TAX OPINIONS have become an area of controversy.
The IRS wants any US tax advice that it considers a “covered opinion” to follow certain rules. Some advice will have to include prominent disclosures. The new rules take effect on June 21.
Some tax lawyers complain that the rules will prevent them from answering questions in the future about just a few tax issues in a transaction. This is probably an overreaction.
In general, any advice starting June 21 this year that rises to the level of a “covered opinion” must be in a “long form” in which the tax lawyer lists all the relevant facts of the transaction, addresses every significant tax issue and expresses an opinion about each issue and about the proper tax treatment of the transaction as a whole. He must explain his reasoning behind each conclusion he reaches.
He can write a more limited opinion, but any such opinion would have to include two prominent disclosures that there may be other issues that could affect the tax treatment of the transaction that are not addressed and that the client cannot rely on the opinion to avoid IRS penalties, except on the limited issues covered.
Warnings — or prominent disclosures — are also required in two other circumstances. One is where a third party will use the opinion to market or promote a transaction. Such an opinion must include a warning that the opinion is being written to support such efforts and that the taxpayer should seek advice on the transaction from his own tax adviser. The other situation where a warning is required is where the lawyer fails to express a view at least as strong as “more likely than not” that the taxpayer is taking the right tax position. In that case, the opinion must call attention to that fact and warn that it cannot be used to avoid IRS penalties on positions the taxpayer is taking with such weak support.
One thing that has some tax lawyers up in arms is that “opinion” is so broadly defined in the new IRS rules that it can include something as simple as an email responding to a tax question.
However, to be a “covered opinion,” it must fall into one of three categories. One category is written advice about a “listed transaction,” meaning a type of transaction that the IRS has put Americans on notice that it does not believe works. Another category is written advice about a transaction with “a principal purpose” of avoiding or evading federal taxes. The last category is written advice about a transaction with “a significant purpose” of avoiding or evading federal taxes, but — in cases where such tax results are only a significant purpose — there must be something more. That extra bit might be that the client intends to rely on the opinion to avoid IRS penalties or a third party plans to use the opinion to market a deal, the lawyer giving the opinion insists that the transaction structure or his tax advice be kept confidential, or his fees are tied partly to tax results.
On May 18, the IRS responded to complaints about the new rules by issuing additional guidance.
It said that advice that an outside counsel gives in connection with an IRS audit after the taxpayer has already filed his return is not a “covered opinion.” Also, most advice given by in-house tax people — at least those not involved in planning transactions — is not a covered opinion.
Finally, it said that transactions where companies are merely claiming tax benefits “in a manner consistent with the statute and Congressional purpose” are not transactions with a principal purpose of avoiding or evading federal taxes. However, they still might be considered transactions with a significant purpose.