Amendments to circular 230.

• Author: Gardner, John C.
• Position: Part 2

EXECUTIVE SUMMARY

* Section 10.35(c) is critical in establishing the facts, in relating the law to the facts and in evaluating significant Federal tax issues.

* Section 10.37 is important for tax practitioners issuing written advice that is not a covered opinion.

* Practitioners should carefully consider the new and amended terms and standards established by the modifications to Circular 230.

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This two-part article analyzes additions and amendments to the Circular 230 regulations adopted in 2004 and 2005. Part II examines the requirements for covered opinions and other written advice.

This two-part article reviews the recent amendments to the Treasury Circular 230 (24) regulations, which govern tax practice before the IRS by CPAs, attorneys, enrolled agents, enrolled actuaries and appraisers. (25)

Part I, in the January 2006 issue, analyzed best practices and the definitions relevant to covered opinions. Part II, below, focuses on the requirements for covered opinions and other written advice, as well as compliance provisions and the establishment of an advisory committee to the Office of Professional Responsibility (OPR).

Requirements

Exhibit 1 on p. 92 is a summary of the requirements for covered opinions under the amended Circular 230 regulations.

 Exhibit 1: Requirements for covered opinions Section 10.35(c)(1)--Factual matters: * Practitioners must use reasonable efforts to identify and ascertain

the relevant facts, including future events, if a transaction is

prospective or proposed. An opinion must identify and consider all

facts that the practitioner determines relevant. * Practitioners must not base an opinion on any unreasonable factual assumptions, including assumptions as to future events. The opinion must identify in a separate section all factual assumptions relied on by the practitioner. * Practitioners must not base an opinion on any unreasonable factual

representations, statements or findings of the taxpayer or any other

person. The opinion must identify in a separate section all factual

representations, statements or findings of the taxpayer relied on by the practitioner. Section 10.35(c)(2)--Relate law to facts: * Opinions must relate applicable law (including potentially applicable

judicial doctrines) to relevant facts. * Practitioners must not assume favorable resolution of any significant Federal tax issue except as provided in Section 10.35(c)(3)(v) and (d), or otherwise base an opinion on any unreasonable legal assumptions, representations or conclusions. * Opinions must not contain internally inconsistent legal analyses or conclusions. Section 10.35(c)(3)--Evaluation of significant Federal tax issues: * Opinions must consider all significant Federal tax issues, except as provided in Section 10.35(c)(3)(v) and (d). * Opinions must provide a practitioner's conclusion as to the likelihood that a taxpayer will prevail on the merits as to each

significant Federal tax issue considered in the opinion. * If the practitioner is unable to reach a conclusion as to one or more of those issues, the opinion must state that. * Opinions must describe reasons for conclusions, including facts and analysis supporting conclusions, or describe reasons that the practitioner is unable to reach a conclusion as to one or more issues. * If the practitioner fails to reach a conclusion at a confidence level of at least more likely than not as to one or more significant Federal tax issues considered, the opinion must include appropriate disclosure(s) required under Section 10.35(e). * Practitioners must not take into account the possibility that a tax return will not be audited, an issue will not be raised on audit or an issue will be resolved through settlement if raised. Marketed opinions only: * Opinions must provide the practitioner's conclusion that the taxpayer will prevail on the merits at a confidence level of at least more likely than not as to each significant Federal tax issue. * If the practitioner is unable to reach a more-likely-than-not

conclusion as to each significant Federal tax issue, the practitioner must not provide o marketed opinion, but may provide written advice that satisfies the requirements of Section 10.35(b)(5)(ii). Limited scope opinions only: * Practitioners may provide an opinion that considers less than all 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 purposes of avoiding penalties that may be imposed on the taxpayer are limited to the Federal tax issue(s) addressed in the opinion; 2. The opinion is not advice described in Section 10.35(b)(2)(i)(A), (B) or (b)(5) above; and

3. It includes appropriate disclosure(s) required under Section

10.35(e). * Practitioners may make reasonable assumptions regarding favorable resolution of a Federal tax issue, provided the opinion identifies in a separate section all issues for which the practitioner assumed a favorable resolution. Section 10.35(c)(4)---Overall conclusion: * Opinions must provide a practitioner's overall conclusion as to the

likelihood that the Federal tax treatment of the transaction or matter that is the subject of the opinion is the proper treatment

and the reasons for that conclusion. * If the practitioner is unable to reach an overall conclusion, the opinion must state that the practitioner is unable to reach an overall conclusion and describe the reasons for the practitioner's inability to reach a conclusion. Marketed opinions only: * Opinions must provide a practitioner's overall conclusion that the Federal tax treatment of the transaction or matter that is the subject of the opinion is the proper treatment at a confidence

level of at least more likely than not.

Factual Matters

Section 10.35(c)(1), Factual matters, is critical in establishing the facts. An opinion cannot be based on unreasonable factual assumptions, and practitioners must consider all the facts they deem relevant. This would seem to tie their efforts to due diligence under Section 10.22. Practitioners should also examine case law on unreasonable factual assumptions and the efforts to be undertaken to establish which facts are relevant. Thus, documentation is critical in demonstrating compliance with the requirements to ascertain the facts. An examination of tax shelter case law will reveal situations in which courts have held that a practitioner did not act with due diligence in ascertaining the facts. Additional guidance may be found in Interpretation No. 1-2, "Tax Planning," of Statements on Standards for Tax Services (SSTS) No. 1, Tax Return Positions, (26) which contains examples of tax planning and tax shelter situations.

One sentence in the new regulations has the potential to provide very useful guidance in fully understanding some troublesome parts of this law. The preamble (27) states, "[t]he final regulations provide that a practitioner providing a covered opinion, including a marketed opinion, must not assume that a...