Connecting the Legal and Tax Departments

Now that the personal tax return deadline has passed, it might be a good time to consider your company's tax needs. Counsel at a Fortune 500 company recently told a colleague of ours that all of their tax matters are handled entirely outside of the legal department. This arrangement is not good. Corporate counsel and accountants must work together to bring the full measure of the company's resources to bear on tax-related issues.

Corporate tax departments are staffed by competent individuals with expertise in key tax matters. However, when a tax department operates entirely independent of corporate counsel, it puts the company at risk. Important tax decisions impact the entire business, and when these decisions are not vetted through corporate counsel, it is like looking through binoculars with one eye. Some examples of tax-related decisions that impact other areas of the business:

• Booking a potential tax liability or refund for a U.S. Securities and Exchange Commission (SEC) filing;
• Taking a tax position that could unintentionally impact an environmental or labor issue;
• Approaching a tax issue without considering government relations objectives;
• Deciding a tax issue without considering the company's marketing strategy;
• Pursuing tax controversies and litigation without involving corporate counsel; and
• Hiring an outside consultant and ceding control over appeal and litigation decisions.

An effective in-house counsel helps the tax department approach these decisions with a full view of the impact on the business as a whole. Here are five tips for building bridges between the legal and tax departments.

1. Treat All Tax Audits and Refund Claims as Potential Litigation.

Keep the end in mind. It is easy to get lost in the details of a tax issue because of the nature of the subject matter. However, it is important to evaluate and identify the final objective of a particular issue and work backwards from there.

Government auditors are trained to identify underpayments of tax and make assessments. They are unconcerned with tax overpayments. Accordingly, tax audits are inflated. There will be issues of disagreement between corporate tax departments and government auditors. Counsel should be involved (as early as possible) in the evaluations of tax issues when the amounts are material. The tax department may be focused solely on immediate results, whereas corporate counsel can bring a global perspective to the analysis of the issue. Counsel should help the tax department by asking and helping resolve the following questions:

• Is the tax position consistent with nontax positions taken by the company?
• Does the amount at issue (including future impact) warrant an appeal or litigation?
• What is the likelihood of settlement or favorable resolution in court?
• What resources (internal and external) are available and cost-effective?
• If an outside vendor is needed, how may the company best control/monitor the issue?
• How can we preserve attorney-client and work product privileges?
• How does this issue affect other litigation?

One way to implement this concept is to assign one of the legal department's attorneys as a liaison to the tax department. The liaison would be responsible for attending periodic meetings with the tax department and reporting pertinent tax developments to the general counsel, and would likewise provide information from general counsel to the tax department. Companies that build this two-way bridge between the legal and tax departments are positioned to fully realize the value of the professionals in both departments.

2. Help Pick the Right Consultant and/or Outside Counsel.

Corporate counsel should be involved in the selection and agreement processes concerning any outside tax service provider. Tax departments are familiar with accounting firms and consultants. However, these firms have limited ability to provide services beyond the audit and administrative appeal levels.

If the disagreed tax issues involve potential litigation, then corporate counsel can provide valuable input on available law firms that fit the company's culture, objectives and budget. Corporate counsel should be able to identify law firms that are already working for the company in a jurisdiction. Moreover, corporate counsel should be aware of the judicial climate and company's government relations activities.

To maximize value respecting this decision, the liaison must be involved early in the process (see Tip No. 1). Corporate counsel can help the tax department in two main ways:

1. Not letting the tax department enter into a services contract that weakens the ability to control the litigation process or impedes the ability to hire or fire legal counsel. (Note: Consulting agreements often transfer decision-making power from the taxpayer to the consultant, which erodes the company's autonomy and prioritizes the consultant's objectives over the values and objectives of the client.)
2. Ensuring that the outside vendor shares the company's values and approach to case resolution. We live in a results-driven world, but those results must be accomplished in a way that is consistent with the company's reputation, as it could affect the company's future ability to operate effectively in the jurisdiction.

3. Learn and Train.

Corporate tax departments are filled with highly competent staff. Corporate counsel can learn from the institutional knowledge of the tax department. Moreover, the corporate counsel liaison should read available journals and attend continuing legal education (CLE) events that address substantive tax issues in relevant jurisdictions. Corporate counsel also should register for case law and legislation updates in those jurisdictions. Company lawyers can better serve the tax department's needs by staying on top of relevant tax issues.

On the flip side, corporate counsel can provide an invaluable resource by training the tax department to handle government audits. The lawyers should build litigation plans and procedural checklists in the event of a tax audit or refund claim. These should identify procedural deadlines and filing requirements, and provide pleading templates and legal or regulatory citations. In-house attorneys also could help facilitate joint CLE and continuing professional education (CPE) programs onsite for the tax department. These programs could be presented by the corporate counsel liaison or in cooperation with outside providers.

4. Build a Network of Tax Advisers.

Even the most diligent, hard-working corporate counsel will not have the capacity to learn and apply every potential tax nuance. It is extremely important for the lawyers to build, develop and maintain a network of professionals in the areas of tax that affect the company. By doing so, they can help the tax department avoid costly errors and expensive litigation simply by making a timely call to a trusted adviser.

Building these networks takes time, but there are a few shortcuts:

• Leverage existing firm relationships. Many companies have existing relationships with firms that provide services in the areas of corporate transactions, intellectual property, real estate, etc. If a trusted firm has a tax practice, corporate counsel should evaluate the scope of the firm's tax expertise and then utilize that resource when needed.
• Ask the taxing authority. In-house lawyers can benefit the company by developing relationships with attorneys in key state taxing agencies. Moreover, those attorneys are often great resources for identifying competent practitioners.
• Network. Nothing beats good old-fashioned networking, whether it is through your university, sitting on a nonprofit board or via a social networking platform. If an attorney identifies a potential adviser through networking, it still would be prudent to vet that person through a trusted law firm or the pertinent taxing agency.

5. Communicate, Communicate, Communicate.

Our apologies for sounding like marriage counselors, but communication is the most important factor in any relationship. Corporate counsel should take an active role in engaging the tax department ' asking questions, sending case law updates, offering to assist with research and responding quickly to their questions.

Tax departments are burdened with a tremendous amount of compliance. Just when they meet one filing deadline, here comes another. This environment does not allow even the best-staffed tax department time to fully evaluate or analyze tax decisions, and consequently many decisions are made in a rush or by less-experienced personnel. Once decisions are made, the department then may be forced into a bunker mentality in defending them. An active corporate counsel, who proactively communicates with the tax department, can help its client avoid this problem.

Kevin Oldham is senior counsel in Dykema's office in Austin, TX. He focuses his practice on state and local tax litigation, servicing clients in multiple state jurisdictions and in all industries, including manufacturing, energy and telecommunications. He can be reached at [email protected]. Drew McEwen is senior counsel in the same office. His practice focuses on state tax litigation and planning. He represents clients through all stages of tax controversies, from the audit or refund claim level to litigation in court. He can be reached at [email protected].

Now that the personal tax return deadline has passed, it might be a good time to consider your company's tax needs. Counsel at a Fortune 500 company recently told a colleague of ours that all of their tax matters are handled entirely outside of the legal department. This arrangement is not good. Corporate counsel and accountants must work together to bring the full measure of the company's resources to bear on tax-related issues.

Corporate tax departments are staffed by competent individuals with expertise in key tax matters. However, when a tax department operates entirely independent of corporate counsel, it puts the company at risk. Important tax decisions impact the entire business, and when these decisions are not vetted through corporate counsel, it is like looking through binoculars with one eye. Some examples of tax-related decisions that impact other areas of the business:

• Booking a potential tax liability or refund for a U.S. Securities and Exchange Commission (SEC) filing;
• Taking a tax position that could unintentionally impact an environmental or labor issue;
• Approaching a tax issue without considering government relations objectives;
• Deciding a tax issue without considering the company's marketing strategy;
• Pursuing tax controversies and litigation without involving corporate counsel; and
• Hiring an outside consultant and ceding control over appeal and litigation decisions.

An effective in-house counsel helps the tax department approach these decisions with a full view of the impact on the business as a whole. Here are five tips for building bridges between the legal and tax departments.

1. Treat All Tax Audits and Refund Claims as Potential Litigation.

Keep the end in mind. It is easy to get lost in the details of a tax issue because of the nature of the subject matter. However, it is important to evaluate and identify the final objective of a particular issue and work backwards from there.

Government auditors are trained to identify underpayments of tax and make assessments. They are unconcerned with tax overpayments. Accordingly, tax audits are inflated. There will be issues of disagreement between corporate tax departments and government auditors. Counsel should be involved (as early as possible) in the evaluations of tax issues when the amounts are material. The tax department may be focused solely on immediate results, whereas corporate counsel can bring a global perspective to the analysis of the issue. Counsel should help the tax department by asking and helping resolve the following questions:

• Is the tax position consistent with nontax positions taken by the company?
• Does the amount at issue (including future impact) warrant an appeal or litigation?
• What is the likelihood of settlement or favorable resolution in court?
• What resources (internal and external) are available and cost-effective?
• If an outside vendor is needed, how may the company best control/monitor the issue?
• How can we preserve attorney-client and work product privileges?
• How does this issue affect other litigation?

One way to implement this concept is to assign one of the legal department's attorneys as a liaison to the tax department. The liaison would be responsible for attending periodic meetings with the tax department and reporting pertinent tax developments to the general counsel, and would likewise provide information from general counsel to the tax department. Companies that build this two-way bridge between the legal and tax departments are positioned to fully realize the value of the professionals in both departments.

2. Help Pick the Right Consultant and/or Outside Counsel.

Corporate counsel should be involved in the selection and agreement processes concerning any outside tax service provider. Tax departments are familiar with accounting firms and consultants. However, these firms have limited ability to provide services beyond the audit and administrative appeal levels.

If the disagreed tax issues involve potential litigation, then corporate counsel can provide valuable input on available law firms that fit the company's culture, objectives and budget. Corporate counsel should be able to identify law firms that are already working for the company in a jurisdiction. Moreover, corporate counsel should be aware of the judicial climate and company's government relations activities.

To maximize value respecting this decision, the liaison must be involved early in the process (see Tip No. 1). Corporate counsel can help the tax department in two main ways:

1. Not letting the tax department enter into a services contract that weakens the ability to control the litigation process or impedes the ability to hire or fire legal counsel. (Note: Consulting agreements often transfer decision-making power from the taxpayer to the consultant, which erodes the company's autonomy and prioritizes the consultant's objectives over the values and objectives of the client.)
2. Ensuring that the outside vendor shares the company's values and approach to case resolution. We live in a results-driven world, but those results must be accomplished in a way that is consistent with the company's reputation, as it could affect the company's future ability to operate effectively in the jurisdiction.

3. Learn and Train.

Corporate tax departments are filled with highly competent staff. Corporate counsel can learn from the institutional knowledge of the tax department. Moreover, the corporate counsel liaison should read available journals and attend continuing legal education (CLE) events that address substantive tax issues in relevant jurisdictions. Corporate counsel also should register for case law and legislation updates in those jurisdictions. Company lawyers can better serve the tax department's needs by staying on top of relevant tax issues.

On the flip side, corporate counsel can provide an invaluable resource by training the tax department to handle government audits. The lawyers should build litigation plans and procedural checklists in the event of a tax audit or refund claim. These should identify procedural deadlines and filing requirements, and provide pleading templates and legal or regulatory citations. In-house attorneys also could help facilitate joint CLE and continuing professional education (CPE) programs onsite for the tax department. These programs could be presented by the corporate counsel liaison or in cooperation with outside providers.

4. Build a Network of Tax Advisers.

Even the most diligent, hard-working corporate counsel will not have the capacity to learn and apply every potential tax nuance. It is extremely important for the lawyers to build, develop and maintain a network of professionals in the areas of tax that affect the company. By doing so, they can help the tax department avoid costly errors and expensive litigation simply by making a timely call to a trusted adviser.

Building these networks takes time, but there are a few shortcuts:

• Leverage existing firm relationships. Many companies have existing relationships with firms that provide services in the areas of corporate transactions, intellectual property, real estate, etc. If a trusted firm has a tax practice, corporate counsel should evaluate the scope of the firm's tax expertise and then utilize that resource when needed.
• Ask the taxing authority. In-house lawyers can benefit the company by developing relationships with attorneys in key state taxing agencies. Moreover, those attorneys are often great resources for identifying competent practitioners.
• Network. Nothing beats good old-fashioned networking, whether it is through your university, sitting on a nonprofit board or via a social networking platform. If an attorney identifies a potential adviser through networking, it still would be prudent to vet that person through a trusted law firm or the pertinent taxing agency.

5. Communicate, Communicate, Communicate.

Our apologies for sounding like marriage counselors, but communication is the most important factor in any relationship. Corporate counsel should take an active role in engaging the tax department ' asking questions, sending case law updates, offering to assist with research and responding quickly to their questions.

Tax departments are burdened with a tremendous amount of compliance. Just when they meet one filing deadline, here comes another. This environment does not allow even the best-staffed tax department time to fully evaluate or analyze tax decisions, and consequently many decisions are made in a rush or by less-experienced personnel. Once decisions are made, the department then may be forced into a bunker mentality in defending them. An active corporate counsel, who proactively communicates with the tax department, can help its client avoid this problem.

Kevin Oldham is senior counsel in Dykema's office in Austin, TX. He focuses his practice on state and local tax litigation, servicing clients in multiple state jurisdictions and in all industries, including manufacturing, energy and telecommunications. He can be reached at [email protected]. Drew McEwen is senior counsel in the same office. His practice focuses on state tax litigation and planning. He represents clients through all stages of tax controversies, from the audit or refund claim level to litigation in court. He can be reached at [email protected].