Re: New U.S. Treasury Rules on "Written" Tax Advice

To All Clients:

The U.S. Treasury Department has issued new Regulations setting forth rules governing how tax advisors must communicate with their clients whenever those advisors issue "written advice" on tax issues. Although the Regulations sprang from an effort to regulate tax advisor–client communications in the context of certain transactions the IRS viewed as abusive, the Regulations as finally adopted apply much more broadly.

In the context of the transactions the IRS seems to view as abusive – namely (i) any transaction "listed" as abusive by the IRS or (ii) any other transaction the "principal purpose" of which is tax avoidance -- the IRS specifies mandatory rules that, effectively, prohibit any[1] written advice to a taxpayer by a tax advisor unless the advice essentially constitutes a full-blown opinion on each tax issue in question, backed by full due diligence by the tax advisor of all relevant facts. This type of written advice takes an enormous time to produce and is very expensive. For that reason clients up until now have rarely asked for advice in such a form unless the context – from a business point of view – clearly required it. Instead, taxpayers have often desired to receive different levels of advice depending on the business context, ranging from "off the cuff' advice, often quickly delivered by email and with a disclaimer that the tax advisor would need to do additional work to confirm the advice, to more formal written advice, such as explanatory memoranda that still fell short of a "full blown" opinion with full due diligence ("Non-Opinion Written Advice").

Henceforward, however, for these types of arguably "abusive" transactions, no Non-Opinion Written Advice may be issued by a tax advisor to a taxpayer.[2] The "listed transactions" to which this harsh rule applies are relatively clear, since they are literally "listed" by the IRS in published releases. What transactions have a "principal purpose" of tax avoidance are less clear; however, we do not feel that "principal purpose" transactions frequently include normal business transactions, even though such transactions are almost always structured or re-structured to achieve maximum tax efficiency. At any time we believe that a transaction is of a type requiring such an opinion, we will inform you.

However, the regulations also apply to a broad set of other transactions, transactions that have avoidance of tax as a "significant purpose". No one is yet at all sure what "significant purpose" is, but many professionals are worried that this phrase could be read broadly enough to include any transaction structured or re-structured in a tax-efficient manner. However, Taxpayers receiving written advice with respect to these transactions – unlike Taxpayers receiving written advice about "abusive" transactions – will usually have a choice.

They will be able to choose to receive a "full blown" opinion with full due diligence, as described above.

Alternatively, they will generally be able to receive the normal Non-Opinion Written Advice they are used to (ranging from brief email communication to memoranda), so long as the following legend is prominently displayed on the writing (including emails):

"To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed therein."

The foregoing legend does not weaken the advice rendered in the relevant writing. What it does do is prevent you from taking advantage of authority holding that, even if a taxpayer's tax position falls short of certain standards (below which varying penalties can be imposed), good faith reliance on the advice of a practitioner can, in certain cases, in and of itself, protect the taxpayer from imposition of penalties. (It also of course indicates that it is not to be used as a tool for marketing a tax reduction strategy.) The legend does not mean that, if a court finds against the taxpayer on the substantive issue, penalty imposition will be automatic. If the taxpayer in fact satisfies the minimum thresholds[3] for a non-penalty return position, even though his position is ultimately found to be incorrect, penalties will not be imposed, regardless of the existence of legends on written advice received by him.

As a matter of practice, in all written advice henceforward issued by this Firm --including all emails -- the legend set forth in the second preceding paragraph will be included automatically. This will permit us in the normal situations typically faced by our clients to continue to issue the differing levels of informal written communications to which our clients are accustomed. Should any client wish "non-legended" advice – namely a full blown opinion without a legend – they can of course choose that route instead.

Do not hesitate to give us a call with any questions you may have concerning these new rules and/or the Firm's new procedures in light of those rules.

Davis & Gilbert LLP

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[1] A number of exceptions exist, however, including — importantly -- written advice that concludes negatively on the suggested structure. We can discuss at greater length the varying narrow exceptions with any client interested in doing so.

[2] Unless an exception, such as that for "negative advice," applies.

[3] It should be noted that these "minimum" thresholds generally are substantial, but are the "minimum" in the sense that they constitute for the issue in question the minimum level of supporting legal authority permitted in order to avoid imposition of penalties.