A Tax Opinion Letter – Complex Transactions, Special Requirements

For complex investment transactions, particularly those with possible tax implications, you should be discussing the matter with your tax advisor before you make any final decisions. The purpose of a tax opinion letter is to justify your tax position, should it be called into question by the IRS. A tax opinion letter can help in reducing the likelihood of an audit and provide a strong rationale for a tax position or a strategy to minimize your tax exposure by referring to specific IRS codes and rulings. Since business transactions and deductions can be structured in different of ways with different tax consequences, contacting an experienced and independent tax professional early on can be of great benefit. You can get advice, input, and a tax opinion letter in advance of your final transaction or investment to assure that any favorable tax impact is upheld.

In an effort to combat abusive tax shelters, The Internal Revenue Service and the U.S. Treasury department have reduced the extensive use of tax opinion letters by implementing new regulations, referred to now in Circular 230. Tax opinion letters are deemed so valuable and necessary for legitimate transactions that could lead to significant tax consequences. It is best to have the letter prepared by an independent and objective party, not closely involved in the business transaction, nor standing to profit from it. For investors, individual and business taxpayers considering a large transaction such as an investment, or a specific tax deduction, an opinion letter is furnished to prove legitimacy of the transaction, deal or deduction by referring to specific IRS codes and rulings. Before you take an aggressive position, it is wise to work with an unbiased and independent tax professional to review the transaction or investment, alongside your own circumstances, to weigh the potential liabilities.

Circular 230 states that any written advice with the purpose of minimizing tax, or taking an aggressive tax position by means of a deduction or an investment plan, must meet specific criteria. If it doesn’t meet these, it offers no real advantage to the taxpayer in the event of an audit.

The regulations serve as a framework for tax advisors when they issue a “Covered Opinion.” Practitioners who provide a covered opinion must:

  • Use reasonable efforts to identify, ascertain, and consider all relevant facts;
  • Base the opinion only on reasonable factual assumptions;
  • Rely only on reasonable “factual representations, statements or findings of the taxpayer or any other person;”
  • Relate the applicable law to the relevant facts;
  • Consider all significant Federal tax issues (unless the opinion is expressly limited in scope);
  • Provide a “conclusion as to the likelihood that the taxpayer will prevail on the merits with respect to each significant Federal tax issue considered in the opinion;” and
  • Provide an “overall conclusion as to the likelihood that the Federal tax treatment of the transaction . . . is the proper treatment and the reasons for that conclusion.”

A recent Tax Court decision, Canal Corp. v. Commissioner , 135 T.C. No. 9 (2010), affirmed the importance for taxpayers to hire independent tax professionals when seeking a tax opinion. The court held that a tax opinion can be disregarded if the tax advisor writing the opinion being too closely involved with the structuring of the transaction – resulting in a conflict of interest.

A Tax Opinion Letter, Points to Consider:

  • The letter should present the information in a straight-forward manner, clearly, concisely and completely. There is no room for ambiguity and the letter must address each of the elements of the transaction concerned.
  • An effective tax opinion letter will discuss factual details as well as technical concerns. It should include a thoughtful tax analysis. Citing examples to uphold the position from authorities and Tax Court can strengthen the letter as well. The best letters discuss the reasons in support of and against the position, to illustrate the reasoning behind the position. All supporting documentation should accompany the opinion letter to support it.
  • Generally, the letter needs to meet the threshold of “more-likely-than-not,” to effectively protect a taxpayer from any future penalty liabilities.
  • The best protection an opinion letter offers is when you get one in advance of making your decision and ultimately taking a tax deduction or investing. However, that may not always be possible. You can, and should, contact a tax professional to aide you in having your tax position upheld through the use of an opinion letter as soon as it becomes obvious that one is needed.

You, as a taxpayer, want to have your tax position upheld. So, for any complicated transactions or investments that may come into question at tax time, consulting an independent tax professional can prove to be incredibly valuable. A tax opinion—especially one prepared while you are still in the midst of the purchase or making the transaction—can help put you in the best possible light on both the facts and the tax laws. If you find you need a tax opinion letter after you’ve already made your transaction – we can still help you have your position upheld.

For assistance, or an independent unbiased tax opinion, we welcome you to contact our tax firm for a free tax consultation at 877-788-2937.

Mike Habib, EA is a licensed boutique tax controversy firm that helps individual and business taxpayers in various tax matters. We are an accredited member of the Better Business Bureau and maintain the highest BBB rating of "A +".

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