Tax Advisory & Opinion Letters for Complex Transactions & Tax Positions

What Tax Advisory Means in Practice

Tax advisory is independent legal analysis of a tax position, transaction, or business structure. It is not tax preparation and it is not compliance work. Advisory is what happens before you file, before you close, and often before you commit to a deal structure at all. The role of a tax advisory attorney is to analyze the legal merits of a position, identify the risks, and give you a written assessment you can rely on.

Most business owners and high-net-worth individuals already have a CPA. The CPA handles returns, bookkeeping, and day-to-day compliance. But when a transaction has meaningful tax consequences — a business sale, a real estate exchange, an entity restructuring, or a position that pushes the boundaries of the code — you need an attorney who can analyze the legal question independently. That is what tax strategy counsel provides: the legal analysis layer that sits on top of your existing accounting relationship.

At Brotman Law, advisory engagements begin with a specific question. A client brings us a proposed transaction, a tax position their CPA has identified, or a deal structure they are evaluating. We analyze the relevant code sections, regulations, revenue rulings, and case law, and deliver a written memorandum or formal opinion letter depending on the level of assurance required.

Tax Opinion Letters: What They Are, When They Are Required, and How They Protect You

A tax opinion letter is a formal written document from a tax attorney that states the attorney's professional conclusion about the likely tax treatment of a specific transaction or position. Opinion letters serve two distinct purposes: they give the client a basis for making an informed decision, and they provide penalty protection if the IRS later challenges the position.

Under IRC §6662, the IRS can impose accuracy-related penalties of 20% on any underpayment attributable to a substantial understatement of income tax, negligence, or disregard of rules and regulations. However, a taxpayer who obtains a qualified opinion letter and relies on it in good faith can establish a reasonable cause defense that eliminates those penalties entirely. The opinion must be from an independent advisor, based on all relevant facts, and reflect a genuine analysis — not a rubber stamp.

Opinion letters are not always required, but they become critical in specific scenarios: transactions involving pass-through entities with complex allocation provisions, tax positions that could trigger an audit, listed or reportable transactions, and any deal where the tax benefit is a material component of the economics. If the tax savings drive the transaction, an opinion letter is your first line of defense.

Types of Tax Opinions

Not all opinion letters carry the same weight. The level of assurance in the opinion reflects the attorney's confidence in the legal analysis, and the IRS evaluates these levels when determining whether penalty protection applies:

"Should" level opinion — The attorney concludes the position "should" be sustained on its merits. This is the highest standard below a guaranteed outcome and is the level most often required for meaningful penalty protection. It indicates a greater than 70% likelihood the position will be upheld.

"More likely than not" opinion — The attorney concludes there is a greater than 50% likelihood the position will be sustained. This is the standard required for penalty protection on most substantial understatement issues under IRC §6662. Many transaction participants require this level as a condition of closing.

"Substantial authority" opinion — The attorney concludes the position meets the "substantial authority" threshold, which is generally interpreted as approximately 40% likelihood of being sustained. This standard reduces — but does not eliminate — exposure to accuracy-related penalties.

The level of opinion you need depends on the transaction, the dollar amount at stake, and your risk tolerance. We advise clients on which level is appropriate before beginning the analysis, so there are no surprises about scope or cost.

Transaction Structuring Advisory

Advisory work is not limited to opinion letters. A significant portion of our practice involves working alongside clients and their CPAs during the structuring phase of a transaction — before the deal terms are finalized, before the entity documents are drafted, and before the closing date.

Transaction structuring advisory applies to business transactions including mergers, acquisitions, and dispositions where the choice of deal structure (asset sale vs. stock sale, taxable vs. tax-free reorganization) has consequences that can exceed seven figures. It applies to real estate transactions involving 1031 exchanges, opportunity zone investments, cost segregation, and partnership structures. And it applies to exit planning scenarios where the owner is evaluating sale, ESOP, or generational transfer structures years before the actual transaction.

In each case, the advisory attorney's role is to identify the tax-optimal structure, quantify the savings relative to alternatives, and flag the risks. This analysis happens in coordination with the client's CPA, who handles the return-level implementation and ongoing compliance.

Kovel Arrangements: Extending Attorney-Client Privilege to Your CPA

One of the most significant advantages of engaging a tax attorney for advisory work is attorney-client privilege. Communications between you and your attorney are privileged. Communications between you and your CPA generally are not.

A Kovel arrangement — named after the Second Circuit's decision in United States v. Kovel — allows the attorney to retain the CPA as an agent of the attorney, extending the attorney-client privilege to the CPA's work product and communications within the scope of the engagement. This is critical when the advisory work involves sensitive positions, potential controversies, or transactions where the analysis itself could be used against the client in a later tax defense matter.

We regularly establish Kovel arrangements for clients whose advisory matters involve risk. The CPA does the quantitative analysis; we provide the legal framework and opinion. Because the CPA is working under our direction, the entire work product is protected by privilege — a protection that does not exist when the CPA works independently.

When to Get an Opinion Letter vs. When Advisory Is Sufficient

Not every advisory engagement requires a formal opinion letter. The decision depends on three factors:

Penalty exposure. If the position involves a substantial understatement (generally exceeding 10% of the tax shown on the return or $5,000, whichever is greater), a formal opinion letter provides the reasonable cause defense under IRC §6662 that an informal memo does not.

Third-party requirements. Investors, lenders, and transaction counterparties frequently require opinion letters as a condition of closing. The opinion gives the other party assurance that the tax treatment they are relying on has been independently vetted.

Complexity and dollar amount. For straightforward entity structuring questions or high-net-worth planning matters where the risk is low, a detailed advisory memorandum may be sufficient. For transactions where the tax benefit exceeds $500,000 or where the IRS has identified similar transactions as areas of enforcement focus, a formal opinion is the prudent choice.

During the initial consultation, we identify which level of work product is appropriate and scope the engagement accordingly. Clients are never billed for an opinion letter when a memorandum would suffice.

Pre-Transaction vs. Post-Transaction Advisory

The most valuable advisory work is proactive. When we analyze a transaction before it closes, we can influence the structure, adjust the terms, and optimize the tax outcome. Pre-transaction advisory typically costs a fraction of what post-transaction remediation requires — and the results are materially better.

Post-transaction advisory is reactive. The client has already closed the deal, filed the return, or taken the position, and now needs to understand the exposure. We still provide written analysis in these situations, and post-transaction opinions can still support a penalty defense, but the range of available strategies is narrower. You cannot restructure a transaction that has already closed.

This is why we encourage clients to bring us in early. The best outcome for a complex transaction is one where the tax attorney, the CPA, and the business attorney are all at the table before the letter of intent is signed — not after the closing binder is assembled.

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