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Tax Opinions: What Does it Cost You and What is it Worth to Your Client

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. Regulatory Landscape for Tax Opinions Why Opine? Staff Legal Bulletin No. 19

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Tax Opinions: What Does it Cost You and What is it Worth to Your Client

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  1. 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

  2. Contents • Regulatory Landscape for Tax Opinions • Why Opine? • Staff Legal Bulletin No. 19 • Canal Corp. v. Comm’r, 135 T.C. 9 (2010) 1

  3. The Landscape • Circular 230 • Taxpayer Penalty Protection • State Bar/ABA standards • State law negligence • AICPA (FIN 48) • Securities Laws 2

  4. Opinion Standards • 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. 85-352) • Reasonable Basis (Treas. Reg. 1.6662-3(b)) 3

  5. The Context for Opinions • Closing Condition • Third Party Reliance/Inducement • Penalty Protection (IRC 6662) • Financial Statements (FIN 48) • Securities Offering/Disclosure 4

  6. Penalty Protection • Non-tax shelter transaction (IRC 6662(d)(2)(B) • Substantial authority • Reasonable basis plus disclosure • Tax shelter transactions 5

  7. Staff Legal Bulletin No. 19 • Published October 14, 2011 • Affects Tax Opinions in Registered Offerings • Debt offerings • Stock offerings • Reorganization opinions • Requirements • Required Elements 6

  8. 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” 7

  9. 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 8

  10. 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) 9

  11. Required Substance of the Opinion • Material Federal Income Tax Consequences • Conclusions as a matter of Law • Assumptions and Qualifications • Uncertainty 10

  12. 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 11

  13. 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” 12

  14. 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) 13

  15. Uncertainty: Opinions below “will” • 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…” 14

  16. Other Issues • Investor reliance • “Informational Purposes only” • “Investors should seek and rely on their own tax advisors” • Personal Tax Consequences 15

  17. 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 16

  18. 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) 17

  19. 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 18

  20. 2nd Guessing Opinion Analysis • AccordLong 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? SeeLTCM 19

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