This page explains to our clients the appearance of disclaimer language on almost all communications sent out by Karlin & Peebles, LLP, and its predecessor firm, Karlin & Co, from June 20, 2005 onwards, including letters, reports, memoranda, PowerPoint presentations, emails and other documents, if the communications contain tax advice.
The disclaimers are required to enable us to comply with provisions of regulations promulgated by the Internal Revenue Service that govern the conduct of tax professional. New rules under Circular 230 concerning written tax advice became effective on June 20, 2005. The key language of the disclaimers was developed by a coalition of law firms, including many of the leading law firms in New York.
The text of the disclaimers, which may be modified to suit particular circumstances, is set out in the Appendix to this letter. Because this continues to be a developing field, we may slightly the revise the disclaimers as we would like to follow the practice of these large firms.
The regulations have a well-intentioned goal, namely to prevent professional tax advice from being used by taxpayers to escape penalties for participating in tax shelters and other improper transactions, especially tax shelters of a kind that have been marketed by investment banks, financial advisors and professional firms in the past decade. These shelters attracted a great deal of attention from Congress and the media. Many shelters were supported by opinions from law firms and accounting firms, including some of the largest in America – indeed such opinions were routinely used by tax shelter promoters to persuade clients to sign up for the shelters by promising or suggesting that the taxpayers’ downside would be limited to tax they would have had to pay anyway, plus interest, and that they would be protected against tax penalties because they had relied on advice from well-established professional firms.
Unfortunately, the regulations are almost comically over-broad in the way they define the kind of advice that is a “covered opinion” under the new regulations. For example, without getting into all of the details, routine tax advice may often be covered if we know or expect that a client will use the advice to persuade another person to enter into a transaction. Such advice, if put in writing, may be treated as a “marketed opinion”. Under the regulations, we are not permitted to give a marketed opinion unless we comply with extensive requirements that would raise the cost to you by between five and fifteen times, by our estimate. Advice that would normally cost $5,000 might cost between $25,000 and $75,000. The firm and individual lawyers can be barred from practice as a tax lawyer if it were determined that we have provided a marketed opinion that did not comply with the requirements.
There are only two alternative approaches to providing routine tax advice at a reasonable cost, including advice that you may disclose to third parties in business negotiations: We can either determine that the advice does not fall within the definition of a marketed opinion or any of the other kinds of covered opinions or we can include a disclaimer in the written advice. That disclaimer has to include a notification to you that neither you nor anyone else may use the advice to avoid tax penalties. Marketed opinions have to contain additional disclaimer language that either parrots or closely tracks the language of the regulations.
Unfortunately, the first alternative is not practical. There is simply too little clear guidance under the regulations on which we can lawfully rely to enable us to make a determination of when an opinion is a covered opinion, especially a marketed opinion, in all but the most trivial cases. Treasury officials have made numerous speeches about how the regulations should be interpreted using common sense, but their speeches are just what you would expect from government officials: Hot air, on which neither the IRS itself nor any court would ever permit us or you to rely.
We are not sure, in any event, that common sense can be legislated but until and unless the government backs off and puts in place a less expansive definition of a covered opinion, the only viable solution will be disclaimers of the kind that you will see on our communications. As noted above, the principal form of disclaimer is being crafted not by us but by a coalition that includes many of the leading law firms of the United States and represents a high level response of the profession to the circumstances we face.
Despite the prestige of the authors of the disclaimer and the fact that many reputable law firms will be using the language or something similar, it is embarrassing that we are being forced to tell you that taking advice from us will not protect you from tax penalties, because we try to ensure that the advice we give complies with high standards of professionalism and ethics. But we also cannot risk our professional qualifications and we do not believe our taking such risk is in your interest either. So we promise you that we will continue to serve you and all our clients to the very best of our abilities and we ask you to accept the disclaimer in that spirit. If a matter arises where penalty protection is required and a full-blown opinion is therefore justified, we will be happy to provide it and we should discuss exactly what this will entail in costs and time.
We also take the opportunity to thank you for your confidence in us. We look forward to continuing to work with you.
With very best wishes,
Michael Karlin and Jane Peebles
United States Internal Revenue Service (IRS) Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that, unless and to the extent we otherwise state, any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
You will see this in any written advice if we know or have reason to believe that you may show our advice to a third party, other than a third party who is acting as a professional advisor to you and does not have an interest in the transaction or matter in question.
United States Internal Revenue Service (IRS) Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that, unless and to the extent we otherwise state:
• Any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties under the Internal Revenue Code.
• The advice was written in connection with the promotion or marketing of the transaction(s) or matter(s) addressed by the written advice.
• Any taxpayer who receives this communication should seek advice based on the taxpayer's particular circumstances from an independent tax advisor.