Tax Opinions: What Does it Cost
You and What is it Worth to Your
Client
ABA Tax Section
February 18, 2012
Speakers:
Jack Cummings, Alston & Bird
Julie Divola, Pillsbury
Daniel White, Bryan Cave
Contents
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Regulatory Landscape for Tax Opinions
Why Opine?
Staff Legal Bulletin No. 19
Canal Corp. v. Comm’r, 135 T.C. 9 (2010)
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The Landscape
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Circular 230
Taxpayer Penalty Protection
State Bar/ABA standards
State law negligence
AICPA (FIN 48)
Securities Laws
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Opinion Standards
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Will
Should
More likely than not (Treas. Reg. 1.6662-4(d))
Substantial Authority (Treas. Reg. 1.6662-4(d))
Realistic Possibility of Success (ABA Opn. 85352)
• Reasonable Basis (Treas. Reg. 1.6662-3(b))
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The Context for Opinions
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Closing Condition
Third Party Reliance/Inducement
Penalty Protection (IRC 6662)
Financial Statements (FIN 48)
Securities Offering/Disclosure
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Penalty Protection
• Non-tax shelter transaction (IRC
6662(d)(2)(B)
– Substantial authority
– Reasonable basis plus disclosure
• Tax shelter transactions
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Staff Legal Bulletin No. 19
• Published October 14, 2011
• Affects Tax Opinions in Registered
Offerings
– Debt offerings
– Stock offerings
– Reorganization opinions
• Requirements
• Required Elements
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Securities Laws
• Tax Opinions Required:
– Form S-11
– Securities Act Industry Guide 5
– Roll-up transactions
– Registered offerings where “tax
consequences are material to an investor and
a representation as to tax consequences is
set forth in the filing”
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Tax Consequences are Material
• Substantial likelihood that a reasonable
investor would consider the information
important in deciding how to vote or make
an investment decision
• Would it significantly alter the total mix of
available information
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Are Opinions Required?
• Stock Dividend
– described in Section 305(a)?
– taxable under Section 305(b)?
– described in Section 355(a)?
• Acquisition
– reorganization or taxable?
– Target?
– Acquiring?
• Debt offering
– OID?
– Other (eg., note exchange)
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Required Substance of the Opinion
1. Material Federal Income Tax
Consequences
2. Conclusions as a matter of Law
3. Assumptions and Qualifications
4. Uncertainty
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Material Federal Income Tax
Consequences
• Need not opine on state, local, or foreign
tax law
• May opine to “material” but not “certain” or
“principal” consequences
• Must identify each material consequence
• Must conclude on each tax item
• Must set forth the basis for the opinion
• If unable to conclude, provide the reason
and discuss possible alternatives and risks
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Examples of Inadequate Disclosure
“In the opinion of counsel…
• a partnership is taxed in the following
manner”
• a preponderance of the tax consequences
is likely to occur”
• the following discussion is a fair and
accurate summary of the material tax
consequences”
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Assumptions and Qualifications
They must be:
• Adequately disclosed (e.g., “modification is not
economically significant…”)
• Consistent with the transaction
• Future facts/conditions (e.g., “exchange offer will
occur according to its terms…”)
• Facts not known/knowable
Opinion cannot:
• Assume tax consequences
• Assume underlying legal conclusion (e.g., state
law partnership, merger is valid under local law)
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Uncertainty: Opinions below “will”
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Lack of authority
Conflicting authority
Unclear authority (significant doubt)
Must explain the basis for and degree of
uncertainty
“While not free from doubt and while no
authority is directly applicable, the tax
consequences will be…”
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Other Issues
• Investor reliance
– “Informational Purposes only”
– “Investors should seek and rely on their own
tax advisors”
• Personal Tax Consequences
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Administrivia
• File before registration statement is effective
• Not required if
– the reorganization tax opinion is a closing condition to
a merger
– prospectus discusses substance
– filed prior to closing (or if S-3, 8K, 6K – incorporated
by reference)
• Waivable conditions require filed opinion
• Consent to filing
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Canal Corp. v. Comm’r
• Issue: Was leveraged partnership
transaction a ‘disguised sale’ under Code
Section 707.
• Despite ‘should’ opinion-based reasonable
cause defense, Court imposed substantial
understatement penalty. See Treas. Reg.
1.6664-4(c)
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Why did the Canal court Reject
Opinion Reliance?
• Inadequate analysis (eg, debt-equity,
economic substance)
• Opinion from firm that planned the
transaction
• Large, fixed fee for opinion
• Typos
• Timing of Delivery of Final Opinion
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2nd Guessing Opinion Analysis
• Accord Long Term Capital Management, 330 F.
Supp. 2d. 122, 206 (D. Conn. 2004), aff’d (2nd
Cir. 2005) (failure to apply law to facts)
• U.S. v. Boyle (taxpayer reliance on expert
appropriate when not competent to discern error.
To require 2nd opinion nullifies purpose of
seeking advice).
• Sophistication of client?
• How many people must read the opinion? See
LTCM
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