Alice is an AICPA member actively engaged in advising clients on a variety of federal and state tax matters. Recently, she has expanded her practice to provide tax advice to various corporate taxpayers. Acme corporation, a private, California closely held wholesaler of dry goods ("Acme"), is one of her clients. Although Acme's tax affairs are relatively straightforward and mostly involve determinations of proper accrual of income and cost of goods sold for federal income tax purposes, Alice recently has been solicited in connection with a merger proposal by Johnson, a Delaware publicly traded corporation.
Under the proposal, Acme would merge into Johnson, and Acme shareholders would exchange their Acme stock for Johnson publicly traded common stock. The arrangement called for a complex valuation to be performed where Acme would be valued by an independent investment banker engaged by Acme which would, after completion of extensive valuation work, present an opinion to Acme that its suggested value was a fair value of Acme in order that Acme's board of directors and shareholders vote on whether to accept the merger proposal. The valuation would also provide an allocation of the overall value to all of the assets of Acme. Further, to assure Acme and its shareholders that the proposed transaction was a legal transaction pursuant to California law, a law firm engaged by Acme would issue its opinion that the proposed transaction fully complied with such corporation and other laws that otherwise applied.
Finally, to assure Acme and its shareholders that the transaction could be completed as a tax-free reorganization (pursuant to Internal Revenue Code Section 368(a)(1)(A)), an independent tax law firm engaged by Acme will provide its well-reasoned legal opinion that there is substantial authority supporting tax free treatment to Acme and its shareholders. Notwithstanding the opinions, under certain state sales tax laws, the transaction would be taxable and allocations of the overall "price" assigned to Acme stock would be required to be made to certain sales taxable goods transferred to Johnson in the merger.
In connection with taking tax return positions and rendering tax advice to Acme with respect to such positions, Alice is concerned whether she can appropriately rely upon the opinions of the investment banker and tax law firm. Without addressing any tax issues involving mergers, etc. or the appropriateness of Acme and its shareholders relying upon various opinions, discuss to what extent Alice can rely upon third party tax and nontax opinion letters for purposes of rendering tax advice to Acme and preparing its tax returns in order to meet the realistic possibility standards. Note that Alice feels a little bit unprepared to deal with this complex merger transaction and needs your able advice as to how to proceed. May she rely upon the (1) state law opinion, (2) investment banking valuation opinion and (3) the tax opinion?