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Federal Court Rules that Taxpayer Cannot Claim “Privilege” After Claiming Reliance on Professional Advice to Avoid Penalties

A Court of Federal Claims has ruled that a taxpayer cannot claim “privilege” when the taxpayer has already claimed to rely on professional advice to avoid penalties.  As part of the background, the taxpayer was involved in financial transactions as professional services.  Along the way, the taxpayer got involved in Structured Trust Advantaged Repackaged Securities (STARS).

Foreign tax credits in the hundreds of millions of dollars were taken against their tax liability and the taxpayer claimed it was to gain leverage.  The IRS claimed it was a tax shelter.  The court tended to be sympathetic to the taxpayer; however, the fact remained that the taxpayer used the professional advice as a defense and thus waived his rights (under the defense) to “work product protection”.

Editor’s Comment

It is worth mentioning this case because many people use professional advice as a defense to penalties.  Often it is effective, but the defense, no matter when asserted, should be claimed only after it has been thought of strategically and thoroughly.  Often it is tempting to assert the defense on a haphazard basis.  Don’t!

By: Basi & Basi at the Center for Financial, Legal and Tax Planning for Transworld M&A Advisors