Identify and weight sources of tax authority - the Code, regulations, rulings, and case law - and apply the substantial authority and reasonable basis standards to support a position.

Enrolled agent Marguerite Lefebvre is advising her client, Anselm Boateng, about a large deduction that would cause a substantial understatement of income tax if disallowed. Marguerite judges the position has a reasonable basis but not substantial authority, the position is not contrary to a regulation, and it is not a tax shelter. Anselm wants to avoid the accuracy-related penalty on his own return. Under Section 6662, how can the substantial understatement penalty be avoided for this position?

• ABy adequately disclosing the position on Form 8275 and ensuring it has a reasonable basis, because disclosure plus reasonable basis defeats the substantial understatement penalty for a non-shelter item.check_circle Correct
• BBy treating the deduction as automatically protected, because Section 6662 never applies to a position that the taxpayer's preparer has reviewed and signed.
• CBy having the taxpayer obtain a private letter ruling confirming the deduction, because only an advance ruling shields a reasonable-basis position from the substantial understatement penalty.
• DBy showing the position meets substantial authority, because the substantial understatement penalty can be avoided only by substantial authority and disclosure gives a reasonable-basis item no relief.

Why A is correct: Under Section 6662 the substantial understatement penalty does not apply to a non-shelter item if the position is adequately disclosed and has a reasonable basis; since Marguerite has reasonable basis, disclosing the position on Form 8275 satisfies both requirements and protects Anselm.

Why B is wrong: It is comforting to think preparer review removes the penalty, but Section 6662 turns on the strength and disclosure of the position, not on the fact that a preparer signed the return.

Why C is wrong: A ruling sounds like solid protection, but Section 6662 provides a disclosure route to relief; an expensive advance ruling is not required to protect a reasonable-basis, non-shelter position from the substantial understatement penalty.

Why D is wrong: Substantial authority is one route to relief, which makes this tempting, but disclosure of a reasonable-basis non-shelter position is a separate route under Section 6662, so the item is not left unprotected merely because it falls short of substantial authority.