According to Sam Young of Tax Analysts several tax professionals have expressed concern over the Tax Court’s recent decision in Canal Corporation v. Commissioner:
In an e-mail to Tax Analysts, Blake D. Rubin, Andrea M. Whiteway, and Jon Finkelstein of McDermott Will & Emery LLP argued that the court misconstrued section 6662 in upholding the accuracy-related penalty against the taxpayer. “The taxpayer should definitely appeal,” they wrote.
… Rubin said the court skipped necessary inquiries in upholding the accuracy-related penalty. “Regardless of the taxpayer’s state of mind, reasonable cause, good faith, etc., if there were substantial authority for the position, then the penalty should be inapplicable unless the court determines it’s a tax shelter,” he said.
But without determining whether there was substantial authority for the taxpayer’s position or whether the transaction was a tax shelter, the court “just went directly to the [section] 6664 reasonable cause good-faith exception,” he said.
Robert Willens of Robert Willens LLC said the court’s section 6662 findings will “have untold impact on the opinion business.”
“It seems to me that when taxpayers get such high level opinions from reputable firms, the courts should give deference to the opinion when penalties are involved,” said Todd D. Golub of Baker & McKenzie LLP. He suggested that the flat fee may have unduly influenced Judge Kroupa.
Willens echoed that view, saying, “I couldn’t help but think that the judge wanted to make an example of someone who would charge that large a fee for something like this.” Under the court’s logic, a contingent fee arrangement would be difficult to distinguish from the flat fee, “and that’s obviously troubling, too,” he added.
I would share these individuals’ concerns if it were not for Judge Kroupa’s specific finding that the payment of the fee to PriceWaterhouseCoopers was conditioned on the closing of the deal and that the deal could not close without a positive opinion letter from PWC:
We also find suspect the exorbitant price tag associated with the sole condition of closing. Chesapeake essentially bought an insurance policy as to the taxability of the transaction. PWC received an $800,000 fixed fee for its tax opinion. PWC did not base its fee on an hourly rate plus expenses. The fee was payable and contingent on the closing of the joint venture transaction. PWC would receive payment only if it issued Chesapeake a “should” opinion on the joint venture transaction. PWC therefore had a large stake in making sure the closing occurred.
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3 responses so far ↓
1 Ed Zollars // Aug 9, 2010 at 4:41 pm
I believe there are lots of “bad facts” in this case that may mean it’s more limited in its impact than some may worry. In addition to the fixed fee contingent on giving the “expected” opinion required to allow the deal to close, the Court was also troubled by the fact that the individual writing the opinion a) was not the firm’s long time representative with the firm and b) was intimately involved with designing the very transaction he then sought to give a protective opinion on.
I do think it tells us that a taxpayer cannot merely rely on an opinion from a “reputable firm” but must look behind the facts to see if, in fact, the person giving the opinion has a vested interest in coming to a specific conclusion.
2 Peter // Aug 9, 2010 at 6:07 pm
Ed,
I agree with your assessment. This case isn’t going hurt people who get legitimate opinions from reputable tax firms.
3 sohotaxman // Aug 21, 2010 at 4:56 pm
Isn’t this the exact same leveraged partnership deal described by the KPMG whistleblower as the ABC Partnershp Transaction done by XYZ Corporation?
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