UNITED STATES OF AMERICA (2006)

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UNITED STATES OF AMERICA

DEPARTMENT OF THE TREASURY

INTERNAL REVENUE SERVICE

OFFICE OF PROFESSIONAL RESPONSIBILITY

WASHINGTON, DC

DIRECTOR, OFFICE OF PROFESSIONAL

RESPONSIBILITY,

Complainant,

JOHN M. SYKES, III,

COMPLAINT NO. 2006-1

Respondent.

DECISION

This matter arises from a complaint issued on January 19, 2006, by the Director, Office

of Professional Responsibility, Department of the Treasury, Internal Revenue Service (OPR),

pursuant to 31 C.F.R. 10.60 and 10.91, issued under the authority of 31 U.S.C. 330 (1986),

seeking to have Respondent, John M. Sykes, III, an attorney engaged in practice before the

Internal Revenue Service, suspended from such practice for a period of one year. The

complaint alleges that Respondent failed to exercise due diligence in connection with certain

(b)(3)/26 USC 6103

opinions he issued to

1 on or about Date 1 and Date 2, and that he willfully

engaged in disreputable conduct within the meaning of 31 C.F.R. Part 10, when he issued those

opinions.

Respondent filed a timely answer denying that he engaged in any misconduct and/or

that he has engaged in any disreputable conduct and asserting that this proceeding is timebarred under the statute of limitations provided in 28 U.S.C. 2462 because the alleged

misconduct occurred more than five years prior to issuance of the complaint.

A hearing was held in Washington, DC, on September 18 through 20, 2007, at which the

parties were given a full opportunity to examine and cross-examine witnesses and to present

other evidence and argument. Proposed findings of fact, conclusions of law, and supporting

reasons submitted by the parties have been given due consideration. Upon the entire record

and my observation of the demeanor of the witnesses, I make the following

Findings of Fact

Respondent is a tax attorney who has been associated with the State #1 office of the law

firm of Attorney & Attorney (A&A) since Date 4 and has been a partner in that firm since Date 3.

He has an LL.M. degree in tax from NYU Law School and has over 30 years of experience in a

practice specializing in the tax aspects of (b)(3)/26 USC 6103 . Partner 1, a retired A&A partner

who also specialized in the tax aspects of (b)(3)/26 USC 6103 and who worked with

(b)(3)/26 USC 6103

Respondent for many years, described him as one of the brightest tax attorneys he has ever

met. Tax Attorney 1, a tax attorney and financial advisor with extensive experience in private

practice, Government, and academia, testified that he regarded Respondent “as one of the best

tax lawyers I’ve worked with.” In its post-hearing brief, OPR states that “Respondent is an

acknowledged expert in the area of the tax law at issue in the underlying case,” which gave rise

to the complaint in this proceeding. Respondent first became involved with what led to the

underlying case when he was part of an A&A team that worked on (b)(3)/26 USC 6103

were designed by Tax Attorney 1 and the financial

advisory firm of Advisory Firm #1 for its client Corporation #1 and involved Corporation #1’s

(b)(3)/26 USC 6103

. In Date 5, Corporation #1 sought the assistance of Advisory Firm

(b)(3)/26 USC 6103

. Previously, Corporation

(b)(3)/26 USC 6103

. Under

(b)(3)/26 USC 6103 devised by Advisory Firm #1 in

(b)(3)/26 USC 6103

In addition to

the economic benefits flowing to Corporation #1 and others in these transactions, they were

(b)(3)/26 USC 6103

designed to create

In order for the transactions to have the desired effects, it was essential that (b)(3)/26

USC 6103

(b)(3)/26 USC 6103

the factors to be considered in determining

(b)(3)/26 USC 6103

. Among

(b)(3)/26 USC 6103

As the

were being formulated in early Date 5, A&A was

retained by Advisory Firm #1 to advise it on structuring the transactions and to provide opinions

(b)(3)/26 USC 6103

on the

. The A&A team was under the direction of firm Partner

1 and Respondent, at that time an associate attorney of the firm, was part of that team. 4 The

credited testimony of Partner 1 and Respondent and the documentation in the record

(b)(3)/26 USC 6103

3 Partner 1 estimated that, as of Date 5, he had worked on between 50 and 100 tax opinions

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involving the subject of “ (b)(3)/26

.”

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4 The law firm of Law Firm #3 served as co-counsel and assisted in putting these

transactions together.

establishes that the A&A team and its co-counsel sought to identify all of the legal issues likely

to be involved and that they conducted extensive legal research and analyses of the tax statutes

and common law doctrines reasonably expected to have an impact on (b)(3)/26 USC 6103

before A&A issued any opinions. These included Internal Revenue Code (Code) Sections 269,

446, and 482, and the common law doctrines of business purpose, economic substance,

substance- over-form, step transactions and sham transactions.

One of the important factors in the analysis done by A&A was an appraisal of the

(b)(3)/26 USC 6103 .

(b)(3)/26 USC 6103

Partner 1 and

Respondent were involved in selecting the appraiser of the (b)(3)/26 USC 6103 . After

interviewing four appraisal firms, the firm of Appraisal Firm #1 was chosen and Appraiser #1 did

the appraisal of the (b)(3)/26 USC 6103 . Partner 1 testified that they closely examined all of

the appraisal firms and concluded that Appraisal Firm #1 had the needed experience in the

(b)(3)/26 USC 6103 area. Respondent testified that he reviewed a draft of Appraiser #1’s

appraisal to assure that it was internally consistent and that it provided the answers needed to

evaluate the tax consequences of (b)(3)/26 USC 6103 . He also discussed the appraisal with

Appraiser #1 and had him explain any parts that were unclear. Partner 1 testified that because

(b)(3)/26 USC 6103

he had not dealt with

before he wanted someone else with

experience in that area to review the Appraisal Firm #1 appraisal to give him “some level of

comfort” that the approach used and the value determined by Appraisal Firm #1 were correct

and that its conclusions were reasonable. The firm of Accounting Firm #1, with whom Partner 1

had previously dealt, was selected to review the Appraisal Firm #1 appraisal. Accounting Firm

#1 concluded that the Appraisal Firm #1 appraisal followed generally accepted appraisal

procedures, the conclusions in the appraisal were reasonable, and that the methodology used

(b)(3)/26 USC 6103

to determine

Ultimately, A&A issued five written opinions signed by Partner 1 concerning the federal

(b)(3)/26 USC 6103

tax consequences of

August Date 5 and

(b)(3)/26 USC 6103

July Date 6. Those opinions concluded that

(b)(3)/26 USC 6103

These opinions were issued as “short form” opinions, meaning that they contained a

detailed recitation of the facts and conclusions relating to the particular transaction but did not

contain a written legal analysis. Partner 1 testified that in his experience clients in (b)(3)/

26 USC 6103 preferred to have, and A&A always issued, short form opinions. He said that much

of the legal analysis in the firm’s Same practice

was similar and cumulative and involved a

___

_ _

___ developed in connection with other (b)(3)/

collection of materials in the firm’s files which_were

26 USC 6103 , sometimes, dating back several years.___

(b)(3)/26 USC 6103

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These (b)(3)/26

opinions were issued at the “more likely than not level,” which Partner

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1 testified means that there is at least a 51 percent chance that the conclusions in a tax opinion

given to a client are correct and that if the case went to court, was properly tried, and all of the

facts and law were understood by the tribunal, that is what the result would be. This is

contrasted with a “reasonable basis” opinion which has a 25 percent chance that it is correct, a

“substantial authority” opinion which has about a 40 percent chance, a “should” opinion which

has a 75 to 80 percent chance, and a “will” opinion which has about a 95 percent chance.

5 Respondent testified that the

(b)(3)/26 USC 6103

A&A did not feel a need for a review of that appraisal.

was simpler and

The next steps in

(b)(3)/26 USC 6103

On (b)(3)/26 USC 6103 , the IRS had (b)(3)/26 USC 6103 in which it announced its

intention to challenge losses claimed as a result of lease stripping transactions. The notice

indicated that new regulations might be issued and also stated that the IRS may apply various

specified sections of the Code and corresponding regulations to such transactions, as well as,

common law principles, including, the business-purpose doctrine, the substance-over-form

doctrine, and the step and sham transaction doctrines, to existing transactions.

(b)(3)/26 USC 6103

A&A had acted as counsel to Advisory Firm #1 on

(b)(3)/26 USC 6103

Date 5 and August Date 6. It provided

[Same] opinions signed by Partner 1 which were based on

the

(b)(3)/

(b)(3)/26 USC 6103 . Other counsel for the

the work done in connection with

26 USC

used these (b)(3)/26 opinions in issuing their own opinions advising the clients

6103

USC 6103

(b)(3)/26 USC 6103

concerning the

The tax opinions authored by the Respondent which led to the complaint in this matter

(b)(3)/26 USC 6103

concern the

which in

(b)(3)/26

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6103

Date 3 requested that A&A provide it with opinions as to

. Respondent authored and signed those Same

opinions and OPR alleges that in doing so he failed to exercise due diligence and engaged in

disreputable conduct.

The Same opinions authored by Respondent were short form opinions. They opined that

(a)

(b)

and (c)

(b)(3)/26 USC 6103

In Date 7,

(b)(3)/26 USC 6103

7 The firms were Law Firm #5, Law Firm #4, and Accounting Firm #2.

(b)(3)/26 USC 6103

(b)(3)/26 USC 6103 challenged the IRS’s determinations in the U.S. District Court for the

(b)(3)/26 USC 6103

District of State #2 and lost. The court held that

The court also held that

(b)(3)/26 USC 6103

. Because of that, the

court did not reach the question of whether

(b)(3)/26 USC 6103

. (Redacted opinions concerning third party.)

Following the trial and decision in the district court in the (b)(3)/26 USC 6103 tax case, the

Department of Justice, which had represented the IRS in that proceeding, referred this matter to

OPR which subsequently issued the complaint against Respondent.

Analysis and Conclusions

While the Respondent admits to having engaged in “limited practice” before the IRS, he

does not concede that the matters involved here constitute practice before the IRS or make him

subject to the federal statute, 31 C.F.R. U.S.C. 330, and the regulations at 31 C.F.R. Part 10

governing such practice. 8 However, he has not pursued this contention in his post-trial brief.

Section 10.2(d) of 31 C.F.R. broadly defines practice before the IRS to include all matters

(b)(3)/26 USC

connected to a presentation to the IRS or any of its officers and employees relating to a

6103 ___

___

__ taxpayer’s rights, privileges, or liabilities under the federal tax laws. The ultimate purpose of the

(b) opinions prepared by Respondent which are the subject matter of this proceeding was to

(3)/26

(b)(3)/26 USC 6103

convince the IRS that

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6103

expected to be a part of the

. I find that the opinions were intended and were reasonably

(b)(3)/26 USC 6103

and that Respondent’s preparation of those opinions

constituted practice before the IRS. Consequently, I find that Respondent is subject to the law

and regulations governing such practice.

Inasmuch as OPR seeks to suspend Respondent from practice before the IRS for a

period of one year, 31 C.F.R. 10.76(a) requires that “an allegation of fact that is necessary for a

finding against the practitioner must be proven by clear and convincing evidence in the record.”

While not defined in Circular No. 230, a generally accepted definition of clear and convincing

evidence is that it requires a degree of proof which will produce in the mind of the trier of fact a

firm belief as to the allegations sought to be established. It is more than a mere preponderance

but less than proof beyond a reasonable doubt. Jove Engineering, Inc., v. IRS. 92 F.3d 1539,

1545 (11th Cir. 1996); Hobson v. Eaton, 399 F.2d 781, 784 fn. 2 (6th Cir.1968). The allegations

The regulations are contained in what is known as Treasury Department Circular No. 230.

The current version of Circular No. 230 was last revised in 2005 and contains the procedural

rules applicable to this proceeding. The 1996 version was in effect when Respondent’s (b)(3)/

___

opinions were issued and govern this proceeding.

___

(b)(3)/26 USC 6103

must be proven to a “high probability.” Waits v. Frito-Lay, Inc., 978 F.2d 1093, 1105 (9th Cir.

1992).

The complaint alleges that Respondent failed to exercise due diligence in violation of 31

(b)(3)/26 USC 6103

C.F.R. 10.22(a) and (c) when he authored the five

in which he failed to analyze, and advise his clients of, relevant facts, law, and regulations

that could have had an effect on (b)(3)/26 USC 6103 . Specifically, it alleges that (1) the

(b)(3)/26 USC 6103

opinions contained no analysis of

; (2) the opinions contained no analysis of the

; (3)

(b)(3)/26 USC 6103

the opinions contained no analysis of

; (4) Respondent did not make sufficient inquiries to determine whether the

assumptions contained in the opinions were correct; and (5) Respondent did not make sufficient

(b)(3)/26 USC 6103

inquiries to determine whether the

(b)(3)/26 USC 6103

and whether

. The complaint also alleges that when Respondent

authored the (b) opinions without performing due diligence he willfully engaged in

disreputable (3)/26

conduct within the meaning of 31 C.F.R. 51.

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6103

Section 10.22 of 31 C.F.R., Diligence as to accuracy, provides:

Each attorney, certified public accountant, enrolled agent, or enrolled actuary

shall exercise due diligence

(a) In preparing or assisting in the preparation of, approving, and filing returns,

documents, affidavits, and other papers relating to Internal Revenue Service

matters;

....

to clients with reference to any matter administered by the Internal Revenue

Service.

Section 10.52 of 31 C.F.R., Violation of regulations, provides:

A practitioner may be disbarred or suspended from practice before the Internal

Revenue Service for any of the following:

(a) Willfully violating any part of the regulations contained in this part.

While the term “willful” is not defined in the regulations, its use in the Treasury laws has

consistently been held to mean, in both civil and criminal contexts, the “voluntary, intentional

violation of a known legal duty.” E.g., United States v. Pomponio, 429 U.S. 10, 12 (1976);

Thibodeau v. United States, 828 F. 2d 1499, 1505 (11th Cir. 1987). Consequently, OPR does

not have to show that Respondent acted with malicious intent or bad purpose, only that he

purposefully disregarded or was indifferent to his obligations.

OPR has established that Respondent was aware of his client’s purpose in

(b)(3)/26 USC 6103

(b)(3)/26

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6103

, that

(b)(3)/26 USC 6103

was aware of

when he authored those opinions, and that he was familiar with the requirements of

Treasury Regulation 1-6664-4, which provide standards as to when a taxpayer may rely on the

advice of tax advisors as evidence of reasonable cause and good faith for purposes of avoiding

substantial understatement of income penalties with respect to tax shelter items. The regulation

requires that the advice take into account all relevant facts and circumstances, including the

taxpayer’s purpose in entering into and structuring the transaction, and must not be based on

any unreasonable factual or legal assumptions or representations. OPR asserts that in

preparing and issuing the

opinions Respondent willfully failed to meet the duty of due

(b)(3)/26 USC and to the Internal Revenue Service and by so

diligence owed to its client

6103

doing he engaged in disreputable conduct.

(b)(3)/26 USC

6103

Specifically, OPR asserts that using the short form opinions, which contained “facts,

assumptions and conclusions without setting forth any analysis,” put (b)(3)/26 USC 6103 at risk

because they did not show that all relevant information had been taken into account and they

(b)(3)/26 USC 6103

did not provide adequate documentation to justify

. It asserts that Respondent failed to exercise due diligence because he

(b)(3)/26 USC 6103

knew that the IRS had

before he issued the

(b) opinions, but the opinions he issued did not indicate that

(b)(3)/26 USC 6103

(3)/2

. The opinions failed to

and did

6 discuss the various statutes and common law doctrines

(b)(3)/26 USC 6103

not

USC

(b)(3)/26 USC 6103 .

(b)(3)/26 USC 6103

or how they might

6103

They did not show the due diligence performed in arriving at the conclusions as to (b)(3)/26

USC

6103

of the opportunity to make an

(b)(3)/26 USC 6103

. This deprived

informed decision whether or not

(b)(3)/26 USC

6103 ____

(b)(3)/26 USC 6103

Respondent credibly testified as to the due diligence he performed in connection with the

(b) opinions he issued to (b)(3)/26 USC 6103 and introduced numerous documents on which

(3)/2

relied in arriving at his opinions, which were not included a part of those “short form”

(b)(3)/26 USC 6103

opinions.

These opinions dealt with

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He said that prior to the

6103

issuance

of those opinions he needed to consider several things to reach his conclusions as to

(b)(3)/26 USC 6103

OPR asserts that Respondent failed to exercise due diligence because he failed to make

sufficient inquiries concerning the correctness of certain of the assumptions contained in the

(b)(3)/26 USC 6103

opinions. In addressing the issue of whether

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he included two assumptions that had not been contained in the earlier (b)(3)/26

6103

(b)(3)/26 USC 6103

opinions issued by A&A, i.e., “Assumption (S)” which stated that

and

(b)(3)/26 USC 6103

“Assumption (V)” which stated that “

.” However, he did not explain why these assumptions

were reasonable and he did not secure such representations from (b)(3)/26 USC 6103 but

relied on representations from Advisory Firm #1 which was not a disinterested party but one

with a considerable interest in the outcome of the transactions. It asserts that Respondent

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failed to reconsider and update the legal analysis underlying the (b)(3)/26

opinions he relied

6103

on and that he failed to resolve questions about the reliability of the appraisals done by

Appraisal Firm #1 in connection with those opinions.

(b)(3)/26 USC 6103

OPR did not present any witnesses with any direct knowledge of (b)(3)/26 USC 6103

(b)(3)/26 involved here, the interaction between Respondent and his client (b)(3)/26 USC

6103

USC

(b) , 6103

or the preparation of the (b) opinions it alleges constitute disreputable conduct. Rather,

it(3)/2

chose to rely on the opinions, (3)/2

which it apparently contends speak for themselves and

establish misconduct on Respondent’s

part. First, OPR asserts that Respondent’s use of “short

USC

(b)(3)/26 USC 6103

form” opinions with respect to

was

6103

inappropriate and shows a lack of due diligence on his part, or at least constitutes evidence of a

lack of due diligence. The evidence in the record does not support that view. On the contrary, it

establishes that use of the short form opinion at that time was the accepted norm.

Respondent testified that prior to making partner at A&A and issuing the opinions in

question in Date 3; he had assisted other firm partners in the preparation of dozens of tax

opinions, the vast majority of which were short form. No client had ever rejected the use of the

short form and he was aware that other members of the tax bar used short form opinions. He

knew of no IRS guidelines prohibiting the use of short form opinions until Circular 230 was

amended some years after 2000 to require that “covered” opinions be in writing and set forth the

reasoning underlying the opinion. Since the amendment, he has not used the short form for the

opinions he has issued in order to comply with those requirements.

Respondent also presented the testimony of Larry Langdon, whom I find was qualified

as an expert witness. Langdon has extensive tax law experience with the IRS, corporations,

private practice, and professional associations. This experience included 22 years as the chief

tax officer of Hewlett-Packard Corporation where he had the opportunity and responsibility to

review tax opinions prepared by a number of the leading U.S. and international law firms. His

IRS experience included serving as its Commissioner of the Large and Midsized Business

Division dealing with corporate tax shelter activity. In that position, he was involved in drafting

guidelines for practitioners which were issued by the IRS. He established his familiarity with the

use of opinions provided to taxpayers by outside counsel and with the published requirements

of the IRS with respect to such opinions, including those in Circular 230.

Langdon testified that while, ideally, a taxpayer might prefer to receive a long form

opinion detailing all of the facts, all of the possible contingencies, and all of the legal issues, as

(b)(3)/26 USC 6103

a practical matter, when A&A provided

it was typical

and an accepted practice for outside counsel to use the short form. He described the short form

opinion as the “gold standard of opinion writing at that point in time.” He said that several

factors drove tax practitioners to favor the short form, including, the time and expense involved

in preparing a long form opinion and the need for reasonably quick guidance as whether to go

ahead with a transaction or not. This led the opinion authors to concentrate on the key issues of

strategic importance, “rather than in effect writing a law review article about issues that might

arise at some later point. He testified that a short form opinion did not fail to meet the

requirements in Circular 230 which did not require an opinion to set forth a law firm’s legal

analysis underlying the opinion. He also testified that he reviewed opinions issued by the law

firms of Law Firm #3, Law Firm #4, and Law Firm #5 concerning aspects of (b)(3)/26 USC 6103

in issue here and that those opinions were short form opinions. There is no

evidence that any of those opinions were alleged to be inappropriate or inadequate.

Langdon testified that, in addition to the opinions of the above-mentioned law firms, he

(b)(3)/26

USC 6103

{

(b)(3)/26 USC

6103

(b)(3)/26

USC 6103

the

opinions Respondent prepared, background memos and files, draft memos

{ reviewed

and notes, and valuation reports relating to the transactions. He said that, in his opinion, the

(b)

(3)/2

6 underlying the (b) opinions issued by Respondent to (b)(3)/26 USC 6103

quality of the work

USC

was very thoughtfully done, it did a(3)/2

good job of analyzing the underlying facts, and it met an

6103 of legal efficacy6 for the positions that the (b) opinions were supporting, at

acceptable standard

USC not” level. He said that (3)/2

either the “should” or “more likely than

the (b) opinions were “clearly

6103

6 (3)/2 he saw while serving

within the top tier, clearly within the top 15, 20 percent of all the opinions”

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as counsel at Corporation #2.

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6103

Partner 1, another experienced tax attorney, testified that he

had authored between 50

and 100 short form opinions in his practice before the (b) opinions

were issued. He said that,

_________________________________

(b)(3)/26 USC

in his experience, clients preferred short form opinions(3)/2

which contained a description of the

6103

facts, any assumptions that were made, and the conclusions.

The detailed legal analysis of a

transaction contained in the issuing firm’s files was notUSC

made a part of the short form opinion;

6103

consequently, such an analysis, discussing not only the

pros but also the cons of a transaction,

would not be accessible by a taxing authority examining the transaction. Technical Advisor #1,

an IRS technical advisor for tax shelters, called as a witness by OPR, testified that she was

aware that prior to the year 2002, short form opinions were commonly issued by law firms on tax

issues and she was not aware of any rules prohibiting their use. The regulations in Circular 230

were revised, effective December 20, 2004, to require that opinions “relate the applicable law

(including potentially applicable judicial doctrines) to the relevant facts.” 31 C.F.R. 10.35(c)(2).

As Respondent’s brief points out, such a revision would have been unnecessary if this were

already required by the due diligence standard in Circular 230. Moreover, Treasury Reg. 16664-4(c), concerning the standards for reliance by a taxpayer on professional advice for

penalty protection, states that such advice “does not have to be in any particular form.” I find

that OPR has failed to establish that Respondent’s use of short form opinions was inappropriate

or is evidence of a lack of due diligence. 9

It is with this in mind that OPR’s other contentions must be considered. OPR contends

that Respondent failed to exercise due diligence because he failed to mention in his (b)(3)/

(b)(3)/26 USC 6103

opinions that the (b)(3)/26

USC 6103 and because he was aware of but did not discuss in those opinions

(b)(3)/26 USC 6103

This, it asserts, deprived (b)(3)/26 USC 6103 of the opportunity to make an informed decision

(b)(3)/26 USC 6103

regarding whether

I find there is no factual basis for this assertion in this

record. As noted, OPR did not call any representative of (b)(3)/26 USC 6103 as a witness or

present any other evidence tending to establish that (b)(3)/26 USC 6103 was not aware that the

(b)(3)/26 USC 6103

or that the information available to it was not sufficient to make an

USC

informed decision about whether (b)(3)/26

. Respondent’s credible and uncontradicted

6103

testimony was that during his first meeting with representatives of (b)(3)/26 USC 6103 to discuss

USC

the possibility of representation, he discussed (b)(3)/26

with Accountant #1, an accountant

6103

(b)(3)/26

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6103

and tax attorney who served as

Tax Director. Aside from this, it is simply

(b)(3)/26 USC 6103

unreasonable to assume that (b)(3)/26 USC 6103 , which was

. That knowledge was no

9 I find that the comments of the judge in the

case about Respondent’s

opinions to be of little persuasive value since there is no indication that she was aware of the

due diligence undertaken by Respondent but not a part of the short form opinions.

(b)(3)/26 USC 6103

doubt one of the reasons why

(b)(3)/

Further evidence that (b)(3)/26 USC 6103 was made aware of

is contained in a

memo Respondent caused to be sent to Accountant #1, dated 26 USC 6103 , Date 3, which had

an attached copy of a portion of an opinion letter A&A had issued to another taxpayer in

(b)(3)/26 USC

(b)(3)/26 USC 6103

Date 6,

6103

.”

More importantly, the evidence shows that Respondent was aware (b)(3)/26 USC 6103 and

had analyzed the statutes and legal doctrines (b)(3)/26 USC 6103 before he issued the (b)

opinions. The documentation in the record and testimony of Respondent and Partner 1(3)/2

establishes that they and other members of A&A had worked together closely in doing the

(b)(3)/26 USC

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extensive research and analysis leading to the

opinions that Partner 1 issued to

6103

(b)(3)/26 USC 6103

Advisory Firm #1 in Date 5 and Date 6, which concluded that the

(b)(3)/26 USC 6103

and that the

. Neither the extent nor the quality of the due diligence underlying these opinions is

questioned here. The evidence shows that in the course of their research and analysis they

recognized the possible applicability and considered each of the following statutes and common

(b)(3)/26 USC 6103

law doctrines which

Date 6: Code Sections 269, 446(b), and 482; business purpose doctrine; economic

substance doctrine; and substance-over-form doctrine, including the step and sham transaction

doctrines.

(b)(3)/26_USC

___

6103

Although obviously pertinent to the some of the issues Respondent would later address

in his (b) opinions, OPR dismisses this work as not relevant to whether Respondent engaged

in due(3)/2

diligence in preparing those opinions and says that, even if it was relevant, that due

6 “needed to reconsidered and updated to ensure that the legal analysis was still valid at

diligence

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(b)(3)/26 USC 6103

the time of

.” It does not say why.

6103

(b)(3)/26 USC 6103

The evidence shows that A&A had already considered those statutes and

legal doctrines and concluded that they did not apply or, as in the case of the step transaction

theory, specifically structured the transactions so that it did not apply. Respondent has also

(b)(3)/26 USC 6103

established that

or required further

consideration before he reached the conclusions set forth in the (b) opinions. Respondent

(3)/2

testified that this was the case, as did an expert witness Expert Witness

#1, a tax attorney with

(b)(3)/26

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6103

over 30 years of experience primarily in the area of

, who said that “the

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(b)(3)/26 USC 6103

things that defined

.” OPR’s witness

6103

Technical Advisor #1 also agreed with that proposition. OPR asserts that this argument is

“unpersuasive,” but it presented no evidence or authority to the contrary.

As a part of its argument that Respondent needed to reconsider the due diligence

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performed in connection with (b)(3)/26

opinions, OPR asserts that Respondent failed to

6103

make sufficient inquiries to determine the correctness of two of the assumptions contained in his

_ (b) opinions which were not part of the previous opinions. It contends that these assumptions

___

(b)(3)/26 USC 6103

(3)/2

concerning

the

were not reasonable. It asserts that he failed to

(b)(3)/26 USC

(b)(3)/26 USC 6103

contact

the

appropriate

parties

confirm

that

they

, but

6103

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accepted, without question, the representations of Advisory Firm #1, which had a financial

6103

interest

in the transactions which it had promoted, as to (b)(3)/26 USC 6103 . It also asserts that

(b)(3)/26 USC 6103

the appraisal of the

were

based was deficient and that it was unreasonable to rely on it.

I find that the evidence fails to establish that Respondent’s reliance on representations of

Advisory Firm #1 was unreasonable as matter of law because it had a financial interest in these

transactions. On the contrary, the credible and uncontradicted evidence was that Advisory Firm

#1 was a leading firm in (b)(3)/26 USC 6103 with a reputation for professionalism and integrity.

Expert Witness #1 testified that he was familiar with the firm and its personnel and described it

as “absolutely first rate,” and having an excellent reputation as a firm that would get a job done

right and would have more knowledge about the transactions involved than most of the

participating parties. He was asked if he would rely on a representation from Advisory Firm #1

in (b)(3)/26 USC 6103 in which he represented one of the parties and said that he “would rely

on their representation regarding financial matters.” Partner 1 testified that Advisory Firm #1

was the pre-eminent firm in its field and that he “felt very comfortable relying on any

representation they made.” He said that Advisory Firm #1’s position in (b)(3)/26 USC 6103 was “so

exalted” that it could not afford to provide anything but “an accurate and thorough

representation.” Respondent, likewise, testified that he was aware of Advisory Firm #1’s

standing in the industry. He said that when he was given the representation that Advisory Firm

(b)(3)/26 USC 6103

#1 had provided one of (b)(3)/26 USC 6103 involved in

he felt that he

could reasonably rely on it in reaching his opinion because it would not make a statement as to

a fact or a financial analysis it did not believe it could stand behind. The evidence here

indicates that a representation made by Advisory Firm #1 would be at least as reliable as a

representation by a party who stood to gain by establishing that it had an expectation of a nontax benefit from the transaction. The cases cited by OPR as purportedly establishing the

unreasonableness of reliance on representations by the promoters of a transaction or their

agents are all factually distinguishable from the situation presented here. But in any event,

Respondent has shown that he did not than uncritically accept representations from Advisory

Firm #1.

Respondent testified that he had reviewed (b)(3)/26 USC 6103

(b)(3)/26 USC 6103

in the record that

. For each transaction, he had

(b)(3)/26 USC 6103

examined and analyzed

(b)(3)/26 USC 6103

and, in turn, that of the

(b)(3)/26 USC 6103

and determined that it

(b)(3)/26 USC 6103

also had

. The transaction he

(b)(3)/26 USC 6103

discussed in detail in his testimony involving

(b)(3)/

. He said he was also aware of due diligence

(b)(3)/26 USC 6103

which included an opinion obtained fro the

law firm of Law Firm #5 concerning the (b)(3)/26 USC 6103

and he drew on his own

knowledge of the transactions.

Key to the question of whether the

(b)(3)/26 USC 6103

According to

Partner 1, the appraisal of that value was “the fundamental factual reference point” from which

the tax opinions issued by A&A flowed. OPR contends that A&A did not investigate the

appraiser’s qualifications and had “reservations” about the appraisal obtained from Appraisal

Firm #1. Therefore, Respondent should have done something more to assure that the

appraised values were accurate before he issued his (b) opinions.

The evidence does not

____________________________

(3)/2any of the numerous parties or (b)(3)/26 USC

support that contention. In fact, there is no evidence that

attorneys involved in these transactions ever questioned6 the accuracy of the appraisals. 6103

USC

Respondent and Partner 1 credibly testified that they interviewed

four appraisal firms and

6103

according to Partner 1 made an “extensive” examination of their qualifications before selecting

Appraisal Firm #1. OPR’s contention is apparently based on the fact that after A&A received

and analyzed the Appraisal Firm #1 appraisal it engaged Accounting Firm #1 to review it as

well. Partner 1 credibly testified that he did this because he had not used Appraisal Firm #1

(b)(3)/26 USC 6103

before, he had not done

before, and he wanted

assurance that the approach used and the value determined by Appraisal Firm #1 was

reasonable. There is no evidence that A&A believed that the Appraisal Firm #1 appraisal was

not accurate or that its methodology was flawed in any way. Contrary to the assertion by OPR,

it does not appear that A&A placed significant restrictions on Accounting Firm #1’s review of the

appraisal. It was not seeking a second appraisal, only confirmation that the methodology

employed and the conclusions reached were reasonable. That is what it got. It appears that

OPR now faults Respondent for not doing the same kind of due diligence that A&A had already

done. I find that OPR has failed to prove by clear and convincing evidence that Respondent’s

use of the assumptions it questions in his (b) opinions was unreasonable or amounted to a

(3)/2 ____

lack of due diligence on his part.

(b)(3)/26 USC 6103

USC

Conclusions of Law

6103

I find that OPR initiated this disciplinary proceeding based on the fact that Respondent

used short form opinions in advising (b)(3)/26 USC 6103 concerning (b)(3)/26 USC 6103

. It has provided little more than

that fact as the evidence in support of its complaint allegations and has failed to prove any of

those allegations by clear and convincing evidence, as required by Circular No. 230. 10

Respondent’s evidence establishes that use of the short form opinions was an accepted

practice at the time they were issued, and more important, that he had done the due diligence

necessary to support the conclusions contained in those opinions. Accordingly, I find that OPR

has not proved that Respondent failed to meet the requirements of the regulations or that he

(b)(3)/26 USC 6103

willfully engaged in disreputable conduct when he issued those

. I find that the complaint should be dismissed. 11

On these findings of fact and conclusions of law and on the entire record, I issue the

following

ORDER 12

The complaint is dismissed in it entirety.

Dated, Washington, D.C. January 29, 2009

____________________

Richard A. Scully

Administrative Law Judge

10 Respondent has repeatedly questioned OPR’s good faith in bringing this proceeding.

However, it appears that if he had been more forthcoming during OPR’s investigation of his

(b)(3)/26

conduct in preparing USC

opinions, this complaint might not have been issued.

6103

11 Having found that Respondent did not engage in any misconduct, I find it unnecessary to

reach the question of whether or not the statute of limitations in 28 U.S.C. 2462 is applicable to

this proceeding.

12 Pursuant to 31 C.F.R. 10.77, either party may appeal this Decision to the Secretary of the

Treasury within thirty (30) days of its date of issuance.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.