Note: The following is an excerpt from the introduction to the article as published in The Tax Lawyer. Author citations have been omitted for brevity. Tax Section members may read the article in its entirety in Adobe Acrobat format.
MacMurray v. Commissioner: Distinguishing Between the Reasonable
Cause and Good Faith Requirements of the Section 6664 Exception
to Accuracy-Related Penalties
In MacMurray v. Commissioner the Tax Court held, in a summary opinion, that the taxpayer’s exclusion of income derived from a settlement constituted a substantial understatement of income. The taxpayer was therefore liable for an accuracy-related penalty under section 6662(a). The Tax Court found that the taxpayer did not satisfy the elements required under section 6664(c)(1) to receive an exemption from a section 6662(a) accuracy-related penalty. More specifically, the court concluded that the taxpayer could not avoid the penalty because he did not show reasonable cause for making the understatement or act in good faith.This Note argues that the Tax Court, in determining whether the taxpayer had a defense to the accuracy-related penalty, failed to correctly apply the analytical framework provided by the statutory language and prior case law. The court likely reached the correct decision, and although summary opinions are non-precedential, the court’s failure to distinguish between “reasonable cause” and “good faith” could eventually cause the section 6664(c)(1) defense to be both over and under inclusive if the court’s reasoning is for any reason followed by either a future court or practitioner. Part I of this Note summarizes the relevant tax law and the facts of MacMurray. Part II discusses the ruling of the Tax Court and evaluates the Tax Court’s analysis of the section 6664(c)(1) exception. Part III discusses in detail the meaning of the reasonable cause and good faith standards. Part IV applies the analysis from Part III and critiques the court’s decision.