[Federal Register Volume 70, Number 96 (Thursday, May 19, 2005)]
[Rules and Regulations]
[Pages 28824-28826]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-9959]


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DEPARTMENT OF THE TREASURY

Office of the Secretary

31 CFR Part 10

[TD 9201]
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 regulations clarify the 
standards for covered opinions.

DATES: Effective Date: These regulations are effective May 19, 2005.
    Applicability Date: For dates of applicability, see Sec.  10.35(g).

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:

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 20, 2004, the Treasury Department and the 
IRS published in the Federal Register (69 FR 75839) final regulations 
(Final Regulations) applicable to written advice that is rendered after 
June 20, 2005. Since publication of the Final Regulations, Treasury and 
the IRS have received a number of comments highlighting areas where the 
language of the Final Regulations might have consequences inconsistent 
with their intent. Upon consideration of those comments, the Treasury 
Department and the IRS have made revisions to the Final Regulations, as 
described below, to clarify the language of the Final Regulations.

Explanation of Provisions

Written Advice Issued After a Tax Return Is Filed

    Commentators have expressed concern that advice given after a tax 
return is filed, in particular advice given in the context of an IRS 
examination or litigation, might constitute a covered opinion within 
the meaning of the Final Regulations. In response to this concern, the 
definition of excluded advice in Sec.  10.35 is expanded to include 
written advice prepared for and provided to a taxpayer, solely for use 
by that taxpayer, after the taxpayer has filed a tax return reflecting 
the tax benefits of the transaction described in or referred to in the 
written advice. This exclusion does not apply if the practitioner knows 
or has reason to know that the taxpayer will rely upon the written 
advice to take a position on a return (including an amended return that 
claims tax benefits not reported on the original return) filed after 
the date on which the advice is provided to the taxpayer.

Advice Provided by Taxpayer's In-House Counsel

    Commentators have also expressed concern that written advice 
provided by in-house counsel to the employer for purposes of 
determining the employer's tax liability could constitute a covered 
opinion and that the concept of a covered opinion in that context 
raises numerous issues. In response to these concerns, the definition 
of excluded advice in Sec.  10.35 is expanded to include advice 
provided to an employer by a practitioner in that practitioner's 
capacity as an employee of that employer solely for purposes of 
determining the tax liability of the employer. Written advice provided 
by in-house counsel that falls within the revised definition of 
excluded advice will continue to be subject to the

[[Page 28825]]

requirements set forth in Sec.  10.37 for other written advice. The 
exclusion of written advice provided by in-house counsel from the 
covered opinion standards of Sec.  10.35 is in no way intended to 
affect other aspects of the relationship between in-house counsel and 
the employer, such as whether, and in what circumstances, the attorney-
client privilege applies to communications involving in-house counsel, 
or the circumstances in which written advice provided by in-house 
counsel might be relevant to determining the employer's good faith and 
reasonable cause.

Negative Advice

    Several commentators have suggested that negative advice, i.e., 
advice concluding that a Federal tax issue will not be resolved in the 
taxpayer's favor, could constitute a covered opinion. This concern is 
most prevalent (1) in the context of written advice relating to a 
listed transaction or a transaction having the principal purpose of tax 
avoidance and (2) where written advice addresses more than one Federal 
tax issue and the advice concludes that one or more Federal tax issues 
will not be resolved in the taxpayer's favor.
    Treasury and the IRS encourage practitioners to advise taxpayers 
that a transaction is not appropriate or that one or more Federal tax 
issues will not be resolved in the taxpayer's favor. Treasury and the 
IRS are concerned, however, about written advice that could be 
construed as encouraging taxpayers to take aggressive positions on 
their tax returns, such as advice that concludes one or more Federal 
tax issues will not be resolved in the taxpayer's favor, but also 
reaches a conclusion favorable to the taxpayer at any confidence level 
(e.g., not frivolous, realistic possibility of success, reasonable 
basis or substantial authority) with respect to that issue(s). 
Consequently, the regulations are revised to provide that written 
advice that concludes that a Federal tax issue will not be resolved in 
the taxpayer's favor is not a covered opinion with respect to that 
issue, unless the written advice also reaches a conclusion favorable to 
the taxpayer at any confidence level (e.g., not frivolous, realistic 
possibility of success, reasonable basis or substantial authority) with 
respect to that issue. If written advice concerns more than one Federal 
tax issue, the advice must comply with the requirements of Sec.  
10.35(c) with respect to any Federal tax issue that is not treated as 
excluded advice pursuant to the preceding sentence.

Prominently Disclosed

    Commentators have raised questions about how to apply the 
definition of prominently disclosed under Sec.  10.35(b)(8). The 
prominent disclosure requirement is intended to ensure transparency 
between taxpayers and practitioners and to provide taxpayers with 
notice of any limitation on their ability to rely on written advice. To 
achieve these goals while minimizing the burden of compliance on 
practitioners, these regulations modify the definition of prominently 
disclosed.

Transactions With the Principal Purpose of Tax Avoidance or Evasion

    Commentators have asked for clarification of the term the principal 
purpose of tax avoidance or evasion and in particular have asked 
whether the definition in 26 CFR 1.6662-4(g)(2)(i) and (ii) is 
incorporated into Sec.  10.35. In response, these regulations define 
the principal purpose in Sec.  10.35(b)(10) similar to the definition 
in 26 CFR 1.6662-4(g)(2)(ii). This definition also provides that a 
transaction can be a listed transaction or can have a significant 
purpose of tax avoidance even if it lacks the principal purpose of tax 
avoidance. Practitioners must evaluate transactions under the rules in 
Sec.  10.35(b)(2)(i)(A) and (C), even if those transactions are not 
covered by Sec.  10.35(b)(2)(i)(B) because they do not have the 
principal purpose of avoidance or evasion within the meaning of Sec.  
10.35(b)(10) of these regulations.

Special Analyses

    This final rule clarifies and narrows the application of final 
regulations published in the Federal Register on December 20, 2004 (69 
FR 75839). Accordingly, pursuant to 5 U.S.C. 553(b)(B), there is good 
cause to issue this final rule without prior notice and opportunity for 
public comment, because such would be contrary to the public interest. 
For these same reasons, and because the previously published final 
regulations apply to written advice rendered after June 20, 2005, under 
5 U.S.C. 553(d)(1) and (3) a delayed effective date is not required. 
This final rule is not a significant regulatory action for purposes of 
Executive Order 12866. Accordingly, a regulatory impact analysis is not 
required. Because no notice of proposed rulemaking is required, the 
Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply.

Drafting Information

    The principal author of the regulations is Heather L. Dostaler 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 31 CFR part 10 continues 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, 118 Stat. 1418; 
Reorg. Plan No. 26 of 1950, 15 FR 4935, 64 Stat. 1280, 3 CFR, 1949-
1953 Comp., p. 1017.


0
Par. 2. Section 10.35 is amended by:
0
1. Revising paragraph (b)(2)(ii).
0
2. Revising paragraph (b)(8).
0
3. Adding paragraph (b)(10).
    The additions and revisions read as follows:


Sec.  10.35  Requirements for covered opinions.

* * * * *
    (b) * * *
    (2) * * *
    (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;
    (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;
    (C) Written advice prepared for and provided to a taxpayer, solely 
for use by that taxpayer, after the taxpayer has filed a tax return 
with the Internal Revenue Service reflecting the tax benefits of the 
transaction. The preceding sentence does not apply if the practitioner 
knows or has reason to know that the written advice will be relied upon 
by the taxpayer to take a position on a tax return (including for

[[Page 28826]]

these purposes an amended return that claims tax benefits not reported 
on a previously filed return) filed after the date on which the advice 
is provided to the taxpayer;
    (D) Written advice provided to an employer by a practitioner in 
that practitioner's capacity as an employee of that employer solely for 
purposes of determining the tax liability of the employer; or
    (E) Written advice that does not resolve a Federal tax issue in the 
taxpayer's favor, unless the advice reaches a conclusion favorable to 
the taxpayer at any confidence level (e.g., not frivolous, realistic 
possibility of success, reasonable basis or substantial authority) with 
respect to that issue. If written advice concerns more than one Federal 
tax issue, the advice must comply with the requirements of paragraph 
(c) of this section with respect to any Federal tax issue not described 
in the preceding sentence.
* * * * *
    (8) Prominently disclosed. An item is prominently disclosed if it 
is readily apparent to a reader of the written advice. Whether an item 
is readily apparent will depend on the facts and circumstances 
surrounding the written advice including, but not limited to, the 
sophistication of the taxpayer and the length of the written advice. At 
a minimum, to be prominently disclosed an item must be set forth in a 
separate section (and not in a footnote) in a typeface that is the same 
size or larger than the typeface of any discussion of the facts or law 
in the written advice.
* * * * *
    (10) The principal purpose. For purposes of this section, the 
principal purpose of a partnership or other entity, investment plan or 
arrangement, or other plan or arrangement is the avoidance or evasion 
of any tax imposed by the Internal Revenue Code if that purpose exceeds 
any other purpose. The principal purpose of a partnership or other 
entity, investment plan or arrangement, or other plan or arrangement is 
not to avoid or evade Federal tax if that partnership, entity, plan or 
arrangement has as its purpose the claiming of tax benefits in a manner 
consistent with the statute and Congressional purpose. A partnership, 
entity, plan or arrangement may have a significant purpose of avoidance 
or evasion even though it does not have the principal purpose of 
avoidance or evasion under this paragraph (b)(10).
* * * * *

    Approved: May 12, 2005.
Mark E. Matthews,
Deputy Commissioner for Services and Enforcement, Internal Revenue 
Service.
James W. Carroll,
Acting General Counsel, Department of the Treasury.
[FR Doc. 05-9959 Filed 5-18-05; 8:45 am]
BILLING CODE 4830-01-P