The purpose of this memorandum is to alert you to recent changes to Treasury and Internal Revenue Service regulations that will affect the manner in which we provide written federal tax advice to our clients.

The Treasury recently issued changes to Circular 230 that regulate the conduct of tax professionals who are admitted to practice before the Internal Revenue Service.   These changes became effective on June 21, 2005.  The revisions to Circular 230 implement new requirements that must be followed when tax practitioners provide written advice regarding federal tax issues.  The Preamble to the new Circular 230 regulations states that the primary focus of the new provisions is on written federal tax advice concerning transactions that are considered “tax shelter” transactions; but the language of the new regulations is much broader, so that it covers advice given in connection with legitimate business transactions that are structured in a tax-efficient manner.  The Circular 230 requirements apply to all written forms of federal tax advice, and thus apply not only to formal legal opinions, but also to written advice contained in emails, private offering memoranda, draft contracts, letters, memos and other documents.  Accordingly, most of the written federal tax advice that Patton Boggs LLP provides after June 20, 2005 will need to comply with the requirements contained in the revised Circular 230 regulations.  Practitioners who fail to comply with the requirements of the Circular 230 provisions may be suspended or disbarred from practice before the Internal Revenue Service, be publicly censured or be fined.

Under the new rules, there are minimum standards for all written tax advice.  Specifically, a tax practitioner generally is prohibited from giving written advice (including advice by email) about a federal tax issue if the practitioner:  (1) bases the written advice on unreasonable factual or legal assumptions, including assumptions as to future events; (2) unreasonably relies upon representations, statements, findings or agreements by the client or any other person; (3) does not consider all the relevant facts that the practitioner knows or should know; or (4) in evaluating the tax issue, takes into account the possibility that a tax return will not be audited, or that an issue either will not be raised on audit or, if raised, will be settled.

Different and higher standards will be applicable to so-called “covered opinions.”   In general, a covered opinion is written tax advice (again, including emails) on a federal tax issue arising in connection with (1) a “listed [tax shelter] transaction” or a “substantially similar” transaction; (2) any entity, plan or arrangement the principal purpose of which is tax evasion or avoidance; and (3) with certain exceptions, any entity, plan or arrangement a significant purpose of which is tax evasion or avoidance.  Certain types of written tax advice are specifically excluded from the Circular 230 requirements, including written tax advice rendered in a significant purpose transaction that is contained in a document filed with the SEC.

In the case of a covered opinion, written tax advice must meet a number of additional requirements.   For example, there are limits on when the practitioner may rely simply on factual representations by a client (including representations about the business purpose of a transaction) and there are requirements for inclusion of extended discussions of facts and law in the opinion, including discussions of all potentially relevant tax issues.  As a result, the preparation of long-form covered opinions that comply with the new Circular 230 requirements will most likely be more time consuming and expensive for clients than the short-form opinions that frequently have been suitable for client needs in the past.

With certain exceptions, the new regulations give practitioners the option, in lieu of issuing a covered opinion, of including a legend in the written advice that clearly states that the written advice is not intended by the practitioner, and cannot be relied upon by the taxpayer, for the purpose of avoiding penalties resulting from federal tax positions taken by the taxpayer in connection with the transaction.   To ensure that we do not inadvertently violate the new rules, we expect to make two changes in our email practices.  First, because the new rules do not apply to preliminary advice, we will so label our email responses where those responses will be followed by more formal written advice on the matter, such as an opinion (either long form or short form), at the closing of a transaction.  Second, while we will of course continue to respond by email to an inquiry from you on a matter where immediate advice is required, we may include a penalties disclaimer in our email responses if we believe there is any risk that our email would otherwise be treated as a “covered opinion” absent such a disclaimer.  Indeed, as a precautionary matter, we may include a disclaimer in most if not all of our emails that contain substantive tax discussions.  The text of this new legend appears following this paragraph.  A similar legend will be included in draft transactional documents, client memoranda and client letters that contain tax advice.  Private offering memoranda and tax opinions relating to private offering memoranda will include a different legend, as required by Circular 230, that also states that the tax advice was written to support the promotion or marketing of the transaction described therein, and urges individual recipients of the offering memorandum to seek tax advice based on their particular circumstances from an independent tax advisor.  The placement of these legends on emails and other documents should enable our tax advisors to comply with the requirements of Circular 230 without having to provide a detailed long-form opinion in situations where such an opinion is not requested or warranted, and thus should enable us to adhere to the requirements of Circular 230 in most situations in a cost-efficient manner.  You will also see similar legends on the correspondence of other law firms.

IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

This memorandum is not intended to provide legal advice with respect to any particular situation and no legal or business decision should be based solely on its content.  Questions concerning issues addressed in this memorandum should be directed to George J. Schutzer (202‑457-5273) or Mark McWatters (214) 758-3562.