Don Durfee is research editor at CFO.
At the height of the tax-shelter boom, Raymond Ruble, a lawyer with Brown & Wood in New York, was a prolific author of opinion letters. Ruble wrote hundreds of letters stating that various tax shelters — shelters promoted by firms he had relationships with — would likely be acceptable to the IRS. Many companies and individual investors assumed that such letters would shield them from penalties if the day came when the government decided that the shelters were not, in fact, acceptable.
The assumption was wrong. A number of recent cases — in particular the August ruling that defunct hedge fund Long-Term Capital Management had evaded millions of dollars in taxes — have shown that courts don’t view such letters as an automatic exoneration. “There was a thought by some that if you hired the right firm and they gave an opinion, you’d be protected,” says Jonathan R. Zelnik, a senior counsel at the IRS. “But as the [Long-Term Capital] case shows, the opinion letter is just one factor in determining whether you have a reasonable belief that the transaction works.”
Now the IRS has been pressing law firms to hand over the lists of clients for whom they wrote such letters. “The IRS and some law firms have been battling it out in the courts,” says Louis Marett of Testa, Hurwitz & Thibeault LLP. “And the IRS is generally prevailing.” —D.D.
What to Disclose
The IRS defines six major categories of reportable transactions:
- Transactions in which the promoter requires confidentiality.
- Transactions in which the investor has contractual protection (for example, a refund of fees if the promised tax savings don’t materialize).
- Transactions that generate tax losses above a specified level (for example, $10 million in a year for a corporation).
- Transactions with a significant book-tax difference.
- Transactions involving a brief holding period.
- Transactions similar to 30 specific shelters the IRS has identified so far.
Source: Internal Revenue Service