Tax Advisory & Opinion Letters for Complex Transactions and Tax Positions

What Tax Advisory Means in Practice

Tax advisory is independent legal analysis of a tax position, transaction, or business structure — done before you file or close, not after the IRS asks.

The short version is that advisory work is not tax preparation and it is not compliance. Advisory sits in front of those. 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 — either to make the decision, or to defend the decision later.

Most business owners and high-net-worth individuals already have a CPA. The CPA handles returns, bookkeeping, and day-to-day compliance. That relationship is essential and we are not a replacement for it. 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. Because we also handle tax controversy, our advisory work is informed by what the IRS actually does when a position gets challenged — not just what the statute says.

Tax Opinion Letters: What They Are and What They Actually Protect

A tax opinion letter is a formal written conclusion from a tax attorney about the likely tax treatment of a specific transaction or position. Its real job is to establish a reasonable cause defense against IRS accuracy-related penalties.

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. 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.

The whole question here hinges on independence and substance. The IRS reads opinion letters skeptically, especially the ones written by advisors with a financial stake in the transaction going through. If the opinion does not analyze the actual facts, cite the actual authorities, and acknowledge the actual counterarguments, the IRS will treat it as marketing material — and the reasonable cause defense will fail.

Opinion letters are not always required, but they become critical in a specific set of 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.

Levels of Tax Opinion: Should, More Likely Than Not, Substantial Authority

Not all opinion letters carry the same weight. The level of assurance reflects the attorney’s confidence in the 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 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, generally interpreted as approximately 40% likelihood of being sustained. This standard reduces — but does not eliminate — exposure to accuracy-related penalties.

The level you need depends on the transaction, the dollar amount at stake, the counterparty’s requirements, and your own risk tolerance. We tell clients up front which level the position will support, so there are no surprises about scope or cost. If the position will not support a “more likely than not” opinion, we say so — and we work with you on whether to restructure, reprice the risk, or take a different position entirely.

Transaction Structuring Advisory

Transaction structuring advisory is the work we do before a deal closes — analyzing the structure, quantifying the tax outcome, and flagging risks while the terms are still negotiable.

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 is set. The window where structuring matters is narrow, but inside that window the choices you make can swing the tax result by seven figures or more.

This 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, F-reorganization vs. straight merger) has consequences that can exceed seven figures. It applies to real estate transactions involving 1031 exchanges, opportunity zone investments, cost segregation studies, 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 in writing. This work happens in coordination with the client’s CPA, who handles the return-level implementation and ongoing compliance, and with the client’s deal attorney, who handles the documents. We sit in the middle of those two workstreams.

Kovel Arrangements: Extending Attorney-Client Privilege to Your CPA

A Kovel arrangement extends attorney-client privilege to your CPA’s work product when the CPA is retained by the attorney to assist with a legal matter.

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. If the IRS later issues a summons for the CPA’s analysis, the CPA can be compelled to produce it.

A Kovel arrangement — named after the Second Circuit’s decision in United States v. Kovel, 296 F.2d 918 (2d Cir. 1961) — 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 carry meaningful risk. The CPA does the quantitative analysis; we provide the legal framework and the 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. To be clear, Kovel does not cover unrelated CPA work, and it does not retroactively protect analysis done before the arrangement is in place. The structure has to be set up properly and early.

When You Need an Opinion Letter vs. When a Memo Is Enough

You need a formal opinion letter when penalty exposure is real, a counterparty requires it, or the tax benefit is the reason the deal makes sense. Otherwise, a written advisory memo is usually enough.

The decision turns on three factors:

1. 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 establishes the reasonable cause defense under IRC §6662 that an informal memo does not.

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

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

During the initial consultation, we identify which level of work product the matter actually requires and scope the engagement accordingly. Clients are not billed for an opinion letter when a memo would suffice, and we will tell you the cheaper version is enough if that is true.

Pre-Transaction vs. Post-Transaction Advisory

Pre-transaction advisory is cheaper, faster, and produces a materially better tax outcome. Post-transaction advisory is sometimes the only option, but the range of moves is narrower and you cannot unwind a closed deal.

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 strategies available are limited. You cannot restructure a transaction that has already closed.

This is why we ask clients to bring us in early. The best outcome for a complex transaction is one where the tax attorney, the CPA, and the deal attorney are all at the table before the letter of intent is signed — not after the closing binder is assembled. If you are early enough that the term sheet is still being negotiated, we can usually save a lot of money. If you are late enough that you are reading this after closing, we can still help — but the conversation looks different.

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