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ABA Opinions Panel by vSTnB6

VIEWS: 7 PAGES: 20

									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
•   Canal Corp. v. Comm’r, 135 T.C. 9 (2010)




                                               1
             The Landscape
•   Circular 230
•   Taxpayer Penalty Protection
•   State Bar/ABA standards
•   State law negligence
•   AICPA (FIN 48)
•   Securities Laws



                                  2
          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
       The Context for Opinions
•   Closing Condition
•   Third Party Reliance/Inducement
•   Penalty Protection (IRC 6662)
•   Financial Statements (FIN 48)
•   Securities Offering/Disclosure




                                      4
         Penalty Protection
• Non-tax shelter transaction (IRC
  6662(d)(2)(B)
  – Substantial authority
  – Reasonable basis plus disclosure
• Tax shelter transactions




                                       5
 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
           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
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
     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
Required Substance of the Opinion
1. Material Federal Income Tax
   Consequences
2. Conclusions as a matter of Law
3. Assumptions and Qualifications
4. Uncertainty




                                    10
    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
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
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
    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
              Other Issues
• Investor reliance
  – “Informational Purposes only”
  – “Investors should seek and rely on their own
    tax advisors”
• Personal Tax Consequences




                                                   15
                  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
      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
  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
 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

                                                       19

								
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