Managing Uncertainty: A Survival Guide to the Tax Cuts and Jobs Act of 2017
TCJA is complex, convoluted, with a dearth of administrative guidance

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With the passage of the Tax Cuts and Jobs Act of 2017 (TCJA), tax executives face the most uncertainty in interpreting and applying the tax law they have ever encountered. As is the apparent norm these days, with game-changing congressional legislation, the TCJA was cobbled together quickly, and its clarity and consequences were insufficiently addressed before enactment.

The TCJA is complex and convoluted, with a dearth of administrative guidance, an absence of regulatory guidance, and no relief in sight. What’s more, it is unlikely there will be any judicial interpretations of the provisions to rely upon for years. Thus, the interpretative skies are gray and foreboding, and impending technical corrections may or may not lift the clouds. The future is fraught with significant tax compliance and planning hazards, and there are sleepless and gloomy nights ahead for those who remain unprepared.

All hope is not lost, however. The following serves as a survival guide through the impending uncertainty. We address how tax executives can cope with the new and complex statute, including how to arrive at defensible tax positions, while managing penalty risk and consequent reputational risk, and how to prepare to defend these positions years down the road, upon examination.

Is Certainty Readily Attainable?

The short answer is no. Certainty prior to taking a tax reporting position or engaging in tax planning under the TCJA is not readily attainable. Taxpayers under the jurisdiction of the Large Business and International Division may request, under certain circumstances, that the Internal Revenue Service (IRS) examine specific tax issues involving completed transactions before a tax return is filed. If the taxpayer and the IRS can resolve the issue before the tax return is filed, they may execute a pre-filing agreement (PFA). However, one criterion for selecting taxpayers to participate in the PFA program entails the suitability of the issue presented (i.e., whether it can be resolved by addressing factual questions under well-established law). Because the uncertain provisions of the TCJA do not fall under well-established law, the ability to enter into a PFA is limited.1

Requests for rulings are likewise not efficacious under these circumstances. The IRS has a no-rulings policy in many areas, thus eliminating that possibility.2 Even when ruling requests are available, they are expensive, time-consuming, and limited to the facts as represented at the time. The IRS, however, will not ordinarily issue a private-letter ruling before the promulgation of a regulation or other published guidance. Add this to the IRS’ current resource constraints and its preoccupation with addressing the new legislation, and the ruling process is unlikely to be a viable option.

Avoiding Penalties

Uncertainty under the TCJA raises significant penalty exposure concerns for tax directors when they take unsettled tax positions on tax returns or plan transactions that will later be reflected on returns. Avoiding accuracy-related penalties, such as the substantial understatement penalty, is perhaps the most common relevant concern.

To Disclose or Not to Disclose? That Is the Question

Generally speaking, outside of the tax shelter context,3 if the company has a reasonable basis for a tax return position and adequately discloses that position on the return, accuracy-related penalties may be avoided.4 This begs the question as to whether disclosure is desirable. Often companies would prefer not to disclose an unsettled position, because it flags the issue to the IRS and may lead to an expensive examination of the issue and even potential litigation. If, however, disclosure is mandated (for example, on Schedule UTP), then this may be the path of least resistance.

“Reasonable basis” is a relatively high standard of tax reporting, although it is a lower standard than, for example, “substantial authority” and “more likely than not,” both of which will be discussed below. It requires a position that is significantly higher than “not frivolous” or “not patently improper.” It is not satisfied by a return position that is merely arguable or a colorable claim. Reasonable basis requires reliance on legal authorities and not on opinions rendered by tax professionals.5

The reasonable basis standard is satisfied if the position is reasonably based on one or more authorities, taking into account the relevance and persuasiveness of those authorities. A taxpayer may rely upon a variety of recognized authorities to demonstrate that it had a reasonable basis for a tax position. These include the Internal Revenue Code and regulations construing it; revenue rulings and revenue procedures, court cases, and congressional intent as reflected in committee reports; General Explanations of tax legislation prepared by the Joint Committee on Taxation (the Blue Book); and private letter rulings and technical advice memoranda issued after October 31, 1976.6 If even one authority from the list of recognized authorities supports a return position, the return position generally will satisfy the reasonable basis standard.

To sustain the reasonable basis defense, the company should be prepared to prove that it actually relied upon the authorities that form the basis of that defense prior to the filing of the tax return, because at least one federal Court of Appeals has interpreted “reasonable basis” to be a subjective standard that focuses on the taxpayer’s conduct and whether it exercised due care. Taxpayers should therefore document what relevant authority or authorities they reviewed and relied upon during both the tax planning and reporting processes.7

In documenting their reasonable basis position under the provisions of the TCJA, tax directors should cite the language of the Internal Revenue Code itself, the committee reports, and the Blue Book to support their reporting positions, since other recognized authoritative guidance, such as revenue rulings or applicable regulations, is not yet available. In this regard, the Supreme Court has recently reiterated that in analyzing statutes one should start with the key statutory terms and interpret the words consistent with their ordinary meaning at the time Congress adopted the statute.8 This is a useful instruction in the absence of ambiguity. However, the TCJA is rife with ambiguity. In the case of ambiguity, the default should be to look to the legislative history, which if clear and unambiguous is a better indication of congressional intent than a presumed reading of the statute.9

Absent Disclosure, Is There “Substantial Authority”?

In the absence of adequate disclosure and reasonable basis, substantial authority is generally required to avoid the substantial understatement penalty.10 The “substantial authority” standard is higher than the “reasonable basis” standard, but lower than the “more likely than not” standard. A forty percent chance of prevailing on the merits is a common estimate for the substantial understatement comfort level.

The substantial authority standard, unlike the reasonable basis standard, is an objective standard involving an analysis of the law and application of the law to the relevant facts. Therefore, the taxpayer’s belief that there is substantial authority for its position is irrelevant. Unlike the reasonable basis standard, which requires reasonable reliance on at least one recognized authority, substantial authority for the tax treatment of an item prevails only if the weight of authorities supporting the treatment is substantial in relation to the weight of authorities supporting contrary treatment. All authorities relevant to the tax treatment of an item, including authorities who take a contrary position, are taken into account to determine whether substantial authority exists. The weight of authorities is determined in light of the pertinent facts and circumstances.11

The list of recognized authorities is the same as that for the reasonable basis standard.12 The weight accorded an authority depends on its relevance and persuasiveness and the type of document providing the authority. The nature of the analysis in the document should be considered.

For example, an authority that has more facts aligned with the taxpayer’s position is more persuasive than one that does not. A well-reasoned authority is more persuasive than a merely conclusory one. The weight of authority of a document that is significantly redacted to the extent that it may affect the authority’s conclusions is diminished. Likewise, the type of document must be considered. Revenue Rulings, for example, have more value than Private Letter Rulings. An older letter ruling, technical advice memorandum, or the like should be accorded less weight than a newer one, and those more than ten years old are generally accorded little weight.13

Significantly, there may be substantial authority for the tax treatment of an item despite the absence of certain types of authority. Thus, a taxpayer may have substantial authority for a position that is supported only by a well-reasoned construction of the applicable statutory provision.14 Therefore, contemporaneously documenting a well-reasoned interpretation of the TCJA is advisable to bolster one’s position that there is substantial authority for the tax treatment of the position.15

Are Reasonable Cause and Good Faith a Panacea?

The “reasonable cause” defense, where applicable, is a panacea for almost all accuracy-related penalties asserted by the IRS.16 It applies where the taxpayer had reasonable cause and acted in good faith. It is a less stringent standard than the reasonable basis defense, yet its application is broader.17 A showing of reasonable cause may provide relief even if the return position does not have a reasonable basis.18 The reasonable cause defense, like the reasonable basis defense, is subjective, and the determination of “reasonable cause” and “good faith” is made on a case-by-case basis that accounts for all relevant facts and circumstances.

Generally, the most important factor is the taxpayer’s effort to assess its proper tax liability. Other factors that come into play are the taxpayer’s experience, knowledge, education, and reliance on the advice of a tax advisor. All relevant facts, including the nature of the tax position, the complexity of the tax issues, and the quality of the opinion relied upon are evaluated to determine whether the taxpayer satisfies the defense. Circumstances that may suggest reasonable cause and good faith include an honest misunderstanding of fact or law that is reasonable in light of the facts, including the experience, knowledge, sophistication, and education of the taxpayer.19

Relying on a tax opinion or advice provided by a professional tax advisor, who is not a disqualified tax advisor, may also be grounds for this defense. The reliance, however, must be objectively reasonable. It must be based on all pertinent facts and circumstances and the law as applied to those circumstances, and it must not be based on unreasonable factual or legal assumptions or representations.20 The advice can include any communication, including the opinion of a professional tax advisor, setting forth an analysis or conclusion on which the taxpayer relied when preparing the return. The advice need not be in any particular form.21

Special rules apply for reportable transactions, nontax matters, and corporate tax shelter items.22 The failure to disclose a reportable transaction strongly indicates that the taxpayer did not act in good faith; however, a taxpayer may argue that the failure to disclose was based on the advice of a tax advisor who concluded that the transaction was not reportable.23

Where a tax benefit depends on nontax factors, the taxpayer has a duty to investigate the underlying factors rather than simply relying on the statements of another person, such as the promoter. If the corporate taxpayer has a substantial understatement that is attributable to a tax shelter item, a corporation’s legal justification may be considered in determining whether it acted with reasonable cause and in good faith, but only if there is substantial authority for the treatment of the item and the corporation reasonably believed that this treatment was more likely than not the proper treatment at the time the return was filed.24

The reasonable belief standard is satisfied if the corporation analyzes the pertinent facts and authorities using the same paradigm as required for the substantial authority standard and, in relying on that analysis, concludes in good faith that there is a greater-than-fifty-percent likelihood that the tax treatment of the item will be sustained if the IRS challenges it or if the corporation reasonably relies in good faith on the opinion of a professional tax advisor, which, based on this same construct, unambiguously arrives at a “more likely than not” conclusion.25 The “more likely than not” standard emerges here.

Satisfying the substantial authority and reasonable belief requirements is a minimal, but not necessarily dispositive, requirement of demonstrating that a corporate taxpayer acted with reasonable cause and in good faith with respect to the tax shelter item. Other factors may be taken into account. For example, if the tax shelter lacked significant business purpose, if the claimed tax benefits are unreasonable in comparison to the taxpayer’s investment in the shelter, or if the shelter was subject to conditions of confidentiality, the reasonable cause defense may not be sustained.

Arriving at a “more likely than not” conclusion under the TCJA poses challenges, particularly where the statute and legislative history are ambiguous. Although no court cases are currently interpreting the statute, tax executives and professionals should look to prior court cases involving, for example, broad-based judicial doctrines, such as the economic substance, step transaction, and substance-over-form doctrines, and those involving general tax principles such as the benefits and burdens of ownership to inform themselves about the potential strengths or weaknesses of the reporting position.26


IRS information or press releases and notices, announcements, and other administrative pronouncements published in the Internal Revenue Bulletin and conclusions reached in treatises, legal periodicals, legal opinions, or opinions rendered by tax professionals are not considered authorities for the purposes of the various tax reporting standards. However, in the absence of recognized authoritative guidance it is recommended that these sources be reviewed carefully. These may help to inform judgments about the merits of a position, as may the views of professional organizations like the Tax Executives Institute, the American Bar Association, the New York State Bar Association, the American Institute of Certified Public Accountants, and various industry groups. At a minimum, this kind of analysis may be used as evidence of a taxpayer’s good-faith effort to assess its proper tax liability.

Lawrence M. Hill is a partner and global head of the federal tax controversy practice at Winston & Strawn LLP in New York.

Checklist for Mitigating Tax Reporting Risk

As discussed, a range of reporting standards can mitigate potential penalty exposure. “Reasonable cause and good faith” (for positions unrelated to tax shelters) is the easiest standard to achieve, with broad penalty protection. “Reasonable basis” is a higher standard to achieve, with less utility. “Substantial authority” is an even higher standard, with broad use in penalty avoidance, and “more likely than not” is the highest and most difficult standard to achieve but provides the greatest protection from penalty exposure. The following is a checklist for satisfying the reasonable cause and good faith standard or higher under the TCJA:

  • engage a non-disqualified1 professional tax advisor to review and/or offer an opinion on the return position and/or transaction;
  • establish and document the relevant background facts and provide these to the advisor as well;
  • investigate any relevant nontax facts rather than relying on statements of third parties;
  • consider and document the business purpose and economic substance (if relevant) of the transaction;
  • compare the overall tax benefits of the transaction to the economics of the transaction;
  • consider the reasonableness of any assumptions and any representations;
  • consider whether the issue involves a listed or reportable transaction or its equivalents and disclose where required;
  • avoid conditions of confidentiality;
  • identify, review, and document well-reasoned reliance on all supporting authority, including the statute and legislative history;
  • review all authorities and determine if the weight of authority supporting the position is substantial in comparison to the authority contrary to the position;
  • review cases involving potentially applicable judicial doctrines, such as the economic substance doctrine, to evaluate the merits of the position and to assist in planning;
  • consult secondary sources, such as treatises, periodicals, and professional and industry organizations, where authoritative sources are ambiguous;
  • obtain a well-reasoned written opinion from the tax advisor that is based upon all pertinent facts, does not rely upon unreasonable assumptions or representations, and reaches an unambiguous conclusion at the highest level of comfort that the advisor can appropriately reach; and
  • disclose the position on the return where required on Schedule UTP, where otherwise required by the Internal Revenue Code, or where substantial authority may be lacking.
  1. See IRC Section 6664(d)(4)(B)(ii) for the definition of a “disqualified tax advisor.”

Additional Considerations When Preparing for Potential Audit

  • Consult with tax counsel on privilege policies and procedures and appropriate review and contemporaneous documentation of the transaction.
  • Consider retaining relevant experts, including economists and qualified appraisers,1 to support the positions when taken rather than after they are challenged.
  • Segregate all relevant transactional documents and supporting memoranda and advice, including emails, for ready access if needed.
  1. Treas. Reg. Section 1.6662-4(h)(2) and Section 1.170A-13(c)(5).


  1. See Rev. Proc. 2016-30.
  2. See Rev. Proc. 2018-1.
  3. Adequately disclosing a position with a reasonable basis does not reduce the portion of any understatement attributable to a tax shelter. See IRC Section 6662(d)(2)(C).
  4. IRC Section 6662(d)(2)(B)(ii).
  5. Treas. Reg. Section 1.6662-3(b)(3).
  6. Treas. Reg. Section 1.6662-4(d)(3)(iii).
  7. Wells Fargo & Co. v. U.S., 260 F. Supp. 3d 1140 (2017).
  8. Wisconsin Central Ltd. et al. v. U.S., 585 U.S.___(2018).
  9. See, e.g., Ad Global Fund LLC v. U.S., 67 Fed. Cl. 657 (2005).
  10. IRC Section 6662(d)(2)(B)(i).
  11. See, generally, Treas. Reg. Section 1.6662-4(d)(2).
  12. Treas. Reg. Section 1.6662-4(d)(3)(iii).
  13. Treas. Reg. Section 1.6662-4(d)(3)(ii).
  14. Id.
  15. Substantial authority does not reduce the portion of any understatement attributable to a tax shelter. See IRC Section 6662(d)(2)(C).
  16. See IRC Sections 6664(c)(1) and (d)(1); but see IRC Section 6664(d)(2) (reasonable cause does not apply to transactions lacking economic substance within the meaning of IRC Section 7701(o)).
  17. Treas. Reg. Section 1.6662-3(b)(3).
  18. Id.
  19. Treas. Reg. Section 1.6664-4(b)(1).
  20. IRC Sections 6664(d)(4)(B)(ii) and (iii); Treas. Reg. Section 1.6662-4(a), et seq.
  21. Treas. Reg. Section 1.6662-4(c)(2).
  22. See Treas. Reg. Section 1.6662-4(f).
  23. See IRM (12-13-2016).
  24. See Treas. Reg. Section 1.6662-4(f)(2).
  25. See Treas. Reg. Sections 1.6662-4(f)(2)(A) and (B).
  26. See Treas. Reg. Sections 1.6662-4(f)(3) and (4).

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