A Successful Tax Plan

Monday was one of the best days I have enjoyed at work in a long time
Two wonderful things happened on the same day. Even the timing was perfect: one celebration occurred in the morning and the other in the afternoon.

The morning celebration was about the conclusion of a successful tax plan. It was not smooth sailing. The tax plan limped across the finish line battered and bruised but intact.

The afternoon celebration was about a struggling client becoming an overnight success. I will write that newsletter soon. It is quite a story!

This newsletter is about perseverance as an essential part of tax planning, and is, of course, shared with our clients’ permission.

The morning 
About 10AM, two delightful and talented young women notified me by email that a tax plan we put in place March 31, 2020 was approved by the IRS. The 2020 tax savings of this tax plan was $1.5 million. They were delighted; I was delighted. Everybody danced!!

The tax planning process did not go smoothly
There is a category of tax planning that requires advance IRS approval. On behalf of the client, I laid out the facts and circumstances in detail and explained to the IRS why we believed this tax plan to be within the framework of the Code.

Initially, the IRS approved the tax plan effective for the Tax Year 2021. That’s good. Great, even. This is a complex tax plan that will enjoy a long-term multi-year payoff worth millions of dollars. I am happy.

But… I really needed this to be effective for the Tax Year 2020. $1.5 million for 2020 is serious money. I know that 2021 and future years represent a lot more tax savings than a single tax year, but I want the tax savings to apply to 2020!

The IRS said no.

The tax plan
Getting advance approval from the IRS on a tax plan this rich is, to be honest, dicey. Clay Staggs and I estimated that IRS approval was a 50-50 proposition. We elected to pursue IRS approval on the ‘nothing ventured, nothing gained’ tax theory.

In this case, advance IRS approval was not optional. It was required by IRS Revenue Rulings and Revenue Procedures. Many tax plans require advance IRS approval.

The tax compliance team
This plan could not have happened without Clay Staggs. Clay is our firm’s tax attorney and a vital part of any complex tax compliance or tax planning issue.

The other vital part of our tax planning team is our client. These are careful and knowledgeable women who do their due diligence and know when they have reached the limits of their understanding in tax matters. They ask the right questions, consider the answers over several days before responding, and often ask for clarification. The client is a key part of the tax planning team.

A complex client
This client came to us with complex business and tax problems: a new client company, subsidiary companies, foreign shareholders, and a complex business plan. Our first job as their CPA Firm was to help them execute their business plan, which included buying out all foreign shareholders and rolling the subsidiary companies into the parent company. Clay and I, at or near the same time, saw a possible corporate reorganization and a golden tax planning opportunity.

Client communications
When we first submitted our ‘tax plan’ to the client, Clay and I both considered that it would be automatically approved (as if any advance ruling from the IRS is automatic). The obvious selling point is a 2020 tax savings of $1.5 million. Initially, Clay and I believed that we had a near-100% probability of IRS approval for this tax plan.

After discussing our tax plan, the client said, ‘Obviously, you and Clay have our best interest at heart, so, yes, we agree with the plan.’ Good client communications are important.

Problems
This is a complicated client with complex tax issues. Foreign shareholders (yikes!) add in a dozen other factors, so in time it became obvious to Clay and me that this was not going to be a slam dunk. The more research we did, the more problems we discovered. We got to the last possible day to file for an IRS ruling and make the plan work.

50-50
In tax law there is a code of ethical conduct known a Circular 230. Circular 230 has a standard that any tax return position we take, if audited by the IRS, must be “More Likely than Not” have a “greater than 50% probability of success” if audited.

That standard colors how CPAs and tax attorneys approach tax problems.

Clay and I, after discussion, decided that we had an honest 50-50 chance of success.

Ironically the Circular 230 “More Likely than Not” standard does not apply when one seeks advance IRS approval. Even so, the 50-50 discussion is always in the background of any tax planning activity. We met that standard. Thank God, with all the facts disclosed, the IRS agreed. It is more accurate to say that, initially, the IRS agreed with us in part but not in whole.

The last possible day
There were so many ongoing non-tax problems, both big and small, that our clients were, to use their own words, ‘frazzled’. They already had given Clay and I the go ahead, but on the basis that this was a near certain IRS approval.

These very capable women did not have the time or capacity to discuss why this tax plan went from a near 100% IRS approval to a 50-50 within the very strict time limits allowed by the IRS.

Clay said, “Steve, you know this client better than I do; you make the call. Do we file for approval or not?” On behalf of my client, I gave Clay the ok to file for an IRS Ruling.

It was only a partial victory!!
Bummer!! The IRS agreed but only allowed for a prospective application of the ruling. Meaning that the IRS would allow the tax plan to be effective for 2021 and going forward but 2020 was not allowed the benefits of the tax plan. This is a win. Right? A big win. Yes, it is a big win.

No, this is bad. This is $1.5 million bad. I am not happy.

I want 2020 covered in the tax plan.

My client deserves every legal break the Internal Revenue Code will give them. I want my client to have that money. I think the law entitles them to the benefits of this tax plan.

Back to Clay
Clay said we could appeal the IRS Ruling, but he said that the appeal would be much better if it came from the client instead of from a tax lawyer.

It seems that if an appeal comes from a tax lawyer, the IRS will have their own tax lawyers review the appeal. Lawyers are persnickety people. There were a dozen minor issues with this plan that any good lawyer could latch onto. I did not want minor issues to cloud the big tax planning picture. I believed if the IRS focused on the big picture, they would allow the plan to apply to 2020. I made my case.

The client drafted a really good appeal.
The client drafted an excellent appeal letter. (Actually, I drafted the appeal for their signature.) That is what CPAs do; we help our clients comply with the tax law. I explained the appeals process to the client and once again the tax principal of ‘nothing ventured, nothing gained’ was applied and the appeal was filed.

We filed the appeal one year after the initial filing on March 31, 2021.

Our argument was pedestrian. Simple arguments are not always bad: if the tax plan was legal for 2021, it should be legal for 2020. The IRS agreed. They had all the facts. The IRS was informed of tax issues related to 2020 that were not factors in 2021. They knew the amount of tax money involved. The IRS approved the plan!

In their ruling, the IRS was specific, citing areas wherein the Taxpayer should not abuse the IRS Ruling.

But the IRS agreed to allow the plan to apply to 2020.

I like my job.
What I enjoy most about my job is that I get to help people. That, to me, is job satisfaction.

Steve Richardson & Company, PC
2618 8th St
Tuscaloosa, AL 35401
(205) 349-3580