‘Decrease’ is defined as the net difference between the previous and current level.

The comment addressed two different issues, the first being the definition of “decrease in tax” provided in § 301.6707A-1(d)(1)(i) of the proposed regulations. Section 6707A(b)(1) provides that, subject to certain minimum and maximum amounts, the amount of the penalty under subsection (a) of section 6707A with respect to any reportable transaction shall be 75 percent of the decrease in tax shown on the return as a result of such transaction (or which would have resulted from such transaction if such transaction were respected for federal tax purposes). Section 301.6707A-1(d)(1)(i) of the proposed regulations defines a “decrease in tax” generally as the difference between the amount of tax reported on the return as filed and the amount of tax that would be reported on a hypothetical return where the taxpayer did not participate in the reportable transaction. The definition in § 301.6707A-1(d)(1)(i) also encompasses situations where a taxpayer's participation in a reportable transaction creates a liability for a tax that would not exist absent participation in the transaction. For example, a taxpayer engaging in a listed transaction involving a Roth IRA may be subject to an excise tax on excess IRA contributions. If the taxpayer fails to report the excise tax on the taxpayer's excess IRA contributions, this amount of tax would not appear on the return filed by the taxpayer that reflected the taxpayer's participation in the reportable transaction. The excise tax would also not appear on a return filed by the taxpayer if the taxpayer had not engaged in the transaction, because there would be no excess contribution on which the excise tax would be imposed. Therefore, the difference between these two returns would result in no decrease in tax attributable to the abusive Roth IRA transaction. To account for this type of situation, § 301.6707A-1(d)(1)(i)(B) of the proposed regulations includes in the definition of decrease in tax “any other tax that results from participation in the reportable transaction but was not reported on the taxpayer's return.” Example 1 in § 301.6707A-1(d)(3)(i) illustrates this rule.

The commenter noted that the proposed regulation includes tax that should have been shown on the return, but was not, in the definition of “decrease in tax” described in § 301.6707A-1(d)(1)(i)(B) of the proposed regulations. The decrease in tax described in § 301.6707A-1(d)(1)(i)(B) of the proposed regulations will only exist if the taxpayer's reporting position is invalid. If the taxpayer's reporting position were determined to be correct, there would be no additional tax resulting from the participation in the reportable transaction that the taxpayer was required to, but did not, report on the taxpayer's return. The commenter contended that including this unreported tax as part of the decrease in tax used to calculate the penalty conflicts with the common understanding that the section 6707A penalty is intended to apply even if the taxpayer's reporting position is determined to be correct. In this situation, the Service will not be able to impose the penalty without first determining the merits of the reporting position. The commenter expressed concerns about whether Congress intended for the penalty to apply in such circumstances, absent adjudication on the merits of the underlying reporting position. The commenter noted that, in contrast, § 301.6707A-1(d)(1)(i)(A) of the proposed regulations defines “decrease in tax” by comparing the amount reported on the taxpayer's return (reflecting participation in the reportable transaction) with the tax liability that would be reported on a hypothetical return that did not reflect participation in the reportable transaction. This portion of the definition is not affected by the assumption that the taxpayer's reporting position is invalid.