rp-01-11.pdf

Preserve advance releases and the authoritative Internal Revenue Bulletin rendition; directory timestamps are file-publication metadata, not legal effective dates. HTML bulletins begin June 2003; earlier available issues require full PDF parsing.

This collection currently includes the publisher’s available advance-release directory. Historical bulletin renditions are discovered separately; an advance-release record alone does not certify the collection archive complete.

Part III
Administrative, Procedural, and Miscellaneous
26 CFR 601.105: Examination of returns and claims for refund, credit or abatement;
determination of correct tax liability. (Also Part I, ' 6662.)
Rev. Proc. 2001-11
SECTION 1. PURPOSE
.01 This revenue procedure updates Rev. Proc. 99-41, 1999-46 I.R.B. 566, 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 ' 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 ' 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 ' 6662 accuracy-related
penalty).
.02 This revenue procedure applies to any return filed on 2000 tax forms for a
taxable year beginning in 2000, and to any return filed on 2000 tax forms in 2001 for short
taxable years beginning in 2001.
SEC. 2. CHANGES FROM REV. PROC. 99-41
The following will no longer constitute adequate disclosure for purposes of reducing
the understatement of income tax under ' 6662(d) and avoiding the preparer penalty under

2
' 6694(a): The completion of Schedule M (Form 5471), Transactions Between Controlled
Foreign Corporation and Shareholders or Other Related Persons, lines 19 and 20, and
Form 5472, Part IV, Monetary Transactions Between Reporting Corporations and Foreign
Related Party, lines 7 and 18. Additionally, minor editorial changes have been made in
updating Rev. Proc. 99-41.
SEC. 3. BACKGROUND
.01 If ' 6662 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 ' 6662(b)(2), ' 6662 applies to the portion of
an underpayment that is attributable to a substantial understatement of income tax.
.02 Section 6662(d)(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 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 shown on
the return reduced by any rebate (within the meaning of ' 6211(b)(2)).
.03 In the case of an item not attributable to a tax shelter, ' 6662(d)(2)(B)(ii)
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

3
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 ' 6662(d). 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 ' 6662(d) for returns filed for 1999, 1998, and 1997 is provided in Rev.
Proc. 99-41; Rev. Proc. 98-62, 1998-2 C.B. 816; and Rev. Proc. 97-56, 1997-2 C.B. 582,
respectively.
SEC. 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 ' 6662(d) 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:

4
(a) Medical and Dental Expenses: Complete lines 1 through 4, supplying all
required information.
(b) Taxes: Complete lines 5 through 9, supplying all required information.
Line 8 must list each type of tax and the amount paid.
(c) Interest Expense: Complete lines 10 through 14, supplying all required
information. This section 4.01(1)(c) does not apply to (i) amounts disallowed under '
163(d) unless Form 4952, Investment Interest Expense Deduction, is completed, or (ii)
amounts disallowed under ' 265.
(d) Contributions: Complete lines 15 through 18, 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. This section 4.01(1)(d) will not
apply to any contribution of $250 or more unless the contemporaneous written
acknowledgment requirement of ' 170(f)(8) is satisfied.
(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.
(2) Certain Trade or Business Expenses (including, for purposes of this section
4.01(2), the following six expenses as they relate to the rental of property):

5
(a) Casualty and Theft Losses: The procedure outlined in section 4.01(1)(e)
above must be followed.
(b) Legal Expenses: The amount claimed must be stated. This section
4.01(2)(b) 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 its 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" payments, as
defined under ' 280G. This section 4.01(2)(d) will not apply to the extent that
remuneration paid or incurred exceeds the $1 million-employee-remuneration limitation, if
applicable.
(e) Repair Expenses: The amount claimed must be stated. This section
4.01(2)(e) 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) Form 1120, Schedule M-1, Reconciliation of Income (Loss) per Books With Income
per Return, provided:
(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

6
(b) The information provided reasonably may be expected to apprise the Internal
Revenue Service of the nature of the potential controversy concerning the tax treatment of
the item.
(4) Foreign Tax Items:
(a) International Boycott Transactions: Transactions disclosed on Form
5713, International Boycott Report.
(b) Treaty-Based Return Position: Transactions and amounts under ' 6114 or '
7701(b) as disclosed on Form 8833, Treaty-Based Return Position Disclosure.
(5) Other:
(a)Moving Expenses: Complete Form 3903, Moving Expenses, and
attach to the return.
(b) Employee Business Expenses: Complete Form 2106, Employee
Business Expenses, or Form 2106-EZ, Unreimbursed Employee Business Expenses, and
attach to the return. This section 4.01(5)(b) does not apply to club dues, or to travel
expenses for any non-employee accompanying the taxpayer on the trip.
(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.
SEC. 5. EFFECTIVE DATE

7
This revenue procedure applies to any return filed on 2000 tax forms for a taxable
year beginning in 2000, and to any return filed on 2000 tax forms in 2001 for short taxable
years beginning in 2001.
SEC. 6. DRAFTING INFORMATION
The principal author of this revenue procedure is Willie Armstrong, Jr. of the Office
of Associate Chief Counsel (Procedure & Administration), Administrative Provisions &
Judicial Practice Division. For further information regarding this revenue procedure,
contact Mr. Armstrong on (202) 622-7920 (not a toll-free call).