Today Treasury issued final regulations to the rules governing standards for covered opinions and other written advice.  Specifically, the Secretary of the Treasury has published regulations governing practice before it in 31 CFR part 10 and reprinted as Treasury Department Circular 230 (“Circular 230”). Circular 230 was enacted to ensure that tax practitioners, including transactional attorneys, meet minimum standards of conduct with respect to written tax advice.Under the latest Amendment, Section 10.35, which provide standards for covered opinions and other written advice, is eliminated.  Now former Section 10.35 provided detailed rules for tax opinions that were “covered opinions” because their application increased the burden on practitioners and clients, without increasing the overall quality of the tax advice.  Covered opinions include written advice concerning (1) listed transactions; (2) transactions with the principal purpose of tax avoidance or evasion; or (3) transactions with a significant purpose of tax avoidance or evasion if the advice is a reliance opinion, a marketed opinion, subject to conditions of conditionality or subject to contractual protection.  These definitions often require considerable effort on the part of a tax practitioner to determine whether the advice rendered in a particular circumstance was subject to the covered opinion rules and adds further complexities and cost to the opinion process.  In practice, former Section 10.35 contributed to overuse of disclaimers on most practitioner communications even when those communications did not constitute tax advice.  Many individuals currently use a Circular 230 disclaimer at the conclusion of every e-mail or other writing to remove the communication from the covered opinion rules in former Section 10.35.

Instead all written tax advice is now subject to one standard set forth in Section 10.37.  Specifically, Section 10.37 states affirmatively the standards to which a practitioner must adhere when providing written advice on a Federal tax matter.  Section 10.37 requires, among other things, that the practitioner base all written advice on reasonable factual and legal assumptions, exercise reasonable reliance, and consider all relevant facts that the practitioner knows or reasonably should know.  A practitioner must also use reasonable efforts to identify and ascertain the facts relevant to written advice on a Federal tax matter.  Under Section 10.37(d), a Federal tax matter is any matter concerning the application or interpretation of (1) a revenue provision as defined in section 6110(i)(1)(B) of the Internal Revenue Code (“Code”); (2) any provision of law impacting a person’s obligations under the internal revenue laws and regulations, including but not limited to the person’s liability to pay tax or obligation to file returns; or (3) any other law or regulation administered by the IRS. The definition of Federal tax matter in the final regulations reflects the broad nature of advice rendered by Federal tax practitioners in today’s practice environment.  Consistent with former Section 10.37, the final regulations provide that a practitioner must not, in evaluating a Federal tax matter, take into account the possibility that a tax return will not be audited or that an issue will not be raised on audit.

Section 10.37, unlike former Section 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, and the practitioner’s conclusion with respect to the law and the facts.  Rather, the scope of the engagement and the type and specificity of the advice sought by the client, in addition to all other appropriate facts and circumstances, are factors in determining the extent to which the relevant facts, application of the law to those facts, and the practitioner’s conclusion with respect to the law and the facts must be set forth in the written advice.  Further, the  final regulations revise §10.37(b)(1)-(3) to prohibit reliance on advice from any other person, including appraisers and other individuals not defined as practitioners under Circular 230, when the practitioner “knows or reasonably should know” that the advice is disqualified as specified in each provision.  The determination of whether a practitioner has failed to comply with the requirements of  Section 10.37 will be based on all facts and circumstances, rather than on whether each requirement is addressed in the written advice.