Conflicting Authority and a Client Who Refuses Disclosure

The hierarchy runs statute, regulations, then court decisions. A private letter ruling is not precedent: §6110(k)(3) says it may not be used or cited as precedent, and it binds only the taxpayer addressed. The Tax Court regular decision is a court decision, but under Golsen v. Commissioner the Tax Court follows the precedent of the circuit to which the case would be appealable. Because the shareholder lives in Washington, an appeal would go to the Ninth Circuit. The Ninth Circuit item, however, is an unpublished disposition; under Ninth Circuit Rule 36-3 it is not precedential and may be cited only for res judicata, collateral estoppel, or law of the case. So it does not bind the Tax Court. The Tax Court decision is persuasive but not controlling, and the private letter ruling has no weight. The internal controller memo is not legal authority, but it is an adverse fact that requires inquiry. Bottom line: no controlling authority supports the deduction; the favorable Tax Court case is the only meaningful support and must be weighed against the Ninth Circuit's unpublished view. This is a weak research position.

Circular 230 §10.34(a) prohibits signing a return containing a position that lacks a reasonable basis or is an unreasonable position under §6694(a)(2). For preparer penalties, §6694(a) requires substantial authority for a non-tax-shelter position, or adequate disclosure plus a reasonable basis. The firm policy also requires substantial authority. Substantial authority is an objective weighing of authorities; PLRs are expressly not authority under Reg. §1.6662-4(d)(3)(iii), and an unpublished opinion is not precedential in the Ninth Circuit and carries little weight. If Priya signs without disclosure and the position is disallowed, the client faces a §6662 accuracy-related penalty for negligence or substantial understatement, and Priya faces §6694(a) ($1,000 or 50% of fees) or, if willful or reckless, §6694(b) ($5,000 or 75% of fees). Disclosure on Form 8275 can avoid the client's substantial understatement penalty but does not cure a lack of reasonable basis or protect against §6694 if the position is unreasonable. Because the client refuses disclosure and the firm requires substantial authority, Priya cannot sign.

Priya should document the research and advise the client in writing that the deduction lacks substantial authority, that the internal memo is adverse, and that she cannot sign the return as proposed. Under §10.21, she must advise the client promptly of the noncompliance and the consequences. If the client insists on the position, §10.21(b) says she should consider withdrawing, and §10.21(c) requires her to withdraw if requested to sign a return that violates Circular 230. She may not inform the IRS of the client's position without consent except as required by law; confidentiality under §7216 and §10.21(a) applies. She should not prepare a return she cannot sign. She can offer alternatives: reduce the deduction to an amount supported by facts, or file with disclosure if a reasonable basis exists, but the firm policy bars that route. If she withdraws, she should return records and not leave the client unable to comply. She should not give a 'more likely than not' opinion because the authority is too weak.