[Federal Register Volume 69, Number 243 (Monday, December 20, 2004)]
[Rules and Regulations]
[Pages 75839-75845]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 04-27678]
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DEPARTMENT OF THE TREASURY
Office of the Secretary
31 CFR Part 10
[TD 9165]
RIN 1545-BA70
Regulations Governing Practice Before the Internal Revenue
Service
AGENCY: Office of the Secretary, Treasury.
ACTION: Final regulations.
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SUMMARY: This document contains final regulations revising the
regulations governing practice before the Internal Revenue Service
(Circular 230). These regulations affect individuals who practice
before the Internal Revenue Service. These final regulations set forth
best practices for tax advisors providing advice to taxpayers relating
to Federal tax issues or submissions to the IRS. These final
regulations also provide standards for covered opinions and other
written advice.
DATES: Effective Date: These regulations are effective December 20,
2004.
Applicability Date: For dates of applicability, see Sec. Sec.
10.33(c),10.35(g), 10.36(b), 10.37(b), 10.38(b), 10.52(b), and 10.93.
FOR FURTHER INFORMATION CONTACT: Heather L. Dostaler at (202) 622-4940,
or Brinton T. Warren at (202) 622-7800 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in these final regulations
has been reviewed and approved by the Office of Management and Budget
in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.
3507(d)) under control number 1545-1871. The collections of information
(disclosure requirements) in these final regulations are in Sec.
10.35(e). Section 10.35(e) requires a practitioner providing a covered
opinion to make certain disclosures in the beginning of marketed
opinions, limited scope opinions and opinions that fail to conclude at
a confidence level of at least more likely than not. In addition,
certain relationships between the practitioner and a person promoting
or marketing a tax shelter must be disclosed. A practitioner may be
required to make one or more disclosures. The collection of this
material helps to ensure that taxpayers who receive a tax shelter
opinion are informed of any facts or circumstances that might limit the
use of the opinion. The collection of information is mandatory.
[[Page 75840]]
Estimated total annual disclosure burden is 13,333 hours.
Estimated annual burden per disclosing practitioner varies from 5
to 10 minutes, depending on individual circumstances, with an estimated
average of 8 minutes.
Estimated number of disclosing practitioners is 100,000.
Estimated annual frequency of responses is on occasion.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless it displays a valid
control number.
Comments concerning the accuracy of this burden estimate and
suggestions for reducing this burden should be sent to the Internal
Revenue Service, Attn: IRS Reports Clearance Officer,
W:SE:CAR:MP:T:T:SP, Washington, DC 20224, and to the Office of
Management and Budget, Attn: Desk Officer for the Department of the
Treasury, Office of Information and Regulatory Affairs, Washington, DC
20503. Books or records relating to a collection of information must be
retained as long as their contents might become material in the
administration of any internal revenue law. Generally, tax returns and
tax return information are confidential, as required by 26 U.S.C. 6103.
Background
Section 330 of title 31 of the United States Code authorizes the
Secretary of the Treasury to regulate practice before the Treasury
Department. The Secretary has published the regulations in Circular 230
(31 CFR part 10). On December 30, 2003, the Treasury Department and the
IRS published in the Federal Register (68 FR 75186) proposed amendments
to the regulations (REG-122379-02) (the proposed regulations) to set
forth best practices for tax advisors providing advice to taxpayers
relating to Federal tax issues or submissions to the IRS and to modify
the standards for certain tax shelter opinions. A public hearing was
held on February 19, 2004. Written public comments responding to the
proposed regulations were received. After thorough consideration of the
public comments, the proposed regulations are adopted as revised by
this Treasury decision.
Explanation of Provisions
Tax advisors play a critical role in the Federal tax system, which
is founded on principles of compliance and voluntary self-assessment.
The tax system is best served when the public has confidence in the
honesty and integrity of the professionals providing tax advice. To
restore, promote, and maintain the public's confidence in those
individuals and firms, these final regulations set forth best practices
applicable to all tax advisors. These regulations also provide
mandatory requirements for practitioners who provide covered opinions.
The scope of these regulations is limited to practice before the IRS.
These regulations do not alter or supplant other ethical standards
applicable to practitioners.
On October 22, 2004, the President signed the American Jobs
Creation Act of 2004, Pub. L. 108-357, (118 Stat. 1418)(the Act), which
amended section 330 of title 31 of the United States Code to clarify
that the Secretary may impose standards for written advice relating to
a matter that is identified as having a potential for tax avoidance or
evasion. The Act also authorizes the Treasury Department and the IRS to
impose a monetary penalty against a practitioner who violates any
provision of Circular 230. These final regulations do not reflect
amendments made by the Act. The Treasury Department and the IRS expect
to propose additional regulations implementing the Act's provisions.
Best Practices
The final regulations adopt the best practices set forth in the
proposed regulations with modifications. These best practices are
aspirational. A practitioner who fails to comply with best practices
will not be subject to discipline under these regulations. Similarly,
the provision relating to steps to ensure that a firm's procedures are
consistent with best practices, now set forth in Sec. 10.33(b), is
aspirational. Although best practices are solely aspirational, tax
professionals are expected to observe these practices to preserve
public confidence in the tax system.
Standards for Covered Opinions
The opinion standards of Sec. 10.35 are adopted with
modifications. The provisions of Sec. 10.35 in the final regulations
are reorganized to clarify the provisions. Opinions subject to Sec.
10.35 are defined as covered opinions.
Definition of Covered Opinion
Under the final regulations, the definition of a covered opinion
includes written advice (including electronic communications) that
concerns one or more Federal tax issue(s) arising from: (1) a listed
transaction; (2) any plan or arrangement, the principal purpose of
which is the avoidance or evasion of any tax; or (3) any plan or
arrangement, a significant purpose of which is the avoidance or evasion
of tax if the written advice (A) is a reliance opinion, (B) is a
marketed opinion, (C) is subject to conditions of confidentiality, or
(D) is subject to contractual protection. A reliance opinion is written
advice that concludes at a confidence level of at least more likely
than not that one or more significant Federal tax issues would be
resolved in the taxpayer's favor.
Written advice will not be treated as a reliance opinion if the
practitioner prominently discloses in the written advice that it was
not written to be used and cannot be used for the purpose of avoiding
penalties. Similarly, written advice generally will not be treated as a
marketed opinion if it does not concern a listed transaction or a plan
or arrangement having the principal purpose of avoidance or evasion of
tax and the written advice contains this disclosure. The Treasury
Department and the IRS intend to amend 26 CFR 1.6664-4 to clarify that
a taxpayer may not rely upon written advice that contains this
disclosure to establish the reasonable cause and good faith defense to
the accuracy-related penalties.
Written advice regarding a plan or arrangement having a significant
purpose of tax avoidance or evasion is excluded from the definition of
a covered opinion if the written advice concerns the qualification of a
qualified plan or is included in documents required to be filed with
the Securities and Exchange Commission. The final regulations also
adopt an exclusion for preliminary advice if the practitioner is
reasonably expected to provide subsequent advice that satisfies the
requirements of the regulations.
Written advice that is not a covered opinion for purposes of Sec.
10.35 is subject to the standards set forth in new Sec. 10.37.
Municipal Bond Opinions
After careful consideration, the Treasury Department and the IRS
have concluded that practitioners rendering opinions concerning the tax
treatment of municipal bonds should be subject to the same professional
standards that are applicable to all other practitioners. The standards
for certain opinions concerning the tax treatment of municipal bonds
(State or local bond opinions) that are included in offering materials
that otherwise would be covered opinions are being issued separately in
proposed form. The proposed standards will require practitioners to
exercise the same degree of diligence with respect to ascertaining the
relevant facts and discussing the significant Federal tax issues, but
will take into account the unique
[[Page 75841]]
circumstances of the municipal bond market.
To give bond practitioners an opportunity to comment on the
proposed standards for State or local bond opinions, opinions that are
included in offering materials, including an official statement, are
excluded from the definition of covered opinions in these final
regulations. Thus, State or local bond opinions included in offering
materials will not be subject to the opinion standards of Sec. 10.35
or proposed Sec. 10.39 until 120 days after the proposed regulations
are finalized.
The exclusion for State or local bond opinions applies only to the
requirements for covered opinions set forth in Sec. 10.35. State or
local bond opinions are subject to the standards set forth in Sec.
10.37 relating to requirements for other written advice, and
practitioners who prepare bond opinions must comply with any other
applicable requirement provided in Circular 230.
Requirements for Covered Opinions
In general, the requirements for all covered opinions are adopted
as proposed. The final regulations provide that a practitioner
providing a covered opinion, including a marketed opinion, must not
assume that a transaction has a business purpose or is potentially
profitable apart from tax benefits, or make an assumption with respect
to a material valuation issue.
Required Disclosures
In general, the required disclosures of Sec. 10.35(e) are adopted
as proposed. These disclosures ensure that taxpayers receive
information that is necessary to their evaluation of, and reliance on,
a covered opinion.
Requirements for Other Written Advice
The final regulations also set forth requirements for written
advice that is not a covered opinion. Under Sec. 10.37 a practitioner
must not give written advice if the practitioner: (1) Bases the written
advice on unreasonable factual or legal assumptions; (2) unreasonably
relies upon representations, statements, findings or agreements of the
taxpayer or any other person; (3) fails to consider all relevant facts;
or (4) takes into account the possibility that a tax return will not be
audited, that an issue will not be raised on audit, or that an issue
will be settled. Section 10.37, unlike Sec. 10.35, does not require
that the practitioner describe in the written advice the relevant facts
(including assumptions and representations), the application of the law
to those facts, or the practitioner's conclusion with respect to the
law and the facts. The scope of the engagement and the type and
specificity of the advice sought by the client, in addition to all
other facts and circumstances, will be considered in determining
whether a practitioner has failed to comply with the requirements of
Sec. 10.37.
Procedures To Ensure Compliance
In general, the procedures to ensure compliance with requirements
of Sec. 10.35 are adopted as proposed and set forth in Sec. 10.36.
Advisory Committees on the Integrity of Tax Professionals
Newly designated Sec. 10.38, formerly Sec. 10.37 in the proposed
regulations, is adopted as proposed with the following modifications.
Section 10.38 is modified to clarify that an advisory committee may not
make recommendations about actual practitioner cases, or have access to
information pertaining to actual cases. The section also is modified to
clarify that the Director of the Office of Professional Responsibility
should ensure that membership of these committees is balanced among
those individuals who practice as attorneys, accountants and enrolled
agents.
Applicability Dates
To eliminate any adverse impact that the adoption of the new
requirements for covered opinions or other written advice could have on
pending or imminent transactions, the applicability date of the
standards for covered opinions under Sec. 10.35 and other written
advice under Sec. 10.37 (and the procedures to ensure compliance as
they relate to covered opinions under Sec. 10.36) is June 20, 2005.
Special Analyses
It has been determined that this final rule is not a significant
regulatory action as defined in Executive Order 12866. Therefore, a
regulatory assessment is not required. It is hereby certified that
these regulations will not have a significant economic impact on a
substantial number of small entities. Persons authorized to practice
before the IRS have long been required to comply with certain standards
of conduct. The added disclosure requirements for tax shelter opinions
imposed by these regulations will not have a significant economic
impact on a substantial number of small entities because, as previously
noted, the estimated burden of disclosures is minimal. Practitioners
have the information needed to determine whether any of the disclosures
will be required before the opinion is prepared and, for some
disclosures, the regulations provide practitioners with the language to
be included in the opinion. Therefore, a regulatory flexibility
analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is
not required. Pursuant to section 7805(f) of the Internal Revenue Code,
the proposed regulations preceding these regulations were submitted to
the Chief Counsel for Advocacy of the Small Business Administration for
comment on its impact on small businesses.
Drafting Information
The principal authors of the regulations are Heather L. Dostaler
and Brinton T. Warren of the Office of the Associate Chief Counsel
(Procedure and Administration), Administrative Provisions and Judicial
Practice Division.
List of Subjects in 31 CFR Part 10
Administrative practice and procedure, Lawyers, Accountants,
Enrolled agents, Enrolled actuaries, Appraisers.
Adoption of Amendments to the Regulations
0
Accordingly, 31 CFR part 10 is amended as follows:
PART 10--PRACTICE BEFORE THE INTERNAL REVENUE SERVICE
0
Paragraph 1. The authority citation for subtitle A, part 10 is revised
to read as follows:
Authority: Sec. 3, 23 Stat. 258, secs. 2-12, 60 Stat. 237 et
seq.; 5 U.S.C. 301, 500, 551-559; 31 U.S.C. 330; Reorg. Plan No. 26
of 1950, 15 FR 4935, 64 Stat. 1280, 3 CFR, 1949-1953 Comp., p. 1017.
0
Par. 2. Section 10.33 is revised to read as follows:
Sec. 10.33 Best practices for tax advisors.
(a) Best practices. Tax advisors should provide clients with the
highest quality representation concerning Federal tax issues by
adhering to best practices in providing advice and in preparing or
assisting in the preparation of a submission to the Internal Revenue
Service. In addition to compliance with the standards of practice
provided elsewhere in this part, best practices include the following:
(1) Communicating clearly with the client regarding the terms of
the engagement. For example, the advisor should determine the client's
expected purpose for and use of the advice and should have a clear
understanding with the client regarding the form and scope of the
advice or assistance to be rendered.
(2) Establishing the facts, determining which facts are relevant,
evaluating the
[[Page 75842]]
reasonableness of any assumptions or representations, relating the
applicable law (including potentially applicable judicial doctrines) to
the relevant facts, and arriving at a conclusion supported by the law
and the facts.
(3) Advising the client regarding the import of the conclusions
reached, including, for example, whether a taxpayer may avoid accuracy-
related penalties under the Internal Revenue Code if a taxpayer acts in
reliance on the advice.
(4) Acting fairly and with integrity in practice before the
Internal Revenue Service.
(b) Procedures to ensure best practices for tax advisors. Tax
advisors with responsibility for overseeing a firm's practice of
providing advice concerning Federal tax issues or of preparing or
assisting in the preparation of submissions to the Internal Revenue
Service should take reasonable steps to ensure that the firm's
procedures for all members, associates, and employees are consistent
with the best practices set forth in paragraph (a) of this section.
(c) Applicability date. This section is effective after June 20,
2005.
0
Par. 3. Sections 10.35, 10.36, 10.37 and 10.38 are added to subpart B
to read as follows:
Sec. 10.35 Requirements for covered opinions.
(a) A practitioner who provides a covered opinion shall comply with
the standards of practice in this section.
(b) Definitions. For purposes of this subpart--
(1) A practitioner includes any individual described in Sec.
10.2(e).
(2) Covered opinion--(i) In general. A covered opinion is written
advice (including electronic communications) by a practitioner
concerning one or more Federal tax issues arising from--
(A) A transaction that is the same as or substantially similar to a
transaction that, at the time the advice is rendered, the Internal
Revenue Service has determined to be a tax avoidance transaction and
identified by published guidance as a listed transaction under 26 CFR
1.6011-4(b)(2);
(B) Any 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 tax imposed by the Internal
Revenue Code; or
(C) Any partnership or other entity, any investment plan or
arrangement, or any other plan or arrangement, a significant purpose of
which is the avoidance or evasion of any tax imposed by the Internal
Revenue Code if the written advice--
(1) Is a reliance opinion;
(2) Is a marketed opinion;
(3) Is subject to conditions of confidentiality; or
(4) Is subject to contractual protection.
(ii) Excluded advice. A covered opinion does not include--
(A) Written advice provided to a client during the course of an
engagement if a practitioner is reasonably expected to provide
subsequent written advice to the client that satisfies the requirements
of this section; or
(B) Written advice, other than advice described in paragraph
(b)(2)(i)(A) of this section (concerning listed transactions) or
paragraph (b)(2)(ii)(B) of this section (concerning the principal
purpose of avoidance or evasion) that--
(1) Concerns the qualification of a qualified plan;
(2) Is a State or local bond opinion; or
(3) Is included in documents required to be filed with the
Securities and Exchange Commission.
(3) 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, or the value of
property for Federal tax purposes. For purposes of this subpart, a
Federal tax issue is significant if the Internal Revenue Service has a
reasonable basis for a successful challenge and its resolution could
have a significant impact, whether beneficial or adverse and under any
reasonably foreseeable circumstance, on the overall Federal tax
treatment of the transaction(s) or matter(s) addressed in the opinion.
(4) Reliance opinion--(i) Written advice is a reliance opinion if
the advice concludes at a confidence level of more likely than not (a
greater than 50 percent likelihood) that one or more significant
Federal tax issues would be resolved in the taxpayer's favor.
(ii) For purposes of this section, written advice, other than
advice described in paragraph (b)(2)(i)(A) of this section (concerning
listed transactions) or paragraph (b)(2)(i)(B) of this section
(concerning the principal purpose of avoidance or evasion), is not
treated as a reliance opinion if 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.
(5) Marketed opinion--(i) Written advice is a marketed opinion if
the practitioner knows or has reason to know that the written advice
will be used or referred to by a person other than the practitioner (or
a person who is a member of, associated with, or employed by the
practitioner's firm) in promoting, marketing or recommending a
partnership or other entity, investment plan or arrangement to one or
more taxpayer(s).
(ii) For purposes of this section, written advice, other than
advice described in paragraph (b)(2)(i)(A) of this section (concerning
listed transactions) or paragraph (b)(2)(i)(B) of this section
(concerning the principal purpose of avoidance or evasion), is not
treated as a marketed opinion if the practitioner prominently discloses
in the written advice that--
(A) 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;
(B) The advice was written to support the promotion or marketing of
the transaction(s) or matter(s) addressed by the written advice; and
(C) The taxpayer should seek advice based on the taxpayer's
particular circumstances from an independent tax advisor.
(6) Conditions of confidentiality. Written advice is subject to
conditions of confidentiality if 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 that practitioner's tax
strategies, regardless of whether the limitation on disclosure is
legally binding. A claim that a transaction is proprietary or exclusive
is not a limitation on disclosure 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.
(7) Contractual protection. Written advice is subject to
contractual protection if the taxpayer has the right to a full or
partial refund of fees paid to the practitioner (or a person who is a
member of, associated with, or employed by the practitioner's firm) if
all or a part of the intended tax consequences from the matters
addressed in the written advice are not sustained, or if the fees paid
to the practitioner (or a person who is a member of, associated with,
or employed by the practitioner's firm) are contingent on the
taxpayer's realization of tax benefits from the transaction. All the
facts and circumstances relating to
[[Page 75843]]
the matters addressed in the written advice will be considered when
determining whether a fee is refundable or contingent, including the
right to reimbursements of amounts that the parties to a transaction
have not designated as fees or any agreement to provide services
without reasonable compensation.
(8) Prominently disclosed. An item required to be prominently
disclosed must be set forth in a separate section at the beginning of
the written advice in a bolded typeface that is larger than any other
typeface used in the written advice.
(9) State or local bond opinion. A State or local bond opinion is
written advice with respect to a Federal tax issue included in any
materials delivered to a purchaser of a State or local bond in
connection with the issuance of the bond in a public or private
offering, including an official statement (if one is prepared), that
concerns only the excludability of interest on a State or local bond
from gross income under section 103 of the Internal Revenue Code, the
application of section 55 of the Internal Revenue Code to a State or
local bond, the status of a State or local bond as a qualified tax-
exempt obligation under section 265(b)(3) of the Internal Revenue Code,
the status of a State or local bond as a qualified zone academy bond
under section 1397E of the Internal Revenue Code, or any combination of
the above.
(c) Requirements for covered opinions. A practitioner providing a
covered opinion must comply with each of the following requirements.
(1) Factual matters. (i) The 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 facts are relevant. The opinion must identify and consider all
facts that the practitioner determines to be relevant.
(ii) The practitioner must not base the opinion on any unreasonable
factual assumptions (including assumptions as to future events). An
unreasonable factual assumption includes a factual assumption that the
practitioner knows or should know is incorrect or incomplete. For
example, it is unreasonable to assume that a transaction has a business
purpose or that a transaction is potentially profitable apart from tax
benefits. A factual assumption includes reliance on a projection,
financial forecast or appraisal. It is unreasonable for a practitioner
to rely on a projection, financial forecast or appraisal if the
practitioner knows or should know that the projection, financial
forecast or appraisal is incorrect or incomplete or was prepared by a
person lacking the skills or qualifications necessary to prepare such
projection, financial forecast or appraisal. The opinion must identify
in a separate section all factual assumptions relied upon by the
practitioner.
(iii) The practitioner must not base the opinion on any
unreasonable factual representations, statements or findings of the
taxpayer or any other person. An unreasonable factual representation
includes a factual representation that the practitioner knows or should
know is incorrect or incomplete. For example, a practitioner may not
rely on a factual representation that a transaction has a business
purpose if the representation does not include a specific description
of the business purpose or the practitioner knows or should know that
the representation is incorrect or incomplete. The opinion must
identify in a separate section all factual representations, statements
or findings of the taxpayer relied upon by the practitioner.
(2) Relate law to facts. (i) The opinion must relate the applicable
law (including potentially applicable judicial doctrines) to the
relevant facts.
(ii) The practitioner must not assume the favorable resolution of
any significant Federal tax issue except as provided in paragraphs
(c)(3)(v) and (d) of this section, or otherwise base an opinion on any
unreasonable legal assumptions, representations, or conclusions.
(iii) The opinion must not contain internally inconsistent legal
analyses or conclusions.
(3) Evaluation of significant Federal tax issues--(i) In general.
The opinion must consider all significant Federal tax issues except as
provided in paragraphs (c)(3)(v) and (d) of this section.
(ii) Conclusion as to each significant Federal tax issue. The
opinion must provide the practitioner's conclusion as to the likelihood
that the taxpayer will prevail on the merits with respect to each
significant Federal tax issue considered in the opinion. If the
practitioner is unable to reach a conclusion with respect to one or
more of those issues, the opinion must state that the practitioner is
unable to reach a conclusion with respect to those issues. The opinion
must describe the reasons for the conclusions, including the facts and
analysis supporting the conclusions, or describe the 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 with respect to one or more
significant Federal tax issues considered, the opinion must include the
appropriate disclosure(s) required under paragraph (e) of this section.
(iii) Evaluation based on chances of success on the merits. In
evaluating the significant Federal tax issues addressed in the opinion,
the practitioner must not take into account the possibility that a tax
return will not be audited, that an issue will not be raised on audit,
or that an issue will be resolved through settlement if raised.
(iv) Marketed opinions. In the case of a marketed opinion, the
opinion 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 with respect to each significant Federal tax issue. If
the practitioner is unable to reach a more likely than not conclusion
with respect to each significant Federal tax issue, the practitioner
must not provide the marketed opinion, but may provide written advice
that satisfies the requirements in paragraph (b)(5)(ii) of this
section.
(v) Limited scope opinions. (A) The 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
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 paragraph (b)(2)(i)(A)
of this section (concerning listed transactions), paragraph
(b)(2)(i)(B) of this section (concerning the principal purpose of
avoidance or evasion) or paragraph (b)(5) of this section (a marketed
opinion); and
(3) The opinion includes the appropriate disclosure(s) required
under paragraph (e) of this section.
(B) A practitioner may make reasonable assumptions regarding the
favorable resolution of a Federal tax issue (an assumed issue) for
purposes of providing an opinion on less than all of the significant
Federal tax issues as provided in this paragraph (c)(3)(v). The opinion
must identify in a separate section all issues for which the
practitioner assumed a favorable resolution.
(4) Overall conclusion. (i) The opinion must provide the
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
[[Page 75844]]
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.
(ii) In the case of a marketed opinion, the opinion must provide
the 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.
(d) Competence to provide opinion; reliance on opinions of others.
(1) The practitioner must be knowledgeable in all of the aspects of
Federal tax law relevant to the opinion being rendered, except that the
practitioner may rely on the opinion of another practitioner with
respect to one or more significant Federal tax issues, unless the
practitioner knows or should know that the opinion of the other
practitioner should not be relied on. If a practitioner relies on the
opinion of another practitioner, the relying practitioner's opinion
must identify the other opinion and set forth the conclusions reached
in the other opinion.
(2) The practitioner must be satisfied that the combined analysis
of the opinions, taken as a whole, and the overall conclusion, if any,
satisfy the requirements of this section.
(e) Required disclosures. A covered opinion must contain all of the
following disclosures that apply--
(1) Relationship between promoter and practitioner. An opinion must
prominently disclose the existence of--
(i) Any compensation arrangement, such as a referral fee or a fee-
sharing arrangement, between the practitioner (or the practitioner's
firm or any person who is a member of, associated with, or employed by
the practitioner's firm) and any person (other than the client for whom
the opinion is prepared) with respect to promoting, marketing or
recommending the entity, plan, or arrangement (or a substantially
similar arrangement) that is the subject of the opinion; or
(ii) Any referral agreement between the practitioner (or the
practitioner's firm or any person who is a member of, associated with,
or employed by the practitioner's firm) and a person (other than the
client for whom the opinion is prepared) engaged in promoting,
marketing or recommending the entity, plan, or arrangement (or a
substantially similar arrangement) that is the subject of the opinion.
(2) Marketed opinions. A marketed opinion must prominently disclose
that--
(i) The opinion was written to support the promotion or marketing
of the transaction(s) or matter(s) addressed in the opinion; and
(ii) The taxpayer should seek advice based on the taxpayer's
particular circumstances from an independent tax advisor.
(3) Limited scope opinions. A limited scope opinion must
prominently disclose that--
(i) The opinion is limited to the one or more Federal tax issues
addressed in the opinion;
(ii) Additional issues may exist that could affect the Federal tax
treatment of the transaction or matter that is the subject of the
opinion and the opinion does not consider or provide a conclusion with
respect to any additional issues; and
(iii) With respect to any significant Federal tax issues outside
the limited scope of the opinion, 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.
(4) Opinions that fail to reach a more likely than not conclusion.
An opinion that does not reach a conclusion at a confidence level of at
least more likely than not with respect to a significant Federal tax
issue must prominently disclose that--
(i) The opinion does not reach a conclusion at a confidence level
of at least more likely than not with respect to one or more
significant Federal tax issues addressed by the opinion; and
(ii) With respect to those significant Federal tax issues, 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.
(5) Advice regarding required disclosures. In the case of any
disclosure required under this section, the practitioner may not
provide advice to any person that is contrary to or inconsistent with
the required disclosure.
(f) Effect of opinion that meets these standards--(1) In general.
An opinion that meets the requirements of this section satisfies the
practitioner's responsibilities under this section, but the
persuasiveness of the opinion with regard to the tax issues in question
and the taxpayer's good faith reliance on the opinion will be
determined separately under applicable provisions of the law and
regulations.
(2) Standards for other written advice. A practitioner who provides
written advice that is not a covered opinion for purposes of this
section is subject to the requirements of Sec. 10.37.
(g) Effective date. This section applies to written advice that is
rendered after June 20, 2005.
Sec. 10.36 Procedures to ensure compliance.
(a) Requirements for covered opinions. Any practitioner who has (or
practitioners who have or share) principal authority and responsibility
for overseeing a firm's practice of providing advice concerning Federal
tax issues must take reasonable steps to ensure that the firm has
adequate procedures in effect for all members, associates, and
employees for purposes of complying with Sec. 10.35. Any such
practitioner will be subject to discipline for failing to comply with
the requirements of this paragraph if--
(1) The practitioner through willfulness, recklessness, or gross
incompetence does not take reasonable steps to ensure that the firm has
adequate procedures to comply with Sec. 10.35, and one or more
individuals who are members of, associated with, or employed by, the
firm are, or have, engaged in a pattern or practice, in connection with
their practice with the firm, of failing to comply with Sec. 10.35; or
(2) The practitioner knows or should know that one or more
individuals who are members of, associated with, or employed by, the
firm are, or have, engaged in a pattern or practice, in connection with
their practice with the firm, that does not comply with Sec. 10.35 and
the practitioner, through willfulness, recklessness, or gross
incompetence, fails to take prompt action to correct the noncompliance.
(b) Effective date. This section is applicable after June 20, 2005.
Sec. 10.37 Requirements for other written advice.
(a) Requirements. A practitioner must not give written advice
(including electronic communications) concerning one or more Federal
tax issues if the practitioner bases the written advice on unreasonable
factual or legal assumptions (including assumptions as to future
events), unreasonably relies upon representations, statements, findings
or agreements of the taxpayer or any other person, does not consider
all relevant facts that the practitioner knows or should know, or, in
evaluating a Federal tax issue, takes into account the possibility that
a tax return will not be audited, that an issue will not be raised on
audit, or that an issue will be resolved through settlement if raised.
All facts and circumstances, including
[[Page 75845]]
the scope of the engagement and the type and specificity of the advice
sought by the client will be considered in determining whether a
practitioner has failed to comply with this section. In the case of an
opinion the practitioner knows or has reason to know will be used or
referred to by a person other than the practitioner (or a person who is
a member of, associated with, or employed by the practitioner's firm)
in promoting, marketing or recommending to one or more taxpayers a
partnership or other entity, investment plan or arrangement a
significant purpose of which is the avoidance or evasion of any tax
imposed by the Internal Revenue Code, the determination of whether a
practitioner has failed to comply with this section will be made on the
basis of a heightened standard of care because of the greater risk
caused by the practitioner's lack of knowledge of the taxpayer's
particular circumstances.
(b) Effective date. This section applies to written advice that is
rendered after June 20, 2004.
Sec. 10.38 Establishment of advisory committees.
(a) Advisory committees. To promote and maintain the public's
confidence in tax advisors, the Director of the Office of Professional
Responsibility is authorized to establish one or more advisory
committees composed of at least five individuals authorized to practice
before the Internal Revenue Service. The Director should ensure that
membership of an advisory committee is balanced among those who
practice as attorneys, accountants, and enrolled agents. Under
procedures prescribed by the Director, an advisory committee may review
and make general recommendations regarding professional standards or
best practices for tax advisors, including whether hypothetical conduct
would give rise to a violation of Sec. Sec. 10.35 or 10.36.
(b) Effective date. This section applies after December 20, 2004.
0
Par. 4. Section 10.52 is revised to read as follows:
Sec. 10.52 Violation of regulations.
(a) Prohibited conduct. A practitioner may be censured, suspended
or disbarred from practice before the Internal Revenue Service for any
of the following:
(1) Willfully violating any of the regulations (other than Sec.
10.33) contained in this part; or
(2) Recklessly or through gross incompetence (within the meaning of
Sec. 10.51(l)) violating Sec. Sec. 10.34, 10.35, 10.36 or 10.37.
(b) Effective date. This section applies after June 20, 2005.
0
Par. 5. Section 10.93 is revised to read as follows:
Sec. 10.93 Effective date.
Except as otherwise provided in each section and subject to Sec.
10.91, Part 10 is applicable on July 26, 2002.
Mark E. Matthews,
Deputy Commissioner for Services and Enforcement, Internal Revenue
Service.
Approved: December 8, 2004.
Arnold I. Havens,
General Counsel, Department of the Treasury.
[FR Doc. 04-27678 Filed 12-17-04; 8:45 am]
BILLING CODE 4830-01-P