More Facts Resolve Tax Risks –

The IRS Query –

THE INITIAL LETTER from the IRS will usually request from the taxpayer a list of documentation and information.

Whenever the IRS requires a taxpayer to furnish documentation and information, the IRS must state the administrative purpose for which it is sought.

All information provided must be of a factual nature; and the IRS is not entitled to information that extends to the realm of ideas, opinions, or judgments.

An example of an IRS query dealing with a transaction would typically include the following:

Kindly furnish by [x date] a detailed reply to the following observations or inquiries arising out of an examination of the annual financial statements of your company.

• Factual diagrammatical flowchart highlighting all transaction and cash flows and the respective dates and the names of the parties involved.

• Bank statements reflecting the cash flows.

• Loan applications and all related correspondence.

• Information furnished on requesting approval of the loan facility as well as information furnished on review of the facility.

• All agreements, addendums, amended agreements, side letters or verbal understandings and supporting documentation. Copy of the complete synopsis or presentation regarding the structure.

• Name of entity marketing the structure as well as marketing person.

• The accounting and tax treatments including journals as well as the cash flows for all transactions already accounted for and for the transactions to be accounted for in future.

• Discuss the extent to which the company complied or did not comply with AC 125 Financial Instruments: Disclosure and Presentation.

• Reasons as to the purpose for entering into these financial agreements.

• All opinions obtained from lawyers, auditors or any other party relating to this transaction. If you are of the view that these opinions are subject to legal privilege, kindly support your view with detailed reasons.

• Copies of correspondence by the auditors with the relevant bank.

• Detailed opinions why you are of the view that you are entitled to the deduction.

• Detailed valuation report with regard to the share value of the forward purchase of shares plus working papers including a discussion of the valuation methods used.

• Kindly explain the consequences and remedies for all the agreements involved in the structured deal and for each of the parties involved under the following circumstances:

♦ If the taxpayer does not perform in terms of the agreements concluded.

♦ If the taxpayer is placed in liquidation.

♦ If the bank is placed in liquidation.

♦ If the taxpayer wishes to exit out of the structured deal.

The following guidelines should be considered before furnishing the IRS with any documentation and information:

• Make sure that no generic marketing brochures, presentations, or proposals are furnished. All relevant documentation should be tailor-made to the specific transaction.

• Ensure that all correspondence pertains specifically to the final structure implemented.

• Ensure that only final versions of the agreements, addendums, and side letters are provided.

• Any verbal understandings must be given by the role players and preferably recorded in affidavits.

In accordance with Circular 230 Disclosure