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Circular 230 - It's Not Just for Tax Lawyers
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THIS ARTICLE DOES NOT CONSTITUTE TAX ADVICE AND MAY NOT BE USED BY ANY TAXPAYER FOR PENALTY PROTECTION
OVERVIEW of Circular 230
FOR TAX PRACTITIONERS
By JONATHAN G. BLATTMACHR, MITCHELL M. GANS and DAMIEN RIOS
© 2005. All Rights Reserved.
Effective June 21, 2005, practice requirements changed for individuals who provide written tax advice and practice before the Internal Revenue Service. Tax Practitioners now must comply when rendering written advice about Federal tax issues with Treasury Regulations known as Circular 230 that was amended in December 2004 and again in mid-May of 2005. Failure to comply with the Circular may result in disbarment or suspension of practice before the Internal Revenue Service, a censure, or fines if the failure is due to the practitioner's willfulness, recklessness or gross incompetency. It may also result in professional liability at least for attorneys. The Circular should be of interest to tax practitioners and others who provide written advice about Federal tax issues, including estate planners, divorce lawyers, and practitioners who offer elderlaw services. Those professionals often provide written advice and documents that involve Federal tax issues; the Circular may have a significant impact on them, their clients and their practices.
In this article, we describe some of the significant changes made to the Circular. Taken literally, the changes are extremely broad—inhibiting the free flow of information about Federal tax matters from lawyers and accountants to their clients—and will increase the cost of delivering written work product to clients. The Circular 230 amendments represent one of the most significant developments in practice in recent years.
Overview of Revisions to Circular 230
There are three broad areas of change brought about by revised Circular 230. The first is contained in § 10.33. This section sets forth what is labeled as “best practices.” These are suggested or “aspirational” practices that the Treasury believes tax practitioners should follow. The aspirational practices are worth reading, but are not mandatory. That is, a practitioner who fails to comply with these practices will not be subject to discipline under the Circular. They will not be discussed in this article. Nevertheless, practitioners may wish to consider whether failure to follow these suggested practices could result in malpractice liability.
The second change sets forth minimum required practice rules with respect to a written discussion of a Federal tax issue. These rules are contained in § 10.35. They will be the principal subject of this article.
The third set of changes are contained in §§ 10.36 and 10.52, which set forth the requirements for the practitioner who has principal authority for overseeing a firm’s Federal tax practice. The goal of this third area of change is enhance compliance with the Circular by trying to insure that the person who has such principal authority will develop and enforce procedures designed to achieve such enhancement.
Overview of New § 10.35 of Circular 230
Section 10.35 presents new requirements for certain written discussions of a Federal tax issue. A “writing” certainly covers emails and faxes. Failure to meet these practice standards may result in disciplinary action mentioned at the beginning of this article. The writings to which this section applies are called “Covered Opinions” but appear to cover much more than what many practitioners regard as a “formal” written legal opinion.
A Covered Opinion is “written advice” by a practitioner concerning one or more Federal tax issues (quite apparently including any estate, gift, or generation-skipping transfer tax issue) arising in six categories. Although reference is made to tax advice, the term seems to be very broad covering virtually any written discussion of a Federal tax matter. A writing may fall into more than one category of Covered Opinions. It seems that mere recitals of the provisions of the Code (e.g., “Section 215 provides for a deduction for alimony paid”) may constitute advice—arguably, the practitioner is advising as to what the Code states. It is possible that what the practitioner really intends as a transmittal message, if it mentions Federal tax issues or consequences, may be written advice that must be tested to determine if it is a Covered Opinion. In fact, it is possible that preparation of an income tax return that reflects certain tax positions and the submission of it to the taxpayer for review and signing constitutes written advice potentially covered by § 10.35 of the Circular.
Before turning to the six categories of writings that constitute Covered Opinions, it is appropriate to note that there are five writings that are expressly excluded from being Covered Opinions: (1) written advice provided during the course of an engagement if the practitioner is reasonably expected to provide subsequent written advice to the client that will satisfy the requirements for Covered Opinions; (2), except for advice related to a Listed Transaction (described below) or an arrangement the principal purpose of which is tax avoidance or evasion, written advice that concerns qualification of a qualified plan, a state or local bond opinion, or is included in documents required to be filed with the Securities and Exchange Commission; (3) written advice provided after the taxpayer has filed a tax return if the advice is solely for the use by the taxpayer and if the practitioner neither knows nor has reason to know the advice will be used by the taxpayer to take a position on a tax return filed after the advice is provided; (4) written advice provide to an employer by in–house counsel or other tax advisor solely related to the employer’s tax return; and (5) written advice that is negative—that is, it concludes the tax issues will not be resolved in the taxpayer’s favor and does not reach any level of confidence (e.g., does not even say the position would not be frivolous) that the taxpayer would prevail.
The Six Categories of Covered Opinions
1. Listed Transactions. The first area of written advice that constitutes a Covered Opinion is one arising from a transaction that is the same as or substantially similar to a transaction that, at the time the advice is rendered, the IRS has determined to be a tax avoidance transaction and identified by published guidance as a “Listed Transaction” under Treas. Reg. § 1.6011-4(b)(2). To date, no Listed Transaction seems directly to involve what probably would be viewed as a traditional estate planning arrangement or involves tax matters relating to a divorce. But the list is constantly expanded by the IRS and practitioners should monitor these notices.
2. Tax Avoidance is the Principal Purpose of an Arrangement. The second area is one arising from any partnership or other entity, any investment plan or arrangement, or any other plan or arrangement (an “arrangement”), the principal purpose of which is the avoidance or evasion of any tax imposed by the Internal Revenue Code (“Code”).
Special Note about Estate Planning. Estate planning usually encompasses a very broad array of steps and purposes. Traditional estate planning certainly covers the transmission of property at death but deals with much more, including choice of guardians for minor children, selection of other fiduciaries, planning for successive management of a closely-held business, burial instructions, marital arrangements and retirement planning. Almost always, for individuals of significant means, it includes planning to reduce gift, estate and generation-skipping transfer taxation. Indeed, everyday decisions, such as providing for the education or health care of descendants, involve tax considerations, such as deciding between establishing educational accounts under Code Sec. 529 or paying tuition directly to an educational institution so as to fall under the non-taxable transfer rule of Code Sec. 2503(e) to avoid gift tax. The timing and form of a gift of $11,000 to each descendant or other loved one in any calendar may be motivated by a wish to have each transfer fall under the protection of the gift tax (and, if applicable, generation-skipping transfer tax) annual exclusion. Structuring of Wills and trusts often is dictated primarily by tax considerations, such a having a trust contain terms so it may qualify for the marital deduction or making a bequest to use exactly the taxpayer’s remaining estate tax exemption and in a manner so that the bequest will not be included in the gross estate for Federal estate tax purposes of the taxpayer’s surviving spouse or any descendant of his or hers.
Exemption from Principal Purpose: Claiming a Tax Benefit in a Manner Consistent with the Code and Congressional Purpose. Is tax avoidance the principal purpose, within the meaning of the Circular, of all such gift/estate/generation-skipping transfer tax related arrangements? As originally issued, the Circular provided no guidance as to how a practitioner should or could discern what the taxpayer’s principal purpose. However, changes made in mid-May clarify that, if the arrangement has as its purpose the “claiming of tax benefits in a manner consistent with the statute and Congressional purpose”, it will not be treated as a principal-purpose transaction.
This new “safe harbor” from principal-purpose status is derived from Treas. Reg. § 1.6662-4(g)(2)(ii). Although the regulation provides no further clarification as to the meaning of the phrase, it does contain a list of example of qualifying transactions or elections, such as an investment in a municipal bond to qualify for the exclusion from gross income under Code Sec. 103 or making an S corporation election.
It might seem that anything expressly permitted by the Code must necessarily be consistent with it and the Congressional purpose behind it. For example, claiming the gift tax annual exclusion under Code Sec. 2503(c) and creating a grantor retained annuity trust (GRAT) certainly are expressly authorized by section 2702(b)(1) of the Code. But sometimes the exact structure or the facts will raise an issue as to whether the tax benefit will be allowed. For example, in Hackl v. Comm’r, 335 F. 3d 664 (7th Cir. 2003), the annual exclusion was not allowed for an outright gift of a limited partnership interest. Similarly, the IRS contended in TAM 2002-45-053 (not precedent) that the value of the taxable remainder of a GRAT cannot be zero (or very close to zero).
It seems that if the taxpayer’s position is ultimately sustained that the safe harbor will have been met—in other words, the tax benefit was claimed in a manner consistent with the Code and Congressional purpose. If, however, the taxpayer’s position is not sustained, then it may be that the benefit was not so claimed and, therefore, the safe harbor may not apply—we just do not know.
Nevertheless, even if the safe harbor does not apply (because the taxpayer’s position is not sustained), it seems the practitioner who concluded that the tax benefit was being claimed in a manner consistent with the Code and Congressional purpose can avoid the Circular 230 sanctions by establishing that he or her conclusion was not a willful, reckless or grossly incompetent failure to comply with the Circular. In fact, unless the practitioner was unreasonable in concluding the benefit was being claimed in a manner consistent with the Code and Congressional purpose, it seems unlikely the practitioner would face penalties under the Circular.
3. Reliance Opinions. If tax avoidance is not the principal purpose of the arrangement but it is a significant purpose, any written advice about it is a Covered Opinion (requiring compliance with the 230 Circular practices) if it is written advice that concludes at a confidence level of “more likely than not” (that is, a greater than 50 percent likelihood) that one or more significant Federal tax issues would be resolved in the taxpayer’s favor. In other words, if the written advice does not reach a more-likely-than-not level of confidence, it is not a Reliance Opinion (although it may be a Covered Opinion for other reasons).
Significant Federal Tax Issue. A Federal tax issue is significant if the IRS has a reasonable basis for a successful challenge and its resolution could have a significant impact, whether beneficial or adverse under any reasonably foreseeable circumstance, on the overall Federal tax treatment of the transaction(s) or matter(s) addressed in the writing. It is appropriate to note that the IRS does not need a winning hand with respect to the issue but only has a reasonable basis for a successful challenge. No guidance is provided as to how a practitioner makes that determination. And the “cost” of violating the Circular, apparently even if the lawyer or accountant has acted in good faith, may be severe, as mentioned above.
No Reliance Exemption from Reliance Opinion Status. A further exception enabling the practitioner to fall outside of the Reliance Opinion category is where the “practitioner prominently discloses in the written advice that it was not intended or written by the practitioner to be used, and that it cannot be used by the taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer.” That “disclaimer” may be used by many practitioners. But client reaction may not be positive. Why would a client want written advice unless he or she believes it could be relied upon it for penalty protection?
4. Marketed Opinions. Written advice is a Marketed Opinion, and therefore a Covered Opinion, if it relates to an arrangement a significant purpose of which is tax avoidance or evasion and if the practitioner knows or has reason to know that it will be used or referred to by a person other than the practitioner (or someone affiliated with his or her firm) in promoting, marketing or recommending an arrangement to one or more taxpayers. A writing is not a Marketed Opinion, unless it relates to a Listed Transaction or to an arrangement, the principal purpose of which is tax avoidance, if it prominently discloses in the written advice that (1) the advice was not intended or written by the practitioner to be used, and that it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer, (2) the advice was written to support the promotion or marketing of the transaction(s) or matter(s) addressed in the written advice, and (3) the taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor. In other words, if it is known that others will refer to or use the opinion in promoting an arrangement, it is a Market Opinion if it relates to a Listed Transaction or its principal purpose is tax avoidance even if it contains the three “disclaimer/warning” statements.
It is uncertain whether a writing constitutes a Marketed Opinion if the practitioner merely prepares text that the client will put in its brochure with no attribution that it was prepared by the attorney. For example, a lawyer or accountant prepares text for a client that is a charitable organization so it can prepare a brochure to be sent to current and prospective donors about various forms of deferred giving (such as a charitable remainder trust, gift annuity or pooled income fund). Even if the charity does not refer to or attribute the text it uses to the lawyer who prepared it, it is not certain whether the writing constitutes a Marketed Opinion.
It is possible that a Marketed Opinion even covers an article written about Federal tax issues that is to be published in a commercial publication (such as the Journal of Taxation) or distributed at a seminar sponsored by someone other than the practitioner (or his or her firm) attended by other tax practitioners. Although there seems to be an exception for the distributions of written advice by the practitioner (and his or her firm), there is none, it appears, for anyone else. Therefore, such an article written by a practitioner and will be published in a commercial publication or distributed at a conference may be a Covered Opinion unless it contains the prominently disclosed “disclaimers” and “warnings” discussed above, and does not address Listed Transactions or an arrangement the principal purpose of which is tax avoidance or evasion.
Internal Written Communications/Newsletters. As stated above, the exception from Covered Opinion status for “in house” advice only applies with respect to matters relating to the employer’s own taxes. For example, a memorandum prepared by the in-house tax adviser and distributed to other employees about recent Federal income tax developments does not appear to fall under the in-house exception. However, it may be that such a written communication is not covered by § 10.35 of the Circular. First, because it is internally circulated, it seems that it is not a Marketed Opinion. Second, if it is not advice to other employees as to their own tax situations, it seems that the writing may not constitute advice at all. But that is not a certainty. What seems to be more certain is that a newsletter distributed to clients or potential clients of the accounting or law firm likely will be a Covered Opinion as a Marketed Opinion unless tax avoidance is not the principal purpose (because, for example, all matters discussed are consistent with the Code and Congressional purpose) and the three disclaimers/warnings mentioned above are prominently disclosed in the newsletter. It may be appropriate to note here, as will be discussed in more detail below, that any Covered Opinion must discuss all significant Federal tax issues the arrangement presents unless it is a “Limited Scope Opinion” which has limited application—and a Marketed Opinion cannot be a Limited Scope Opinion.
Prominent Disclosure. A statement may avoid being a Covered Opinion by reason of being a Reliance Opinion if it “prominently discloses…that it was not intended or written…to be used, and that it cannot be used by the taxpayer, for the purpose of avoiding penalties”. A statement also may avoid being a Covered Opinion by reason of being a Marketed Opinion if it does not discuss a Listed Transaction, does not relate to an arrangement the principal purpose of which is tax avoidance, and prominently discloses three disclaimers/warnings mentioned above.
An item is prominently disclosed if it is readily apparent to the reader (which may vary from reader to reader). At a minimum, the disclosure must be set forth in a separate section (and not a footnote alone) in a typeface at least as large as the typeface of any discussion of the facts. It probably would be appropriate for the prominently disclosed matter to be on the first page or, perhaps, at the bottom of each page (but not in a footnote).
5. Conditions of Confidentiality. Written advice with respect to one or more Federal tax issues involving an arrangement, a significant purpose of which is tax avoidance or evasion, that is subject to conditions of confidentiality is a Covered Opinion. Such a condition of confidentiality will be present is the practitioner imposes on one or more recipients of the written advice a limitation on disclosure of the tax treatment or tax structure of the transaction and the limitation on disclosure protects the confidentiality of the practitioner’s tax strategies, regardless of whether the limitation is legally binding. A claim that a transaction is proprietary or exclusive is not a limitation if the practitioner confirms to all recipients of the written advice that there is no limitation on disclosure of the tax treatment or tax structure of the transaction that is the subject of the written advice.
6. Contractual Protection. Written advice with respect to an arrangement, a significant purpose of which is tax avoidance or evasion, is subject to Contractual Protection is a Covered Opinion. Contractual Protection means the taxpayer has the right to a full or partial refund of fees paid to the practitioner if all or part of the intended tax consequences from the matters addressed are not sustained, or if the fees are contingent on the taxpayer’s realization of tax benefits from the transaction. The Circular indicates that “any agreement to provide services without reasonable compensation” constitutes contractual protection, although it seems this would be the case only if the intended tax consequences are not sustained. An agreement to defend the intended tax consequences without additional compensation does not appear to be contractual protection within the meaning of the Circular. Similarly, a contingent fee arrangement in seeking a refund does not appear to be contractual protection. Nevertheless, the Treasury has indicated that it will soon address contingent fee matters. Section 10.35 of the Circular does not seem to cover contingent fees the practitioner will receive for defending the taxpayer against an assessment of tax or for obtaining a refund of tax already paid. Section 10.28 of the Circular deals with fees and does not seem to prohibit such fees.
Requirements for Covered Opinions
The Circular specifies four requirements with which a Covered Opinion must comply. Each has subparts. And other rules are also specified. So realistically, the practitioner probably will have to deal with a dozen or so requirements for each Covered Opinion.
1. Factual Matters. A practitioner must use reasonable efforts to identify and ascertain the facts, which may relate to future events if a transaction is prospective or proposed, and to determine which of the facts are relevant. Apparently, the test of whether the practitioner did or did not use reasonable efforts is an objective one. In other words, the fact that the practitioner honestly and, perhaps, even reasonably believed he or she had made reasonable efforts to identify and ascertain the facts may not be found to be compliance if it turns out the efforts were not reasonable. All of the facts upon which the practitioner relies must be in a separate section of the written advice.
The practitioner must not base the opinion on any unreasonable factual assumption (including any with respect to future events) or unreasonable representation of another. An unreasonable factual assumption is one that the practitioner knows or should know is incorrect or incomplete. As an illustration, the Circular states that it is unreasonable to assume that a transaction has a business purpose or is potentially profitable apart from tax benefits. On the other hand, the Circular states that it is not unreasonable to rely on a projection, financial forecast or appraisal unless the practitioner knows or should know it is incorrect, incomplete or prepared by a person lacking the skills of qualifications necessary to complete it
2. Relating the Law to the Facts . The practitioner, in rendering a Covered Opinion, must relate the applicable law to the facts. Applicable law includes “potentially applicable judicial doctrines”. Although not specified, these may include the substance over form doctrine, the business purpose doctrine, the economic substance doctrine, the step transaction doctrine, the reciprocal trust or reciprocal transfer doctrines. Perhaps, there are others. Unfortunately, these judicial or court developed doctrines are not codified and, therefore, are uncertain in scope and content. It seems, to be on the “safe” side, that each Covered Opinion should discuss each doctrine.
The opinion must not contain internally inconsistent legal analyses or conclusions. For example, a conclusion that the actuarial value of the remainder interest in a charitable remainder unitrust is less than ten percent seems inconsistent with a conclusion that the value of the remainder is deductible for income and gift tax purposes. See Code Sec. 664(d)(2)(D). It is not specified that such inconsistency must relate solely to Federal tax issues.
3. Evaluation of the Significant Federal Tax Issues . The opinion must consider all significant Federal tax issues except as provided with respect to Limited Scope Opinions (discussed below) or with respect to opinions that may and do rely on the opinion of another practitioner.
In any event, with respect to each significant Federal tax issue, the opinion must provide a conclusion as to the likelihood that the taxpayer will prevail on the merits on each such issue considered in the opinion. If the practitioner is unable to reach a conclusion as to one of more of those issues, the opinion must so state. The opinion must describe the reasons for the conclusions, including the facts and analysis, or describe the reasons the practitioner is unable to reach a conclusion as to one or more issues.
If the practitioner cannot reach a more-likely-than-not level of confidence with respect to one or more significant Federal tax issues considered, the opinion must disclose that and must prominently disclose that “the opinion was not written and cannot be used by the taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer.” However, if the practitioner cannot reach a more likely-than-not on each significant Federal tax issue with respect to what would be a Marketed Opinion, it seems that the opinion may not be issued without violating the Circular.
4. Overall Conclusion. The opinion must provide the practitioner’s overall conclusion as to the likelihood that the stated Federal tax treatment of the arrangement is the proper treatment and the reasons for that conclusion.
5. Competency to Render the Opinion. The practitioner must be knowledgeable in all of the aspects of Federal tax law relevant to the opinion rendered, except the practitioner may rely on another’s opinion with respect to one of more significant Federal tax issues, unless he or she knows or should know that the opinion of the other should not be relied upon. The opinion of another upon which the practitioner relies must identify the other opinion and set for the conclusions it reaches.
Limited Scope Opinions
The Circular provides that a practitioner may provide an opinion that considers less than all of the significant Federal tax issues if (1) the practitioner and the taxpayer agree that the scope of the opinion and the taxpayer’s potential reliance on the opinion for avoiding penalties that may be imposed are limited to the Federal tax issues that are address in the writing, (2) the opinion does not involve a Listed Transaction or an arrangement the principal purpose of which is tax avoidance, and is not a Marketed Opinion, and (3) the opinion includes certain Required Disclosures (discussed below).
The practitioner, in issuing a limited scope opinion, may make reasonable assumptions about the favorable resolution of a Federal tax issue but must identify, in a separate section of the opinion, all issues for which the practitioner assumed a favorable resolution. It probably would be appropriate for the opinion to contain a heading for such part of the writing stating something like “Assumptions about Favorable Resolution of Certain Federal Tax Issues.” It is important to note that limited scope opinions are not permitted for arrangements the principal purpose of which is tax avoidance. As discussed above, there is a chance that many estate planning strategies will be held to be such arrangements, thereby foreclosing the use of limited scope opinions with respect to them.
Required Disclosure with Respect to Promoter Relationship
Each Covered Opinion must Prominently Disclose any compensation arrangement (such as a referral fee or fee-sharing) or referral agreement between the practitioner (or the practitioner’s firm) and any person (other than the client for whom the opinion is prepared) engaged in promoting, marketing or recommending the arrangement (or a substantially similar one) that is the subject of the opinion.
The scope of the promoter relationship rule is uncertain. For example, consider the situation in which an attorney occasionally refers individuals to an insurance sales representative who, in turn, typically recommends that the customer engage that attorney to draft an irrevocable trust to acquire the policy. The sales representative occasionally refers other customers who are acquiring policies to that same attorney if the representative concludes that the customer should seek legal advice in structuring the acquisition of a life policy and is not otherwise adequately represented on legal matters. If the attorney prepares a Covered Opinion with respect to a Federal tax matter with respect to the trust and/or the policy of insurance, must the lawyer include the required disclosure with respect to the sales representative because it is a promoter-practitioner relationship that Circular 230 covers? The answer is not certain. But prudence again may suggest that the fact that the attorney and the life agent make referrals to each other might well be mentioned. It seems also appropriate to mention that there is no fee sharing between them (assuming that is correct). Similar disclosure probably should be made with respect to other “referral” arrangements, even if not formal, such as with a law firm, an accounting firm, bank or trust company, where the attorney or accountant (or his or her firm) has, even if only occasionally, referred clients to the entity and the entity has, again even if only occasionally, referred customers to the accountant or attorney (or his of her law firm).
12 Suggested Guidelines to Increase Compliance with the Circular
It is important for practitioners to have appropriate procedure in place to comply with the Circular. Here are some suggestions.
1. Advise Old and New Clients the Circular Is Coming. Some practitioners will find it appropriate to advise clients in writing about the Circular, that it has changed how written statements must be prepared and that it may increase the cost of written work relating to any Federal tax issue. A short letter/memorandum might contain something like the following:
“On June 21, 2005, new Circular 230 became effective. The Circular was issued by the United States Treasury Department. It sets forth rules that tax practitioners, including lawyers and certified public accountants, must follow in providing written statements about certain Federal tax issues. A Federal tax issue is a question concerning the Federal tax treatment of an item of income, gain, loss, deduction or credit, the existence or absence of a taxable transfer of property (such as whether a transfer to another is subject to Federal gift tax), or the value of property for Federal tax purposes. The Circular covers much more than formal opinions and may apply to any writing relating to any Internal Revenue Code matter, including email messages. Practitioners who fail to comply with the Circular may be suspended or disbarred from practice before the Internal Revenue Service (such as filing a return or participating in the audit of a United States tax return), be publicly censured or be fined. Unfortunately, we and many others anticipate that the Circular may increase the cost of delivering certain written material to taxpayers. The Circular requires that certain written statements contain disclaimers or warnings and you will see new statements in some messages from us, including in email messages. All responsible tax practitioners will follow the requirements of the Circular. It is our intention to continue to deliver the highest quality services to you and in a cost efficient manner. Please call us if you have any question about how the Circular may affect our representation of you.”
2. Email Disclaimers. Consider having a statement permanently embedded at the beginning of each email message stating something like “Please read the important information relating to tax advice at the bottom of this e-mail message.” This information could appear before the now standard “Confidentiality” message contained at the end of virtually all email messages sent by professionals and may state something like “Unless expressly stated otherwise above, this message does not constitute tax advice and (1) nothing contained in this message was intended or written to be used, can be used by any taxpayer or may be relied upon or used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer under the Internal Revenue Code of 1986, as amended, (2) any written statement contained in this message relating to any Federal tax transaction or matter may not be used by any person to support the promotion or marketing of or to recommend any Federal tax transaction(s) or matter(s) addressed in this message, and (3) any taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor with respect any Federal tax transaction or matter contained in this message.”
Although the foregoing will not necessarily ensure compliance in all cases with the Circular, it may reduce the risk of being charged with knowing or having reason to know that it will be used or referred to by a person in promoting, marketing or recommending an arrangement to one or more taxpayers and, therefore, may reduce the risk of the email constituting a Marketed Opinion. In any case, as indicated, if you intend the addressee to be able to rely on the email, you should so expressly state.
3. Certain Potential Marketed Opinions. In any written statement that discusses any Federal tax matter and that the practitioner does not intend to be a Marketed Opinion, add a statement to the effect that “No one, without our express prior written permission, may use any part of this letter/memorandum in promoting, marketing or recommending an arrangement relating to any Federal tax matter to one or more taxpayers. Furthermore, it may not be shared with any other person without our prior written consent other than as required by law or by ethical rules. However, this prohibition on sharing this letter/memorandum does not preclude you from sharing with others the nature of this transaction or the fact that you consummated it.”
Such a statement should help to demonstrate that the drafter of the written statement did not know or have reason to know that someone would use it in promoting, marketing or recommending any Federal tax transaction or matter contained in the statement to any other taxpayer. The last sentence of the statement is intended to clarify that the e-mail is not subject to Conditions of Confidentiality.
4. Use a Decision-Tree Approach. The rules of the Circular are complex. It is recommended that practitioners use a decision-tree approach to reviewing a writing to determine if it is a Covered Opinion and, if so, what kind or kinds. For example, probably the first question should be something like “Does the writing discuss any Federal tax matter?” If not, the Circular’s Covered Opinion rules should not apply. But if the answer is “yes”, ask next, “Does the writing relate solely to preliminary advice?” And so on. A Circular 230 Decision-Tree is displayed at the end of this article.
5. Approach Listed Transactions with Caution. Do not discuss in writing any Listed Transaction (or principal purpose arrangement) without careful compliance with the Circular’s rules.
6. Obtain a Representation of Principal Purpose in Some Cases. In some cases, it will be appropriate to obtain a statement from the taxpayer as to the principal purpose of the arrangement. But keep in mind that a practitioner may not rely on an unreasonable or unfounded representation for such purposes.
7. Determine If the Tax Benefits Are Claimed in a Manner Consistent with the Code and Congressional Purpose. It may greatly reduce the cost of compliance with the Circular if the principal purpose of the arrangement is not tax avoidance and is not a Listed Transaction—for example, the practitioner may then issued a Limited Scope Opinion. A practitioner generally can objectively determine if the arrangement is a Listed Transaction. Although the determination of principal purpose for an arrangement normally could be viewed as making a subjective determination, the Circular, as now amended, provides that the principal purpose of the arrangement will not tax avoidance if the tax benefits are claimed in a manner consistent with the Code and Congressional purpose. This new test to determine if the principal purpose is tax avoidance should be considered (as long as a Listed Transaction is not involved) so compliance with the Circular can be simplified.
8. Drafting Guidelines to Comply with Section 10.35. Consider the following approach in drafting a written statement that may constitute a Cover Opinion.
a. Comply with the Strictest Standard. It may be critical to realize that a written statement may constitute more than one type of Covered Opinion. If so, ensure compliance with the most “strict” rules (e.g., those for Marketed Opinions which prohibit an overall conclusion at a confidence level of less than more-likely-than-not).
b. Include an Introductory Statement about the Circular. Consider beginning any written statement that will constitute a Covered Opinion with an introductory statement that it is a Covered Opinion and what that means.
c. Have a Separate Definitions Section. Circular 230 contains many unique or special terms, such as Covered Opinion, Significant Federal Tax Issue, Listed Transaction, Principal Purpose and Marketed Opinion. It may be that each written statement that deals with the Circular will be easier to prepare and will be easier to read if these definitions are contained in a separate section of the written statement entitled something like “Definition of Terms relating to Circular 230.”
d. State the Type of Covered Opinion or Why the Writing is not a Covered Opinion and the Reason for that Conclusion.
e. Use Separate Headings for Separate Sections. Consider having each part of the Covered Opinion broken down by headings--for example “Facts”, “Application of the Law to the Facts”, “Overall Conclusions”, “Promoter Relationship”, “Reliance on the Opinion of Another”, etc. as required by the Circular. That should increase the chances of compliance at least with the form of the Covered Opinion rules and help to demonstrate that the practitioner was not willful, reckless or grossly incompetent if some “technical” violation of the Circular is found to have occurred.
f. Recite the Origin of Facts. Recite in the Facts section the source of the facts. In some cases, this might be “You have represented to us that the following facts apply to the arrangement. We have relied on your representations in preparing this letter/memorandum. If any of the facts is incorrect or incomplete, our discussion and conclusion may be different than those set forth below. You have agreed that we are under no obligation and we expressly disavow any obligation to advise you if we learn that the facts are not as you have represented to us.” However, keep in mind that you may not rely on unreasonable facts.
g. Recite the State of the Law. Although not required or suggested by the Circular, it seems appropriate to consider stating expressly--perhaps, in the introductory section--that the written statement is prepared under the current state of the law. Such a statement might be something like “We have prepared this letter/memorandum under what we believe to be the current state of the law. You have agreed that we are under no obligation and we expressly disavow any obligation to advise you with respect to any development or other change in the law that would affect the discussion or any conclusion contained in this letter/memorandum.”
h. State Whether the Written Statement Is Intended to Be Relied Upon. It seems appropriate to state whether you know if the client is intending to rely on the written statement for purposes of tax penalty protection or otherwise or is not intending to so rely. For example, if the client is not intending to rely on it for tax penalty protection, that probably should be expressly stated. On the other hand, if the client will be relying upon it, that should be explicitly recited.
In addition, if the written statement is intended to protect the client from one or more tax penalties, it may well be appropriate to have a separate section discuss the potential penalties and how they may be avoided (e.g., good faith and a reasonable basis for taking the position, substantial authority).
9. Obtain a Second Opinion/Private Ruling in Some Cases. It may be appropriate in some cases to seek the opinion of another tax practitioner as to whether the Circular applies and/or whether the written statement prepared complies with the Circular. Seeking and following expert advice should go far in demonstrating that the practitioner was not willful, reckless or grossly incompetent. In cases of substantial doubt, the practitioner might consider inquiring whether the IRS would issue a private letter ruling and, if it will, obtaining one.
10. Oral Advice with an Internal Memo. In some cases, the cost of complying the Circular will be so substantial, compared to the issue involved, that it will be appropriate to provide only oral advice to the client and then prepare an internal written record of what was stated. It seems nearly certain that a taxpayer who can avoid a penalty by relying on the advice of a practitioner may do so whether the advice is written or oral (although it might be anticipated that the Service may contend that a taxpayer should not be able to reasonably rely on oral advice). Because, in the case of oral advice, no written statement will be delivered to a taxpayer, it will not have to comply with any parts of the Circular (other than section 10.34). In such a case, it may be appropriate to advise the client why the advice will not be in writing and, to be able to prove the oral advice was given to the client, to prepare an internal memo that recites the oral advice given. The recording of the advice probably should not be set forth in diary entries because these are often given to the client in connection with billing matters and such diary entries might therefore have to comply with the Circular because they are a written statement delivered to the client.
11. Consider Forming a Circular 230 Committee. Although it will not be practical for solo and many small firm practitioners, larger firms may wish to consider forming a committee that will develop expertise and be able to advise about compliance with the Circular.
12. Provide an Opinion at a Lower Level of Confidence Where Only that Lower Level Is Needed for Penalty Protection. A taxpayer may avoid penalties in certain cases even though the level of confidence reached by the adviser is lower than more-likely-than-not, such as where the issue involves an estate, gift or generation-skipping transfer tax matter where only a reasonable basis is needed (non-negligence). Where the practitioner concludes that the written statement would only be a Reliance Opinion and involves a tax issue where a more-likely-than-not opinion is not needed to provide penalty protection, the practitioner can avoid compliance with section 10.35 (although section 10.37 would still apply) by rendering an opinion at the lower standard needed to avoid penalties. Because the cost of complying with the section 10.35 may be significant, issuing the opinion at the lower threshold may be acceptable to certain clients but it may be appropriate to state so expressly in the written statement. This will provide the client with the necessary penalty protection and yet not have to comply with section 10.35 of the Circular.
Summary and Conclusions
Amended Circular 230 became effective on June 21. It will have a profound effect on tax practitioners, including estate planners, and others who provide advice. It will increase the cost of delivering services to clients and interfere with the free flow of information between lawyers and accountants, on the one side, and their clients, on the other. Any written statement about a Federal tax issue must be tested to determine if it constitutes a Covered Opinion and, if so, what type. If it is a Covered Opinion, the written statement must comply with the requirements of the Circular or the practitioner may be suspended or disbarred from practice before the IRS, be censured or fined if it is determined that the failure to comply with the Circular was attributable to the practitioner’s willfulness, recklessness or grossly incompetency. The most onerous rules apply to Listed Transactions and to arrangements the principal purpose of which is tax avoidance. It may be difficult to determine the client’s principal purpose. Fortunately, the Circular has been clarified so that an arrangement's principal purpose is not tax avoidance (or evasion) if the tax benefits are claimed in a manner consistent with the Code and Congressional purpose. Although the meaning of the clarification is far from clear and may only apply if the tax position claimed is sustained, it probably means that it will be difficult successfully to charge a practitioner with willful, reckless or grossly incompetent failure to comply with the Circular where the practitioner was not unreasonable – though wrong – in concluding that the tax benefit is consistent with the statute and Congressional purpose. Being able to avoid principal-purpose status is important because it may allow the practitioner to provide the written advice under the less onerous Reliance Opinion standard (or avoid Covered Opinion status entirely in some cases). Practitioners should strive to comply fully with the Circular.
 Portions of this article are derived from prior articles by Mr. Blattmachr, Mr. Gans, Michael L. Graham, Esq., Diana S. C. Zeydel, Esq. and Tracy L. Bentley, Esq.
 Jonathan G. Blattmachr is a partner in the law firm of Milbank, Tweed, Hadley & McCloy, LLC, New York, New York, Mitchell M. Gans is Professor at Hofstra University Law School. Damien Rios is in house counsel in New York for an insurance consulting firm.