Andrew Osterland (firstname.lastname@example.org) is a senior editor at CFO.
Taxpayers on the Warpath
Recent court victories by corporate taxpayers.
|Company||Tax shelter at issue||Court forum|
|Compaq Computer||ADR arbitrage||5th Circuit|
|IES (now Alliant Energy)||ADR arbitrage||8th Circuit|
|United Parcel Service||Offshore subsidiary creation||11th Circuit|
|American Home Products||Corporate installment sale notes||D.C. Circuit|
|Florida Power & Light||Offshore limited partnerships||U.S. Tax|
In Their Humble Opinion
When tax practitioners pitch a potential tax-saving investment to CFOs, they often supply an “opinion” on whether the transaction would hold up to an IRS challenge. These opinions usually protect taxpayers from possible underpayment penalties.
Many of the opinions, however, amount to rubber stamps, say critics, and involve little due diligence on the part of tax practitioners. “We’re concerned about potentially abusive transactions that have proceeded based on inadequate tax opinions,” says Herb Beller, chair-elect of the American Bar Association’s Section of Taxation.
In response, the Treasury Department has proposed amendments to Circular 230, the regulations that govern the conduct of tax practitioners. The new rules will impose a higher standard of due diligence on practitioners who provide opinions that a transaction is “more likely than not” to survive an IRS challenge. Not surprisingly, practitioners are nervous. The new rules could make them more vulnerable to censure, fines, and even disbarment for rendering opinions without adequately addressing all material facts of the transaction.
At the heart of their concerns is the Internal Revenue Code definition of a tax shelter as any transaction with a “significant purpose” of federal income tax avoidance. Prior to 1997, the definition was a transaction with the “principal purpose” of tax avoidance. Both the American Institute of Certified Public Accountants and the ABA argue that the new definition is too broad in the context of professional liability, and that it would apply to virtually everything tax practitioners do. “People are concerned that ‘significant’ sweeps in too many legitimate transactions,” says Beller.
Bare minimum, favorable opinions will be harder to come by. – A.O.