Penalty Relief for Reasonable Cause Under Various Code Sections (cont’d) IRC 6664(c)(1) generally provides that the reasonable cause and good faith exception applies to certain accuracy-related penalties under IRC 6662 and to the IRC 6663 fraud penalty; however, reasonable cause and good faith does not apply to any portion of an underpayment that is (1) attributable to penalty under IRC 6662(b)(6) for a transaction lacking economic substance, or (2) attributable to a gross valuation overstatement for a charitable deduction. IRC 6664(c)(2) and (3). If the charitable deduction involves a substantial valuation overstatement, then a reasonable cause and good faith exception applies but it requires the taxpayer to have obtained a qualified appraisal made by a qualified appraiser, and the taxpayer to have made a good faith investigation of the value of the contributed property. The taxpayer must meet both parts of this test to assert a reasonable cause and good faith penalty exception. IRC 6664(c)(3).
IRC 6664(d) provides the reasonable cause and good faith exception applicable to IRC 6662A, the accuracy-related penalty on understatements with respect to reportable transactions. This exception does not apply to transactions lacking economic substance. For the reasonable cause and good faith exception to apply to an IRC 6662A penalty, there are three requirements: (1) There must be adequate disclosure of the relevant facts affecting the tax treatment of the item, (2) substantial authority for such treatment, and (3) the taxpayer’s reasonable belief that such treatment was more likely than not the proper treatment. IRC 6664(d)(3). Because adequate disclosure is an element of reasonable cause for purposes of section 6662A, it necessarily follows that if the 30% rate of the penalty in section 6662A(c) applies for an understatement resulting from a reportable transaction that was not adequately disclosed, a defense to the penalty does not appl
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