Production of the Trusts and Estates Law Section Michael
E. O'Connor, Trusts & Estates Law Section Chair
Gary B. Freidman, eNews Coordinator
to the first edition of the Trusts and Estates eNews.
We hope it brings you information you need, on a timely
basis. Our plan is to send these whenever some topic
calls for quick communication. It is another benefit
of section membership. We would like to give special
thanks to Jonathan Blattmachr, our former chair, for
this piece on Circular 230.
E. O'Connor, Section Chair
ARTICLE MAY NOT BE RELIED UPON
FOR PENALTY PROTECTION
APPLICATION OF CIRCULAR 230 TO ESTATE PLANNERS1
G. BLATTMACHR, MITCHELL M. GANS and MICHAEL L. GRAHAM2
June 21, 2005, practice requirement changed for individuals
and firms providing tax advice and practicing before the Internal
Revenue Service. Tax Practitioners will then operate under
the revised Circular 230 issued by the Treasury Department
on December 20, 2004 and amended again in mid-May. 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. Estate planners often provide written
advice and documents that involve Federal tax issues; the
Circular may have a significant impact on these planners and
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 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 estate planning practice in recent years.
of Revisions to Circular 230
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. Accordingly, 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.
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 and are the principal subject
of this article.
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 to ensure
compliance with the Circular and set forth the consequences
(which include disbarment to practice before the IRS) for
any practitioner who violates the Circular.
article, we principally discuss the second area noted above,
new § 10.35 relating to minimum required practice rules
with respect to a written discussion of a Federal tax matter.
§ 10.35 of Circular 230
10.35 presents new requirements for certain written discussions
of a Federal tax matter. A "writing" certainly seems
to cover 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 referred to as "Covered Opinions" but
appear to cover much more than what many practitioners regard
as a "formal" written legal opinion.
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. 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.
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 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
1. Listed Transactions
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. But
the list is constantly expanded by the IRS and practitioners
should monitor these notices.
Tax Avoidance is the Principal Purpose of an Arrangement
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").
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.
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.
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.
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) or 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).
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. It, 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.
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 very unlikely the practitioner would face penalties
under the Circular.
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
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 has acted in good faith, may be severe,
as mentioned above.
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
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 "you cannot rely" statements.
uncertain whether a writing constitutes a Marketed Opinion
if the lawyer 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 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.
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 Tax Notes) 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.
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 prominently discloses three
other disclaimers, which are mentioned above.
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 facts of law.
Conditions of Confidentiality
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 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
for Covered Opinions
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.
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.
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
if the practitioner knows or should know it is incorrect,
incomplete or prepared by a person lacking the skills of qualifications
necessary to complete it
Relating the Law to the Facts
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. For example, although it does
not seem that the business purpose doctrine is generally applicable
to steps taken to reduce gift tax, a discussion that the doctrine
should not apply (and specifying why that is so) probably
should be contained in the advice.
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. Thus, a conclusion that the taxpayer's
husband is not a citizen of the United States would seem inconsistent
with a conclusion that a lifetime gift to the husband qualifies
for the marital deduction. This is true even though the former
conclusion is not one directly involving a tax issue-because
no gift tax marital deduction is allowed for gifts to one's
spouse if the spouse is not a U.S. citizen.
Evaluation of the Significant Federal Tax Issues
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.
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.
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."
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.
In the case of a Marketed Opinion, the opinion must provide
the practitioner's overall conclusion at a level of at least
more-likely-than-not. If the practitioner cannot reach that
level of confidence with respect to what would be a Marketed
Opinion, it seems that the opinion may not be issued without
violating the Circular.
Competency to Render the Opinion
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
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).
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.
Disclosure with Respect to Promoter Relationship
Covered Opinion must prominently disclose (that is, specify
in bolded typeface larger than any other typeface used in
the writing) 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.
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 an accounting
firm, bank or trust company, where the attorney (or his or
her law firm) has, even if only occasionally, referred clients
to the entity and the entity has, again even if only occasionally,
referred customers to the attorney (or his of her law firm).
Suggested Guidelines to Increase Compliance with the Circular
important for practitioners to have appropriate procedure
in place before June 21 when the Circular becomes effective.
Here are some suggestions.
Advise Clients the Circular Is Out. Some practitioners
will find it appropriate to advise clients in writing
about the Circular, that it will change 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:
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 legal 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
Email Disclaimers. Consider having a statement permanently
embedded at the beginning of each email message stating
something like "Please review the 'Disclaimers'
contained toward the end of this message before reading
this message." The Disclaimer Messages 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,
(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."
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.
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."
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.
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. Such
a Decision Tree can be found at www.ilsdocs.com.
Approach Listed Transactions with Caution. Do not
discuss in writing any Listed Transaction (or principal
purpose transaction) without careful compliance with
the Circular's rules.
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.
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.
Drafting Guidelines to Comply with Section 10.35.
Consider the following approach in drafting a written
statement that may constitute a Cover Opinion.
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).
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
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."
State the Type of Covered Opinion or Why the Writing
is not a Covered Opinion and the Reason for that
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.
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
NEW YORK STATE BAR ASSOCIATION, ONE ELK STREET, ALBANY, NY 12207 PH: (518) 463-3200 SECURE FX: (518) 463-5993