background image
advocacy community education
Now, a decision of the United States
Tax Court (Canal Corporation &
Subsidiaries v. Commissioner, 135 T.C.
No. 9, Aug. 5, 2010
) calls into question
whether any tax advice you provide to
your client, no matter how thorough,
can successfully be used as a defense
against imposition of the accuracy-
related penalty.
Tax Issue
The Canal Corporation case involves a
fairly complex transaction. Two part-
ners formed a joint venture by each
contributing assets of operating busi-
nesses. The joint venture was treated
as a partnership for tax purposes.
On the same day, the partnership bor-
rowed money from an unrelated bank
and distributed the funds to one of the
partners. The other partner guaranteed
the bank loan, and the partner that
received the distribution agreed to
indemnify the guarantor for any princi-
pal payments it might have to make
under the guarantee.
The key tax question in the case is
whether the transaction resulted in a
disguised sale of assets. The compa-
ny's long-time accounting firm assisted
in structuring the transaction in a man-
ner intended to comply with the debt-
financed transfer of consideration
exception to the disguised sale rule
under Reg. 1.707-5(b). As a condition
of closing the transaction, the compa-
ny, a publicly-traded entity, asked its
accounting firm to render a tax opinion
on the transaction.
Accounting Firm's Role
The accounting firm had served the
company for many years as both audi-
tor and tax preparer. Keep in mind that
the tax years at issue in the case pre-
date the 2002 Sarbanes-Oxley Act.
As part of a corporate restructuring
effort spearheaded by a new CEO, the
company engaged the accounting firm
and an investment banker to explore
strategic alternatives. The investment
Reliance on Accountant Fails to
Forestall Tax Penalty
By Michael R. Redemske, CPA, CSCPA Past President
our clients rely on you for tax advice. Most clients believe that by relying on your advice
they will not only pay less tax, but they will also be protected from accuracy-related
penalties. If the IRS successfully challenges a tax position where the client followed your
well-reasoned advice, the client will assert that he or she had a reasonable basis for taking
that tax position and had relied on the advice of a competent tax adviser.