 C.B. 737, as extended by Rev. Proc. 93-33, 1993-28 I.R.B. 49, and identifies circumstances under which the disclosure on a taxpayer's return of a position with respect to an item is adequate for the purpose of reducing the understatement of income tax under section 6662(d) of the Internal Revenue Code (relating to the substantial understatement aspect of the accuracy-related penalty), and for the purpose of avoiding the preparer penalty under section 6694(a) (relating to understatements due to unrealistic positions). This revenue procedure does not apply with respect to any other penalty provision (including the negligence or disregard provisions of the section 6662 accuracy-related penalty).

.02 This revenue procedure applies to any return filed on 1993 tax forms for a taxable year beginning in 1993, and to any return filed on 1993 tax forms in 1994 for short taxable years beginning in 1994.

SECTION 2. CHANGES FROM REV. PROC. 92-23

.01 Section 3.04 has been modified to identify only those revenue procedures providing guidance for returns filed in the immediately preceding three years (1991, 1992, and 1993).

.02 Section 4 has been modified to eliminate any reference to the General Business Credit Carryforward: Line 5 of Form 3800, General Business Credit. Disclosure concerning a general business credit is not required in a carryforward year, but is only required in the year the credit arises. See section 1.6662-4(f)(4) of the Income Tax Regulations.

.03 Section 4 has been clarified to indicate that this revenue procedure does not apply to legal expenses that are nondeductible lobbying or political expenditures.

.04 Section 4 has been expanded to include Form 5472, Part IV, Monetary Transactions Between Reporting Corporations and Foreign Related Party, lines 7 and 18.

.05 Sections 3.03 and 5 have been expanded to include changes made by the Omnibus Budget Reconciliation Act of 1993.

SECTION 3. BACKGROUND

.01 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 is added to the tax. (The penalty rate is 40 percent in the case of certain gross valuation misstatements.) Under section 6662(b)(2), section 6662 applies to the portion of an underpayment that is attributable to a substantial understatement of income tax.

.02 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 of tax required to be shown on the return for the taxable year 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 excess of the amount of tax required to be shown on the return for the taxable year over the amount of the tax that is actually shown on the return reduced by any rebate (within the meaning of section 6211(b)(2)).

.03 In the case of an item not attributable to a tax shelter, section 6662(d)(2)(B)(ii) of the Code, as amended by section 13251(a) of the Omnibus Budget Reconciliation Act of 1993, 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 on the return or on a statement attached to the return, and there is a reasonable basis for the tax treatment of such item by the taxpayer.

.04 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 6662(d) for returns filed in 1991, 1992, and 1993 is provided in Rev. Proc. 91- 19, 1991-1 C.B. 523, Rev. Proc. 92-23, 1992-1 C.B. 737, and Rev. Proc. 93-33, 1993-28 I.R.B. 49, respectively.

SECTION 4. PROCEDURE

.01 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 provided that the forms and attachments are completed in a clear manner and in accordance with their instructions. 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.

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

(a) Medical and Dental Expenses: Complete lines 1 through 4, supplying all required information.

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

(c) Interest Expense: Complete lines 9a through 12, 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) amounts disallowed under section 265 of the Code.

(d) Contributions: Complete lines 13 through 16, supplying all required information. Merely entering 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.

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

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

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

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

(b) Legal Expenses: The amount claimed must be stated. This revenue procedure does not apply, however, to amounts properly characterized as capital expenditures, personal expenses, or nondeductible lobbying or political expenditures, including amounts that are required to be (or that are) amortized over a period of years.

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

(d) Reasonableness of Officers' Compensation: Form 1120, Schedule E, Compensation of Officers, 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 4.01(2)(d) does not apply to "golden parachute" compensation prohibited by section 280G of the Code.

(e) Repair Expenses: The amount claimed must be stated. This revenue procedure does not apply, however, to any repair expenses properly characterized as capital expenditures or personal expenses.

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

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

(a) 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

(b) 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.

(4) Other:

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

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

(c) Fuels Credit: Complete Form 4136, Credit for Federal Tax Paid on Fuels, and attach to the return.

(d) Investment Credit: Complete Form 3468, Investment Credit, and attach to the return.

(5) Foreign Tax Items:

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

(b) Intercompany Transactions: Transactions and amounts shown on Schedule M (Form 5471), Transactions Between Controlled Foreign Corporation and Shareholders or Other Related Persons, lines 9 and 18, and Form 5472, Part IV, Monetary Transactions Between Reporting Corporations and Foreign Related Party, lines 7 and 18.

SECTION 5. EFFECTIVE DATE

.01 Sections 1 through 4 of this revenue procedure apply to any return filed on 1993 tax forms for a taxable year beginning in 1993, and to any return filed on 1993 tax forms in 1994 for short taxable years beginning in 1994, except to the extent provided by this section 5 to reflect changes made to the law by the Omnibus Budget Reconciliation Act of 1993, as follows:

(1) Section 4.01(1)(d). Contributions: This revenue procedure will not apply to any contribution of $250 or more made after December 31, 1993, unless the contemporaneous written acknowledgement requirement is satisfied.

(2) Section 4.01(1)(f). Moving Expenses: This revenue procedure applies only to a taxpayer's moving expenses for travel, lodging (excluding meals), and transportation of household goods incurred after December 31, 1993, provided the new place of employment meets the new 50-mile test, if applicable.

(3) Section 4.01(2)(d). Reasonableness of Officers' Compensation: This revenue procedure will not apply to the extent that remuneration paid or incurred in taxable years beginning after December 31, 1993, exceeds the $1 million employee remuneration limitation, if applicable.

(4) Section 4.01(4)(b). Employee Business Expenses: This revenue procedure applies only to 50 percent of a taxpayer's meal and entertainment expenses paid or incurred after December 31, 1993. However, this revenue procedure does not apply to club dues, or to travel expenses for any non-employee accompanying the taxpayer on a trip, paid or incurred after December 31, 1993.

SECTION 6. DRAFTING INFORMATION

The principal author of this revenue procedure is Marcia Rachy of the Office of Assistant Chief Counsel (Income Tax and Accounting). For further information regarding this revenue procedure, contact Ms. Rachy on (202) 622-4940 (not a toll-free call).