Covered Opinions under Circular 230

IRS's rules on written advice provided to clients by tax practitioners have been tightened. Anyone who obtains the services of a professional tax advisor should be aware of how these new rules affect the advice they receive.

The rules are contained in “Circular 230” and apply to “covered opinions” (formerly known as “tax shelter opinions”). A covered opinion is defined as written advice, including electronic communications (i.e., e-mail, faxes), on a federal tax issue arising from

  1. a transaction IRS has determined is a tax-avoidance transaction,
  2. a partnership or other entity or investment plan, or any other plan or arrangement, that has tax avoidance or evasion as a principal purpose, or
  3. a partnership or other entity or investment plan, or any other plan or arrangement, that has tax avoidance or evasion as a “significant purpose,” if the written advice is a “reliance opinion” (explained below), or “marketed opinion” (i.e., the opinion will be used by a promoter to market an investment).

Since the term “significant purpose” is not precisely defined, the rules could conceivably apply to routine tax advice provided in writing.

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Eleventh Circuit Agrees with Fifth that Corporate Stock Values at Death Must Reflect a Reduction Equal to the Corporation's Full Built-In Capital Gain Tax Liability

The Eleventh Circuit recently held that in determining the value of a decedent's holding company stock for estate tax purposes, the company's value is reduced by the entire built-in capital gain tax liability as of the date of death. (Estate of Frazier Jelke III v. Comm’r) The decision puts the Eleventh Circuit in agreement with the Fifth Circuit. We now have two Circuit Courts disagreeing with the Tax Court and the IRS, which argue a full discount should only be allowed if there is evidence that a purchaser would liquidate the corporation.

Allowing a discount for the full amount of the tax that would be incurred on recognition of all built-in gains, I think, better reflects reality. In my experience, a purchaser of stock always negotiates for a reduction in purchase price equal to the full amount of the tax on the built-in gains. Hopefully, if this issue goes to the Supreme Court, as it may due to the difference of opinion among the Circuit Courts, the Supreme Court will follow the realities of the business world in valuing stock in a corporation and follow the Fifth and Eleventh Circuits. Continue Reading...

Preserving Franchise Tax NOLs

I received my form from the Comptroller this week: Texas Franchise Tax Preservation of Temporary Credit. If you have any losses that you were carrying forward for Texas Franchise Tax purposes, don't throw this form away. Fill it out and send it in. If you don't, you will lose any benefits from those prior losses when it comes to the "new" Texas Franchise Tax -- lovingly christened "the margin tax."