Wednesday, June 24, 2009

Long-term tax advice not "promotion" of tax shelters

Note taking while talking with your Federally Authorized Tax Practitioner (FATP) is still confidential, as long as your FATP is giving advice and not “promoting” a tax shelter.

In a case addressing the confidentiality of notes taken during meetings with a tax professional regarding the tax consequences of certain business transactions, the Tax Court recently decided that the limited privilege of Section 7525(b) of the Internal Revenue Code does not apply to personal notes because they are not written communications given to someone else:

“The notes were not communicated to anyone. Therefore, they do not constitute a written communication that can satisfy that element of the section 7525(b) exception. The FATP privilege accorded to the notes is not subject to the exception in section 7525(b.)”

However, the Tax Court decided that they were privileged anyway because they were not promotions of a tax shelter. The long time relationship between the FATP and the taxpayer weighed against the argument that the FATP was “promoting” a tax shelter and in favor of the argument that the FATP was providing tax privileged tax advice. Noting differences among District Courts in defining the meaning of the term “promotion” in section 7525(b), it turned to the legislative history for guidance. It noted that the conferees of the House and Senate committee stated:

“The Conferees do not understand the promotion of tax shelters to be part of the routine relationship between a tax practitioner and a client. Accordingly, the Conferees do not anticipate that the tax shelter limitation will adversely affect such routine relationships.”

Following this guideline, the Tax Court ruled that the communications from the FATP to his client remained privileged because they were not “promotion” of a tax shelter. The factors it noted were that the FATP:

“has had a long, close relationship with the Winn organization, preparing returns, assisting with tax planning when asked, answering questions when asked, and responding to notices and inquiries from Federal and State tax officials. His advice with respect to the partnership redemptions and associated transactions under review in these cases was furnished (as was similar advice with respect to similar transactions) as part of a long-standing, ongoing, and, hence, routine relationship with the Winn organization.”

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