Tax Blog/Blawg

Following up on our earlier post, Deconstructing Canal Corp. v. Commissioner – Part I, we now examine the second question raised by Judge Kroupa’s opinion.  Specifically, where a taxpayer relies on the opinion of an advisor to establish a “reasonable cause and good faith” defense to the imposition of penalties, have the modifications to the penalty preparer rules of Code section 6694 obviated the need for a judicial rule disallowing taxpayer reliance on the opinion of an advisor who has a conflict of interest?

Many practitioners were taken aback by the recent Tax Court decision in Canal Corp. v. Commissioner, where Judge Kroupa issued a stinging opinion that not only recast a leveraged partnership distribution as a disguised sale, but also upheld penalties against the taxpayer for what the judge characterized as the taxpayer’s unreasonable reliance on the opinion of its tax advisor.  Judge Kroupa’s analysis, which should be on the forefront of every tax advisor’s mind, raises a number of interesting, if thorny, questions, including:

• Should a fixed and/or contingent fee arrangement necessarily render tax advice unreliable for purposes of avoiding a substantial understatement penalty under the “reasonable cause and good faith” exception?

• Has the enactment of section 6694 undercut the rationale for prohibiting taxpayers from relying on advisors that have a conflict of interest?

• When (if at all) should courts defer to the opinion of a reputable tax advisor in deciding whether to uphold an assessment of penalties against a taxpayer?

Today, we tackle the first of these three questions.

In Tuesday’s confirmation hearings for Supreme Court nominee Elena Kagan, one topic on which there appeared to be agreement between the nominee and the panel was concern about the dwindling number of cases heard by the High Court. In response to questioning from Senator Arlen Specter, Kagan had no explanation for the precipitous decline in the Court’s docket over the last 20 years, but agreed that it has led to an increase in unresolved conflicts among the circuit courts on “vital national issues.”

Quite naturally, those of us in the tax field like to think of our livelihoods as ...

Just when the Department of Justice must have thought that it could do no wrong in pursuing the workpapers of taxpayers and their auditors, it ran smack into the formidable blockade that is the Court of Appeals for the District of Columbia Circuit.  In United States v. Deloitte LLP et al., No. 09-5171 (D.C. Cir. Jun. 29, 2010), the D.C. Circuit seems to have fired a shot across the bow of both the Department of Justice and the IRS’s brand-new Schedule UTP.  

TaxBlawg’s Guest Commentator, David L. Bernard, is the recently retired Vice President of Taxes for Kimberly-Clark Corporation, a past president of the Tax Executives Institute, and a periodic contributor to TaxBlawg.

As the IRS sifts through dozens of comment letters on the proposed disclosure of uncertain tax positions, in-house tax officers have to wonder what's next. Over the last decade, CTO's have been hit with a barrage of new demands and worries. We have seen the rise of FIN 48 (now ASC 740-10), Sarbanes-Oxley and the resulting increased focus on controls, increasingly burdensome quarterly and annual attest firm reviews, listed transactions disclosures, the electronic filing mandate (Everson's legacy), Schedule M-3, and now the still proposed UTP disclosure.

Notwithstanding the new challenges, the number one performance metric used to judge a tax department's performance is still the effective tax rate ("ETR"). CTO's and their staffs continue to be measured by their delivery on the ETR at a time when most at the IRS seem to believe that all tax planning is bad, outside counsel is becoming more cautious, attest firms are insisting to review opinions (thus jeopardizing privilege), budgets and head count have been cut and, oh by the way, "cash is king".

Tax Blawg’s Guest Commentator, David L. Bernard, is the recently retired Vice President of Taxes for Kimberly-Clark Corporation and a past president of the Tax Executives Institute.

It is not too soon for in-house tax professionals to be thinking about how the disclosure of uncertain tax positions (required beginning with 2010 tax returns) will change their lives and perhaps their historical practices.

There are plenty of questions about the new requirement and, not least among them, doubts that it will produce the results the IRS anticipates. The most obvious question is whether the potential over-disclosure of temporary differences and the required disclosure of maximum exposure by issue will bog down the audit process and lead to more unagreed issues going to Appeals or to the courts. Notwithstanding the controversy, tax professionals would be wise to forget arguing about the merits of the new draft requirement and begin thinking about their responses; this is going to happen!

For almost 50 years, lawyers have relied on the “Kovel Rule” to extend the attorney-client privilege to non-testifying accountants or other business experts.   The philosophy behind the rule, so named after the landmark case, United States v. Kovel, 296 F. 2d 918 (2nd. Cir. 1961), is to recognize “the complexities of modern existence [which] prevent attorneys from effectively handling clients' affairs without the help of others . . . .”  Id. at 921.  Without such a rule, disclosure to a third party would constitute a waiver of the attorney-client privilege.

In practice, the ...

Last week, at the TEI Midyear Conference in Washington, LMSB Commissioner Heather Maloy told corporate tax executives attending the conference that “trust” was the key to successfully implementing the new reporting requirements for uncertain tax positions first set forth in Announcement 2010-9.  As reported in the April 14th edition of Tax Notes, 2010 TNT 71-2, Maloy also told the attendees that enhanced transparency through the use of this reporting mechanism would be “mutually beneficial” in terms of improved issue resolution and efficiency.

Last month, I commented ...

The recent decision in Bemont Investments, LLC v. United States, USDC E.D. Tex., No. 4:07-cv-00009 (March 9, 2010) is another burr in the IRS’s saddle when it comes to enforcement of the substantial valuation and gross valuation misstatement penalties.  These two penalties, particularly the 40% gross valuation misstatement penalty, are powerful weapons in the IRS’s arsenal to deter taxpayers from entering into transactions the IRS considers abusive.  Bemont, out of the District Court for the Eastern District of Texas, was a Son of BOSS case that the IRS characterized as a sham ...

Predictably, there has been a good deal of consternation accompanying the release of IRS Announcement 2010-09, which continues the trend away from the Service's traditional "policy of restraint" in seeking to uncover uncertain tax positions.  The first chink in this long-standing policy of restraint was exhibited in Announcement 2002-63, where the Service expanded the circumstances under which it would seek tax accrual workpapers.  Prior to the earlier Announcement, workpaper demands were limited to workpapers relating to listed transactions provided such transactions had been disclosed.  Thereafter, a taxpayer who engaged in more than one listed transaction, whether previously disclosed or not, was subject to a demand to disclose all workpapers.  The IRS's summons enforcement action in Textron relied on Announcement 2002-63 to seek all of the taxpayer's workpapers (arguing that six separate SILO transactions fit within the scope of its new policy).

Announcement 2010-09 goes significantly further in eroding the policy of restraint by placing the onus on the taxpayer to make its own affirmative disclosures of uncertain positions rather than requiring the Service to deduce them from the taxpayer's workpapers.  What has received little attention, however, are the implications of the Service's intention to require the new disclosure form not only for taxpayers who record a reserve in their financial statements for uncertain tax positions, but also taxpayers who "expect[] to litigate the position."