CIRCULAR 230

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					     CIRCULAR 230

TAX ADVICE UNDER THE NEW
   CIRCULAR 230 REGIME

        Richard A. Shaw, Esq.
     Higgs, Fletcher & Mack, LLP
     401 West A Street, Suite 2600
     San Diego, California 92101
        Office: (619) 236-1551
      Facsimile: (619) 696-1410
     E-mail: shawr@higgslaw.com
    Regulation of Tax Advice
       Practitioner rules of professional
        responsibility
       Internal Revenue Code
       Treasury Regulations
       Internal Revenue Service Administrative
        Guidance
           Revenue Rulings
           Revenue Procedures
           Notices and Announcements
                                          Richard A. Shaw, Esq.

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    Traditional Tax Advice

       Traditional tax advice is aimed at minimizing
        taxes in business, investment and personal
        transactions.
       A secondary need is to provide the taxpayer
        protection from the potential for tax penalties
        asserted in the event of underpayment of
        taxes


                                             Richard A. Shaw, Esq.

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    Primary Penalty Risk (IRC § 6662)
    Primary Tax Penalties
     IRC § 6662 poses a penalty when there is an understatement of
       taxes in the amount of the greater of 10% or $5,000 ($10,000
       for C Corporations with a limit of $10,000,000)
           20% penalty:
                Negligence;
                 Substantial understatement of income tax
           20%-40% penalty:
                Gross valuation misstatement.
                      General valuation misstatements
                      Pension liability understatements, and
                      Estate or Gift tax understatements.



                                                                Richard A. Shaw, Esq.

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    Reduction in Understatement
       The taxpayer is entitled to a reduction of
        penalties upon presentation of:
           Substantial authority for the treatment of an
            item, or
           Adequate disclosure of relevant facts on the tax
            return, and
           There is a reasonable basis for the tax treatment

           Tax shelters are not allowed a reduction under
            section 6662
                                                  Richard A. Shaw, Esq.

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    Good Faith Reasonable Cause Protection

       The substantial understatement penalties of § 6662
        may be avoided if the taxpayer has acted in good
        faith and has a reasonable cause of the
        underpayment of tax. IRC § 6664(c).

       The Treasury Regulations provide that the taxpayer
        may rely on tax advice to support the existence of
        good faith existence of reasonable cause. Treas.
        Reg. § 1.6664-1

                                                Richard A. Shaw, Esq.

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    Tax Advice Defined

     “Any communication including the opinion of
     a professional tax advisor, setting forth the
     analysis or conclusion of a person, other than
     the taxpayer, provided to (or for the benefit)
     the taxpayer and on which the taxpayer relies,
     directly or indirectly, with respect to the
     imposition of the section 6662 accuracy-
     related penalty. Advice does not have to be in
     any particular form.”
                                         Richard A. Shaw, Esq.

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                    Circular 230
             Rules Regulating Tax Advice

       Circular 230 regulates tax advice whether:
           Oral
           Written
           General tax advice
           Specific tax advice with respect to a tax return
            position
           Signing of a tax return


                                                   Richard A. Shaw, Esq.

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    Practice Before the Internal Revenue Service

       February 3, 2006 proposals expand IRS
        authority to regulate any written advice with
        respect to any entity, transaction, plan or
        arrangement, “having a potential for tax
        avoidance or evasion and representing a
        client at conferences, hearings and meetings.”



                                            Richard A. Shaw, Esq.

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     Section 10.33 Aspiration of Best Practices
     Leading to Highest Quality Representation

        Clearly communicate terms of engagement
         and scope of advice
        Determine relevant facts, reasonable
         assumptions and representation
        Apply law to the facts
        Have conclusion supported by law and facts
        Include presentation on risks of penalties
        Act fairly and without diligence
                                           Richard A. Shaw, Esq.

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     Section 10.34 Advice on Tax Return Positions
     and for Preparing and Signing Tax Returns
     Minimum requirements for oral and written tax advice on a tax
     return position.
     Realistic possibility of success:
     “If a reasonable and well informed analysis by a person
     knowledgeable in the tax law would lead such a person to
     conclude that the position has approximately a one in three or
     greater likelihood of being sustained on the merits.”
     Adequate Disclosure and Not Frivolous:
           Position is not frivolous, and
           The client is advised of the opportunity to avoid § 6662 penalties
            by adequate disclosure
                Frivolous means patently improper (or groundless)


                                                                Richard A. Shaw, Esq.

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     Section 10.35 Reliance on a “Covered Tax Opinion”

        Penalty protection opinions.
        Six types of written tax advice must satisfy
         detailed drafting requirements before the
         taxpayer may rely on the tax advisor for
         penalty protection.




                                             Richard A. Shaw, Esq.

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     Covered Opinions
     Written advice (including electronic communications)
     relating to:
           A listed transaction
           A transaction with a principal purpose of tax avoidance
           A transaction with a significant purpose of tax avoidance
            that is:
               A marketed opinion

               An opinion subject to conditions of confidentiality

               An opinion subject to conditions of contract protection

               A “reliance opinion”


                                                           Richard A. Shaw, Esq.

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     Listed Transaction Opinions

     Treasury Regulation § 1.6011-4(b)(2)
          Specific Transactions identified by notice
           regulations or published guidance
          Any other transactions that are the same or
           substantially similar transactions that the IRS
           considers are avoidance transactions
          More than 30 listed transactions



                                                  Richard A. Shaw, Esq.

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     Principal Purpose Covered Opinions

        Any plan or arrangement where there is a principal
         purpose of avoidance or evasion
        Purpose of avoidance must exceed any other purpose
        Not a principal purpose of avoidance if the
         partnership, entity, plan or arrangement has as its
         purpose the claiming of tax benefits consistent
         with the statute and congressional purposes.
            See Treasury Regulation § 1.6662-4(g)(2)(ii).



                                                             Richard A. Shaw, Esq.

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     Significant Purpose Opinions

        Four Types of Significant Purpose Opinions:
            Confidentiality opinions
            Contract protection opinions
            Marketed opinions
            Other reliance opinions

         Significant purpose – no definition. IRC § 6662.


                                                Richard A. Shaw, Esq.

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     Marketed Opinion

        Marketed Opinion Requirements
            Significant purpose of avoidance
            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 in promoting marketing or
             recommending a partnership or other entity, investment
             plan, or arrangement to one or more taxpayers.
            The tax treatment of each significant federal tax issue must
             be more likely than not the proper treatment.
        Marketing Opinion Disclosure Requirements.
            Opinion is written to support marketing or promotion
            Taxpayer should seek independent tax advice
                                                           Richard A. Shaw, Esq.

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     Failed Marketing Opinions

        If the opinion fails as a marketed opinion or the
     practitioner elects out of the penalty protection, the
     opinion must prominently disclose:
      That advice is not intended and cannot be used for
     penalty protection
      That the advice was written to support promotion
     and marketing, and
      That the taxpayer should seek independent advice


     Limited scope opinion is not permitted
                                                 Richard A. Shaw, Esq.

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     Confidential Transaction Opinion

        A significant purpose of tax avoidance
        The practitioner imposes on the recipient a
         condition of confidentiality
        Applies even if tax advisor fee limitations
         ($50,000/$250,000) of a reportable
         transaction under § 6011 are not met



                                             Richard A. Shaw, Esq.

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     Contract Protection Transaction Opinion

        A significant purpose of tax avoidance
        Taxpayer is entitled to some refund of fees if
         the intended tax consequences are not
         sustained or if the fees paid are contingent
         upon realizing the tax benefits




                                             Richard A. Shaw, Esq.

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     Reliance Opinion

        A significant purpose of tax avoidance
        Confidence level of more likely that not (over 50%)
        One or more significant federal tax issues will be
         resolved in the taxpayer’s favor

        A federal tax issue is “significant” if the IRS has a
         “reasonable basis” for a successful challenge and its
         resolution would have a significant impact on the
         overall tax treatment of the transactions
                                                  Richard A. Shaw, Esq.

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     Required Content of a Covered Opinion

     Factual Matters
           Identify and include all relevant facts
           No unreasonable factual assumptions
               No assumption as to business purpose or profitability

     Apply the law to the facts
     Evaluate significant federal tax issues
           Advice must opine whether each significant federal tax
            issue will prevail on the merits
     Overall conclusion as to proper tax treatment of each
       item and reasons.
                                                        Richard A. Shaw, Esq.

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     Exceptions to Covered Opinion Requirements
        Limited Scope Opinion
             Practitioner and taxpayer agree that penalty protection is limited to
              federal tax issues addressed
             Must disclose that opinion does not consider additional issues
             Must state that tax advice cannot be used for penalty protection on
              other significant tax issues
             Not available for opinions covering:
                  Listed transactions
                  Principal purpose transactions
                  Marketing opinions
        Qualified retirement plans, state and local bond opinions and
         submissions to the SEC
        Written advice after the tax return is filed
        Written advice by in-house council
        Negative advice
                                                                     Richard A. Shaw, Esq.

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     Non-Reliance Opinions
        Practitioner can elect out of covered opinion
         requirements for a significant purpose
         tranaction.
        Must forgo penalty protection.
        Must prominently disclose in a separate
         section in the same or larger type face that the
         advice is not intended to be written and
         cannot be used for the purpose of avoiding
         tax penalties. Cannot be in a footnote.
                                              Richard A. Shaw, Esq.

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     Section 10.37 Other Written Advice

     Mandatory standards for other written tax advice
     Written advice cannot:
           Be based on unreasonable factual or legal assumptions
           Be based on unreasonable reliance on representations,
            statements, findings or agreements
           Consider less than all relevant facts
           Takes into account the possibility that a tax return will not
            be audited, that the issue will not be raised in audit, or that
            the issue will be resolved by settlement


                                                             Richard A. Shaw, Esq.

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     General Ethical Rules of Tax Advice
          Circular 10.22(a)(3)
             In determining the correctness of oral or written
              representation made by the practitioner to client, the
              practitioner must exercise due diligence.
          ABA Model Rule 1.1
             Competence requires, “the full knowledge, skill,
              thoroughness, and preparation reasonably necessary for
              the representation”
          ABA Model Rule 1.3
             “Lawyer shall act with reasonable diligence and
              promptness in representing the client”
          California Rule of Professional Conduct. Section 3-110

                                                       Richard A. Shaw, Esq.

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     Section 10.36 Procedures to Ensure Compliance

        The practitioner with principal authority and
         responsibility for overseeing the firm’s tax
         advice practice must take reasonable steps to
         ensure compliance under the covered opinion
         rules of § 10.3
        Discipline will be applied if the practitioner,
         through willfulness, recklessness, or gross
         incompetence fails to take reasonable steps to
         ensure adequate procedure.
                                             Richard A. Shaw, Esq.

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     The American Jobs Creation Act of 2004
                (the “Jobs Act”)

         The Jobs Act regulates tax opinions related to
     reportable transactions:
              Listed transactions, confidential transactions,
              contract protection transactions, loss
              transactions, and short term holding
              transactions.
          It assures transparency by requiring full disclosure
     of reportable transactions and tax advisor independence
     in providing tax opinions. IRC §§ 6011, 6111, 6112,
     6700, 6707, 6707A, and 6708.
                                                  Richard A. Shaw, Esq.

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     Tax Shelters

        Tax Shelters: § 6662 prohibits any reduction in any
         accuracy-related penalty for tax shelters, even if
         there is substantial authority, full disclosure, or even
         reasonable cause for the understatement.
        Tax Shelter Definition. A tax shelter is defined as
         “any partnership or other entity, or any plan, or
         arrangement where there is a significant purpose of
         tax avoidance or evasion. IRC § 6662(d)(2)(C).
        Good Faith, Reasonable Cause defense remains
         available under section 6664.
                                                   Richard A. Shaw, Esq.

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     Reportable Transaction Tax Advice
        The taxpayer is prohibited from relying on a
         “disqualified tax advisor” or upon a “disqualified tax
         opinion” to support reasonable belief for a reportable
         position.
            Disqualified Tax Advisor.
               A material advisor who participates in the organization,
                management, promotion, or sale of any reportable
                transaction.
               Any person compensated directly or indirectly by a
                material advisor regarding the reportable transaction.
               Any person that has a fee arrangement that is contingent
                on the tax benefits of the reportable transaction. IRC §
                6664(d)(3)(B)(ii).
                                                            Richard A. Shaw, Esq.

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     Material Advisor

        A material advisor is a person who provides
         any material aide, assistance or advice on the
         organization, management, promotion, sale or
         implementation of a reportable transaction
         and who derives gross income over $50,000
         in the case of a natural person, or $250,000 in
         any other case. IRC § 6111(b)(1).


                                             Richard A. Shaw, Esq.

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     Disqualified Opinion

       A tax opinion is disqualified if it:
       1. Relies on unreasonable facts or
          assumptions.
       2. Relies on unreasonable representations,
          statements, findings or agreements.
       3. Does not identify all relevant facts.
       4. Fails to meet other requirements of the
          Internal Revenue Service
       IRC § 6664(d)(3)(B)(iii)
                                         Richard A. Shaw, Esq.

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