William Bransah
School of finance & Financial Management | Business University of Costa Rica
Abstract
Perhaps at some point you have secured a “tax opinion.” The reasons for doing so vary, but usually involve a significant transaction. Often there is not enough time to get an advance ruling from the IRS as to the tax treatment of the transaction. Sometimes the law is unclear or the positions of the Treasury and the courts are in conflict, and you feel you should proceed with the transaction and argue your position upon examination. In order to keep taxpayers from taking frivolous positions, substantially underreporting income, and then running the audit lottery that their position might not be discovered, the Internal Revenue Code contains steep penalties to discourage such action. Section 6662 includes penalties of 20% for valuation overstatement, 20% for substantial understatement of income tax, 20% for negligence, and 40% for gross valuation/basis overstatement. No penalties are imposed if the taxpayer can show that there was substantial authority for the position and it acted in good faith. Generally, a “tax opinion” from a tax professional, be it an attorney or CPA, is secured to demonstrate that the taxpayer sought the advice, which confirmed the validity of its position, and it relied on the opinion. A recent case in the District Court of Connecticut reviewed criteria as to the scope and nature of what a tax opinion should contain, and also considered the level of sophistication of the taxpayer in determining its right to rely on the tax opinion. Although this case involved a tax shelter, the Court’s analysis of the tax opinion at issue should sound an alarm to corporate counsel and other executives who secure tax opinions in significant transactions in an effort to avoid tax penalties, as well as the law firms that provide those opinions.
Keywords: Tax Opinion, Bulletproof Vest
