Grant Thornton Warns of Problems With Tax Shelter Regulations

Grant Thornton, currently the nation's fifth largest accounting firm, has responded to the Internal Revenue Service's request for comments on proposed tax shelter regulations and has raised issues that may be of concern to middle-market companies.

The regulations, which are set to be come effective January 1, 2003, include two provisions that have sparked concern with the accountants at Grant Thornton.

First, the revised regulations include a provision for contractual protection against the risk that tax benefits from tax shelters will be denied. Taxpayers may find that contingent fee arrangements are part of the provisions. "Grant Thornton is of the position that the Contractual Protection provisions are arguably broad enough to include contingent fee arrangements. Contingent fees encourage tax advisors to provide services in an efficient and effective manner and are already permitted under IRS Circular 230, which provides the rules for practice before the IRS. Contingent fee arrangements are particularly valuable to middle-market firms to whom the advisors' fee constitutes a significant expense," said Mark Stutman, managing partner of Grant Thornton's tax practice.

Grant Thornton believes that companies, especially middle-market companies, may find themselves choosing between foregoing such a fee arrangement and disclosing routine transactions. Grant Thornton has recommended that the IRS modify the Contractual Protection provisions of the proposed regulations to specifically exclude fee arrangements "where it is expected that the claimed tax benefit will receive substantive review by the IRS," according to Mr. Stutman.

Another area of concern is that the tax shelter regulations include "Time of Providing Disclosure" provisions that require disclosure of reportable transactions even if the transaction doesn't become reportable until after federal tax returns affected by the transaction have been filed. "We call these types of transactions subsequently reportable transactions," said Mr. Stutman. Grant Thornton notes that no statute of limitation has been applied to this area of the proposed regulations. "This places an undue burden on middle-market companies, with small internal staffs, and may penalize them for a failure of organizational memory. They will be required to be knowledgeable of all past transactions in the event that one of them subsequently becomes a 'listed transaction' and is therefore reportable," said Mr. Stutman.

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