John Ryan: Creating a Sense of Urgency Among Employees
August 14th, 2009 | Posted by innovLike so many business sectors, the executive-education industry is challenged as the global economic crisis lingers. Many companies are scaling back their training budgets, resulting in slower business for my organization, the Center for Creative Leadership, and for many of our competitors. So we had real cause for excitement a few weeks ago when a major corporation chose our company for a large leadership development contract. As you might imagine, those deals aren’t easy to land in this climate, and they don’t happen without the hard work and collaboration of very talented men and women. This was a win worth celebrating, and we didn’t waste much time spreading the word internally.
All the while, however, I kept remembering the lessons from a favorite book of mine, A Sense of Urgency, by Harvard Business School change expert John Kotter. In the more stable economy of recent decades, Kotter tell us, leaders could expect their organizations to face one big change a year, such as a merger or acquisition. Solving that challenge took considerable resources, to be sure. But leaders had the time to focus on it fully and ensure a successful outcome. Our world isn’t the same anymore.
Now, challenges—really big challenges—come at us relentlessly. Severe recessions. New competitors. Natural disasters. New technology breakthroughs. Government legislation. We can never tell what will happen next. In this climate, establishing and sustaining a true sense of urgency in our organizations becomes vital.
Don’t Take Your Foot off the Gas
Throughout my 40 years of service in the military, higher education, and nonprofits, I’ve seen firsthand how elusive urgency can be. So it wasn’t long before I started reminding my colleagues that our big new contract certainly is a great accomplishment. But it’s still just one contract. We need many more like it to keep extending our reach and impact. We’ve all seen this dynamic: When things are going well, when we notch a big win, it’s tempting to take the foot off the gas just a little bit. What we’re doing, we tell ourselves, is obviously working. So what’s the harm in relaxing for a moment?
We start to lose the discipline that made us effective all along. That’s one way in which we can all benefit from a vicious downturn that has harmed a lot of people and companies around the world. If nothing else, we have the chance to re-establish discipline—discipline in how we select and develop talent and discipline in how we design our products and business processes.
While we’re doing that, we must also remain alert to a big danger organizations face at times like these: a compulsion to panic. Panic is the dark side of urgency. It manifests itself in a tendency to focus more on short-term survival than long-term success. My twin brother and I played a lot of baseball and basketball growing up. Whenever we made a big jump, from youth leagues to high school to college squads, the competition got tougher. Having to prove ourselves at higher and higher levels was always a challenge; we faced the doubts most athletes have at one time or another about their abilities. We wanted and expected to perform well. But there was also that nagging little voice telling us it was good enough simply to make the team.
That’s the kind of short-term outlook that ends in lower performance over the long run. It’s an attitude leaders need to guard against especially well into a recession like this, when it can be hard to think about more than getting through the week. The challenge every leader has now is this: How do I keep my colleagues focused not just on staying in the game but on actually getting better?
Of course, there are no simple answers. But it all starts with urgency—and as leaders, we need to model it every day. Certainly, I don’t claim to have perfected this particular art. But here are a few steps that can help spur a sense of urgency in our organizations:
• Don’t hesitate to share bad news.
It’s much more fun to announce client wins than budget cuts, but your women and men need to know the good and bad. And the sooner they know, the quicker they can adjust their work. Transparency builds trust.
• Convey optimism and passion.
Your colleagues are searching for clues in your every word and gesture. If you truly believe your organization has a bright future, you need to say it and give specific reasons why—and keep repeating yourself until others believe you and get engaged in making that bright future a reality.
• Publicly praise urgent actions.
When someone in your organization—regardless of their level—moves quickly to make something happen, thank them and make sure everyone knows about it. Small acts of urgency have the power to inspire larger ones.
• Partner with colleagues on strategy:
To move things along with urgency, it’s tempting to grab your five closest advisers, lock yourselves in a room and hammer out your updated strategy for the next year. But the rest of your organization won’t feel invested or engaged. This is the wrong way to demonstrate urgency! So solicit the thoughts and expertise of a wide swath of your colleagues and show them their input mattered. With so much uncertainty on the horizon, you need everyone to understand that your strategy will have to be revised as the global economy evolves. Maintain urgency, but stay flexible, too.
Eight hundred years ago, St. Francis of Assisi said something every modern leader needs to remember: “Preach the Gospel at all times. Use words if necessary.” When it comes to instilling urgency in our organizations, there’s no better advice.
You Need to Increase the Top Line to Sustain the Bottom Line
August 13th, 2009 | Posted by stockS&P 500 Q2 sales are off 24.82% Y/Y or $597B; 1-year is off 13.24% or $1.27T
Industrials posted their worst 12-month percentage drop since our record started in 1964, -9.03%
For reported issues only:
Operating Margins at 6.6%, with Financials at 2.7% and Industrials (old) at 7.3%
As Reported flat at 4.9%
click here
Sales deteriorated significantly during the quarter, with damage to margins minimized by higher productivity – those of us that worked, worked a lot harder. S&P 500 sales for the quarter posted their third consecutive double-digit year-over-year decline, with the 12-month decline at -13.2%. Consumer Staple sales for the quarter were slightly down, Financials and Health Care were slightly up, Information Technology was off 12%, and Energy dropped 46%. Industrial sales over the last 4-quarters posted their worst decline (-9%) since our records started in 1964.
If companies can increase sales, high margins (from their cost cutting), should enhance profits. Consumer and corporate spending remains key. Once the storm is over, companies may try to use all that built-up cash (near record for Q2) via M&A, to increase their sales.
Data Visualization: Stories for the Information Age
August 12th, 2009 | Posted by innovAt the intersection of art and algorithm, data visualization schematically abstracts information to bring about a deeper understanding of the data, wrapping it in an element of awe. While the practice of visually representing information is arguably the foundation of all design, a newfound fascination with data visualization has been emerging. After The New York Times and The Guardian recently opened their online archives to the public, artists rushed to dissect nearly two centuries worth of information, elevating this art form to new prominence.
For artists and designers, data visualization is a new frontier of self-expression, powered by the proliferation of information and the evolution of available tools. For enterprise, it’s a platform for showcasing products and services in the context of the cultural interaction that surrounds them, reflecting consumers’ increasing demand for corporate transparency.
“Looking at something ordinary in a new way makes it extraordinary,” says Aaron Koblin, one of the more recent pioneers of the discipline. As technology lead of Google’s Creative Labs in San Francisco, he spearheaded the search giant’s Chrome Experiments series, launched earlier this year and designed to show off the speed and reliability of the Chrome browser.
Data visualization has nothing to do with pie charts and bar graphs. And it’s only marginally related to “infographics,” information design that tends to be about objectivity and clarification. Such representations simply offer another iteration of the data—restating it visually and making it easier to digest. Data visualization, on the other hand, is an interpretation, a different way to look at and think about data that often exposes complex patterns or correlations.
Data visualization is a way to make sense of the ever-increasing stream of information with which we’re bombarded and provides a creative antidote to the “analysis paralysis” that can result from the burden of processing such a large volume of information. “It’s not about clarifying data,” says Koblin. “It’s about contextualizing it.”
Today algorithmically inspired artists are re-imagining the art-science continuum through work that frames the left-brain analysis of data in a right-brain creative story. Some use data visualization as a bridge between alienating information and its emotional impact—see Chris Jordan’s portraits of global mass culture. Others take a more technological angle and focus on cultural utility—the Zoetrope project offers a temporal and historical visualization of the ephemeral Web. Still others are pure artistic indulgence—like Koblin’s own Flight Patterns project, a visualization of air traffic over North America. Here, see a slideshow of works by 21 current pioneers of the discipline.
There are real implications for business here. Most cell phone providers, for instance, offer a statement of a user’s monthly activity. Most often it’s an overwhelming table of various numerical measures of how much you talked, when, with whom, and how much it cost. A visual representation of this data might help certain patterns emerge, revealing calling habits and perhaps helping users save money.
Companies can also use data visualization to gain new insight into consumer behavior. By observing and understanding what people do with the data—what they find useful and what they dismiss as worthless—executives can make the valuable distinction between what consumers say vs. what they do. Even now, this can be a tricky call to make from behind the two-way mirror of a traditional qualitative research setting.
It’s essential to understand the importance of creative vision along with the technical mastery of software. Data visualization isn’t about using all the data available, but about deciding which patterns and elements to focus on, building a narrative, and telling the story of the raw data in a different, compelling way.
Ultimately, data visualization is more than complex software or the prettying up of spreadsheets. It’s not innovation for the sake of innovation. It’s about the most ancient of social rituals: storytelling. It’s about telling the story locked in the data differently, more engagingly, in a way that draws us in, makes our eyes open a little wider and our jaw drop ever so slightly. And as we process it, it can sometimes change our perspective altogether.
Why Did Homebuilding Stocks Surge?
August 11th, 2009 | Posted by stockPosted by: Ben Steverman on August 11, 2009
When you buy stock in a corporation, you theoretically are buying rights to a slice of that company’s future profits. So how do you value a stock when those profits are almost nonexistent, both now and for the foreseeable future?
That’s arguably the situation for homebuilders. Yes, the housing market may be stabilizing. But a true recovery for this sector is almost certainly a few years, maybe several years, in the future.
So how to explain what’s happened in the last month? Homebuilding stocks have surged.
Consider, from July 8th to Aug. 7th:
Toll Brothers (TOL), up 40%
D.R. Horton (DHI), up 61%
Pulte Homes (PHM), up 21%
Lennar Corp. (LEN), up 63%
KB Home (KBH), up 62%
Centex Corp. (CTX), up 60%
Ryland Group (RYL), up 56%
Hovnanian Enterprises (HOV), up 144%
Beazer Homes USA (BZH), up 163%
Brookfield Homes Corp. (BHS), up 121%
Most of these stocks backed off on Aug. 11, after the release of a Stifel Nicolaus (SF) report by analyst Michael Widner — titled “Is the Homebuilder Rally for Real?”
His answer: Probably not. Widner notes, “The companies with the worst balance sheets performed the best.” He tries to explain:
We believe the weakest balance sheets tend to outperform in this environment because investors expect that 1) the rising economic tide will lift all boats, and 2) cheap boats will offer the highest bang for the buck so to speak.
Some of homebuilder stocks’ rally could be explained by the stabilization of certain economic measures. But, the data haven’t changed that quickly. Nor is a better economy or a stabler housing market likely to translate into significantly better homebuilder earnings for quite some time.
Also, another “fundamental” measure of these stocks — recent earnings reports — had no perceptible effect on homebuilders’ share performance, Widner argues.
With the outlook for homebuilders remaining very murky, and a full recovery and predictable earnings “a few years away,” these stocks are trading on that elusive concept of “sentiment.”
We believe sentiment drives the sector, not fundamental valuations and we see future data as unlikely to support the recent rise in sentiment.
A few lucky shareholders have doubled their money by correctly predicting when beaten-down, underappreciated homebuilder stocks would get their due. But those traders must also know that the winds on Wall Street can shift quickly.
When the homebuilding business is this slow, a disappointing housing data point or a skeptical analysts report are all it can take to turn the stock market’s leaders into its laggards.
August 11th, 2009 | Posted by innovHow can we be expected to grow and create jobs, many executives wonder, when we are shrinking?
Despite a slight easing on the unemployment rate, a quarter million Americans lost their jobs last month, and job prospects for those out of work look bleak for the foreseeable future. Policymakers and citizens alike are concerned with how we can reduce the rate of unemployment—no easy feat when balanced with the need to slash expenses.
However, focusing on unemployment is exactly the wrong thing to do. Yes, the numbers are staggering. But they only tell part of the story, and they do not offer a solution for relieving the economic chaos.
Instead, there is a more effective way to grow—a way that is free, does not rely on a government bailout, and has the potential for massive societal impact. American executives should turn to the 140 million who have jobs, and find practical ways to inspire them in their work, to empower them to innovate us out of a mess.
Based on extensive, long-term research, Gallup has determined that less than 30% of the corporate workforce is truly engaged in its work. That’s less than 30% of employees who work with passion and feel a profound connection to their companies. Yet employee engagement leads to increased customer engagement, which leads to real revenues and, eventually, more job opportunities for others.
Unfortunately, it seems that amid the crush of an urgent economic reality, executives and managers have overlooked some elementary tasks, such as making sure employees know what is expected of them and allowing them to use their talents in their roles. Yet the need to engage employees better is especially crucial during a recession, when mantras such as “do more with less” can madden employees who must pick up extra duties after their colleagues are laid off, but who are offered no tangible financial incentive to innovate.
Engagement serves as an intangible incentive — one that can be more valuable than any money can provide.
Take, for example, one store in the multibillion-dollar electronics retail chain, Best Buy (BBY). Executives evaluated employee engagement and discovered the store was middling at best. The poor score was affecting morale, employee turnover, and store profits.
After polling the employees for solutions, the management implemented some significant institutional changes, like a “team close,” so all team members felt jointly responsible for the nightly store closing, and not just an unlucky few.
As a result of management’s listening and making some bold decisions, employee engagement improved, and the store substantially lowered employee turnover and increased profits. Then, the changes were scaled across the 1,200-store chain. For every one-tenth-of-a-point increase in employee engagement, each Best Buy store increased profits by $100,000 a year.
So consider all of those who aren’t inspired to put their hearts into their work. Worse, nearly 20% are “actively disengaged,” trying to undermine others’ productive work. This is not merely a caricature of Office Space or Dilbert. Tens of millions of people deliberately clock in every day with the intention of holding back U.S. corporations’ ability to compete and innovate.
This is a shame—and yet it is an opportunity too.
Consider this a call to arms for all leaders. Imagine the results if we were to double employee engagement at our organizations within 18 months, from 30% to 60%. Through a disciplined effort to increase the connection and commitment of our employed workers, our organizations can innovate and create new solutions. This is the surest way to lower those devastating unemployment numbers. And we have no excuse—not even a bad economy.
Is it a Good Time to Buy Ford?
August 10th, 2009 | Posted by stockPosted by: Lauren Young on August 10, 2009
A reader sent me an email today asking if it is a good time to buy Ford (F) stock. In turn, I asked my sources in the investment world what they think. I’ll be posting their responses as they filter in.
Here’s what Martin Weiss, founder of Weiss Research and several investment newsletters, has to say:
Anyone recommending Ford today is probably basing it on the shaky premise that:(1) The recent pick-up in auto demand is sustainable;
(2) The U.S. auto industry somehow has restored—or will restore—its competitive power;
(3) Ford shares still provide good value despite their sharp rally—from $1.26 per share last November to $8.44 last week.
This doesn’t meant that Ford shares cannot move higher, Weiss says. “They may do just that. But the auto industry recovery is driven more by unsustainable government bailouts than lasting growth in demand, and Ford will have long-term difficulty competing,” he says.
Bottom line: According to Weiss, buying Ford shares now is not an investment. “It’s a high-risk speculation,” he says.
What do you think? Does Ford’s recent uptick signal that the worst is behind the company now?
Wiregrass residents capitalize on sales tax holiday
August 9th, 2009 | Posted by taxAug. 9–Residents from around the Wiregrass are taking advantage of the statewide sales tax-free weekend.
With a temporary break from Dothan’s 9-cent sales tax, shoppers at The Barn turned out in droves to buy clothing in preparation of school starting soon.
“I’ve got three girls, so anything I can get a break on is great,” said Valerie Sawyers. “We’ll probably venture out (Sunday) too, I’m sure, because (their) daddy is with us and he doesn’t want to stay out too long. By the time I get through, I’m hoping it’s going to help with at least half of what I’m spending.”
For residents buying for kids, the tax break is especially useful.
“I think it’ll help a lot, (because) I’m buying kids’ clothes for my grandchildren,” said Rita Wood.
Scott Deal brought his son from Eufaula to buy clothes.
“The way the economy is, you’ve got to save every bit you can save,” Deal said. “We don’t have uniforms in Eufaula, we just came here to buy his blue jeans, and boots are a trend now, so we wanted to get him some of those, and also a belt.”
Some parents who normally stay away from stores on weekends are out in full force this weekend.
“(The sales tax holiday) will bring us out more than usual, for sure,” said Kim Duren. “We home school our kids, but we still take advantage of the tax-free weekend, because we need school clothes for the year, coming up on the fall season, just like everybody else.”
Even residents without children say they’re shopping more this weekend than usual.
“Right now, with today’s economy, at 9 percent tax, you’re saving 10 cents on every dollar, and generally jeans cost you $30, so there’s almost $3 savings every time,” said Tim Wilson. “If you come out today and buy three or four pairs of jeans, you could save $12, and that $12 can help with gas and a little bit of everything else. It’s worth it to come out, because while you generally might not need something right now, go ahead and get it, because you’re gonna save money.”
Shoppers at The Barn were in favor of expanding the holiday.
“This should happen more often,” Deal said. “Hard-working people deserve every break they can get.”
According to Wilson, tax breaks are the easiest way to relieve residents’ financial burdens.
“It helps out quite a bit, because I’m at the income level where the only real savings I see are getting out of paying taxes,” he said. “Any tax savings I can get will help.”
To see more of The Dothan Eagle or to subscribe to the newspaper, go to http://www.dothaneagle.com . Copyright (c) 2009, Dothan Eagle, Ala. Distributed by McClatchy-Tribune Information Services. For reprints, email tmsreprints@permissionsgroup.com , call 800-374-7985 or 847-635-6550 , send a fax to 847-635-6968, or write to The Permissions Group Inc., 1247 Milwaukee Ave., Suite 303, Glenview, IL 60025, USA.
State, local officials leery of $189 tax-appeal offer
August 5th, 2009 | Posted by taxBy Dale Quinn The Arizona Daily Star, Tucson
Publication: The Arizona Daily Star (Tucson)
Aug. 5–It’s too late for people to save money on their 2009 property taxes, despite an official-looking letter recently sent to Tucson homeowners that appears to claim otherwise.
The mailer, distributed by a company called Property Tax Review Board, says “2009 Property Tax Reduction Form” at the top and proposes saving homeowners thousands of dollars if they quickly mail a check for $189. It claims that because of a continued drop in property values, the county’s assessed value of a home exceeds its property value for the 2009 tax roll.
But the deadline for homeowners to appeal the valuation of their homes for 2009 tax purposes has come and gone, said Pima County Assessor Bill Staples.
“All of the appeal deadlines for 2009 have passed, so it would not be in (homeowners’) best interest to mail a check to these people,” Staples said.
The Arizona Attorney General’s Office issued a consumer advisory Tuesday warning homeowners about the mailers.
“This solicitation appears to be an attempt to scam homeowners who are looking to reduce their property tax bill,” the advisory reads.
The attorney general also points out that while the document appears official, contains a notice number and a deadline for prompt processing, the company is not affiliated with any government entity. The letter itself does say that Property Tax Review Board is “not a government agency.”
Kim States, president and CEO of the Better Business Bureau of Southern Arizona, said her office began receiving phone calls about the letter late last week, and in total had gotten about 20 inquiries.
The BBB tells the callers that if they choose, they can dispute their property valuation at no cost, without using an outside company, if they do it within the time limit allowed by law.
“We’re not telling them not to do business with the company,” States said. “We’re just giving them the facts.”
It doesn’t appear that the Property Tax Review Board does anything homeowners couldn’t do on their own for free, if they filed an appeal within the deadline allowed by the law, County Assessor Staples said. And the deadline has been expired for quite some time, Staples said. The Assessor’s Office mailed valuations for 2010 last February, and the window for a free appeal for that valuation has also expired, he said.
Property owners still can appeal their valuations in Pima County Superior Court, Staples said, but they would have to pay court fees.
According to the Arizona Corporation Commission, Property Tax Review Board lists its address as 11856 Balboa Blvd. in Granada Hills, Calif., with Michael McConville as an officer.
California Attorney General Edmund G. Brown Jr. filed suit against McConville, his brother Sean McConville, and their businesses, Property Tax Reassessment and Property Tax Adjustment Services, in San Diego County Superior Court in May.
The suit contends the companies made untrue and misleading statements to induce consumers to buy products and services, and that they distributed solicitations implying a government connection, approval or endorsement.
“The brothers billed tens of thousands of homeowners throughout California nearly $200 each for property tax reassessment services that were almost never performed and are available free of charge from local tax assessors,” a news release from the California attorney general reads.
When an Arizona Daily Star reporter reached the Property Tax Review Board by calling the number listed on the letter, he was told to send media inquiries to the California mailing address. Attempts to reach the McConvilles at that address were unsuccessful.
Contact reporter Dale Quinn at 573-4197 or dquinn@azstarnet.com
To see more of The Arizona Daily Star, or to subscribe to the newspaper, go to http://www.azstarnet.com . Copyright (c) 2009, The Arizona Daily Star, Tucson Distributed by McClatchy-Tribune Information Services. For reprints, email tmsreprints@permissionsgroup.com , call 800-374-7985 or 847-635-6550 , send a fax to 847-635-6968, or write to The Permissions Group Inc., 1247 Milwaukee Ave., Suite 303, Glenview, IL 60025, USA.
Two courts address tax shelter exception to tax practitioner privilege
August 1st, 2009 | Posted by taxBy Beavers, James
Publication: The Tax Adviser
The Tax Court and the Seventh Circuit recently decided cases dealing with the tax practitioner/client privilege under Sec. 7525. The Tax Court held that the tax shelter exception to the tax practitioner/client privilege did not apply to documents in the form of the minutes of meetings between a
partnership and a federally authorized tax practitioner because the tax advice in the documents was not given in connection with the promotion of a tax shelter. In another case, the Seventh Circuit upheld a district court’s order to a corporation to produce certain documents containing communications between a corporation and its accounting firm because the tax shelter exception applied to those documents.
Background of Tax Court Case
Timothy Egan is an accountant who is a partner with PricewaterhouseCoopers (PwC). Egan’s clients at PwC include Arthur Winn and the “Winn organization,” a group of corporations and partnerships controlled by Arthur Winn and his associates. Egan had provided tax compliance and tax planning and advisory services to Winn and the Winn organization entities over a long period. As part of his services to the Winn organization, Egan provided tax advice to the organization regarding transactions of the Countryside Limited Partnership. The IRS considered these transactions to be tax shelters.
During litigation with Countryside over these transactions, the IRS asked the Tax Court to compel Countryside to produce a series of 16 documents, all titled “Estate Planning Meeting Minutes” (the minutes), that constituted a cumulative chronicle of communications, in part confidential, from clients, including Countryside, to their attorneys for legal advice; to Timothy Egan, for tax advice; or from those individuals back to their clients. Countryside argued that it was not required to produce the documents because the IRS had failed to prove that minutes were related to the promotion of a corporation’s participation in any tax shelter, so the Sec. 7525(b) tax shelter exception did not apply.
Background of Seventh Circuit Case
Valero Energy Corp. is a large oil refining company based in Texas. In December 2001, Valero acquired a Canadian oil company. Shortly after that acquisition, Valero, with the help of its accounting firm, Arthur Andersen, undertook a complicated series of transactions that allowed it to realize $105 million in foreigncurrency losses.
These large losses led to an IRS investigation. In the investigation, the IRS issued a summons to Arthur Andersen for documents related to the tax aspects of the transactions. Valero resisted the summons in court, claiming that documents were protected by the tax practitioner/client privilege under Sec. 7525. A district court eventually held that the tax-shelter exception to the privilege applied to some of the documents and ordered Valero to produce those documents. Valero appealed this decision to the Seventh Circuit, arguing that the documents were prepared as part of individualized tax planning services provided by Andersen to Valero, so the tax-shelter exception did not apply.
Sec. 7525
Under Sec. 7525(a), a limited privilege, equivalent to the attorney-client privilege, applies to communications between a taxpayer and a federally authorized tax practitioner regarding tax advice. However, under Sec. 7525(b), there is an exception to the privilege for communications regarding tax shelter transactions. At the time of the events in both cases, Sec 7525(b) stated that the privilege did “not apply to any written communication between a federally authorized tax practitioner and a director, shareholder, officer, or employee, agent, or representative of a corporation in connection with the promotion of the direct or indirect participation of such corporation in any tax shelter (as defined in section 6662(d)(2)(C)(iii)).”
Tax Court’s Decision
In the Countryside case, the Tax Court held that the exception did not apply to the minutes because Egan did not give the advice they contained as part of the promotion of a tax shelter. Noting that other courts addressing the meaning of promotion for purposes of Sec. 7525(b) had come to different and widely diverging definitions of the term, the Tax Court decided that recourse to the legislative history of the statute was justified. The Tax Court found that the legislative history of Sec. 7525 indicated that a routine relationship between a tax practitioner and a client did not amount to promotion of a tax shelter for purposes of Sec. 7525(b).
Based on Egan’s deposition testimony about his work for the Winn organization, the veracity of which the IRS did not challenge, the Tax Court found that Egan’s advice about Countryside was provided as part of Egan’s routine relationship with the organization. In coming to this conclusion, the court stressed the close, longterm nature of Egan’s relationship with the organization and the fact that Egan had given similar advice about other transactions under the same procedures on a regular basis during the relationship.
The Tax Court also pointed out that PwC had no stake in the outcome of the Countryside transactions that Egan gave advice on and that the firm was paid on the same hourly basis for the advice as it was for the tax preparation services provided by Egan to the Winn organization as evidence that the advice was not the promotion of a tax shelter.
Seventh Circuit’s Decision
In a decision released shortly after the Tax Court’s decision in the Countryside case, the Seventh Circuit in Valero upheld the district court’s order, rejecting Valero’s claim that the tax shelter exception to the tax practitioner/client privilege did not apply to the documents in question. Valero had argued that, for purposes of the Sec. 7525(b) exception, promotion meant the “active furtherance of sale of merchandise through advertising or other publicity.” It also argued that a tax shelter was limited under the exception to prepackaged, one-size-fits-all tax shelter products and that an individualized tax savings plan, such as the one that Andersen provided Valero, was not a shelter.
Unlike the Tax Court, the Seventh Circuit did not focus on the relationship between the taxpayer and the tax adviser to make its determination. Instead it focused on the separate meanings of the word “promotion” and the term “tax shelter.” It found that promotion meant the encouragement of participation in a shelter as opposed to merely informing a client about a shelter, assessing a shelter in a neutral fashion, or evaluating weak spots in a shelter a client previously used. It found (referring to the language of Sec. 6662(d)(2)(c)(ii)) that the term tax shelter meant “any plan or arrangement whose significant purpose is to avoid or evade federal taxes” and that therefore a tax shelter could include an individualized or one-size-fits-all plan.
The court explained that this definition of the exception was consistent with the broad summons power granted to the IRS under Sec. 7602(a). According to the court, accepting the narrow definition proposed by Valero would restrict the IRS’s summons power, which the court would not do without clear direction from Congress. The court also addressed the House report language that the Tax Court relied on in Countryside. While it agreed with the Tax Court that a House report could be a good record of congressional intent, it also found that in this case the report did not support Valero’s position because nothing in it indicated that tax shelters were limited to actively marketed tax shelters or prepackaged products.
Reflections
Although the Tax Court and the Seventh Circuit took quite different approaches to determining whether documents were subject to the tax shelter exception and seemed to reach different conclusions, they might well have come to the same general holdings if the cases had been switched. In Countryside, the Tax Court indicated that while Egan advised on the results of transactions for the Winn organization at its request, he did not encourage the organization’s participation in the transactions, and he and his employer, PwC, did not stand to gain if the transactions were completed. Therefore, although the transactions at issue were tax shelters under the Seventh Circuit’s definition in Valero, if the Seventh Circuit had issued the decision in Countryside, it may well have decided that Egan was not promoting the shelters and that Countryside was not subject to the exception for this reason.
In Valero, the Seventh Circuit indicated that the transaction at issue was not an ordinary one for Valero. Instead the transactions at issue were the result of a relatively unusual event–the acquisition of a large foreign company–and were designed specifically to take advantage of a temporary condition in the foreign currency exchange markets. In addition, the Seventh Circuit indicated that in the documents the district court held were subject to the exception, Andersen did actively encourage Valero to undertake the transactions. Given its stance in Countryside, it is likely that the Tax Court would have found that the advice given in the documents was not advice given in the routine relationship between Valero and Arthur Andersen and that therefore it would have held that the documents were subject to the tax shelter exception.
Countryside Limited Partnership, 132 T.C. No. 17 (2009); Valero Energy Corp., No. 08-3473 (7th Cir. 6/17/09)
James Beavers, J.D., LL.M., CPA
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