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Test a return position against substantial authority

Weighs the authorities for and against a return position under Reg. § 1.6662-4(d), lands on one named confidence level, and answers the disclosure question, including when the honest answer is that the authorities do not get there.

About 22 minadvancedTax

Your prompt4,968 characters

Still to fill in: Governing regime and reviewing court, Facts, The issue, as a yes-or-no question

RoleYou are a tax practitioner who signs returns and issues written advice you expect an examiner to read. You weigh authority rather than counting it, you keep what the client wants the answer to be separate from what Reg. § 1.6662-4(d) actually supports, and when a position is reasonable basis you say reasonable basis. You do not round up to substantial authority because the memo would read better.What I needA tax-position memo on the issue below, under Governing regime and reviewing court, written for this purpose: Return position: I am signing this year's return. End on one named confidence level and a disclosure recommendation.InputsFacts: Facts Issue: The issue, as a yes-or-no question Authorities already pulled: Authorities already pulled Governing regime: Governing regime and reviewing court Purpose: Return position: I am signing this year's returnHow to work this1. Restate the issue as a yes-or-no question with the dollar amount attached. If it will not reduce to that, say the issue is not framed and stop. 2. Sort every authority into the Reg. § 1.6662-4(d)(3)(iii) hierarchy. Put treatises, journals, and practitioner opinions in a separate "not authority" bucket and give them zero weight in the conclusion. 3. Build the two columns: supporting and adverse. Each entry gets the holding, the level of the authority, and how close its facts are to ours. State each adverse authority at its strongest reading. 4. Apply the elements to these facts. Name the one fact carrying the position and the one fact that is missing or unfavorable. 5. Land on a single confidence level from the ladder and define it in one sentence. Do not give a range and do not give two. 6. Recommend disclosure or none, tied to § 6662(d)(2)(B), and say whether Form 8275 or 8275-R applies and why. 7. Run the § 6011 reportable- and listed-transaction screen as its own step. That regime is independent of substantial authority.Ask me firstBefore you produce anything, ask me these questions, then stop and wait: 1. What dollar amount rides on this position for the year, and would the understatement clear the § 6662(d)(1) threshold if the position fails? The penalty analysis is only worth writing above the line. 2. Which of these facts are documented in contemporaneous records I could hand an examiner, and which rest on the client's characterization after the fact? 3. Would the client actually sign a Form 8275 if I recommend it, and what is their audit history? 4. Does a state conformity question ride on the federal answer in Governing regime and reviewing court? Do not begin work until I answer. If I tell you to proceed anyway, state each assumption you are making at the top of your output and mark it [ASSUMPTION - verify].Output formatA memorandum marked privileged and confidential - tax advice, with To / From / Date / Re. Then: I. Facts, dates and dollars in bullets. II. Issue, one sentence. III. Conclusion up front with the confidence level. IV. Authorities by hierarchy. V. Supporting authority, weighed. VI. Adverse authority, weighed. VII. Application to these facts. VIII. Confidence level, defined. IX. Disclosure recommendation. X. Reasonable cause under § 6664(c) where Return position: I am signing this year's return calls for it. XI. Reportable-transaction screen. XII. Limitations. End with one line naming the two of my answers that most changed the confidence level or the disclosure recommendation, and where this memo would have landed without them. If an answer changed nothing, say so. It means I should not have been asked.Never do this- If this memo would support the same position for any taxpayer with any facts, it is too generic. Rebuild it from these dates, these dollars, and this allocation. - No hedging filler. Cut "arguably," "it should be noted," and "it depends." Do not tell me to consult a tax advisor. I am the advisor signing this. - Every Code section, regulation, ruling, notice, and case must come from my inputs or be marked [UNVERIFIED - pull before relying]. Never invent a PLR number, a holding, or a subsection. - Where the authorities do not reach the level the client wants, say so plainly and name the level they do reach. Where you do not know whether a regulation has been amended, say you do not know. Do not smooth over the gap with fluent prose. - Do not pad. A clean statutory answer with one adverse notice does not need twelve pages. Length is not value.Before you answer- Did I weigh the authorities, or did I list them and assert a conclusion? - Is every adverse authority stated at its strongest, or did I soften one? - Did anything from outside Reg. § 1.6662-4(d)(3)(iii) carry weight in my conclusion? - Is there exactly one confidence level, defined in plain words? - Would this analysis fit a different taxpayer's transaction? It should not.

Adds driver's-seat tunes: options instead of answers, questions before work, every citation flagged. Your values come with it.

2

Pressure-test it

Makes the AI switch hats and attack its own answer.

Substantial authority is a prediction about what a revenue agent will do with these same authorities, and the prediction is testable before the return is signed. Build the exam as the agent. Name the three authorities you would cite against the position and the single factual point you would press hardest in the interview: usually the one the memo states without a document behind it. Then rewrite the application and adverse-authority sections to meet those specific attacks, either by developing the fact or by distinguishing the authority honestly. Finish by saying whether the disclosure recommendation should change now that you have seen the exam theory.
3

Go deeper

Pushes the work further once the basics are right.

This memo never leaves the office; two documents do. Produce both: (a) the Form 8275 disclosure statement itself: the description of the item, the statutory and regulatory authority relied on, and the facts, written to fit the form's boxes without giving the examiner a roadmap; and (b) a one-page note to the client in plain English saying what the position is, what confidence level means in real terms, what disclosure does and does not protect against, and what the client must retain in the file.

Before you run it

What to gather first

  • The transaction documents, the allocation, and the accounting treatment actually booked
  • The dollar amount at stake and the client's total tax for the year
  • Code sections, regulations, rulings, and cases you have already pulled
  • Whether the client took a different position on this item in a prior year or on a financial statement
  • Whether this is a return position, a planning question, or an audit response

Watch for

  • Substantial authority is a weight-of-authority threshold, not a probability estimate the client can negotiate. If the authorities land at reasonable basis, the memo has to say reasonable basis. The difference decides whether disclosure is optional or necessary.
  • Treatises, tax journals, and another practitioner's opinion are not authority under Reg. § 1.6662-4(d)(3)(iii). The model will cite them persuasively; strike them from the weighing.
  • Verify every Code section, regulation, ruling, and notice against current text. Section 174 and the R&E capitalization rules have moved repeatedly, and the model will cite a superseded version with complete confidence.
  • Reportable and listed transactions under § 6011 carry independent disclosure duties and penalties that substantial authority does not cure. Run that screen even when the position is strong.
  • Circular 230 § 10.37 governs this advice: reasonable factual and legal assumptions, all relevant facts you know or should know, no reliance on representations you know are wrong, and no consideration of audit-selection odds.

What comes back

A privileged tax memorandum: To/From/Date/Re; facts with dates and dollars; the issue in one sentence; the conclusion and confidence level up front; authorities listed by the Reg. § 1.6662-4(d)(3)(iii) hierarchy; supporting and adverse authority each weighed with holding, level, and factual proximity; application naming the fact that carries the position and the fact that is missing; one defined confidence level; a disclosure recommendation naming Form 8275 or 8275-R or none; reasonable-cause framing; a § 6011 screen; and the limitations the advice depends on.

See an example of what you’ll get
*(After you answer the four questions: $14M item, roughly $2.9M of tax at stake, allocation documented in the § 1060 schedule and a contemporaneous valuation, client will sign an 8275, California conformity in play.)* MEMORANDUM - PRIVILEGED AND CONFIDENTIAL - TAX ADVICE To: K. Nguyen, CFO, Helix Therapeutics, Inc. | Re: § 197 treatment of $14M acquired IPR&D | April 27, 2026 III. Conclusion. The position that the $14M of acquired IPR&D is a § 197 intangible amortizable over fifteen years has substantial authority under Reg. § 1.6662-4(d). It is not more likely than not. Roughly $2.9M of tax rides on it, which clears the § 6662(d)(1) threshold, so the penalty analysis matters. V. Supporting authority, weighed. - *§ 197(d)(1)(C)(iv) and Reg. § 1.197-2(b)(6).* Statute and regulation, directly on point: patents, know-how, processes, and similar items acquired in connection with the acquisition of a trade or business are § 197 intangibles. HX-271 with completed Phase 1 data sits inside "know-how and similar items." Highest weight: this is text, not interpretation. - *Frontier Chevrolet, 116 T.C. 289 (2001), aff'd 329 F.3d 1131 (9th Cir. 2003).* Reviewed Tax Court opinion reading § 197 broadly for intangibles acquired with a business; affirmed in our circuit. Substantial weight, though the facts (a covenant not to compete) are a step away from ours. - *PLR 200736042.* Authority under Reg. § 1.6662-4(d)(3)(iii), not precedent, and not binding on the examiner. Modest weight, close facts. VI. Adverse authority, at its strongest. - *Notice 2023-63, § 6.* Treats amounts paid to acquire IPR&D as subject to § 174 capitalization where the acquirer continues the research. Stated at its strongest, the Notice reaches this transaction directly: Helix did continue development of HX-271 after closing, and the government will read § 6 as controlling. This is the authority that keeps the position out of more-likely-than-not. - *§ 174(a)(2)(B).* Post-2022 mandatory capitalization over five years. The structural argument is that Congress did not intend § 197 to provide a fifteen-year alternative for the same economics. Not authority: excluded from the weighing. The BNA portfolio and the two Tax Notes articles reaching our conclusion. Persuasive reading, zero weight under the regulation. VII. Application. *The fact that carries the position:* the $14M was allocated under § 1060 to a compound that already existed and had completed Phase 1 at closing: it is acquisition consideration, not an amount Helix paid or incurred for research. *The fact that hurts:* Helix began Phase 2 work on HX-271 in October 2025, which is exactly the continuation Notice 2023-63 § 6 addresses. Segregate post-closing development spend and treat it as § 174 in its own right; do not let it bleed into the § 197 basis. IX. Disclosure. Recommend Form 8275 with the 2025 return. Substantial authority alone defeats the § 6662(b)(2) substantial-understatement penalty for a non-shelter item, so disclosure is not required, but it is cheap, it builds the § 6664(c) file, and it forecloses a concealment argument. Form 8275-R is not appropriate; the position is not contrary to a regulation. [ASSUMPTION - verify] I assumed the § 1060 allocation is final and not subject to a seller dispute. If the seller reopens it, the analysis restarts. What your answers changed. Your answer that the $14M allocation sits in the § 1060 schedule and a contemporaneous valuation is what holds section III at substantial authority. If that number rested on the client's characterization after the fact, Notice 2023-63 § 6 carries section VII on its own and this memo concludes reasonable basis, which turns disclosure from a recommendation into a requirement. Your answer that the client will sign an 8275 is why section IX recommends one rather than laying out the option and telling you to price the client's tolerance, which is not advice.
Why this prompt is built the way it is
## Framework 1. **Substantial authority is objective.** Reg. § 1.6662-4(d). More than reasonable basis, less than more-likely-than-not: the weight of authority supporting the position is substantial relative to the weight against. It is not a probability the client would prefer. 2. **Only listed authority counts.** Reg. § 1.6662-4(d)(3)(iii) sets the list: Code, regulations, revenue rulings and procedures, tax treaties, committee reports, PLRs, TAMs, GCMs, IRS notices and announcements, and case law. Treatises, journals, and another firm's opinion are not authority. 3. **Weigh, do not count.** A reviewed Tax Court opinion on the same facts outranks a string of district-court cases on different ones. Relevance to the client's facts is part of the weight. 4. **Both sides on the page.** Every authority against the position gets stated at its strength, not at its weakest reading. The examiner will find it either way. 5. **Apply the elements to these facts.** Name the specific fact carrying the position and the specific fact that is missing. This is where most memos stop short. 6. **One confidence level, defined.** Not frivolous, reasonable basis, substantial authority, more likely than not, should, will. Pick one and say what it means in a sentence. 7. **Answer the disclosure question.** None, Form 8275, or 8275-R, tied to § 6662(d)(2)(B) and to whether the position is contrary to a regulation. 8. **Screen § 6011 separately.** Reportable and listed transactions carry their own disclosure regime and their own penalties; substantial authority does not help there.