New Rules Affect Written Tax Advice Provided By Stradley Ronon ­– A Look at Circular 230

Introduction
The Internal Revenue Service (IRS) recently revised IRS Circular No. 230, regulations that govern practice before the IRS. The revised regulations apply to written tax advice on certain U.S. federal income tax matters provided after June 20, 2005. The new regulations have a potentially far reaching impact on tax practitioners. Written tax advice that constitutes a “covered opinion” under the regulations require that the practitioner conduct extensive due diligence. Circular 230 requires, among other things, that in providing written advice that constitutes a “covered opinion:”

(i) the practitioner ascertain the facts relevant to the transaction;

(ii) the advice must not be based on unreasonable factual assumptions (e.g., under the new regulations, it would be unreasonable to assume that a transaction has a business purpose or that it is potentially profitable apart from the tax benefits associated with the transaction);

(iii) the written communication must relate the relevant facts to the applicable law, and the analysis must include consideration of not only the relevant statutory provisions, but also potentially applicable judicial doctrines; and

(iv) the written communication must address all significant U.S. federal tax issues and provide the practitioner’s conclusion as to the likelihood of success with respect to each issue.

What is a Covered Opinion?
Under the new regulations a “covered opinion” is written advice (including electronic communications) by a practitioner concerning one or more federal tax issues arising from:

1. A “listed transaction” (e.g., a transaction that the IRS has identified as abusive) or a transaction substantially similar to listed transaction.

2. A partnership or other entity, any investment plan or arrangement, or any other plan or arrangement, the “principal purpose” of which is the avoidance or evasion of any U.S. federal tax.

3. A partnership or other entity, any investment plan or arrangement, or any other plan or arrangement, the “significant purpose” of which is the avoidance or evasion of any U.S. federal tax if the written advice is:

a. a “reliance opinion,” which is written advice if the advice concludes at a confidence level of at least more likely than not (a greater than 50 percent likelihood) that one or more significant federal tax issue would be resolved in the taxpayer’s favor;

b. a “marketed opinion,” which is written advice used or referred to in promoting, marketing or recommending a partnership or other entity, investment plan or arrangement to one or more taxpayer;

c. subject to conditions of confidentiality imposed by us; or

d. subject to contractual protection, such as where all or a portion of our fees would be refundable if the intended tax consequences of a transaction addressed by us in written advice are not sustained.

Some written advice is excluded from the definition of a covered opinion. The exclusions include advice that:

(i) concerns the qualification of a qualified plan;

(ii) is a state or local bond opinion; or

(ii) is included in documents required to be filed with the Securities and Exchange Commission.

Certain post-return advice is also excluded. Perhaps more significantly, advice that includes certain legends (discussed below) is excluded from the definition of a reliance opinion or a marketed opinion.

Legends and Covered Opinions
Written advice is not a “reliance opinion” or a “marketed opinion” (and therefore is excluded from the rules applicable to covered opinions) where the advice contains a legend that is prominently disclosed stating:

(a) in the case of a reliance opinion, that it is not intended or written to be used, and that it cannot be used, for the purposes of avoiding penalties that may be imposed on a taxpayer or;

(b) in the case of a marketed opinion, that:

(i) the advice is not intended or written to be used, and that it cannot be used by any taxpayer, for the purposes of avoiding penalties that may be imposed on the taxpayer;

(ii) the advice was written to support the promotion or marketing of transactions or matters addressed by the written advice; and

(iii) the taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.

What Does This Mean to You, Our Client?
Most tax advice we provide is based on an understanding of the facts gained through conversation with our clients and backed by our research, experience and judgment, but which typically does not entail the in-depth due diligence and consideration of the issues required by the new regulations for a “covered opinion.” However, because of the breadth of the Circular 230 provisions, much of the routine written advice we provide (including advice in e-mails) could be considered reliance (and therefore covered) opinions. Most situations do not justify the added time and cost required to comply with the requirements for a “covered opinion.” Therefore, we (like most other tax and accounting firms) will be including in virtually all of our e-mails and much of our other written advice, that address tax issues, a legend intended to satisfy the requirements discussed above in order to have the written tax advice excluded from the definition of a reliance or marketed opinion. The legend in our e-mails will be as follows:

U.S. Treasury Circular 230 Notice: We inform you that, unless expressly stated otherwise, any U.S. federal tax advice contained in this communication, including attachments, is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding any penalties that may be imposed on such taxpayer by the Internal Revenue Service. In addition, if any such tax advice is used or referred to by other parties to promote, market, or recommend any transaction or investment, then (i) the advice should be construed as written in connection with the promotion or marketing by others of the transaction(s) or matter(s) addressed in this communication; and (ii) the taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.

If you have any questions regarding the implications of the new regulations, please feel free to contact any member of our Tax Department or the attorney with whom you are dealing.