Taxpayers often think that "attorney client privilege" will block the IRS from seeing their attorney's legal advice.
In Ad Inv. 2000 Fund LLC v. Commissioner, 142 T.C. No. 13, 4/16/14, the taxpayers had invested in certain aggressive tax shelters. The IRS challenged the tax positions taken, and added the "substantial understatement penalty," on the theory that the taxpayers did not reasonably believe that their position was more likely than not the proper treatment.
As part of the investment, the taxpayers received tax opinions from a large law firm. However, in court, they took the position that they had reasonably concluded that their positions were correct, based on "substantial authority," without relying on the tax opinions. Accordingly, they argued, the tax opinions were not the basis for their "reasonable belief," and they should not be disclosed to the government.
No matter, said the court, concluding that the participants' “averments that the partnerships satisfied the belief requirement ... put into dispute” their knowledge and understanding of pertinent legal authorities and their application to the facts, as well as their belief that their positions would succeed in the courts. Accordingly, the taxpayers had "forfeit[ed] the partnerships' privilege protecting attorney-client communications relevant to the content and the formation of their legal knowledge, understanding, and beliefs."
What might we learn from this decision?
First, it seems apparent that the court is not going to accept a taxpayer's claim that it figured out the legal issues "all by itself."
Still, note that the lawyer's opinion became accessible to the government because the understatement penalty was involved, so that the court needed to determine the taxpayer's knowledge of legal authorities. The particular tax shelter involved, referred to as "Son-of-BOSS," is considered particularly egregious (Noted the court: "A 'Son-of-BOSS' tax shelter is a variant of the Bond and Options Sales Strategy (BOSS) tax shelter. “The purpose of all Son-of-BOSS tax shelters is to create ‘artificial tax losses designed to offset income from other transactions.' " [citation omitted]). Accordingly, "mainstream" tax credit investments are far less likely to inspire this level of inquiry.
Of course, any smart taxpayer is going to want an opinion of knowledgeable counsel that their transaction has been structured properly. The Treasury's "Circular 230" requires that "The opinion must provide the practitioner’s conclusion as to the likelihood that the taxpayer will prevail on the merits with respect to each significant Federal tax issue considered in the opinion. If the practitioner is unable to reach a conclusion with respect to one or more of those issues, the opinion must state that the practitioner is unable to reach a conclusion with respect to those issues. The opinion must describe the reasons for the conclusions, including the facts and analysis supporting the conclusions, or describe the reasons that the practitioner is unable to reach a conclusion as to one or more issues." Typically, this is interpreted to call for a "long form" opinion that discusses the strengths and weaknesses of the taxpayer's position, but arguably, this rule only calls for the "favorable" side, i.e., the "analysis supporting the conclusions."
We'll have to see if Ad Inv. 2000 leads to any changes in the opinions offered by counsel.