Tax Opinion Letters
Sean R. Kennedy
In recent years, the IRS has cracked down on the
protections of a tax opinion letter. Prior to 2004, a tax opinion
letter taking a tax position could protect taxpayers from significant
penalties based on their reliance of that opinion letter. This led
to tax practitioners taking aggressive tax position even when the facts
and legal precedent didn’t support their findings. Many taxpayers
who implemented abusive tax shelters were not penalized for their
evasive activity. This all came to an end in 2004 & 2005 when the
IRS amended Circular 230.
The Circular 230 amendments defined the standards
that tax professionals must abide by when providing written tax advice.
It further defined the content of a tax opinion letter which reviewed
transactions, plans, or arrangements where the significant or principal
purpose was to avoid or evade taxes. If tax opinions do not meet
the standards of Circular 230, taxpayers will still be subject to hefty
IRS penalties if the IRS determines a deficiency exists.
A good tax opinion letter will contain an extensive
review of the relevant facts and technical tax issues.
Furthermore, substantial legal authority and analysis must be discussed
in the opinion. Tax opinion letters must view the transaction from
all perspectives and come to a well-reasoned conclusion. Generally, if
the letter meets the threshold of more-likely-than-not, it can be used
to protect a taxpayer from any future penalty liabilities.
A recent Tax Court decision, Canal Corp. v.
Comm’r, 135 T.C. No. 9 (2010), affirmed the ongoing importance in
taxpayers hiring independent, disinterested tax professionals to write
tax opinions. That court held that a well-reasoned tax opinion can
nonetheless result in penalties if the tax advisor had been closely
involved in the structuring of the transaction the tax opinion
scrutinized. This conflict of interest results in an expensive
penalty that could be avoided by hiring an independent tax professional.
While IRS penalty protection seems to be a legitimate
reason to hire an attorney to write a tax opinion, an opinion letter has
other value as well. Penalty protection is merely a safety net of
a thorough tax opinion. The overriding goal of a tax opinion
letter really is to have the tax position upheld.
Business transactions can be structured in a
multitude of ways with a myriad of tax consequences. Contacting an
experienced tax professional early in the process of business
transactions, allows a trained professional to provide input to assure
that any favorable tax impact is upheld. A tax opinion provides
taxpayers an opportunity to minimize their tax exposure with the added
protection from penalty assessments.
If you think you may benefit from a thorough tax
opinion letter, please contact
Sean R. Kennedy.