An analysis of SSTS interpretation no. 1-2.

• Author: Gardner, John C.
• Position: Part 1 - Statements on Standards for Tax Services on tax planning

EXECUTIVE SUMMARY

* Interpretation No. 1-2 clarifies how SSTSs Nos. 1 and 8 apply in a variety of tax planning and tax shelter situations.

* SSTS No. 1 and Interpretations Nos. 1-1 and 1-2 help members to determine whether a tax position has a realistic possibility of success and whether a member can recommend a nonfrivolous position.

* Familiarity with legal standards, such as the realistic possibility of success, more-likely-than-not, substantial authority and economic-substance and sham-transaction doctrines, as well as the tax shelter disclosure and listing rules, is crucial in recommending a position.

Interpretation No. 1-2 provides official guidance on AICPA member responsibilities in tax planning and interprets Statements on Standards for Tax Services Nos. 1 and 8. This two-part article discusses and analyzes the Interpretation as it applies to tax planning and tax shelters.

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During the past four years, accountants in general, and CPAs in particular, have received substantial negative publicity following Enron and other corporate scandals. Besides that, to counter questionable tax shelter behavior, Congress considered legislation that would restrict tax shelters, and the Service issued a flurry of regulatory initiatives on tax shelter registration and disclosure. CPAs are thus operating under increased scrutiny by all levels of government and the media. Because this often leads to more government regulation, self-regulation of the profession is mandatory to minimize government's involvement. (1)

Interpretation No. 1-2, "Tax Planning," of Statements on Standards for Tax Services (SSTS) No. 1, continues the AICPA's efforts at self-regulating tax practice standards for AICPA members. It provides official guidance on a member's responsibilities in tax planning and interprets SSTSs No. 1, Tax Return Positions, and No. 8, Form and Content of Advice to Taxpayers. (2) Interpretation No. 1-2, however, specifically states that it "does not change or elevate any level of conduct prescribed by any standard. Its goal is to clarify existing standards."

Part I of this two-part article, below, provides general background on Interpretation No. 1-2 and considers how it applies to tax planning and tax shelters. It also analyzes seven of the Interpretation's illustrations. Part II, in the August 2004 issue, will discuss the remaining illustrations and offer practical tips and general recommendations.

Tax Practice Standards

The preface to the SSTSs states, "practice standards are the hallmark of calling one's self a professionS. Members should fulfill their responsibilities as professionals by instituting and maintaining standards against which their professional performance can be measured." The SSTSs were written "in as simple and objective a manner as possible." Concepts and terminology used in the SSTSs (and its two Interpretations) are based on readily comprehensible tax concepts. These professional ethical standards "provide for an appropriate range of behavior that recognizes the need for interpretations to meet a broad range of personal and professional situations." Enforcement of the SSTSs is designed to "be undertaken with flexibility in mind and handled on a case-by-case basis."

The SSTSs are binding on AICPA members who practice in Federal, state and local jurisdictions before agencies that range from the IRS to local property tax districts. Some state statutes may also call (either directly or indirectly) for the adoption of professional standards promulgated by the AICPA. Additionally, professional liability insurance carriers may require their policyholders to follow these standards as part of their practice as CPAs. Thus, familiarity with SSTSs Nos. 1 and 8 and Interpretation No. 1-1, along with recently issued Interpretation No. 1-2, is critical. In addition to the SSTSs, other legal and regulatory standards issued at the Federal, state and local levels may apply for other purposes. For example, Sec. 6694 regulations cover preparer penalties at the Federal level; the tax return position standards under Sec. 6694 could change in the future. Additional tax practice standards are also found in Circular 230, (3) which regulates practice by CPAs, attorneys and enrolled agents before the IRS. Regulatory and statutory standards at the state and local level may also affect tax practice. (4)

The AICPA'S Tax Division continues to expose its membership to their professional and legal responsibilities through presentations at professional meetings and with continuing education. It also continually monitors practice situations that may need to be addressed by the SSTSs.

Issuance of Interpretation No. 1-2

The effort that led to the issuance of Interpretation No. 1-2 began in 2000, with discussion about tax shelters. The Tax Division's Tax Executive Committee (TEC), which is the AICPA'S tax standard setting body, formed a task force to evaluate the SSTSs' applicability to tax shelters. The task force recommended the issuance of an interpretation to SSTS No. 1. As a result, the TEC exposed Interpretation No. 1-2 in November 2002 and requested stakeholders' comments by April 30, 2003. The comments on the exposure draft were reviewed by the task force and Tax Practice Responsibilities Committee in May-June 2003, and the interpretation received final approval at the Aug. 22, 2003,TEC meeting.

The draft recognized that tax shelters and abusive transaction are controversial and continually discussed by courts, the AICPA and various professional organizations and taxing authorities. Although the Introduction to the exposure draft stressed the difficulty in defining a tax shelter, it noted the "compelling need for a comprehensive interpretation of a member's responsibilities in connection with tax planning, with the recognition that such guidance would clarify how those standards would apply across the spectrum of tax planning, including those situations involving tax shelters...."

Tax planning is a significant area of tax practice for many members. (5) The background section to Interpretation No. 1-2 stresses "that...