CCA 1041042: Section 6662A penalty does not apply to excise tax understatements

Plain-English summary

The Chief Counsel’s advice concludes that the section 6662A accuracy-related penalty does not apply to excise tax understatements. The advice reasons that the statutory definition of a reportable transaction understatement is limited to increases in taxable income and decreases in credits under subtitle A, and that an excise tax adjustment does neither.

Ruling snapshot

• Question: Does the section 6662A penalty apply to an excise tax understatement?
• Outcome: Advice given
• Key authorities: IRC §§ 1, 11, 1211, and 6662A; IRC § 6110(k)(3)

Full text (IRS public release)

ID: CCA_2010092911260164 Number: 201041042
Release Date: 10/15/2010
Office: --------------
UILC: 6662A.00-00

From: -----------------
Sent: Wednesday, September 29, 2010 11:26:02 AM
To: -------------------
Cc: ------------------
Subject: 6662A penalty applicability to excise tax

You asked whether the section 6662A penalty applies to excises taxes. We have taken the position that
it does not.

Section 6662A imposes a 20 percent accuracy-related penalty on reportable transaction
understatements. While section 6662A(a) is silent as to which type of tax understatement the penalty
applies, subsection (b) defines the term "reportable transaction understatement." That definition is limited
to understatements involving taxable income.

A reportable transaction understatement is the sum of the product of (i) the amount of the increase in
taxable income which results from the difference between proper tax treatment of an item to which
section 6662A applies and the taxpayer's treatment of such item, and (ii) the highest rate of tax imposed
by section 1 (section 11 for corporations), plus the amount of the decrease in the aggregate amount of
credits determined under subtitle A which results from a difference between the taxpayer's treatment of
an item to which section 6662A applies and the proper tax treatment of the item. IRC § 6662A(b)(1).
Subsection (b)(1) goes on to state that any reduction of the excess of deductions allowed for the taxable
year over gross income for such year, and any reduction in the amount of capital losses which would
(without regard to section 1211) be allowed for such year, shall be treated as an increase in taxable
income. Id. In summary, the amount of the reportable transaction understatement is calculated by
adding the product of the increase in taxable income (which includes the excess of deductions allowed
over gross income and reduction of capital losses) and the highest rate of income tax, to the amount of
the decrease in subtitle A (income tax) credits.

An excise tax adjustment does not increase taxable income or decrease the amount of credits under
subtitle A. Without an increase in taxable income or decrease in subtitle A credits resulting from the
proper treatment of an excise tax, there cannot be a reportable transaction understatement as defined by
the statute. There is no reference to excise taxes at all in the definition of a reportable transaction
understatement. We also note that the statute prescribes rates to determine the amount of the
understatement (i.e., section 1 and section 11) that are income tax rates, not excise tax rates or
amounts. To determine a reportable transaction understatement amount by reference to some amount of
excise tax and without reference to the definition of the term "reportable transaction understatement"
would be to disregard part of the statute altogether. That approach would not be a proper form of
statutory interpretation.

If you would like to discuss this issue further, we can schedule a teleconference to address any concerns
you may have.

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