In the past, if we used an opinion letter to prove that we relied on the counsel of a professional advisor to devise a tax-mitigation strategy that the IRS later ruled to be improper, the government would only demand the actual taxes due. Because it would not levy an additional penalty, we assumed very little risk. The new rules change that. IRS Commissioner Mark W. Everson says the new rules attempt to quash what he called the “lucrative trade in opinion letters, which taxpayers buy in the expectation that they can get penalties waived if their strategy is disallowed.” The new regulations also bar a taxpayer from relying on opinion letters from advisors who have a financial interest in the tax-minimization transaction. For example, a lawyer affiliated with an advisor who would win a deal (say an asset management mandate) on the basis of the transaction’s tax benefits could not issue an opinion letter on it. Also, it has been common practice for law firms to actually earn commissions on transactions they bless with opinion letters. This is no longer tolerated.

Although many have applauded the new regulations as a needed reform, their unfortunate byproduct is the fear and hardship they have created for those who have already engaged in legitimate strategies. Many wealthy families and successful business owners are therefore settling for ultraconservative approaches, reluctantly passing on legitimate tax savings. The fear of attracting unwanted attention also has restricted the creativity of many financial planners, leaving them reluctant to structure even nonaggressive strategies that could further a client’s wealth preservation goals. If legal opinion letters cannot provide comfort, what will?