The Treasury Department is taking a whack at one of the props of phony tax shelters -- lawyers whose vague opinions help persuade investors that the tax deals are legal.
The shady shelters have become one of the primary targets of both the Justice Department and the Internal Revenue Service: In the last few years, the IRS has identified, according to the Sept. 4 Federal Register (page 58595) 25,000 "abusive" shelters, audited 190,000 individual returns related to them and collected an additional $5.1 billion.
Treasury is getting into the act by trying to clamp down on the lawyers who write questionable legal opinions on the shelters that then are included in sales pitches to investors.
"The investor is buying the lawyer's letterhead," is the way one Treasury official described the practice. Most often the investor doesn't or can't read the highly technical opinion. He or she accepts it with the notion that if a tax return is ever questioned, the legal opinion will show that the taxpayer wasn't out to cheat the government.
Ironically, according to the Register notice, many of the opinions do not flatly say that the tax shelters are legal -- they often hedge by using hypothetical rather than real facts. A few even say the taxpaper would probably lose tax benefits if audited, but cloak that grim finding with the advice that there at least is a "reasonable basis" for trying to get away with it.
The American Bar Association, according to the Register, has shown itself to be "increasingly worried' about lawyers who provide shelter promoters with such opinions. The ABA's concern is not for the clients who are being bilked, however. Rather it is for the "careful" lawyer who has to tell his client that the questionable opinion of another lawyer may be wrong and the tax shelter should be avoided.
Treasury has decided to step into this situation with a proposed rule that probably will draw the ire of the "worried" ABA.
Its key provision would limit lawyers to providing opinions only when they conclude that the "bulk of the tax benefits" promoted by the shelter are allowable under tax law.
Treasury is candid about its motive, noting that "in many tax shelter promotions the true victim is the Treasury." Prohibiting vague opinions, or those that actually question the legality of the promotion, "eliminates use of the opinion as insurance against fraud of negligence penalties if the benefits are ultimately disallowed."