
From the U.S. Code Online via GPO Access
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[Laws in effect as of January 2, 2001]
[Document not affected by Public Laws enacted between
  January 2, 2001 and January 28, 2002]
[CITE: 26USC6662]

 
                     TITLE 26--INTERNAL REVENUE CODE
 
                Subtitle F--Procedure and Administration
 
  CHAPTER 68--ADDITIONS TO THE TAX, ADDITIONAL AMOUNTS, AND ASSESSABLE 
                                PENALTIES
 
        Subchapter A--Additions to the Tax and Additional Amounts
 
              PART II--ACCURACY-RELATED AND FRAUD PENALTIES
 
Sec. 6662. Imposition of accuracy-related penalty


(a) Imposition of penalty

    If this section applies to any portion of an underpayment of tax 
required to be shown on a return, there shall be added to the tax an 
amount equal to 20 percent of the portion of the underpayment to which 
this section applies.

(b) Portion of underpayment to which section applies

    This section shall apply to the portion of any underpayment which is 
attributable to 1 or more of the following:
        (1) Negligence or disregard of rules or regulations.
        (2) Any substantial understatement of income tax.
        (3) Any substantial valuation misstatement under chapter 1.
        (4) Any substantial overstatement of pension liabilities.
        (5) Any substantial estate or gift tax valuation understatement.

This section shall not apply to any portion of an underpayment on which 
a penalty is imposed under section 6663.

(c) Negligence

    For purposes of this section, the term ``negligence'' includes any 
failure to make a reasonable attempt to comply with the provisions of 
this title, and the term ``disregard'' includes any careless, reckless, 
or intentional disregard.

(d) Substantial understatement of income tax

                   (1) Substantial understatement

        (A) In general

            For purposes of this section, there is a substantial 
        understatement of income tax for any taxable year if the amount 
        of the understatement for the taxable year exceeds the greater 
        of--
                (i) 10 percent of the tax required to be shown on the 
            return for the taxable year, or
                (ii) $5,000.

        (B) Special rule for corporations

            In the case of a corporation other than an S corporation or 
        a personal holding company (as defined in section 542), 
        paragraph (1) shall be applied by substituting ``$10,000'' for 
        ``$5,000''.

                         (2) Understatement

        (A) In general

            For purposes of paragraph (1), the term ``understatement'' 
        means the excess of--
                (i) the amount of the tax required to be shown on the 
            return for the taxable year, over
                (ii) the amount of the tax imposed which is shown on the 
            return, reduced by any rebate (within the meaning of section 
            6211(b)(2)).

        (B) Reduction for understatement due to position of taxpayer or 
                disclosed item

            The amount of the understatement under subparagraph (A) 
        shall be reduced by that portion of the understatement which is 
        attributable to--
                (i) the tax treatment of any item by the taxpayer if 
            there is or was substantial authority for such treatment, or
                (ii) any item if--
                    (I) the relevant facts affecting the item's tax 
                treatment are adequately disclosed in the return or in a 
                statement attached to the return, and
                    (II) there is a reasonable basis for the tax 
                treatment of such item by the taxpayer.

        For purposes of clause (ii)(II), in no event shall a corporation 
        be treated as having a reasonable basis for its tax treatment of 
        an item attributable to a multiple-party financing transaction 
        if such treatment does not clearly reflect the income of the 
        corporation.

        (C) Special rules in cases involving tax shelters

            (i) In general

                In the case of any item of a taxpayer other than a 
            corporation which is attributable to a tax shelter--
                    (I) subparagraph (B)(ii) shall not apply, and
                    (II) subparagraph (B)(i) shall not apply unless (in 
                addition to meeting the requirements of such 
                subparagraph) the taxpayer reasonably believed that the 
                tax treatment of such item by the taxpayer was more 
                likely than not the proper treatment.
            (ii) Subparagraph (B) not to apply to corporations

                Subparagraph (B) shall not apply to any item of a 
            corporation which is attributable to a tax shelter.
            (iii) Tax shelter

                For purposes of this subparagraph, the term ``tax 
            shelter'' means--
                    (I) a partnership or other entity,
                    (II) any investment plan or arrangement, or
                    (III) any other plan or arrangement,

          if a significant purpose of such partnership, entity, plan, or 
            arrangement is the avoidance or evasion of Federal income 
            tax.

        (D) Secretarial list

            The Secretary shall prescribe (and revise not less 
        frequently than annually) a list of positions--
                (i) for which the Secretary believes there is not 
            substantial authority, and
                (ii) which affect a significant number of taxpayers.

        Such list (and any revision thereof) shall be published in the 
        Federal Register.

(e) Substantial valuation misstatement under chapter 1

                           (1) In general

        For purposes of this section, there is a substantial valuation 
    misstatement under chapter 1 if--
            (A) the value of any property (or the adjusted basis of any 
        property) claimed on any return of tax imposed by chapter 1 is 
        200 percent or more of the amount determined to be the correct 
        amount of such valuation or adjusted basis (as the case may be), 
        or
            (B)(i) the price for any property or services (or for the 
        use of property) claimed on any such return in connection with 
        any transaction between persons described in section 482 is 200 
        percent or more (or 50 percent or less) of the amount determined 
        under section 482 to be the correct amount of such price, or
            (ii) the net section 482 transfer price adjustment for the 
        taxable year exceeds the lesser of $5,000,000 or 10 percent of 
        the taxpayer's gross receipts.

                           (2) Limitation

        No penalty shall be imposed by reason of subsection (b)(3) 
    unless the portion of the underpayment for the taxable year 
    attributable to substantial valuation misstatements under chapter 1 
    exceeds $5,000 ($10,000 in the case of a corporation other than an S 
    corporation or a personal holding company (as defined in section 
    542)).

            (3) Net section 482 transfer price adjustment

        For purposes of this subsection--

        (A) In general

            The term ``net section 482 transfer price adjustment'' 
        means, with respect to any taxable year, the net increase in 
        taxable income for the taxable year (determined without regard 
        to any amount carried to such taxable year from another taxable 
        year) resulting from adjustments under section 482 in the price 
        for any property or services (or for the use of property).

        (B) Certain adjustments excluded in determining threshold

            For purposes of determining whether the threshold 
        requirements of paragraph (1)(B)(ii) are met, the following 
        shall be excluded:
                (i) Any portion of the net increase in taxable income 
            referred to in subparagraph (A) which is attributable to any 
            redetermination of a price if--
                    (I) it is established that the taxpayer determined 
                such price in accordance with a specific pricing method 
                set forth in the regulations prescribed under section 
                482 and that the taxpayer's use of such method was 
                reasonable,
                    (II) the taxpayer has documentation (which was in 
                existence as of the time of filing the return) which 
                sets forth the determination of such price in accordance 
                with such a method and which establishes that the use of 
                such method was reasonable, and
                    (III) the taxpayer provides such documentation to 
                the Secretary within 30 days of a request for such 
                documentation.

                (ii) Any portion of the net increase in taxable income 
            referred to in subparagraph (A) which is attributable to a 
            redetermination of price where such price was not determined 
            in accordance with such a specific pricing method if--
                    (I) the taxpayer establishes that none of such 
                pricing methods was likely to result in a price that 
                would clearly reflect income, the taxpayer used another 
                pricing method to determine such price, and such other 
                pricing method was likely to result in a price that 
                would clearly reflect income,
                    (II) the taxpayer has documentation (which was in 
                existence as of the time of filing the return) which 
                sets forth the determination of such price in accordance 
                with such other method and which establishes that the 
                requirements of subclause (I) were satisfied, and
                    (III) the taxpayer provides such documentation to 
                the Secretary within 30 days of request for such 
                documentation.

                (iii) Any portion of such net increase which is 
            attributable to any transaction solely between foreign 
            corporations unless, in the case of any such corporations, 
            the treatment of such transaction affects the determination 
            of income from sources within the United States or taxable 
            income effectively connected with the conduct of a trade or 
            business within the United States.

        (C) Special rule

            If the regular tax (as defined in section 55(c)) imposed by 
        chapter 1 on the taxpayer is determined by reference to an 
        amount other than taxable income, such amount shall be treated 
        as the taxable income of such taxpayer for purposes of this 
        paragraph.

        (D) Coordination with reasonable cause exception

            For purposes of section 6664(c) the taxpayer shall not be 
        treated as having reasonable cause for any portion of an 
        underpayment attributable to a net section 482 transfer price 
        adjustment unless such taxpayer meets the requirements of clause 
        (i), (ii), or (iii) of subparagraph (B) with respect to such 
        portion.

(f) Substantial overstatement of pension liabilities

                           (1) In general

        For purposes of this section, there is a substantial 
    overstatement of pension liabilities if the actuarial determination 
    of the liabilities taken into account for purposes of computing the 
    deduction under paragraph (1) or (2) of section 404(a) is 200 
    percent or more of the amount determined to be the correct amount of 
    such liabilities.

                           (2) Limitation

        No penalty shall be imposed by reason of subsection (b)(4) 
    unless the portion of the underpayment for the taxable year 
    attributable to substantial overstatements of pension liabilities 
    exceeds $1,000.

(g) Substantial estate or gift tax valuation understatement

                           (1) In general

        For purposes of this section, there is a substantial estate or 
    gift tax valuation understatement if the value of any property 
    claimed on any return of tax imposed by subtitle B is 50 percent or 
    less of the amount determined to be the correct amount of such 
    valuation.

                           (2) Limitation

        No penalty shall be imposed by reason of subsection (b)(5) 
    unless the portion of the underpayment attributable to substantial 
    estate or gift tax valuation understatements for the taxable period 
    (or, in the case of the tax imposed by chapter 11, with respect to 
    the estate of the decedent) exceeds $5,000.

(h) Increase in penalty in case of gross valuation misstatements

                           (1) In general

        To the extent that a portion of the underpayment to which this 
    section applies is attributable to one or more gross valuation 
    misstatements, subsection (a) shall be applied with respect to such 
    portion by substituting ``40 percent'' for ``20 percent''.

                  (2) Gross valuation misstatements

        The term ``gross valuation misstatements'' means--
            (A) any substantial valuation misstatement under chapter 1 
        as determined under subsection (e) by substituting--
                (i) ``400 percent'' for ``200 percent'' each place it 
            appears,
                (ii) ``25 percent'' for ``50 percent'', and
                (iii) in paragraph (1)(B)(ii)--
                    (I) ``$20,000,000'' for ``$5,000,000'', and
                    (II) ``20 percent'' for ``10 percent''.

            (B) any substantial overstatement of pension liabilities as 
        determined under subsection (f) by substituting ``400 percent'' 
        for ``200 percent'', and
            (C) any substantial estate or gift tax valuation 
        understatement as determined under subsection (g) by 
        substituting ``25 percent'' for ``50 percent''.

(Added Pub. L. 101-239, title VII, Sec. 7721(a), Dec. 19, 1989, 103 
Stat. 2395; amended Pub. L. 101-508, title XI, Sec. 11312(a), (b), Nov. 
5, 1990, 104 Stat. 1388-454, 1388-455; Pub. L. 103-66, title XIII, 
Secs. 13236(a)-(d), 13251(a), Aug. 10, 1993, 107 Stat. 505, 506, 531; 
Pub. L. 103-465, title VII, Sec. 744(a), (b), Dec. 8, 1994, 108 Stat. 
5011; Pub. L. 105-34, title X, Sec. 1028(c), Aug. 5, 1997, 111 Stat. 
928.)


                            Prior Provisions

    A prior section 6662, acts Aug. 16, 1954, ch. 736, 68A Stat. 827, 
Sec. 6659; May 14, 1960, Pub. L. 86-470, Sec. 1, 74 Stat. 132; Dec. 30, 
1969, Pub. L. 91-172, title I, Sec. 101(j)(51), 83 Stat. 531; Sept. 2, 
1974, Pub. L. 93-406, title II, Sec. 1016(a)(19), 88 Stat. 931; 
renumbered Sec. 6660, Aug. 13, 1981, Pub. L. 97-34, title VII, 
Sec. 722(a)(1), 95 Stat. 341; renumbered Sec. 6662, Sept. 3, 1982, Pub. 
L. 97-248, title III, Sec. 323(a), 96 Stat. 613, directed that additions 
be treated as tax and set procedure for assessing certain additions to 
tax, prior to repeal by Pub. L. 101-239, title VII, Sec. 7721(a), Dec. 
19, 1989, 103 Stat. 2395, applicable to returns the due date for which 
(determined without regard to extensions) is after Dec. 31, 1989. See 
section 6665 of this title.


                               Amendments

    1997--Subsec. (d)(2)(B). Pub. L. 105-34, Sec. 1028(c)(1), inserted 
concluding provisions.
    Subsec. (d)(2)(C)(iii). Pub. L. 105-34, Sec. 1028(c)(2), substituted 
``a significant purpose'' for ``the principal purpose'' in concluding 
provisions.
    1994--Subsec. (d)(2)(C)(i). Pub. L. 103-465, Sec. 744(b)(1), 
substituted ``In the case of any item of a taxpayer other than a 
corporation which is'' for ``In the case of any item'' in introductory 
provisions.
    Subsec. (d)(2)(C)(ii). Pub. L. 103-465, Sec. 744(a), added cl. (ii). 
Former cl. (ii) redesignated (iii).
    Subsec. (d)(2)(C)(iii). Pub. L. 103-465, Sec. 744(a), (b)(2), 
redesignated cl. (ii) as (iii) and substituted ``this subparagraph'' for 
``clause (i)'' in introductory provisions.
    1993--Subsec. (d)(2)(B)(ii). Pub. L. 103-66, Sec. 13251(a), amended 
cl. (ii) generally. Prior to amendment, cl. (ii) read as follows: ``any 
item with respect to which the relevant facts affecting the item's tax 
treatment are adequately disclosed in the return or in a statement 
attached to the return.''
    Subsec. (e)(1)(B)(ii). Pub. L. 103-66, Sec. 13236(a), amended cl. 
(ii) generally. Prior to amendment, cl. (ii) read as follows: ``the net 
section 482 transfer price adjustment for the taxable year exceeds 
$10,000,000.''
    Subsec. (e)(3)(B). Pub. L. 103-66, Sec. 13236(b), amended heading 
and text of subpar. (B) generally. Prior to amendment, text read as 
follows: ``For purposes of determining whether the $10,000,000 threshold 
requirement of paragraph (1)(B)(ii) is met, there shall be excluded--
        ``(i) any portion of the net increase in taxable income referred 
    to in subparagraph (A) which is attributable to any redetermination 
    of a price if it is shown that there was a reasonable cause for the 
    taxpayer's determination of such price and that the taxpayer acted 
    in good faith with respect to such price, and
        ``(ii) any portion of such net increase which is attributable to 
    any transaction solely between foreign corporations unless, in the 
    case of any of such corporations, the treatment of such transaction 
    affects the determination of income from sources within the United 
    States or taxable income effectively connected with the conduct of a 
    trade or business within the United States.''
    Subsec. (e)(3)(D). Pub. L. 103-66, Sec. 13236(c), added subpar. (D).
    Subsec. (h)(2)(A)(iii). Pub. L. 103-66, Sec. 13236(d), amended cl. 
(iii) generally. Prior to amendment, cl. (iii) read as follows: `` 
`$20,000,000' for `$10,000,000',''.
    1990--Subsec. (b)(3). Pub. L. 101-508, Sec. 11312(b)(1), amended 
par. (3) generally, substituting ``misstatement'' for ``overstatement''.
    Subsec. (e). Pub. L. 101-508, Sec. 11312(a), substituted 
``misstatement'' for ``overstatement'' in heading and amended text 
generally. Prior to amendment, text read as follows:
    ``(1) In general.--For purposes of this section, there is a 
substantial valuation overstatement under chapter 1 if the value of any 
property (or the adjusted basis of any property) claimed on any return 
of tax imposed by chapter 1 is 200 percent or more of the amount 
determined to be the correct amount of such valuation or adjusted basis 
(as the case may be).
    ``(2) Limitation.--No penalty shall be imposed by reason of 
subsection (b)(3) unless the portion of the underpayment for the taxable 
year attributable to substantial valuation overstatements under chapter 
1 exceeds $5,000 ($10,000 in the case of a corporation other than an S 
corporation or a personal holding company (as defined in section 
542)).''
    Subsec. (h)(2)(A). Pub. L. 101-508, Sec. 11312(b)(2), amended 
subpar. (A) generally. Prior to amendment, subpar. (A) read as follows: 
``any substantial valuation overstatement under chapter 1 as determined 
under subsection (e) by substituting `400 percent' for `200 percent',''.


                    Effective Date of 1997 Amendment

    Amendment by Pub. L. 105-34 applicable to items with respect to 
transactions entered into after Aug. 5, 1997, see section 1028(e)(2) of 
Pub. L. 105-34, set out as a note under section 6111 of this title.


                    Effective Date of 1994 Amendment

    Section 744(c) of Pub. L. 103-465 provided that: ``The amendments 
made by this section [amending this section] shall apply to items 
related to transactions occurring after the date of the enactment of 
this Act [Dec. 8, 1994].''


                    Effective Date of 1993 Amendment

    Section 13236(e) of Pub. L. 103-66 provided that: ``The amendments 
made by this section [amending this section] shall apply to taxable 
years beginning after December 31, 1993.''
    Section 13251(b) of Pub. L. 103-66 provided that: ``The amendment 
made by this section [amending this section] shall apply to returns the 
due dates for which (determined without regard to extensions) are after 
December 31, 1993.''


                    Effective Date of 1990 Amendment

    Section 11312(c) of Pub. L. 101-508 provided that: ``The amendments 
made by this section [amending this section] shall apply to taxable 
years ending after the date of the enactment of this Act [Nov. 5, 
1990].''


                             Effective Date

    Part applicable to returns the due date for which (determined 
without regard to extensions) is after Dec. 31, 1989, see section 
7721(d) of Pub. L. 101-239, set out as an Effective Date of 1989 
Amendment note under section 461 of this title.

                  Section Referred to in Other Sections

    This section is referred to in sections 461, 1274, 6015, 6694, 7525 
of this title.
