under §6664 provide that "neither
reliance on the advice of a profession-
al tax adviser nor reliance on facts that,
unknown to the taxpayer, are incorrect
necessarily demonstrates or indicates
reasonable cause or good faith."
firm had set financial ratios the compa-
ny would need to maintain to show that
it could satisfy its obligations under the
indemnity agreement. The firm found
very little guidance in the tax law, other
than some advance ruling parameters
contained in an obsolete, 10-year-old
"irrelevant" and chastised the account-
ing firm for basing its opinion "on such
dubious legal reasoning." The court
was also influenced by the fact that the
contracts and other agreements sup-
porting the transaction did not specifi-
cally require the company to maintain
the financial ratios recommended by
the accounting firm.
accounting firm had a conflict of inter-
est that rendered its advice unreli-
able. It noted that "Courts have
repeatedly held that it is unreason-
able for a taxpayer to rely on a tax
adviser actively involved in planning
the transaction and tainted by an
inherent conflict of interest."
reason to trust the accounting firm's
judgment because of its long-term rela-
tionship with the firm. The court ruled
that the firm "crossed over the line from
trusted adviser for prior accounting
purposes to advocate for a position
with no authority that was based on an
opinion with a high price tag."
drafted the tax opinion.
determine that they complied with the
assumptions used in the opinion.
from the tax assumptions. For exam-
ple, it reviewed state law to determine
if entities were properly formed.
it helped plan.
ed by the size and nature of the fee for
the opinion letter. The company paid
the accounting firm $800,000, which
was not based on hourly billing rates.
While not entirely clear from the facts
presented, the court also believed that
the fee was contingent on the compa-
ny executing the transaction.
ber of times the accounting firm used
the phrase "it appears" when interpret-
ing tax authorities. For example, when
the opinion letter stated "it appears that
such regulations adopt an all or nothing
approach," the court admonished that
the accounting firm "had no basis for
that conclusion other than [its] interpre-
tation of the regulations."
expects an opinion letter to be free of
any expressed opinions.
court, most accounting firms have an
inherent conflict of interest with their
long-term clients. The client relies on
the accounting firm to assist with struc-
turing transactions. That fact alone
tends to put the firm in the position of
rendering tax advice on a transaction
the firm was involved in structuring.
cases in support of its "participation in
the structure leads to conflict of inter-
est" conclusion, virtually all of those
cases involved actively promoted tax
who invested in the shelters were pre-
cluded from claiming reliance on a tax
adviser who was retained by the pro-
moter or who was involved in the struc-
ture and promotion of the shelter.
because their case is heard without the
cost of first paying the tax and then
suing for a refund. Unfortunately, Canal
Corporation is now precedent in the
the issues the court took with the sub-
stance of the accounting firm's opin-
ion. But suppose the court had found
the opinion well-reasoned, but still
disagreed with the conclusion. And
suppose the court had found the fee
paid to the accounting firm reason-
able in amount.
least as interpreted by this court, the
company would still have been unable
to rely on advice provided by that tax
adviser to invoke the reasonable
cause exception to the accuracy-relat-
whether the court thought the conflict
existed with the individual who wrote
the opinion letter or with the entire firm.
It appears the conflict existed with the
firm but since I have no basis for this
conclusion other than my interpretation
of the case, I suppose the court would
find that I am basing my advice on
R. Redemske, CPA
is an instructor in
residence at the
and personal financial planning.