How the section 6700 penalty for promoting abusive tax shelters applies to false statements and gross valuation overstatements

Plain-English summary

This is internal Chief Counsel advice, written as an email answering a question about case guidance. It explains how the penalty in section 6700 works. That penalty applies to a person who organizes, helps organize, or sells interests in an abusive tax shelter and then either makes a statement about the shelter's tax benefits that the person knows or has reason to know is false or fraudulent, or makes a "gross valuation overstatement" (a stated value that is more than 200 percent of the correct value and is tied to a deduction or credit). The advice walks through both prongs, citing court decisions (including Turner and Campbell) for how courts measure a gross overstatement and what counts as a false "statement," and it notes that "reason to know" is judged by what a reasonable person in the promoter's position would have discovered. The specific facts of the case being discussed are redacted, so the document reads as a general statement of the legal standard rather than a conclusion about a particular promoter.

Ruling snapshot

• Question: What are the elements of the section 6700 penalty for promoting abusive tax shelters, including false-statement liability and gross valuation overstatements?
• Outcome: Advice given (general explanation of the section 6700 standards; case-specific application redacted)
• Key authorities: IRC § 6700(a), (b); United States v. Turner, 601 F. Supp. 757 (E.D. Wis. 1985), aff'd sub nom. United States v. Smith, 787 F.2d 595 (7th Cir. 1986); United States v. Campbell, 897 F.2d 1317 (5th Cir. 1990); CCA 202125009

Full text (IRS public release)

 ID:         CCA_2022070711080150
 UILC:       6700.00-00

Number: 202232015
Release Date: 8/12/2022
From: -------------------------
Sent: Thursday, July 7, 2022 11:08:01 AM
To: -----------------------------------------------------------------
Cc:
Bcc:
Subject: RE: case guidance


Good afternoon,

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Generally, section 6700 imposes a penalty on any person who organizes or assists in
the organization of an abusive tax shelter, or participates in the sale of interests in such
a shelter, and makes or furnishes (1) a statement regarding a tax benefit of a shelter
which he knows or has reason to know is false or fraudulent as to a material matter, or
(2) a gross valuation overstatement (that is, a valuation exceeding 200 percent of the
correct value) as defined in section 6700(b).

Section 6700(b) defines a “gross valuation overstatement” as one that exceeds 200
percent of the correct valuation of goods or services, where that value
is directly related to the amount of a deduction or credit allowable under Chapter 1 of
the Code. See, e.g., United States v. Turner, 601 F. Supp. 757, 766–67 (E.D. Wis.
1985), aff'd sub nom. United States v. Smith, 787 F.2d 595 (7th Cir. 1986) (“Priced for
sale at $80,000, the Saxon Energy Brain “001” unit, also known as “EB1,” was
overvalued by more than 200%, which therefore constitutes the first prong of a “gross
valuation overstatement” in accordance with § 6700(b)(1)(A). As the selling price is
represented to be the fair market value of the 001 unit, and therefore the figure upon
which the Investment and Energy tax credits are computed, that overstatement would
be directly related to the amounts of those credits which is the second prong of the
definition of a gross valuation overstatement.”) (emphasis added). ----------------------------
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But the 6700 penalty also applies to a promoter who, in connection with the organization
or sale of an interest in the tax shelter, makes or furnishes (or causes another person to
make or furnish) a statement with respect to: (1) the allowability of any deduction or
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credit; (2) the excludability of any income; or (3) the securing of any other tax benefit, by
reason of holding an interest in the entity or participating in the plan or arrangement that
the promoter knows or has reason to know is false or fraudulent as to any material
matter. §6700(a)(2)(A). A “statement” includes those “directly addressing the availability
of tax benefits, and those concerning factual matters that are relevant to the availability
of tax benefits.” United States v. Campbell, 897 F.2d 1317, 1320 (5th Cir. 1990). In
determining whether there is reason to know, courts have looked to “what a reasonable
person in the defendant’s subjective position would have discovered.” Id. at 1322
(cleaned up); see also id. at 1320–21 (finding that defendant made false statements
under §6700 when he made and furnished statements that certain notes were
deductible in the full amount of their contemporaneous exchange rate when he
promoted an 8 to 1 deduction and disseminated his tax attorney's letter opinion because
he knew or had reason to know that the notes were virtually worthless); see also CCA
202125009 (for purposes of abusive micro-captive insurance transactions, statements
include advice, promotional materials, or any false statements that are material relating
to income exclusion under §831(b) or deductions under §162 for paid insurance
premiums).

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Please let us know if you have any further questions or would like to discuss.

All best,

Very respectfully,

Aurora

Aurora Wheeland
Attorney
CC:PA:02
[email protected]
Office phone: 202-317-5266
Personal cell: 202-641-2454