Benefits & ERISA Law

Memoranda Includes Draft Opinion Letter When Disclosure Required for Tax Shelter Relief

By Suzanne Wynn

When the IRS issued Announcement 2002-2, the Service made a tantalizing offer to taxpayers with possible tax shelter issues. In exchange for disclosure, the IRS offered to waive the accuracy penalty and underpayment of tax related to tax shelters. Announcement 2002-2 contains a list of 7 items under the title of “Information Required to Make a Disclosure” which are required to be disclosed in order to take advantage of this offer. Number 6(c) on the list requires a statement agreeing to provide, if requested, copies of all of the following:

(c) All opinions and memoranda that provide a legal analysis of the item, whether prepared by the taxpayer or a tax professional on behalf of the taxpayer;

In U.S. v. Wealth and Tax Advisory Services Inc., No. 06-55915 (CA9, May 15, 2008), the 9th Circuit settles a dispute over the meaning of those words as they evaluate whether a draft opinion is included within the meaning of “all opinions and memoranda that provide a legal analysis”.

At the heart of this dispute was whether a 29-page “draft opinion letter” written by an accountant at Arthur Andersen and sent to McDermott Will & Emery, the law firm representing the taxpayers regarding an alleged tax shelter involving a leveraged bond transaction entered into by a trust created by the taxpayers. According to the Court, the 29-page draft opinion letter included extensive legal analysis of the leveraged bond transaction. The tax attorneys at McDermott Will & Emery reviewed the draft opinion letter and communicated with the Arthur Andersen accountants about it. The draft never ripened into a final opinion letter and Arthur Andersen never issued a finalized tax opinion letter to the taxpayers.

When the taxpayers decided to take advantage of Announcement 2002-2, they submitted a voluntary disclosure statement to the IRS. The IRS then initiated an audit, and issued a summons to Wealth and Tax Advisory Services, who had succeeded Arthur Andersen as tax advisors to the taxpayers. That summons sought copies of documents associated with the deduction claimed by the taxpayers on their 2001 tax return for the leveraged bond transaction entered into by their trust. Instead of producing the 29-page draft opinion letter, Wealth and Tax Advisory Services provided a privilege log identifying 4 documents that it withheld on the grounds of attorney-client privilege, work product and tax practitioner-client privilege. One of those 4 documents was the 29-page draft opinion letter.

The district court ruled that the 29-page draft opinion letter was not required to be disclosed because it was a draft, and did not rise to the level of tax opinion letter. The IRS appealed this ruling to the 9th Circuit, on the grounds that the draft is still a “memorandum that provides legal analysis” and therefore was within the meaning of Item 6(c) on the list of items required to be disclosed in Announcement 2002-2 as it requires disclosure of “all opinions and memoranda that provide a legal analysis”. The 9th Circuit overruled the district court’s decision, and remanded the case back to the district court. Deciding that “memoranda in the disclosure agreement refers to informal records designating something to be remembered”, the Court found the 29-page draft opinion letter was a memorandum within the meaning of Announcement 2002-2, and should be disclosed to the IRS pursuant to the agreement.

Technorati Tags: Pension Protection Act, ppa, Arthur Andersen, tax shelter, Announcement 2002-2, draft opinion letter, 9th Circuit, Wealth and Tax Advisory Services, McDermott Will, disclosure, ERISA

Full post as published by Pension Protection Act Blog on June 03, 2008 (boomark / email).