Trust lacks reasonable cause for first-tier tax abatement

Plain-English summary

A private-foundation trust made grants to another private foundation without a written grant agreement, annual grantee reports, or the required reports with its Forms 990-PF. The trustees also served on the grantee's board and knew that the funds were used as intended, but their law firm and accountant never advised them about the technical expenditure-responsibility requirements. After a new accountant found the problem, the trust obtained the agreements and reports, adopted controls, and voluntarily filed Form 4720. The IRS advised that correction protected the trust from second-tier taxes but did not establish reasonable cause for abating the first-tier section 4945 taxes under section 4962. Preparing returns without addressing the issue did not amount to substantive professional advice that the trust could reasonably rely on.

Ruling snapshot

• Question: Should first-tier taxable-expenditure taxes be abated when a trust corrected its expenditure-responsibility failures but had received no substantive advice that the requirements did not apply?
• Outcome: Advice given, abatement unavailable
• Key authorities: IRC §§ 4945, 4962, 4963; Treas. Reg. §§ 53.4945-5, 53.4963-1

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
TE/GE: EO Examination
1100 Commerce Street
Dallas, Texas 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Release Number: 201547007

Release Date: 11/20/2015
Date: September 5, 2014
UIL Code: 4962-00-00

Taxpayer Identification Number:
Form:

Tax year Ended:

Person to Contact/ID Number:

Contact Numbers:

Manager Name/ID Number:

Contact Numbers:

CERTIFIED MAIL — RETURN RECEIPT REQUESTED

Dear:

We are enclosing a technical advice memorandum (TAM) that we requested from EO
Rulings and Agreements in Washington D.C. Generally we request TAMs for issues
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Sincerely yours,

Barbara L. Harris
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Enclosures:

Technical Advice Memorandum

Technical Advice Memorandum (sanitized copy)
Notice 438

Publication 892

INTERNAL REVENUE SERVICE

NATIONAL OFFICE TECHNICAL ADVICE MEMORANDUM
E.O. Exams Programs and Review
Internal Revenue Service
September 24, 2014
Attn: EO Mandatory Review
MC 4920 DAL
1100 Commerce Street
Dallas, TX 75242
Taxpayer's Name:

Taxpayer's Address:

Taxpayer's Identification Number:
Tax Years Involved:

Date of Conference:

LEGEND:

Trust =
Year =
Grantor =
Company =
Foundation =
Partnership =
Year1 =
Year2 =
Date =

ISSUE:

Should the first-tier excise taxes under I.R.C. § 4945 on Trust's failure to distribute income for
the years at issue be abated in accordance with § 4962?

FACTS:

Trust is a § 501(c)(3) organization established in Year and classified as a private foundation as
described in § 509(a). Trust began as a grantor trust, payments from which were payable only
to Grantor and then after Grantor's death Trust became an irrevocable trust. Trust was funded
with corporate stock of the Company. Under the trust agreement Trust will liquidate the stock
and distribute the proceeds to Foundation.

Foundation is exempt from income tax under § 501(c)(3) and is classified as a private
foundation within the meaning of §509(a). Foundation’s purpose is to make grants to 501(c)(3)

organizations.

Trust has provided grants to Foundation every year since Year. Upon the completion of the
series of distributions from Partnership, then to Foundation, Trust will terminate. Trust has two

trustees. Neither trustee has experience, knowledge, or understanding of the federal tax
applicable to private foundations. Both trustees are also members of the board of directors of
Foundation. Trust engaged a law firm, which assists Trust in other legal matters, to prepare its
application for exemption and to assist with the preparation of its Form 990-PF for Year. In the
years immediately following Year Trust engaged a certified public accountant to prepare its
annual tax returns and advise it on other tax matters, particularly those concerning its tax
exempt and private foundation status and reporting requirements. The trustees relied upon
these professionals to inform them of all filing and administrative requirements. According to
the filed abatement request, both the law firm and the CPA were aware of all relevant facts and
circumstances giving rise to the expenditure responsibility requirements. Trust did not enter into
a formal written agreement with Foundation concerning the grant payments. Trust represents
that the requirement to enter such a written agreement or to otherwise exercise expenditure
responsibility with respect to the grants to Foundation was never brought to the attention of the
trustees by either the law firm or the CPA.

In Year2, Trust engaged a second CPA at a different firm to assist it with its tax compliance
responsibilities, beginning with its Form 990-PF filing for Year1. During the preparation of this
Form 990-PF the second CPA discovered the error. Specifically, a written agreement
containing the terms of the grant and express requirements that any portion of the investment
not used for the specific purpose of the grant be repaid was not signed by Foundation, and
Foundation did not provide an annual report stating that it has complied with the terms of the
grant. Trust states that during the years in question, however, no portion of the funds granted
were used for purposes other than those intended by the grant, and Foundation has complied
with the terms of the grant. Also, while no written reports were made, the trustees’ positions as
members of the board of Foundation provided them with the knowledge that the funds were
being used in the intended manner. Trust also failed to include an annual report from
Foundation in its Form 990-PF filings for the years in questions since none were provided by
Foundation.

Once the second CPA informed Trust that it had failed to exercise the technical requirements of
expenditure responsibility during the preparation of the Year1 returns in early Year2, Trust
immediately took corrective action, gathering the appropriate information from Foundation and
filing Form 4720, Return of Certain Excise Taxes under Chapter 41 and 42, to voluntarily report
its noncompliance. Trust also implemented controls to ensure that it complies with the
expenditure responsibility requirements for all future grants. Trust took the following corrective
steps:

Trust entered into a written Grant Agreement with Foundation, effective as of the start of Year.
The Grant Agreement contains all of the terms required in order to meet the expenditure
responsibility requirements of § 4945(h), as set forth in § 53.4945-5(b)(3).

Trust on Date obtained reports from Foundation covering the years in question containing the
required statements that Foundation has complied with the terms of the grant.

Trust on its timely filed Year1 return included the required reports with respect to the grant
payments made to Foundation for the years in question on its timely filed Form 990-PF for
Year1.

LAW:

I.R.C. § 4945(a)(1) imposes a tax equal to 20 percent on each taxable expenditure, to be paid
by the private foundation.

I.R.C. § 4945(a)(2) provides that, “there is hereby imposed on the agreement of any foundation
manager to the making of an expenditure, knowing that it is a taxable expenditure, a tax equal
to 5 percent of the amount thereof, unless such agreement is not willful and is due to
reasonable cause. The tax imposed by this paragraph shall be paid by any foundation manager
who agreed to the making of the expenditure.”

I.R.C. § 4945(b) provides that there shall be “additional taxes.--on the foundation--In any case in
which an initial tax is imposed by subsection (a)(1) on a taxable expenditure and such
expenditure is not corrected within the taxable period, there is hereby imposed a tax equal to
100 percent of the amount of the expenditure. The tax imposed by this paragraph shall be paid
by the private foundation.”

I.R.C. § 4945(d)(4) defines taxable expenditure as an amount paid by a private foundation as a
grant to an organization unless such organization is described in §§ 509(a)(1), (2), or (3) or it is
an exempt operating foundation, or the private foundation exercises expenditure responsibility
with respect to such grant in accordance with subsection (h).

I.R.C. § 4945(h) provides that expenditure responsibility referred to in § 4945(d)(4) means that
the private foundation will assert all reasonable efforts and establish adequate procedures to
see that the grant is spent solely for the purpose for which it was made, to obtain full and
complete reports from the grantee on how the funds are spent, and to make full and detailed
reports with respect to such expenditures to the Secretary.

I.R.C. § 4963(a) provides that, “If any taxable event is corrected during the correction period for
such event, then any second tier tax imposed with respect to such event (including interest,
additions to the tax, and additional amounts) shall not be assessed, and if assessed the
assessment shall be abated, and if collected shall be credited or refunded as an overpayment.”

I.R.C. § 4962(a) provides that if it is established to the satisfaction of the Secretary that:

1. a taxable event was due to reasonable cause and not to willful neglect, and
2. such event was corrected within the correction period for such event, then any
   qualified first tier tax imposed with respect to such event (including interest) shall
   not be assessed and, if assessed, the assessment shall be abated and, if collected,
   shall be credited or refunded as an overpayment.

I.R.C. § 4963(e)(1) defines “correction period” as “the period beginning on the date on which
such event occurs and ending 90 days after the date of mailing under section 6212 of a notice
of deficiency.”

I.R.C. § 6651(a)(1) provides that in "Addition to the tax.--In case of failure--to file any return
required under authority of subchapter A of chapter 61 (other than part III thereof), subchapter A
of chapter 51 (relating to distilled spirits, wines, and beer), or of subchapter A of chapter 52
(relating to tobacco, cigars, cigarettes, and cigarette papers and tubes), or of subchapter A of
chapter 53 (relating to machine guns and certain other firearms), on the date prescribed therefor
(determined with regard to any extension of time for filing), unless it is shown that such failure is
due to reasonable cause and not due to willful neglect, there shall be added to the amount

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required to be shown as tax on such return 5 percent of the amount of such tax if the failure is
for not more than 1 month, with an additional 5 percent for each additional month or fraction
thereof during which such failure continues, not exceeding 25 percent in the aggregate.”

I.R.C. § 6656 provides that, “in the case of any failure by any person to deposit (as required by
this title or by regulations of the Secretary under this title) on the date prescribed therefor any
amount of tax imposed by this title in such government depository as is authorized under §
6302(c) to receive such deposit, unless it is shown that such failure is due to reasonable cause
and not due to willful neglect, there shall be imposed upon such person a penalty equal to the
applicable percentage of the amount of the underpayment.”

Treas. Reg. § 53.4945-1(d)(2) provides that, “If the expenditure is taxable only because of a
failure to obtain a full and complete report as required by section 4945(h)(2) or because of a
failure to make a full and detailed report as required by section 4945(h)(3), correction may be
accomplished by obtaining or making the report in question. In addition, if the expenditure is
taxable only because of a failure to obtain a full and complete report as required by section
4945(h)(2) and an investigation indicates that no grant funds have been diverted to any use not
in furtherance of a purpose specified in the grant, correction may be accomplished by exerting
all reasonable efforts to obtain the report in question and reporting the failure to the Internal
Revenue Service, even though the report is not finally obtained.”

Treas. Reg. § 53.4945-5(b)(3) provides that in order to meet the expenditure responsibility
requirements of § 4945(h), a private foundation must require that each grant to an organization
be made subject to a written commitment signed by an appropriate officer, director, or trustee of
the grantee organization. Such commitment must include an agreement by the grantee: to
repay any portion of the amount granted which is not used for the purposes of the grant, to
submit full and complete annual reports on the manner in which the funds are spent and the
progress made in accomplishing the purposes of the grant, to maintain records of receipts and
expenditures and to make its books and records available to the grantor at reasonable times,
and not to use any of the funds for any activity for any purpose other than one specified in §
170(c)(2)(B).

Treas. Reg. § 53.4945-5(c)(1) stipulates that the granting private foundation shall require
reports on the use of the funds, compliance with the terms of the grant, and the progress made
by the grantee toward achieving the purposes for which the grant or any portion thereof is
received and all such subsequent periods until the grant funds are expended in full or the grant is
otherwise terminated.

Treas. Reg. § 53.4945-5(d)(1) provides that to satisfy the report making requirements of §
4945(h)(3), a granting foundation must provide the required information on its annual
information return for each taxable year which is subject to the expenditure responsibility
requirements of § 4945(h).

Treas. Reg. § 53.4955-1(b)(7) provides that the act of agreeing to a political expenditure by a
foundation manager will be considered to be due to reasonable cause if that manager receives
a reasoned written legal opinion. An opinion will be considered reasoned if it addresses the
facts and applicable law. The opinion is will not be considered reasoned if it does nothing more
than recite the facts and express a conclusion.

Treas. Reg. § 53.4963-1(a) defines “first tier tax” as any tax imposed by subsection (a) of §§
4941-45, 51, 52, 55, 58, 66, 67, 71, or 75. A “first tier tax” may also be referred to as an “initial
tax.”

Treas. Reg. § 53.4963-1(b) defines “second tier tax” as any tax imposed by subsection (b) of §§
4941-45, 51, 52, 55, 58, 71, or 75. A “second tier tax” may also be referred to as an “additional
tax.”

Treas. Reg. § 53.4963-1(e) provides that the correction period with respect to any taxable event
shall begin with the date on which the taxable event occurs and shall end 90 days after the date
of mailing of a notice of deficiency under § 6212 with respect to the second tier tax imposed with
respect to the taxable event. Subparagraph (3) provides that the correction period may be
extended by any period which the Commissioner determines is reasonable and necessary to
bring about correction of the taxable event.

In United States v. Boyle, 469 U.S. 241 n.3 (1985), the Supreme Court described “willful
neglect” “as meaning a conscious, intentional failure or reckless indifference.” To show
reasonable cause, the taxpayer must “demonstrate that he exercised ‘ordinary business care
and prudence.” Boyle, 469 U.S. at 246 (quoting Treas. Reg. § 301.6651-1(c)(1). Additionally,
the court stated, “This case is not one in which a taxpayer has relied on the erroneous advice of
counsel concerning a question of law. Courts have frequently held that “reasonable cause” is
established when a taxpayer shows that he reasonably relied on the advice of an accountant or
attorney that it was unnecessary to file a return, even when such advice turned out to have been
mistaken.” Citing United States v. Kroll, 547 F.2d 393, 395-396 (CA7 1977); Commissioner v.
American Assn. of Engineers Employment, Inc., 204 F.2d 19, 21 (CA7 1953); Burton Swartz
Land Corp. v. Commissioner, 198 F.2d 558, 560 (CA5 1952); Haywood Lumber & Mining Co. v.
Commissioner, 178 F.2d, at 771; Orient Investment & Finance Co. v. Commissioner, 83
U.S.App.D.C., at 75, 166 F.2d, at 603; Hatfried, Inc. v. Commissioner, 162 F.2d, at 633-635;
Girard Investment Co. v. Commissioner, 122 F.2d, at 848; Dayton Bronze Bearing Co. v.
Gilligan, 281 Fed. 709, 712 (CA6 1922). This Court also has implied that, in such a situation,
reliance on the opinion of a tax adviser may constitute reasonable cause for failure to file a
return. Citing Commissioner v. Lane-Wells Co., 321 U.S. 219, 64 S.Ct. 511, 88 L.Ed. 684
(1944). The court goes on to state, “When an accountant or attorney advises a taxpayer on a
matter of tax law, such as whether a liability exists, it is reasonable for the taxpayer to rely on
that advice. Most taxpayers are not competent to discern error in the substantive advice of an
accountant or attorney. To require the taxpayer to challenge the attorney, to seek a “second
opinion,” or to try to monitor counsel on the provisions of the Code himself would nullify the very
purpose of seeking the advice of a presumed expert in the first place.”

Haywood Lumber & Mineral Co. v. Commissioner, 178 F.2d 769 (2nd Cir. 1950), holds that a
corporation’s failure to file a personal holding surtax return did not incur a 25 percent penalty
since it had reasonable cause to not file by relying on a competent certified accountant to
prepare the proper returns. The accountant did not inform the taxpayer of its need to file these
returns despite being hired to prepare the taxpayer's returns and being fully informed of all the
information necessary to know you needed to file the forms.

Hatfried, Inc. v. Commissioner, 162 F.2d 628 (3rd Cir. 1947), provides that there will be no
penalty for failing to file the personal holding company return when the taxpayer made full
disclosure of all relevant facts that would establish it as a personal holding company to its
outside tax return preparer who then did not file the return.

Orient Inv. & Finance Co. v. Commissioner, 166 F.2d 601 (D.C. Cir. 1948), provides that there
was reasonable cause for failure to file personal holding company returns when advisors had all

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information necessary to make the determination as to whether or not the returns were required.

L.D. Caulk Co. v. U.S., 116 F. Supp. 835 (D. Del. 1953), provides that the failure to file a
withholding tax return was do to “reasonable cause” where the taxpayer's outside advisor
advised that no withholding tax was due.

Burruss Land & Lumber Co., Inc. v. U.S., 349 F. Supp. 188 (W.D. Va. 1972), primarily
discussed the reasonableness of relying upon in-house counsel, rather than outside counsel,
when determining reasonable cause in relying on such advice for purposes of §§ 6651 and
6656. The court determined that reliance on in-house counsel constitutes reliance on counsel
and not an act of the organization itself therefore reasonable cause existed and no penalty
should be assessed. The court also noted the distinction between penalty and the initial tax
when determining the assessment of a tax.

Burton Swartz Land Corp. v. Commissioner, 198 F.2d 558 (5th Cir. 1952), states that the
delinquency penalty did not apply for the late filing of returns where the corporation had initially
received advice that no returns were due but later found out that this advice was incorrect and
filed delinquent returns.

In Woodsum v. Commissioner, 136 T.C. 585 (2011), the court determined that there was no
reasonable cause for the failure to report $3.4 million in income when the taxpayer had provided
its tax preparer with all of the information for it to know that the taxpayer had earned that
income. The court noted that the tax preparers failure to report the income on the return does
not constitute professional advice on which the taxpayer could rely for not reporting the income.

Hans Mannheimer Charitable Trust v. Commissioner, 93 T.C. 35 (1989), involved the imposition
of taxes under § 4945 for failure to exercise the expenditure responsibilities found under
4945(h). In this case the taxpayer shared a founder with the organizations to which it made
grants and was fully aware of the activities and expenditures of those organizations throughout
the time period in question. The taxpayer in the case did not make the grants conditional upon
a written agreement nor did they require annual reports or submit any annual reports as part of
their Form 990-PF filings. The taxpayer noted that the spirit of the regulations was followed and
that the errors were only “technical” in nature. The court disagreed stating that, “The initial tax is
a spur designed to remind the foundation that it has been remiss. Subsequent compliance with
the rules enables the foundation to avoid the real whip of § 4945(b)(1), but cannot undo the
punishment for its initial infraction.” The court determined that even if no expenditures were
used inappropriately the failure to comply with the regulations and file the appropriate
paperwork warranted imposition of the first-tier tax under § 4945.

In Rembusch v. Commissioner, 38 T.C.M. (CCH) 310 (1979), the court held that the taxpayer
has the burden of showing that a failure to file timely returns was due to reasonable cause and
not willful neglect. A mere showing that the delinquency in filing the returns was not due to
willful neglect is not sufficient and that there must also be reasonable cause.

In de Belaieff v. Commissioner, 15 T.C.M. (CCH) 1426 (1956), the court held that ignorance of
the law does not constitute reasonable cause. The taxpayer had shown that failure to file
returns was not due to willful neglect, but was instead due to ignorance of the law. The
taxpayer received advice from her attorneys regarding the tax treatment of income items, which
at the time of the advice, was correct. Subsequently, for the years at issue, there was a change
in the law and taxpayer continued to treat the items as nontaxable, even though they were now
taxable. The court found that even though taxpayer had legal representation, the failure by the

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attorneys to provide advice and the failure by the taxpayer to seek advice, did not constitute
reasonable cause.

H.R. Rep. No. 432 (Pt. 2), 98th Cong., 2d Sess. 1472 (1984), and S. Rep. No. 169 (Vol. 1), 98th
Cong., 2d Sess. 591 (1984), provide that where the foundation or foundation manager can
establish that there was reasonable cause for such a violation and that there was no willful
neglect of the rules, the Internal Revenue Service is to have discretionary authority to relieve the
foundation or manager from the first-tier penalty tax, provided that the violation is corrected in
the manner required in order to avoid liability for second-tier taxes. A violation which was
merely due to ignorance of the law cannot qualify for such abatement.

Delegation Order No. 7-11 (11-08-2007) delegates authority to abate substantial first-tier excise
taxes to the Director, Exempt Organizations. “Substantial qualified first-tier tax amount’ is
described as a sum exceeding $200,000 for all such tax payments or deficiencies (excluding
interest, other taxes, and penalties) involving all related parties and transactions arising from
chapter 42 taxable events within the statute of limitations as determined by the key district office
involved. See IRM 1.2.46.12(2), (3).

Analysis

For first tier taxes to be abated under § 4962, the tax assessed must be from a taxable event
due to reasonable cause and not due to willful neglect, and the taxable event must be corrected
within the correction period for such event. Here, Trust’s four transfers of funds to Foundation
are taxable expenditures within the meaning of § 4945(d) and do not satisfy the requirement of
§ 4945(d)(4).

Trust, through the counsel of its new CPA, recognized that it had failed to meet the technical
requirements for expenditure responsibility on these grants. Trust’s failure occurred despite the
use of prior counsel that failed to advise Trust of its obligations while being fully aware of the
circumstances of the grants. Trust then corrected the failure to exercise expenditure
responsibility for the years in question as defined in § 4963 without prior notice from the Service,
thus within the applicable period for correction. Section 53.4963-1(e). Trust then promptly filed
these reports with its timely filed Form 990-PF for the final year in question. Trust also filed a
Form 4720 seeking abatement of the taxes on taxable expenditures under § 4962.

Abatement of taxes under § 4962 requires that the failure to comply with the tax law was due to
(1) reasonable cause and (2) not from willful neglect, and that Trust (3) correct its non-
compliance within the applicable correction period. There is no contention that Trust’s failure
was due to willful neglect or that Trust has not corrected within the applicable correction period.
It is not enough to show that the mistake was merely not due to willful neglect, Trust must also
show that it was due to reasonable cause. Rembusch, 38 T.C.M. (CCH) 310. Reasonable
cause is not defined in § 4962. The Supreme Court, however, noted that to show reasonable
cause Trust must demonstrate that it acted with “ordinary business care and prudence.” Boyle,
469 U.S. at 246. The Supreme Court goes on to state that, “When an accountant or attorney
advises a taxpayer on a matter of tax law, such as whether a liability exists, it is reasonable for
the taxpayer to rely on that advice.” Boyle, 469 U.S. at 251. The technical requirements
underlying expenditure responsibility constitute four pages of regulations and are a matter of tax
law akin to whether a liability exists.

While Trust's trustees lacked the knowledge or the expectation that such written products would
be needed given their lack of knowledge and experience as well as their close relationship with

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Foundation, ignorance of the law does not justify abatement. Trust also cannot be said to have
relied upon the written advice of an attorney or accountant that no expenditure responsibilities
were required. Trust contends that it provided full information to its counsel and the lack of
advice to make the appropriate written agreements and reports was reliance on the advice of
counsel that such reports were not required. This argument contradicts the outcome in
Woodsum, 136 T.C. 585, however. That case stated that even though the taxpayer gave the
tax preparer all the appropriate information the fact that the preparer failed to include the
amount in the income of the taxpayer does not constitute advice from counsel that such an
inclusion is not necessary. Trust cannot rely on the lack of advice to perform certain acts as
advice that such acts are not necessary.

This result is consistent with that found in Mannheim Charitable Trust, 93 T.C. 35, where the
court states that “the initial tax is a spur designed to remind the foundation that it has been
remiss. Subsequent compliance with the rules enables the foundation to avoid the real whip of §
4945(b)(1), but cannot undo the punishment for its initial infraction.” Trust's subsequent
correction and informing of the Service removes it from liability for any second-tier taxes that are
the true teeth of the excise tax, but such correction is not enough to absolve it of the need for
the much smaller first tier tax they seek to abate.

Trust asserts that the incorrect completion of the Form 990-PF by a qualified tax preparer who
has all of the necessary information constitutes advice of counsel that may be relied upon when
determining that reasonable cause exists for not completing a requirement of Chapter 42. Trust
points to several cases interpreting the phrase “reasonable cause” in the context of penalties in
the tax code as evidence to how such term should be construed for § 4962 purposes since no
further definition is provided for such term under § 4962, within the regulations or elsewhere.
Trust's argument is unpersuasive, however, since its argument relies entirely on case law for tax
penalties and “additional taxes” rather than the imposition of an initial tax.

The earliest of the cases cited by Trust include Haywood Lumber, 178 F.2d 769, and Hatfried,
Inc., 162 F.2d 628, both of which establish that the taxpayer provided all of the relevant
information to its professional tax preparer, having the necessary competencies to prepare the
taxpayer's taxes, and when that tax preparer failed to file a specific holding company return the
taxpayers were deemed to have exercised reasonable care in determining whether that return
was necessary. The cases provide that relying on a fully informed, competent tax preparer to
file the appropriate returns is ordinary business care and prudence thus constituting a
reasonable cause for not filing the appropriate return. Trust cites to several other cases
maintaining this same holding. E.g., Orient Inv. & Fin. Co., 166 F.2d 601; and L.D. Caulk Co.,
116 F. Supp. 835.

Trust also cites to cases interpreting “reasonable cause” under the penalties for failure to file
and underpayment found in §§ 6651 and 6656. In Burruss Land & Lumber, 349 F. Supp. 188,
the court determined that when assessing the penalties found in §§ 6651 and 6656 “reasonable
cause” is shown when in-house counsel incorrectly determines the proper returns and amounts
owed to the Service causing a delinquent filing or underpayment. The court noted that a
company may rely on in-house counsel the same as it may rely on the advice of outside counsel
as to hold otherwise would put an undue burden on smaller companies that cannot afford
outside counsel or in-house counsel dedicated solely to legal questions. The fact that it was
prepared by in-house counsel does not remove the fact that the taxpayer received advice, upon
which it relied. The court in Burton Swartz, 198 F.2d 558, also held that when incorrect outside
advice created a delinquent return the receiving of advice from fully informed, competent
counsel constitutes “reasonable cause.”

Trust’s protest is unpersuasive, however, because all of the authority upon which it relies
regards the imposition of an additional penalty beyond the initial tax rather than the assessment
of the initial tax itself as we have in this situation. In all of the cases cited by Trust the taxpayer
in those cases paid the initial tax and associated interest. The court in Hatfried, Inc., 162 F.2d
at 632, emphasized that the case at hand dealt with a penalty for an act that is personal and
intentional. Here, the tax imposed on Trust requires no such personal or intentional failure to
act in order to be imposed. In fact, Hans Mannheimer, 93 T.C. 35, provides that the expenditure
responsibilities under § 4945(h) is to be strictly maintained and that the fact that no negative
outcome, intentional or not, occurred does not remove the requirement and excise tax thereon.
Additionally, the court in Burruss Land & Lumber, 349 F. Supp. at 190, cites Spies v. U.S., 317
U.S. 492, 496 (1943) stating, “It is not the purpose of the law to penalize...innocent errors made
despite the exercise of reasonable care. Such errors are corrected by the assessment of the
deficiency of tax and its collection with interest for the delay” (emphasis added). The tax in
question is not the penalty in this case, but instead it is the assessment of the deficiency of the
tax by the foundation for failing to follow the required expenditure responsibilities. Thus, even
the cases cited by Trust suggest that the tax owed here would not be abated. The court in Hans
Mannheimer again comments that “The initial tax is a spur designed to remind the foundation
that it has been remiss. Subsequent compliance with the rules enables the foundation to avoid
the real whip of [the tax], but cannot undo the punishment for its initial infraction.” The “real
whip of [the tax]” referred to in Hans Mannheimer is the second tier taxes found in Chapter 42
such as the one hundred percent tax on foundations for failing to correct a taxable expenditure.
See § 4945(b) and 53.4963-1(b). These cases, cited by Trust, then provide that a distinction
exists as between an initial tax and a penalty incurred as an additional tax. The Service is not
attempting to impose an additional tax on Trust, either under § 4945(b) or on a manager under §
4945(a)(2).

The distinction between the penalties discussed in the cases cited above and the initial tax
imposed here is further emphasized when evaluating the statutory language provided in the
various code sections from which the Trust draws. Sections 6651 and 6656 state within the
section itself that the penalty is to be imposed "unless it is shown that such failure is due to
reasonable cause and not due to willful neglect.” No such language can be found within §
4945(a)(1). This tax is meant to be applied strictly upon the occurrence of such an event. See
Hans Mannheimer, 93 T.C. 35. Looking at § 4945(a)(2) further illustrates that Congress had the
ability to add language similar to that found in §§ 6651 and 6656 had it chosen to make
imposition of such tax dependent upon the taxpayer’s reasonable cause, or lack thereof.
Section 4945(a)(2) imposes a tax on the foundation manager who agrees to a taxable
expenditure, “unless such agreement is not willful and is due to reasonable cause.” Having
such conditional language in §§ 6651, 6656, and 4945(a)(2) and not in § 4945(a)(1)
demonstrates Congress’ intent to apply a different standard for the initial imposition of the tax on
the foundation and the imposition of any penalties or tax on foundation managers. Furthermore,
the added language for foundation managers must be a lower standard than that found in §
4962 or there would be no imposition of a tax on a foundation when there was no tax on the
foundation manager. If Congress had intended this consequence it would not have used
different language in the initial standard for the foundation and the foundation managers as it
has done.

Also, despite Trust's contention that “reasonable cause” should be interpreted consistently
throughout, it fails to address the interpretation of reasonable cause under the foundation
manager code excise taxes in Chapter 42, even going so far as to dismiss these interpretations
without stating proper cause. See Trust's letter dated November 25, 2013, Fn 1, pg. 5. While

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the foundation manager taxes differ from the taxes imposed on the foundations, as discussed
above, they are first tier taxes within Chapter 42 that were contemplated at the same time as the
first tier taxes imposed on the foundation. Given this proximity to the tax in question the
understanding of reasonable cause in these sections is arguably more relevant. Section
53.4955-1(b)(7) provides that the advice of counsel must be a written legal opinion that
addresses the facts and the law and not a recitation of facts with a conclusion. In Trust’s case,
it is arguing that the preparation of the return constitutes the legal advice of counsel. The check
box on the return that Trust points to as the advice of counsel is merely the stating of a
conclusion with no reasoned analysis. Trust cannot argue for drawing from other parts of the
Code to determine the meaning of § 4962 and omit the most relevant references to reasonable
cause in its analysis. The advice of counsel, in order to constitute reasonable cause, must be
more than the checking of a box in the preparation of a return.

Trust contends that the preparing of the Form 990-PF in a manner indicating that no such
expenditure responsibilities are necessary constitutes advice from counsel. While it may be
sufficient to note that a professional tax preparer with full knowledge of the relevant facts
improperly completed a tax return in order to avoid the imposition of a penalty, that standard
cannot hold true for the imposition of the initial tax. In Woodsum, 136 T.C. 585, the court
considered the argument that not declaring certain money as income for tax purposes on an
individual tax return cannot be said to be the advice of counsel despite the preparation of the
return by a fully informed professional tax preparer. The court noted that the individual knew
that he had gained such money and that the individual was put on notice by knowing of the
income. Additionally, the court said that in order to constitute advice of counsel the advice
needed to include analysis and a conclusion that would provide substantive advice and that the
preparation of a return does not rise to this level. Here, Trust was aware of the payments to the
private foundation and was aware that the organization was a private foundation and not a
public charity. Furthermore, the preparation of Trust’s return no more constituted an analysis
and conclusion providing substantive advice than does an individual’s return.

Based on the foregoing facts, we find that:

The § 4945 taxes on taxable expenditures due to failing to meet the technical requirements for
expenditure responsibility are not abated under § 4962 since Trust did not have reasonable
cause for such failure.

A copy of this memorandum is to be given to Trust. Section 6110(k)(3) of the Internal Revenue
Code provides that it may not be used or cited as precedent.

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