Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC Written Federal Tax...
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Transcript of Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC Written Federal Tax...
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Written Federal Tax Advice – Regulation and Risks
___________Selected Topics
Oregon/Washington Tax InstituteMay 2, 2008
Neil D. Kimmelfield
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Topics● Section 6662 penalty protection● FIN 48● Circular 230● Disciplinary rules● Section 6694 preparer penalties● Malpractice risk● Tax shelter promoter penalties● Criminal penalties for false statements● Confidentiality of tax advice● Comfort levels
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
What Can Happen to You if You Mess Up?
● Sanction by the IRS?● Tax penalties?● Malpractice claim by client?● Discipline by the bar?● Securities law exposure?● Criminal penalties?
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
What Can Happen to Your Client if You Mess Up?
● Unexpected taxes plus interest● Tax penalties● Losses from a dumb investment
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
What Is “Messing Up?”
● Giving a wrong answer● Giving a really wrong answer● Warning the client, but not warning
enough● Insufficient due diligence● Lying about the tax consequences● Giving too weak an opinion
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
What Is the Setting for Your Advice?
● Planning a transaction – hypothetical tax advice
● Evaluating a prospective transaction – assumed facts
● Return preparation advice (ordinary)● Return preparation advice (tax shelter)● Assisting with a marketed transaction● Assisting with FIN 48 computations
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Common Terms● More likely than not (MLTN)● Substantial authority● Reasonable basis● Reasonable belief● Reasonable cause● Comfort level● Penalty protection● Significant tax-avoidance purpose
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Protecting Client From Accuracy-Related Penalties
● The Code sections 6662 (substantial understatement) 6662A (reportable transactions) 6664 (reasonable cause)
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Protecting Client From Accuracy-Related Penalties (cont’d)
● Section 6662 basics Penalty based on amount of
understatement Supporting authority for a losing position
can reduce the penalty Penalty is reduced by the tax attributable to
a position with adequate support (a “Supportable Position”)
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Protecting Client From Accuracy-Related Penalties (cont’d)
● Non-tax shelter Supportable Positions Objectively, there is SUBSTANTIAL AUTHORITY
OR Objectively, there is a REASONABLE BASIS, and
the facts are disclosed on the return
OR Objectively, the position is just a loser, BUT:
The taxpayer acted in GOOD FAITH with REASONABLE CAUSE
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Protecting Client From Accuracy-Related Penalties (cont’d)
● Tax shelter Supportable Positions Objective substantial authority doesn’t
help Objective reasonable basis doesn’t help,
even with disclosure
HOWEVER The penalty may be avoided to the extent
the taxpayer acted in GOOD FAITH with REASONABLE CAUSE
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Protecting Client From Accuracy-Related Penalties (cont’d)
● What is a “tax shelter?” Any “entity” or “arrangement” if a
“significant purpose” of the plan or arrangement is the avoidance of Federal income tax
“Significant purpose” is not defined anywhere. (See outline page 14.)
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Protecting Client From Accuracy-Related Penalties (cont’d)
● How can written advice provide “reasonable cause?” Reg. § 1.6664-4(b)(1): “Reliance on . . .
professional advice . . . constitutes reasonable cause and good faith if, under all the circumstances, such reliance was reasonable and the taxpayer acted in good faith.”
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Protecting Client From Accuracy-Related Penalties (cont’d)
● Reasonable Cause: Minimum standards for advice (Reg. § 1.6664-4(c))
Must be based on all pertinent facts and circumstances and related law
May not be based on unreasonable factual or legal assumptions
May not unreasonably rely on representations
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Protecting Client From Accuracy-Related Penalties (cont’d)
● Reasonable Cause: What advice does the taxpayer need?
Reg. § 1.6664-4(c)(2): Advice includes an opinion “on which the taxpayer relies . . . with respect to the imposition of the Code section 6662 accuracy-related penalty.”
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Protecting Client From Accuracy-Related Penalties (cont’d)
● Reasonable Cause: What advice does the taxpayer need?
Does a “Substantial Authority” (or “Reasonable Basis”) opinion provide “reasonable cause?”
Does a stronger opinion put the taxpayer in a better position?
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Protecting Client From Accuracy-Related Penalties (cont’d)
● Reasonable Cause for “tax shelter” items Section 6664 regulations require belief in
“MLTN” sustainability for corporate tax shelter items. See Reg. § 1.6664-4(f).
Section 6662 regulations require belief in “MLTN” sustainability for non-corporate tax shelter items. See Reg. § 1.6662-4(g).
Are these regulations obsolete?
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Protecting Client From Accuracy-Related Penalties (cont’d)
● Reasonable Cause and Circular 230 disclaimers Typical disclaimer language: This advice “was not
written to be used and cannot be used for the purpose of avoiding penalties.”
12/17/04 Circular 230 Preamble: Section 6664 regulations will be amended to prohibit reliance on advice with disclaimer.
Is it “reasonable” to rely on advice with the disclaimer?
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Protecting Client From Accuracy-Related Penalties (cont’d)
● Reasonable Cause for “Reportable Transactions” See section 6662A Special rule in section 6664(d)
Taxpayer must “reasonably believe” return treatment is MLTN proper
Reasonable belief cannot be based on opinion from “material advisor”
Reasonable belief cannot be based on opinion that does not satisfy due-diligence standards
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Protecting Client From Accuracy-Related Penalties (cont’d)
● Practical points: Is a “tax shelter” involved?
If so, taxpayer must have MLTN reasonable belief – probably based on your advice
Is your client relying on your analysis or your advice?
If relying on advice, must satisfy due-diligence standards
Watch out for Circular 230 disclaimers Consider “substantial authority” opinion
without disclaimer
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
FIN 48 Advice
● Basic FIN 48 rules To report the benefit of a tax position on a
company’s financial statement, the company must determine that it is MLTN that the position will be sustained, based on the technical merits of the position, if the taxing authority examines the position.
The benefit to be recorded is the largest amount that is MLTN to be realized, taking into account the possibility of compromise.
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
FIN 48 Advice (cont’d)
● Functions of written advice An unsophisticated company may need
help making MLTN judgment about the merits of a position
Even a sophisticated company may have to demonstrate MLTN determination to auditors
Any company may need help predicting settlement scenarios
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
FIN 48 Advice (cont’d)
● Contents of FIN 48 opinion Not necessarily a Circular 230 “covered
opinion” (Reg. § 10.35(b)(2)(ii)(C)) Use “disclaimer” language if return has not yet
been filed
Find out what the auditors will need Consider “roadmap” issues
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Circular 230
● Sanctions Applied only to violations committed “recklessly
or through gross incompetence” Censure, suspension, or disbarment from practice
before the IRS (Reg. § 10.50(a)) Monetary penalty, not exceeding “the gross
income derived (or to be derived) from the conduct giving rise to the penalty” (Reg. § 10.50(c))
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Circular 230 (cont’d)
● What is “written advice” Letters and memos Includes “electronic communications”
E-mails Intranet postings? Bulletin board postings? Voice mail?
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Circular 230 (cont’d)
● Standards for all written advice (Reg. § 10.37(a)) No unreasonable factual or legal assumptions No unreasonable reliance on representations Must consider all relevant facts the advisor
“knows or should know” May not take audit risk into account
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Circular 230 (cont’d)
● “Covered opinions” are subject to additional rules
● What is a “covered opinion?” Opinions on “listed transactions” Opinions on “principal purpose” transactions Certain opinions on “significant purpose”
transactions
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Circular 230 (cont’d)
● When do opinions on “significant purpose” transactions become “covered opinions?” Reliance opinions Marketed opinions Confidential opinions Money-back opinions
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Circular 230 (cont’d)● What is a “reliance” opinion?
Concludes it is MLTN that at least one “significant Federal tax issue” will be resolved in taxpayer’s favor
● “Reliance opinion” status can be avoided with disclaimer language “This opinion was not intended to be used,
and it cannot be used, to avoid penalties that may be imposed on the taxpayer.”
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Circular 230 (cont’d)● What is a “marketed” opinion?
Practitioner has reason to know the opinion will be used in “promoting, marketing or recommending a partnership or other entity, investment plan or arrangement to one or more taxpayer(s).”
● “Marketed opinion” status can be avoided with adequate disclosures Opinion cannot be relied on for penalty avoidance Opinion was written to support promotion of the
arrangement Taxpayer should get independent tax advice
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Circular 230 (cont’d)● When can a “limited scope” opinion
avoid being a “covered opinion?” Can’t relate to a “listed” transaction Can’t relate to a “principal purpose”
transaction Can’t be a “marketed” opinion Must contain required disclosures (see
next slide) Taxpayer must agree that its ability to rely
is limited
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Circular 230 (cont’d)● Required disclosures for “limited
scope” opinions (Reg. § 10.35(e)(3)) The scope of the opinion is limited There are issues that could affect the
overall Federal tax treatment that are not addressed
The opinion can’t be used to avoid penalties with respect to issues outside the scope of the opinion
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Circular 230 (cont’d)● Requirements for “covered opinions”
(Reg. 10.35(c)) Must identify all factual assumptions in a
separate section Must identify all factual representations in
a separate section
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Circular 230 (cont’d)● Requirements for “covered opinions”
(cont’d) Must consider all “significant federal tax
issues” and must evaluate likelihood of prevailing on each
Must provide “overall conclusion as to the likelihood that the Federal tax treatment of the transaction or matter that is the subject of the opinion is the proper treatment”
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Circular 230 (cont’d)● Requirements for “covered opinions”
(cont’d) If a marketed opinion, must say so and
must recommend getting independent tax advice
Must disclose any compensation arrangement between the advisor and a person other than the client
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
ABA Guidance on Tax Opinions
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Disciplinary Rules – ABA Opinions
● Both Oregon and Washington have adopted Rules of Professional Conduct based on the ABA Model Rules
● Neither State has issued guidance regarding tax opinions
● ABA Opinions could be given weight by the courts
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Disciplinary Rules – ABA Opinions (cont’d)
● ABA Opinion 314 (1965) Attorney is advocate for taxpayer; no duty to
disclose weakness to IRS
● ABA Opinion 85-352 (1985) Attorney may advise taking a position only if there
is a “realistic possibility of success” in litigation No definition of this standard No due-diligence requirement
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Disciplinary Rules – ABA Opinions (cont’d)
● ABA Opinion 346 (1982) Addresses only marketed tax shelter
opinions Provides due diligence, good faith, and full-
disclosure guidelines similar to those in Circular 230 for covered opinions
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Section 6694(a) – Return Preparer Penalty
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Section 6694(a) Return Preparer Penalty
● Overview An advisor can be treated as a return preparer A return preparer may be subject to penalty if the
return has an understatement due to an “unreasonable position”
If a position is undisclosed, it must pass a MLTN test to avoid the penalty
The penalty can be as much as 50% of the preparer’s fee
IRS gave temporary relief from the MLTN standard in Notice 2008-13
Congress may fix this
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Section 6694(a) Return Preparer Penalty (cont’d)
● When is an advisor a preparer? When giving advice that is “directly
relevant” to a determination relating to an entry on a return
IF
The entry is considered to be a “substantial portion” of the return
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Section 6694(a) Return Preparer Penalty (cont’d)
● When is advice “directly relevant” to a return item? Pre-transaction planning does not count Advice regarding GAAP tax reserves does
not count Other advice may be considered “directly
relevant” to a return item
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Section 6694(a) Return Preparer Penalty (cont’d)
● When is a return entry a “substantial portion” of the return? Reg. § 301.7701-15(b)(1): Determined by
“comparing the length and complexity of, and the tax liability or refund involved in, that [entry] to the length and complexity of, and tax liability or refund involved in, the return or claim for refund as a whole.”
How does advisor know whether this applies???
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Section 6694(a) Return Preparer Penalty (cont’d)
● When is a return entry a “substantial portion” of the return? (cont’d) Notice 2008-13: An entry that “could result in a
deficiency determination (or disallowance of refund claim) that the preparer knows or reasonably should know is a significant portion of the tax liability reported on the tax return . . . .”
Not much comfort if little or no tax is reported!
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Section 6694(a) Return Preparer Penalty (cont’d)
● Avoiding the penalty [Assume there is an erroneous position
resulting in an understatement] Was the position disclosed? If it was, no penalty if there was a
“reasonable basis” for the position If it was not, you must have had
“reasonable belief” it would MLTN be sustained
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Section 6694(a) Return Preparer Penalty (cont’d)
● What is “disclosure” under sec. 6694? Under the Code: “Relevant facts affecting
the item's tax treatment are adequately disclosed in the return or in a statement attached to the return.”
Problem: The taxpayer won’t want to do this if there is substantial authority
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Section 6694(a) Return Preparer Penalty (cont’d)
● “Disclosure” under Notice 2008-13 Advice to taxpayer: “the advice … includes a
statement informing the taxpayer of any opportunity to avoid penalties under section 6662 that could apply to the position as a result of disclosure, if relevant, and of the requirements for disclosure.”
Advice to return preparer: “the advice to the tax return preparer includes a statement that disclosure under section 6694(a) may be required.”
This is easy! Do it!
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Section 6694(a) Return Preparer Penalty (cont’d)
● No disclosure: Must apply the MLTN test Preparer must have a “reasonable
belief” the position would MLTN be sustained on its merits
Must have MLTN belief Belief must be reasonable
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Section 6694(a) Return Preparer Penalty (cont’d)
● Requirements for MLTN belief Must be based on analysis of pertinent facts and
authorities (like “substantial authority” analysis) Must conclude MLTN to be sustained “if
challenged by the IRS” May rely on information provided by taxpayer May not rely on information that “appears to be
incorrect or incomplete” May “rely in good faith and without verification
upon information furnished by another advisor”
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Section 6694(a) Return Preparer Penalty (cont’d)
● Bottom line for advisors Know when you are a “return preparer” Take advantage of the Notice 2008-13
disclosure safe harbors
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Section 6694(a) Return Preparer Penalty (cont’d)
● Possible amendment by Congress (Rangel bill – H.R. 5719) Most positions would be subject to
“substantial authority” standard Disclosed positions: “Reasonable basis”
standard Tax shelters: Reasonable belief/MLTN
standard
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Malpractice Risk
● Can you be held liable for giving bad tax advice?
● Yes!
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Malpractice Risk (cont’d)
● To whom do you owe a duty? Your client Third parties you had reason to know
would rely on the advice
● Make sure you opinion specifies who may rely on it
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Malpractice Risk (cont’d)
● Possible damages Losses must be caused by the negligent
advice Causation is not always clear
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Malpractice Risk (cont’d)
● Possible damages (cont’d) Unexpected tax liability
Would it have been incurred anyway?
Deficiency interest Did taxpayer benefit from deferred payment of
tax?
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Malpractice Risk (cont’d)
● Possible damages (cont’d) Penalties
Would taxpayer have taken the position without the opinion?
Transaction/investment losses Would taxpayer have done the deal anyway?
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Malpractice Risk (cont’d)
● Standard of care Specialists are held to standard of care
appropriate for attorneys practicing in the specialty
There is a higher standard of care for tax specialists
There may be an even higher standard for sub-specialties
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Malpractice Risk (cont’d)
● Malpractice avoidance Specify who may rely on your advice Don’t give an opinion in an area you don’t
know Don’t oversell your expertise If you’re a tax generalist giving very
technical advice, suggest to your client that you consult a specialist
Don’t give a stronger opinion than necessary
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Section 6700 – Tax Shelter Promoter Penalty
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Tax Shelter Promoter Penalties● Federal penalty – Code section 6700
Elements Assists in organizing, or assists in selling, an
entity, plan, or arrangement
AND Knowingly makes a false statement about a
material matter About a tax benefit in connection with the
entity, plan, or arrangement
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Tax Shelter Promoter Penalties● Federal penalty – Code section 6700
Penalty = 50% of gross income to be derived from the activity
This penalty has been imposed on attorneys actively involved in promotion
Query: How much involvement in promotion is necessary?
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Tax Shelter Promoter Penalties (cont’d)
● Oregon penalty – ORS 314.406 (2007) Penalty applies if Code section 6700
applies Applies only to “a person who promotes a
tax shelter” with Oregon contacts Penalty is 100% of the gross income
derived in promoting the shelter Query: Is “promoting” narrower than the
scope of section 6700?
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Section 7206(2) – Criminal Liability For False Statements
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Criminal Penalty for False Statements – Section 7206(2)
● “Any person who . . . [w]illfully aids or assists in . . . or advises the preparation . . . under. . . the internal revenue laws, of [any] document, which is fraudulent or is false as to any material matter . . . shall be guilty of a felony . . . .”
● Penalty: Up to a $100,000 fine and 3 years’ imprisonment
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Criminal Penalty for False Statements – Section 7206(2) (cont’d)
● What may cause a tax opinion to be criminally false? A false conclusion due to reliance on
material facts known to be untrue
OR A false conclusion due to legal analysis
known to be incorrect (?)
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Criminal Penalty for False Statements – Section 7206(2) (cont’d)
● Justice Department letter to court in KPMG case: “[W]hile the opinions state that certain tax treatments of certain facts (falsely) described in the opinion letter are more likely than not to survive IRS challenge, the Government alleges that conspirators did not, in truth, believe that to be so.”
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Confidentiality of Tax Opinions
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Confidentiality of Tax Advice● Concern
You need to disclose risks to your client Circular 230 may require you to discuss adverse
authority Section 6664 “reasonable cause” opinions must
consider “contrary” authorities Client’s auditors may insist on full analysis in FIN
48 opinionsBUT…..
You don’t want to give the IRS a “roadmap”
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Confidentiality of Tax Advice (cont’d)
● IRS summons authority Code section 7602: “For the purpose of . . .
determining the liability of any person for any internal revenue tax . . . the Secretary is authorized – (1) To examine any books, papers, records, or other data which may be relevant or material to such inquiry ….”
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Confidentiality of Tax Advice (cont’d)
● IRS summons authority (cont’d) United States v. Arthur Young & Co., 465
U.S. 805 (1984): “The language ‘may be’ reflects Congress' express intention to allow the IRS to obtain items of even potential relevance to an ongoing investigation, without reference to its admissibility.”
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Confidentiality of Tax Advice (cont’d)
● IRS policy of restraint for “tax accrual workpapers” (TAWs”) TAWs are defined as: “audit workpapers, whether
prepared by the taxpayer, the taxpayer's accountant, or the independent auditor, that relate to the tax reserve for current, deferred and potential or contingent tax liabilities . . . .”
IRM 4.10.20.3.1(1): “Audit or tax accrual workpapers should be requested with discretion and not as a matter of standard examining procedure.”
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Confidentiality of Tax Advice (cont’d)
● IRS policy of restraint for “tax accrual workpapers” Under IRM 4.10.20.3.1(2)a., IRS will not request tax
accrual workpapers unless: “A specific issue has been identified by the examiner for which there exists a need for additional facts.”
I.e., workpapers should not be sought in a fishing expedition
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Confidentiality of Tax Advice (cont’d)
● Legal opinions Should be subject to IRS summons
authority unless privileged “Policy of restraint” should apply to FIN 48
opinions
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Confidentiality of Tax Advice (cont’d)
● Protections for legal opinions Attorney-client privilege Work-product doctrine
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Confidentiality of Tax Advice (cont’d)
● Elements of attorney-client privilege Communication made in confidence To an attorney In connection with legal services In an attorney-client relationship
● Attorney communications that contain client information are covered
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Confidentiality of Tax Advice (cont’d)
● Required expectation of confidentiality An opinion is not protected by the attorney-client
privilege if it is intended to be disclosed to a third party.
Thus, a penalty-protection opinion may not be privileged.
See Long-Term Capital Holdings, et al. v. United States, 90 AFTR2d 2002-7446 (D. Conn. 2002).
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Confidentiality of Tax Advice (cont’d)
● Waiver of privilege through disclosure A privileged opinion may lose protection if
it is actually disclosed to third parties, such as the taxpayer’s auditors.
See United States v. Textron, Inc., 507 F. Supp 2d 138 (D. R.I. 2007).
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Confidentiality of Tax Advice (cont’d)
● Work-product doctrine FRCP Rule 26(b)(3) limits the discovery of
documents “prepared in anticipation of litigation or for trial.”
May be obtained only by showing “substantial need.”
Special protection given to “mental conclusions, opinions, or legal theories of an attorney”
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Confidentiality of Tax Advice (cont’d)
● Work-product doctrine (cont’d) Disclosure to third parties does not
automatically waive work-product protection
Key is maintaining confidentiality from litigation adversaries
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Confidentiality of Tax Advice (cont’d)
● Application of protections to legal opinions Transaction-planning opinions: Generally should
be protected by attorney-client privilege Tax-return assistance opinions:
May be protected by attorney-client privilege if the client prepares its return “in house”
Little chance of protection if the client is expected to provide the opinion to an outside return preparer
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Confidentiality of Tax Advice (cont’d)
● Application of protections to legal opinions (cont’d) Section 6662 penalty-protection opinions: Little
chance of attorney-client privilege protection; difficult to show expectation of confidentiality
FIN 48 opinions: Good chance of attorney-client privilege protection if
client does not disclose opinion to outside auditors No attorney-client privilege protection if opinion is
disclosed to auditors Possible work-product protection even if opinion is
disclosed to auditors, if client can demonstrate that opinion would not have been obtained but for the client’s anticipation of litigation – see Textron decision
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Comfort Levels
● Crude hierarchy Will Should MLTN Substantial authority Reasonable basis
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Comfort Levels (cont’d)
● MLTN formulations in the law MLTN the proper treatment (section 6664(d)
(2)) Under Regs, MLTN that treatment “will be
upheld if challenged by the Internal Revenue Service.”
MLTN that the position would be sustained on its merits (section 6694)
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Comfort Levels (cont’d)
● MLTN formulations in the law (cont’d) MLTN that an issue would be resolved in
the taxpayer’s favor (Reg. § 10.35(b)(4)) MLTN that the tax treatment will be upheld
if the IRS challenges it (Prop. Reg. § 10.34(e)(1))
MLTN that the position will be sustained if the taxing authority examines the position (FIN 48)
I think this is the clearest and best.
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Comfort Levels (cont’d)
● Examples of various formulations Will be deductible Will be allowed as a deduction Will be allowed if examined in a well-reasoned
decision Will be “x” and should be so treated
● Query: Does “MLTN is examined in a well-reasoned decision” give penalty protection?
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
Stephanie Simmons Ray [email protected] 206-223-7401© 2008 Lane Powell PC
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