Written by: Steven R. Schneider, Steven R. Dixon, Miller & Chevalier Chartered, Mona L. Hymel
1.01 Introduction and Overview.
After many proposed and temporary regulations and recent legislative changes, major portions of the new anti-tax shelter rules are now final. Although targeted at abuses, the regime is broad and can unexpectedly impact lawyers and accountants involved in common business transactions. This article is meant to help tax practitioners navigate these complicated rules in daily practice addressing questions such as . . .
- There are so many rules – which apply to taxpayers and which apply to advisors?
- Do I need to worry about disclosure even when I don’t have a tax-motivated transaction?
- What if I didn’t disclose a transaction that I now understand to be a reportable transaction? What are my options?
- My partnership sent me a listed transaction protective disclosure – does this affect my personal return?
- I am a taxpayer – should I care if my advisor’s correspondence states that it does not provide me penalty protection – What am I paying them for?
- I am an advisor – if I add the Circular 230 caveat to all of my correspondence, is it business as usual?
- If I prepare tax returns, am I governed by the Circular 230 rules on “covered opinions”? What if I prepare studies or reports for taxpayers under section 382 or section 482?
- Should I be nervous if someone tells me my e-mail was a covered opinion on a transaction where I am a material advisor on an undisclosed reportable transaction that is also a “listed transaction”?
We answer these questions at the end of this article.
This article focuses on two pieces of the anti-tax shelter rules: (1) the rules that define “reportable” transactions and require taxpayers and advisors to disclose those transactions and (2) the Circular 230 rules that govern tax opinions. The article does not discuss other parts of the regime such as (i) the strengthened reasonable cause exception and the disqualified advisor/opinion rules under new section 6662A; (ii) individual state tax shelter rules ; and (iii) audit independence rules for accounting firms doing tax work for their audit clients.
 Disclosure Rules.
The disclosure rules cast a wide net. Strict liability penalties can apply if taxpayers or advisors fail to disclose, even if the transaction is not a tax-motivated transaction and even if the taxpayer ultimately wins on the merits (the penalties are even higher if the taxpayer loses on the merits). The disclosure rules require taxpayers — and sometimes advisors — to disclose “reportable transactions.”
There are now five categories of reportable transactions; section 1.02 provides a more detailed description of these five categories and one category that the IRS recently eliminated — transactions with a significant book-tax difference.
The first type of reportable transaction is a listed transaction. This article provides a brief overview of all 31 current listed transactions. The IRS lists transactions early (i.e., before a court decides the merits of the transaction) to deter taxpayers and ensure that IRS agents review them. The IRS feels that the “shoot first, ask questions later” approach is justified because they are only asking for disclosure.
The other four categories of reportable transactions are: (1) confidential transactions, (2) contractual protection transactions, (3) loss transactions, and (4) brief asset holding period transactions. The IRS eliminated a fifth category of reportable transaction — significant book-tax difference transactions — on January 6, 2006. It is generally unlikely (although by no means certain) that a typical, non-abusive business transaction will fall into categories one, two, or four. The first two categories catch transactions in which the advisor does something that raises suspicion. In a confidential transaction, the tax advisor who earns a specified minimum fee prevents the participants from disclosing the tax structure to others. In a contractual protection transaction, the advisor offers to return fees if the transaction is not successful. The fourth category is relatively narrow and only applies if a taxpayer reports credits from an asset held for less than 45 days.
Categories three and five — loss transactions and book-tax difference transactions — are much more likely to trip up unsuspecting taxpayers and advisors. In a loss transaction, the IRS wants to know about any section 165 losses a taxpayer recognizes in a single year or over multiple years that exceed specific thresholds. Because the threshold is based on gross losses and can be as low as $50,000 (for currency losses) or $2 million (for non-currency losses by non-corporate taxpayers), this category catches many ordinary, non-abusive transactions. The IRS has published an angel list that exempts eleven specific loss-generating transactions (e.g.,involuntary conversion losses) from the reportable transaction regime. The IRS also exempts losses that meet complicated “qualifying-basis” requirements.
Despite the Service’s elimination of the fifth category, taxpayers must still report book-tax difference transactions if they were required to report those transactions before January 6, 2006. Only public corporations or private corporations with over $250 million in gross assets could have book-tax difference transactions. If a public corporation recognized a GAAP gain of $10 million or more and did not report any corresponding tax gain, the IRS wanted to know about it. The book-tax regulations were complex, and the book-tax angel list was the longest, with thirty-five exceptions. Moreover, although the book-tax difference no longer creates a reportable transaction, the IRS still requires this basic information through the new mandatory Form M-3 for certain corporations and partnerships.
[a] Taxpayer Penalties.
The 2004 American Jobs Creation Act (the “Jobs Act”) added a series of penalties to give the new disclosure rules some teeth. The penalty that accompanies the taxpayer disclosure requirement is the section 6707A penalty; it ranges from $10,000 to $50,000 for failures to disclose a non-listed reportable transaction and from $100,000 to $200,000 for failures to disclose a listed transaction. Moreover, if the taxpayer does not disclose the transaction and ultimately loses on the merits, more severe accuracy-related penalties apply under new section 6662A. Taxpayers who fail to disclose listed transactions also face: (i) an indefinitely extended statute of limitations; and (ii) an IRS review of all tax accrual work papers upon audit.
[b] Material Advisor Disclosure – Sections 6111 and 6112.
Congress and the IRS created a dual-disclosure regime with these new tax shelter rules. When taxpayers disclose reportable transactions, they are required to disclose all persons who provided tax advice with respect to those transactions. Similarly, tax advisors who are material advisors are required both to disclose reportable transactions and to maintain a taxpayer list. An advisor is a material advisor if she receives a minimum fee and perform certain services related to a reportable transaction. Although section 6111 defines “material advisor,” Notice 2004-80 changes that definition and provides different fee thresholds.
[c] Material Advisor Penalties.
If a material advisor fails to disclose a reportable transaction or makes a late disclosure, the penalty is $50,000 for a non-listed transaction and the greater of $200,000 or 50% of the material advisor’s gross income from advising on a listed transaction. The penalty increases to 75% of the material advisor’s gross income if non-disclosure is intentional. Failure to maintain a taxpayer list can also result in a penalty of $10,000 per day if the advisor does not produce the list 20 days after the IRS makes a written request for the list.
 Circular 230.
Included in its arsenal to combat abusive tax shelters, the Treasury can regulate the way advisors conduct their tax practice. Through the regulations collectively known as Circular 230, the Treasury provides the rules lawyers, CPAs, and Enrolled Agents must follow to practice in front of the IRS.
Practitioners who fail to follow Circular 230 can have their privilege to practice before the IRS revoked.[20 ] Most recently, the Jobs Act added authority for the Treasury and the IRS to impose Circular 230 standards for written advice and to impose monetary penalties on a practitioner (and his or her firm) who violates any provision of Circular 230. In December 2004, the Treasury issued updated Circular 230 regulations to coordinate with the new legislation and finalized regulations on disclosure requirements and preparer penalties.
The changes to Circular 230 are designed “[t]o restore, promote, and maintain the public’s confidence in those individuals and firms” providing tax advice and ensure that taxpayers are aware of when they can or cannot rely on an opinion to protect against penalties. In general, for a taxpayer to be able to rely on an opinion for penalty protection, the opinion must satisfy the requirements of a Covered Opinion. A Covered Opinion generally falls into the “bad” category (listed transactions,principal-purpose-of-tax-avoidance transactions, marketed transactions, confidential transactions, or contractually protected transactions) or the relatively “good” category (opinions with a more-likely- than-not or higher level of confidence on any tax issue that has a significant purpose of tax avoidance) for which Circular 230 disclaimers are available.Circular 230 provides less stringent requirements for the residual category of advice, which is called “Other Written Advice.” Finally, the Treasury has promulgated aspirational “best practices” that your liability insurance carrier might suggest you also follow. As for monetary penalties, the Treasury and the IRS have indicated that they intend to propose regulations providing for such penalties, but currently no monetary penalties apply for violations of Circular 230.
[a] What Is a Covered Opinion?
Covered Opinions, subject to the most stringent requirements, include written advice (including electronic communications) concerning one or more Federal tax issues arising from: (1) listed transactions, (2) Principal Purpose of Tax Avoidance transactions, and (3) certain Significant Purpose of Tax Avoidance transactions. Principal Purpose of Tax Avoidance transactions include 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. A Significant Purpose of Tax Avoidance transaction is any plan or arrangement, a significant purpose of which is tax avoidance or evasion if the written advice is either: (1) a Reliance Opinion; (2) a Marketed Opinion; (3) subject to conditions of confidentiality; or (4) subject to contractual protection. This article discusses the various types of covered opinions in more detail in section 1.03. In addition, the article also explains the exceptions to Covered Opinions, including the common “opt-out” disclaimer, which an advisor can use to avoid creating a reliance opinion in certain circumstances by including a disclaimer stating that the advice cannot be relied upon for penalty protection.
[b] Requirements for a Covered Opinion.
As a brief overview, Covered Opinions must meet specific detailed requirements regarding:
(i) factual matters (including due diligence requirements, no unreasonable factual assumptions, and no unreasonable factual representations, statements or findings); (ii) the application of the relevant law to the facts; and (iii) the evaluation of significant federal tax issues — including clearly stating any limitations on the scope of the opinion. Circular 230 also requires that the advisor satisfy specific competence requirements and the opinion disclose certain facts such as: (i) the relationship between the promoter and advisor; (ii) whether the opinion is a Marketed Opinion; (iii) whether the scope of the opinion is limited; and (iv) whether the opinion fails to reach a “more-likely-than-not” conclusion on any significant federal tax issue addressed in the opinion.
[c] Requirements for Other Written Advice.
The standards are much broader for Other Written Advice not subject to the Covered Opinion requirements. In general, Other Written Advice must not: (i) be based on unreasonable factual or legal assumptions; (ii) unreasonably rely on representations, statements, findings, or agreements; (iii) fail to consider all relevant facts the advisor knows or should know; or (iv) take into account the possibility 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. The requirements for Covered Opinions and Other Written Advice are discussed in section 1.03.
1.02 Disclosure Rules in Detail.
Before we delve into what these transactions are, it helps to think through the goals of these rules. Their initial purpose is to put the Service on notice of as many potentially abusive transactions as possible by requiring taxpayers to disclose those transactions as they happen. They are also meant to deter taxpayers from participating in those transactions through shining light on the transactions and imposing large penalties for taxpayers who do not disclose or have understated tax liabilities as a result of such transactions. Finally, the rules also target the practitioners who devise and promote such transactions by requiring practitioners to (1) disclose abusive transactions and (2) maintain lists of participants in abusive transactions.
The first step in these rules is to identify abusive transactions. The rules implement two fundamental categories of potentially abusive transactions, reportable transactions and listed transactions. Listed transactions, although a subset of reportable transactions, carry more serious consequences than the other categories of reportable transactions.
 Listed Transactions.
The Service knows about certain kinds of potentially abusive transactions — most were widely marketed to taxpayers — and therefore wants to know about any taxpayers who participate in these transactions. These are listed transactions. The Service puts these transactions on a list; and if taxpayers participate in these listed transactions or transactions that are “substantially similar” to listed transactions, then the taxpayers must disclose that participation. The government aimed the steepest penalties at listed transactions. Currently, the Service has identified 31 listed transactions and two de- listed transactions. They are all described on the IRS website, and the list keeps growing.
[a] The 31 Listed Transactions.
The IRS usually adds listed transactions by Notice. Early on the IRS listed older transactions that a revenue ruling or other guidance had previously identified. The IRS added its most recent addition, the sale-in-lease-out transaction in Notice 2005-13, after Congress already addressed the issue with new section 470.
A taxpayer participates in a listed transaction if the taxpayer’s tax return reflects tax consequences or a tax strategy described by a listed transaction. If the IRS lists a transaction after a taxpayer files the first tax return reflecting the transaction’s consequences but before the statute of limitations expires for the final return reflecting the transaction’s consequences (or tax benefits or tax strategy), then the taxpayer must disclose the transaction with the taxpayer’s next tax return filed after the date the transaction is listed, regardless of whether the taxpayer participated in the transaction in that year.
The following is a brief summary of some of the identifying aspects of each listed transaction. The summaries are not intended to be complete, but provide a general idea of what each type of transaction entails. We have attempted to group the transactions in various categories, although some transactions could be included under multiple categories. We therefore recommend reviewing all of the transactions. Moreover, because the list is subject to additions or deletions at any time, one must review the most current list, which is posted on the IRS web site.
[i] Compensation and Benefits.
• Rev. Rul. 90-105 – § 401(k) accelerator. IRS denies the acceleration of deductions for certain matching and grace period contributions to benefit plans under section 404(a)(6) unless the compensation has been earned in the year for which the deduction is claimed.
• Notice 95-34 – Multiple employer welfare plan. Certain trust arrangements that purport to cover ten or more employers do not qualify as multiple employer welfare benefit funds that are exempt from the limits of sections 419 and 419A.
• Notice 2003-22 – Foreign leasing corporation. To avoid income and employment taxes, an employee of a U.S. company purports to end employment with the U.S. company and move the employment contract to foreign leasing corporation that, through an intervening domestic leasing corporation, leases the employee back to the original employer. A portion of the original salary remains on account at the foreign leasing corporation for the employee’s benefit.
• Notice 2003-24 – Collective bargaining arrangements. Promoter sets up purported collective bargaining arrangements with friendly parties typically not previously involved with labor organizations or other aspects of the collective bargaining process. Taxpayer attempts to benefit from section 419(f)(5), which applies to contributions to a separate welfare benefit fund under a collective bargaining agreement, and is an exception to the strict deduction limits under section 419 and section 419A.
• Notice 2003-47 – Sell option to family partnership. In lieu of exercising a compensatory option and recognizing current income, the employee sells the option to a related person such as a family limited partnership who pays for the option’s value with long-term, unsecured non-negotiable note, with a balloon payment at end of the note’s term, and employee contends that income is not recognized until the note is paid.
• Notice 2004-8 – Roth IRA value shift. Roth IRA engages in non-arm’s length related party transactions designed to artificially shift value to the Roth IRA to avoid the limitations that otherwise apply to Roth IRA contributions.
• Rev. Rul. 2004-20, situation 2 – Life insurance contracts with face in excess of death benefit.
Employer contributions under a qualified defined benefit plan that are used to purchase life insurance coverage for a participant in excess of the participant’s death benefit provided under the plan are not fully deductible when contributed, but are carried over to be treated as contributions in future years.
• See also Rev. Rul. 2003-6 and Rev. Rul. 2004-4 under “S corporation transactions.”
[ii] Partnership Transactions.
• ASA Investerings Partnership and ACM Partnership – Gain-Loss shifting with partnership installment sale. Taxpayer uses the section 453 installment sale rules to accelerate income, offset by a later loss. The income is shifted to a tax-indifferent partner during years of income acceleration.
• Notice 2000-44 – Son of BOSS treatment of obligation as non-section 752 liability. There are two variations involving the contribution of assets and obligations to a partnership. Partner receives a high basis in the partnership because it does not reduce basis by obligations transferred to the partnership.
• Notice 2002-50 – Related party loss tiered partnership straddle. Lower tier partnership recognizes the gain leg of a straddle. Then various steps take place, including sale by upper-tier partner to Investor, before the loss leg is recognized.
• Notice 2004-31 – Partnership guaranteed payment financing and section 163(j). Foreign Parent (“FP”) forms a partnership with its domestic subsidiary (“DC1”). That partnership invests in a different FP domestic subsidiary (“DC2”). The partnership receives dividends from DC2 and allocates dividends to DC1 and makes large guaranteed payments to FP.
[iii] C Corporation Transactions.
• Notice 99-59 – BOSS. Foreign Corporation enters into a bank loan and then distributes assets, subject to the bank loan, but does not reduce its outside basis even though the Foreign Corporation is expected to repay the bank loan.
• Treas. Reg. § 1.7701(l)-3 – Fast pay or step down preferred stock. A corporation uses “fast-pay” stock to pay section 316 dividends that are in substance a return of capital (as opposed to a return on capital).
• Notice 2000-60 – Hook stock compensation transaction. Parent and Subsidiary are not consolidated. Subsidiary buys Parent stock (the hook stock) and uses most of the Parent stock to compensate the Parent’s employees. S’s basis in the compensation stock shifts to its remaining shares that now have a built-in loss.
• Notice 2001-16 – Stock/asset sale through intermediary. X wishes to sell stock and Y wishes to buy assets with a basis step up. X first sells stock to Midco who sells the underlying assets to Y. Midco is a tax-indifferent party (either using losses, tax-exempt, or otherwise).
• Notice 2001-17 – C corporation assumptions of liabilities giving rise to a deduction. Taxpayer transfers a full-basis asset (e.g., $100) and a like amount of liabilities (e.g., $99) where such liabilities will give rise to a later deduction. The stock basis is not reduced by the liabilities per section 357(c)(3). Congress enacted section 358(h) since the IRS listed this transaction.
• Notice 2001-45 – Corporate stock basis bump on redemption-dividend. Taxpayer and Indifferent Party both own stock in Corporation. Indifferent Party is related to Taxpayer under section 318. Corporation treats later redemption of Indifferent Party as a dividend because, through attribution, Indifferent Party’s ownership in Corporation has not been reduced. Because 100% of Indifferent Party’s stock is redeemed, its stock basis is added to Taxpayer’s stock basis.
[iv] Financial Instruments.
• Rev. Rul. 2000-12 – Offsetting debt instruments. Taxpayer acquires two debt instruments, the values of which are expected to move in opposite directions. Taxpayer recognizes the loss on one debt instrument and defers the gain on the other.
• Notice 2002-21 – Asset basis using nominal amount of loan. Buyer acquires asset in exchange for assuming liability for the principal amount (but not interest) on a Note. Buyer claims basis in Asset equal to the principal amount of Note, undiscounted for the time value of the deferred payment.
• Notice 2002-35 – Notional principal contract early termination swaps. Taxpayer enters into a notional principal contract (such as a contingent deferred swap) where Taxpayer makes periodic payments to the counter-party in exchange for a right to an offsetting payment in the future with a fixed and contingent component. Taxpayer currently deducts the periodic payments but does not accrue the right to future payments, reporting them as income when received.
• Notice 2003-81 – Offsetting foreign currency option contracts. A taxpayer pays premiums to purchase a call option and a put option (the purchased options) on a foreign currency. These contracts are covered by section 1256. The taxpayer also receives premiums for writing a call option and a put option (the written options) on a different foreign currency. These contracts are not covered by section 1256. The values of the two currencies are highly correlated. After currency prices move, the taxpayer assigns the purchased option that has a loss to a charity (and recognizes a mark-to-market loss). The charity also assumes the tax payer’s obligation under the offsetting written option that has a gain (without recognizing the gain).
[v] S Corporation Transactions.
• Rev. Rul. 2003-6 – S Corp ESOP shelf Structure. The Section 409(p) restrictions have a delayed effective date. Certain persons set up shell S corporation/ESOP structures before the effective date to sell them as grandfathered structures.
• Rev. Rul. 2004-4 – Disqualified persons with options in S corporation subsidiary. An ESOP nominally holds an S corporation (deferring current tax on the S corporation income) and disqualified persons have an option to acquire the stock of the S corporation’s subsidiary.
• Notice 2004-30 – S corporation stock to charity. S corporation shareholders donate substantial nonvoting stock to charity while retaining voting shares and options.
• Rev. Rul. 2002-69 – Lease-in lease-out (“LILO”). Foreign municipality enters into a headlease to lease a long-term depreciable asset to U.S. Taxpayer. U.S. Taxpayer in turn enters into a sublease for a shorter period of time to lease the asset back to Foreign municipality.
• Notice 2003-55 – Lease Strips. One participant realizes income from property and another participant claims the related deductions. Lease strips may take a variety of forms, such as a tax- indifferent party selling an income stream to accelerate income, and transferring the underlying high- basis, low-value property to a corporation.
• Notice 2005-13 – Sale-in lease-out (“SILO”). Taxpayer enters into a sale-leaseback arrangement with a tax-indifferent person using economically defeased debt.
[vii] Foreign Tax Credit Transactions.
• Notice 2004-20 – Midco use of foreign tax credits. In lieu of a foreign corporation directly selling non-effectively connected assets to a U.S. buyer, the sale is run through an intermediary. The intermediary buys stock,makes a section 338 election, and then sells the assets to the ultimate buyer, triggering the foreign taxes and a U.S. foreign tax credit.
[viii] Abusive Trusts.
• Prop. Reg. § 1.643(a)-8 – Charitable remainder trusts. Taxpayer contributes appreciated assets to a charitable remainder trust with a high payout rate. Taxpayer treats the distribution of cash to the beneficiary as a tax-free return of corpus and later triggers the built-in gain to the charitable beneficiary during the last year of the trust.
• Notice 2000-61 – Guam trusts. Taxpayer interprets section 935 as applying to trusts to avoid income taxes of both U.S. and Guam.
[ix] Accounting Methods.
• Notice 2003-77 – Contested liability trusts. Taxpayer establishes trust to qualify under section 461(f) to receive a current deduction for a contested liability.
[b] The De-listed Transactions.
• Notice 98-5 Foreign Tax Credits. De-listed by Notice 2004-19.
• Notice 2002-70 – PORC. Producer Owned Reinsurance Companies. De-listed by Notice 2004-65.
 Other Reportable Transactions.
The government also thinks there are certain indicia of potentially abusive transactions. For example, when a transaction results in a large loss, or causes a taxpayer’s tax reporting to significantly depart from her financial accounting, a red flag is raised, and the transaction deserves a closer look. These are “reportable transactions,” and five categories of reportable transactions are set out in IRC § 6011: (i) confidential transactions, (ii) contractual protection transactions, (iii) loss transactions,
(iv) significant book-tax difference transactions, and (v) brief holding period transactions. As explained below, the IRS has since eliminated the fourth category of significant book-tax difference transactions. Taxpayers must disclose participation in reportable transactions or face penalties. Penalties also apply to taxpayers who realize “undeserved” tax benefits from these transactions. The categories of reportable transactions are very broad, and many ordinary transactions will fall into these categories. The Service has carved many exceptions out of the reportable transaction categories. It remains to be seen whether those exceptions will serve to exclude enough ordinary transactions.
[a] Confidential Transactions.
A transaction is a confidential transaction if an advisor (1) restricts participants from disclosing the transaction’s tax structure or U.S. tax treatment and (2) earns a minimum fee. The minimum fee is at least $250,000 from a corporation (including a partnership/trust with all corporate partners/beneficiaries) or $50,000 from all other transactions. A minimum fee includes all of the advisor’s fees for devising a tax strategy, providing advice (whether or not tax advice), or implementing the transaction. These fees include consideration in whatever form paid, whether in cash or in kind, for services to analyze the transaction (whether or not related to the tax consequences of the transaction), services to implement the transaction, services to document the transaction, and services to prepare tax returns to the extent that the fees exceed the fees customary for return preparation.
The regulations deem that a taxpayer pays fees to an advisor if the taxpayer knows or should know that the amount will be paid indirectly to the advisor, such as through a referral fee or fee-sharing arrangement.A fee does not, however, include amounts paid to a person, including an advisor, in that person’s capacity as a party to the transaction.
A taxpayer participates in a confidential transaction if (i) the taxpayer’s tax return reflects a tax benefit from the transaction and (ii) the advisor restricts the taxpayer’s disclosure of the transaction’s tax structure. If an advisor limits a partnership’s disclosure, and does not limit the partners’ (or shareholders’ or beneficiaries’) disclosure, then only the partnership, and not the partner, has participated in the confidential transaction.
[ii] What Is Confidential?
A transaction is considered a confidential transaction even if the conditions of confidentiality that the advisor imposes are not legally binding. A transaction is not a confidential transaction when the parties to the transaction impose confidentiality on each other, and none of the advisors in the transaction impose confidentiality.
Waiver. If an advisor claims that a transaction is proprietary or exclusive, the transaction is not a confidential transaction if the advisor confirms to the taxpayer that there is no limitation on disclosure of the transaction’s tax treatment or tax structure.
[iii] Confidentiality Example
Question. Buyer and Seller agree on a term sheet related to the sale of Seller’s wholly owned S corporation. The term sheet states that the sale is contingent on an effective section 338(h)(10) election so that Buyer can receive a basis step up in the S corporation’s assets. Buyer requires that all parties and their advisors keep the sale and its terms confidential until the parties jointly agree to a press release. Is this a confidential reportable transaction because the confidential term sheet includes tax provisions relating to the section 338(h)(10) election?
Answer. This is not a confidential transaction because the confidentiality restriction is not imposed by the advisor, but by a party to the transaction. The IRS narrowed the confidentiality filter in
December 2003 in T.D. 9108.[54 ] The confidential filter only applies if the advisor who receives a minimum fee imposes a restriction on disclosure relating to the tax treatment or tax structure and the limitation protects the confidentiality of that advisor’s tax strategies. The advisor can further protect himself from any claim that a structure is proprietary or exclusive if he confirms to the taxpayer that disclosure of the tax treatment or tax structure is not restricted.
[b] Contractual Protection Transactions.
In transaction with contractual protection, the taxpayer has the right to a full or partial refund of fees if the taxpayer does not sustain all or part of the intended tax consequences. A transaction with contractual protection also includes any transaction in which the advisor’s fees are contingent on the taxpayer realizing tax benefits from the transaction. In determining whether a fee is refundable or contingent, the Service will consider all the facts and circumstances relating to the transaction, including any rights the parties might have to reimbursements that are not specified as “fees” or any agreement on the advisor’s part to provide services without reasonable compensation. This category only captures transactions where the fees are paid by the taxpayer or on the taxpayer’s behalf to an advisor who makes or provides a statement to the taxpayer about the taxpayer’s potential tax consequences.
A taxpayer has participated in a transaction with contractual protection if (i) the taxpayer’s tax return reflects a tax benefit from the transaction and (ii) the taxpayer has the right to the full or partial refund of fees or the fees are contingent. If a partnership has the right to a full or partial refund of fees or has a contingent fee arrangement, and an individual partner does not, then the partnership has participated in the transaction with contractual protection and the individual partners have not.
[ii] Regulatory Exceptions.
Right to terminate. A transaction does not have contractual protection solely because a party has the right to terminate the transaction upon the occurrence of an event that affects how any party involved in the transaction is taxed.
Previously reportedtransaction. If a person makes or provides a statement to a taxpayer as to the potential tax consequences that may result from a transaction only after the taxpayer has entered into the transaction and reported the consequences of the transaction on a filed tax return, and the person has not previously received fees from the taxpayer relating to the transaction, then any refundable or contingent fees are not taken into account in determining whether the transaction has contractual protection.
[iii] Angel List Exceptions.
Rev. Proc. 2004-65 provides the following list of exceptions to contractual protection transactions:
Workopportunitycredit. Transactions in which the refundable or contingent fee is related to the work opportunity credit under section 51;
Welfare-to-work credit. Transactions in which the refundable or contingent fee is related to the welfare-to-work credit under section 51A; and
Indian employment credit. Transactions in which the refundable or contingent fee is related to the Indian employment credit under section 45A(a).
[iv] Contractual ProtectionExample
Question. Advisor provides Corporation with a tax structure in exchange for a $200,000 fee. Advisor’s engagement letter provides that he will not charge for any future audit or litigation assistance if the transaction is ever audited up to the original $200,000 fee. Is this a contractual protection reportable transaction?
Answer. No minimum fee is required for a contractual protection reportable transaction; the regulations only look to whether the fees are refundable or contingent if the taxpayer does not sustain all or part of the intended tax consequences. In determining if fees are contingent or refundable, the regulations consider all of the facts and circumstances, including any agreement to provide services without reasonable compensation. Although the IRS may treat the future “free services” as equivalent to a refund of fees, the advisor can argue that this arrangement is not a contractual protection reportable transaction because the advisor’s free services are offered even if the IRS ultimately sustains the reported tax treatment.
[c] Loss Transactions.
A loss transaction is a transaction that results in the taxpayer claiming a section 165 loss over certain minimum annual or cumulative thresholds. The thresholds are shown in the chart below.
A “section 165 loss” includes an amount deductible pursuant to a provision that treats a transaction as a sale or other disposition, or otherwise results in a deduction under section 165. For example, a loss resulting from a sale or exchange of a partnership interest under section 741 is a section 165 loss. However, the angel list includes exceptions for many different types of losses (e.g., mark-to- market, involuntary conversion, etc.) and from losses meeting the qualifying basis exception (e.g., cash basis).
The amount of a section 165 loss is adjusted for any salvage value and for any insurance or other compensation received. A section 165 loss does not take into account offsetting gains, or other income or limitations. In determining whether a transaction is a loss transaction, the full amount of a section 165 loss is taken into account for the year in which the loss is sustained, regardless of whether that loss is, for example, carried back as a net operating loss. A section 165 loss does not include any portion of a loss attributable to a capital loss carryback or carryover from another year, that is treated as a deemed capital loss under section 1212.
A taxpayer has participated in a loss transaction if the taxpayer’s tax return reflects a section 165 loss, and the amount of the section 165 loss equals or exceeds the applicable threshold amount.[69 ] A special rule for determining if a partner participated in a loss transaction applies . If a taxpayer is a partner in a partnership and a section 165 loss flows through to the taxpayer (disregarding netting at the entity level), the taxpayer has participated in a loss transaction if that flow-through loss equals or exceeds the applicable threshold amounts.[70 ] In other words, determining whether a partner participated in a loss transaction depends on the size of the partner’s – not the partnership’s – loss. For this purpose, a tax return is deemed to reflect the full amount of a section 165 loss described in Treas. Reg. § 1.6011-4(b)(5) allocable to the taxpayer under Treas. Reg. § 1.6011-4(c)(3)(i)(D), regardless of whether the taxpayer carries all or part of the loss back or forward under section 172 or section 1212.
[i] Angel List Exceptions
Rev. Proc. 2004-66 provides angel lists for loss transactions. The first list is a set of specific transactions whose losses are disregarded for purposes of determining whether the taxpayer has engaged in a loss transaction (the “angel transactions”). The second list involves excepted losses derived from certain types of basis the IRS deems to be “good” or “qualifying” basis. These qualifying basis losses also involve a few additional requirements, for instance, the assets sold cannot be an interest in a pass- through entity.
The following list summarizes the eleven types of transactions specifically excepted from the loss transaction category.
1. Casualty losses. A loss from fire, storm, shipwreck, or other casualty, or from theft, as those terms are defined for purposes of section 165(c)(3);
2. Involuntary conversion losses. A loss from a compulsory or involuntary conversion as described in section 1231(a)(3)(A)(ii) and section 1231(a)(4)(B);
3. Section 475(a) and section 1256(a) mark-to-market losses. A loss to which section 475(a) or section 1256(a) applies;
4. Certain other mark-to-market losses. A loss arising from any mark-to-market treatment of an item under section 475(f) (traders), section 1296(a) (marketable stock in a PFIC), Treas. Reg. § 1.446-4(e) (asset and liability hedges), Treas. Reg. § 1.988-5(a)(6) (nonfunctional currency debt instrument and hedges), or Treas. Reg. § 1.1275-6(d)(2) (legging out of a qualifying debt and hedge treated as an integrated transaction), and any loss from a sale or disposition of an item to which one of the foregoing provisions applied, provided that the taxpayer computes its loss by using a qualifying basis or a basis resulting from previously marking the item to market, or computes its loss by making appropriate adjustments for a previously determined mark-to- market gain or loss;
5. Losses from identified hedges that manage business risk or section 1092 mixed straddle. A loss arising from a hedging transaction described in section 1221(b), if the taxpayer properly identifies the transaction as a hedging transaction, or from a mixed straddle account under Treas. Reg. § 1.1092(b)-4T. A loss attributable to basis increases under section 860C(d)(1) during the period of the taxpayer’s ownership;
6. Losses from basis adjustments to residual interests in REMIC. A loss attributable to basis increases under section 860C(d)(1) during the period of the taxpayer’s ownership;
7. Certain abandonment losses. A loss attributable to the abandonment of depreciable tangible property that the taxpayer used in a trade or business and that has a qualifying basis;
8. Certain inventory bulk sale losses. A loss arising from the bulk sale of inventory if the basis of the inventory is determined under section 263A;
9. Cash payment losses such as guarantee payments. A loss that is equal to, and is determined solely by reference to, a payment of cash by the taxpayer (for example, a cash payment by a guarantor that results in a loss or a cash payment that is treated as a loss from the sale of a capital asset under section 1234A or section 1234B);
10. Loss from certain accounts receivable factoring sales. A loss from the sale to a person other than a related party (within the meaning of section 267(b) or section 707(b)) of property described in section 1221(a)(4) in a factoring transaction in the ordinary course of business; and
11. Losses from corporate asset sales if “cost” basis from section 338 election. A loss arising from the disposition of an asset to the extent that the taxpayer’s basis in the asset is determined under section 338(b).
If a transaction giving rise to the loss is not one of the eleven excepted transactions, the loss can still be excepted, provided that the loss is derived solely due to qualifying basis, and four additional requirements are satisfied. First, the asset must not be an interest in a passthrough entity (within the meaning of section 1260(c)(2), other than regular interests in a REMIC as defined in section 860G(a)(1)). Thus, a loss from the sale of a partnership interest is considered a loss transaction, even if the seller had qualified basis (e.g., purchased partnership interest for cash). Second, the loss cannot be from the sale or exchange of the asset that is treated as ordinary under the section 988 foreign currency rules. Third, the asset giving rise to the loss cannot have been separated from any portion of the income it generates. Finally, the asset sold must not be, and never have been, part of a straddle within the meaning of section 1092(c), excluding a mixed straddle under Treas. Reg. § 1.1092(b)-4T.
If the loss meets these four requirements and is derived solely from one of the following seven categories of qualified basis, then it is not a reportable loss transaction.
1. Cash. The taxpayer’s basis equals the cash that the taxpayer paid for the asset and for any improvements to the asset. Cash paid includes amount taken into income as compensation under section 83. In general, cash includes debt secured by the asset.
2. Corporate reorganizations. The basis of the asset is determined under section 358 as a result of being received in an exchange to which sections 354, 355, or 361 applies, and the taxpayer’s basis in the property exchanged in the transaction was qualifying basis because the taxpayer paid cash.
3. Step up at death. The basis of the asset is determined under section 1014.
4. Gifts. The basis of the asset is determined under section 1015, and the donor’s basis in the asset constitutes qualifying basis because the donor paid cash.
5. Like-kind exchanges. The basis of the received asset is determined under section 1031(d); the taxpayer’s basis in the property transferred in the section 1031 transaction constituted qualifying basis; and any debt instrument issued or assumed by the taxpayer in connection with the section 1031 transaction is treated as a payment of cash under section 4.02(4) of Rev. Proc. 2004-66.
6. Adjustments relating to CFCs; adjustments between parent and sub in consolidated group.
The basis of the asset is adjusted under section 961 or Treas. Reg. § 1.1502-32, and the taxpayer’s basis in the asset immediately prior to the adjustment was qualifying basis.
7. OID and market discount basis adjustments. The basis of the asset is adjusted under sections 1272(d)(2) or 1278(b)(4), and the taxpayer’s basis in the asset immediately prior to the adjustment was qualifying basis.
[ii] Partnership Loss Example.
Question. Individual A and Corporation B form Partnership. A contributes Property with basis equal to value and B contributes cash. Partnership sells Property and recognizes a $6 million loss, which is allocated, $3million each, to A and B. Is this a section 165 loss reportable transaction?
Answer. The answer to this question depends on (1) whether the loss is on the loss transaction angel list, (2) whether Partnership has qualified basis in Property, and (3) whether the size of the loss exceeds the minimum threshold.
First, the loss is not derived from one of the eleven angel list transactions (such as casualty losses). Second, Partnership does not have qualified basis in Property because Partnership received carryover basis in the property under section 721. The angel list does not except losses if the partnership has a carryover basis in the loss asset from a section 721 contribution. Thus, even though the loss is a real economic loss that Partnership accrued and recognized while it held the asset, the loss is still a reportable loss if the thresholds are satisfied.
Finally, similar to the book-tax difference rules, the section 165-loss rules apply a minimum threshold at both the partnership and the partner level. The general threshold is $10 million in a single year for a corporation (or a partnership with only corporate partners) and $2 million for all others. Note that losses below these thresholds may still be reportable if the cumulative effect over multiple years exceeds specific thresholds. In this example, because Partnership has both an individual and a corporate partner, the $2 million annual threshold applies. Because the $6 million loss exceeds the $2 million threshold, Partnership has a reportable transaction. Whether each partner must also report, depends on whether each partner’s $3 million loss share exceeds the partner’s specific threshold. Corporation B’s share of the loss is below its $10million threshold and therefore, it does not have to report. But Individual A’s $3 million share exceeds its $2 million threshold; Individual A must report the loss.
[d] Significant Book-Tax Difference Transactions.
The Service eliminated this broad category of reportable transaction from the Treasury Regulations in Notice 2006-6, issued on January 6, 2006. After that date, taxpayers who engage in these transactions are no longer required to disclose them as reportable transactions, and advisors are no longer subject to the material advisor rules for these transactions. This change was prompted by the new Schedule M-3, which is now generally required for all corporations and partnerships with assets of $10 million or more for tax years ending on or after December 31, 2006. Based on a review of the M-3s and disclosure statements from the most recent filing season, the Treasury and the Service determined that the M-3 provides adequate information about these transactions and separate disclosure of significant book-tax difference transactions is no longer necessary. The disclosure obligation still applies to any significant book-tax difference transactions that were required to be disclosed prior to January 6, 2006. Therefore, we provide the following guidance on significant book-tax difference transactions.
A transaction with a significant book-tax difference is a transaction where the amount for tax purposes of any item or items of income, gain, expense, or loss from the transaction differs by more than $10 million on a gross basis from the amount of the item or items for book purposes in any taxable year. For purposes of this determination, offsetting items are not netted for either tax or book purposes. Adjustments to any reserve for taxes are disregarded for purposes of determining the book- tax difference. In general, “book” refers to U.S. General Accepted Accounting Principles. The book-tax filter only applies if the taxpayer is either a reporting company under the Securities Exchange Act of 1934 (or is a related business entity) or the taxpayer is a business entity that has $250 million or more in gross book assets.
A taxpayer participates in a transaction with a significant book-tax difference if the taxpayer’s tax treatment of an item from the transaction differs from the book treatment of that item. In determining whether a transaction results in a significant book-tax difference for a taxpayer, a difference is not taken into account if it arises solely because a subsidiary of the taxpayer is consolidated with the taxpayer, in whole or in part, for book purposes, but not for tax purposes.
[ii] Special Rules.
Related entities. For purposes of this determination, the taxpayer must aggregate the assets of all related business entities (as defined in section 267(b) or 707(b)).[78 ] The items of income, gain, loss, or expense of a disregarded entity for book purposes are treated as items of its owner, and items arising from transactions between the entity and its owner are disregarded. If taxpayers are members of a group of affiliated corporations filing a consolidated return, the regulations provide that transactions solely between or among members of the group are disregarded. Moreover, where two or more members of the group participate in a transaction that is not solely between or among members of the group, the regulations provide that the taxpayer may aggregate items (as if the members were a single taxpayer), but that the tax payer may not net offsetting items.
Foreign persons. In the case of a taxpayer that is a foreign person, only assets that are U.S. assets under Treas. Reg. § 1.884-1(d) are taken into account for purposes of this category, and only transactions that give rise to income that is effectively connected with the conduct of a trade or business within the U.S. (or to losses, expenses, or deductions allocated or apportioned to that income) are taken into account for purposes of this category.
Schedule M-3. In Rev. Proc. 2004-45, the Service announced that it would permit taxpayers with transactions in this category of reportable transactions to satisfy their disclosure obligations under section 6011 on schedule M-3. Taxpayers who properly filed the Schedule M-3 for these transactions are relieved of their obligation to file Form 8886 due to a book-tax difference transaction.
[iii] Angel List Exceptions.
Rev. Proc. 2004-67 modifies and supercedes the previous book-tax angel list from Rev. Proc.
2003-25. The following list describes the 35 book-tax exceptions that currently apply:
1. Book loss before or without corresponding tax loss. Items to the extent a book loss or expense is reported before or without a loss or deduction for federal income tax purposes.
2. Tax income before or without corresponding book income. Items to the extent income or gain for federal income tax purposes is reported before or without book income or gain.
3. Depreciation, depletion and amortization differences due to different methods, lives, conventions, etc. Depreciation, depletion under section 612, and amortization differences relating solely to differences in methods, lives (for example, useful lives, recovery periods), or conventions, as well as differences resulting from the application of sections 168(k) (bonus depreciation), 1400I (commercial revitalization deduction),or 1400L(b) (New York liberty zone property).
4. Percentage depletion and IDC. Percentage depletion under section 613 or section 613A, and intangible drilling costs deductible under section 263(c).
5. Start-up, organization, and syndication costs. Capitalization and amortization under sections 195, 248, and 709.
6. Bad debt and COD income. Bad debts or cancellation of indebtedness income.
7. Taxes. Federal, state, local, and foreign taxes.
8. Compensation. Compensation of employees and independent contractors (whether or not individuals), including stock options, pensions, severance, and retirement.
9. Charitable contributions. Charitable contributions of cash or tangible property.
10. Tax-exempt interest. Tax-exempt interest, including municipal bond interest.
11. Dividends, certain subpart F items, and qualified electing fund items. Dividends as defined in section 316 (including any dividends received deduction), amounts treated as dividends under section 78, distributions of previously taxed income under sections 959 and 1293, and income inclusions under sections 551, 951, and 1293.
12. REIT dividends paid deduction. A dividends paid deduction by a publicly-traded REIT.
13. Patronage refunds – cooperative dividends. Patronage refunds or dividends from cooperatives without a section 267 relationship to the taxpayer.
14. Involuntary conversions. Items resulting from the application of section 1033.
15. Tax-free corporate reorganizations and section 1031 transactions. Items resulting from the application of sections 354, 355, 361, 367, 368, or 1031, if the taxpayer fully complies with the filing and reporting requirements for these sections, including any requirement in the regulations or in forms.
16. Debt-for-debt exchanges. Items resulting from debt-for-debt exchanges.
17. Book sale or lease versus tax financing. Treatment of a transaction as a sale, purchase, or lease for book purposes and as a financing arrangement for tax purposes.
18. Book sale versus tax-free transfer to REMIC for tax. Treatment of a transaction as a sale for book purposes and as a nontaxable transaction under section 860F(b)(1)(A) for tax purposes, not including differences resulting from the application of different valuation methodologies to determine the relative value of REMIC interests for purposes of allocating tax basis among those interests.
19. Hedge accounting for tax and not book or vice-versa. Items resulting from differences solely due to the use of hedge accounting for book purposes but not for tax purposes, the use of hedge accounting under Treas. Reg. § 1.446-4 for tax purposes but not for book purposes, the use of integrated hedge accounting under section 988(d) and Treas. Reg. § 1.1275-6 for tax purposes but not for book purposes, or the use of different hedge accounting methodologies for book and tax purposes.
20. Mark-to-market for tax and not book or vice-versa. Items resulting solely from (i) the use of a mark-to-market method of accounting for book purposes and not for tax purposes, (ii) the use of a mark-to-market method of accounting for tax purposes but not for book purposes, or (iii) in the case of a taxpayer who uses mark-to-market accounting for both book purposes and tax purposes, the use of different methodologies for book purposes and tax purposes.
21. Income inclusion from stripped bonds. Items resulting from the application of section 1286.
22. Life insurance buildup, death benefits, and cash surrender value. Inside buildup, death benefits, or cash surrender value of life insurance or annuity contracts.
23. Insurance reserves. Life insurance reserves determined under section 807 and non-life insurance reserves determined under section 832(b).
24. Capitalization of certain insurance expenses. Capitalization of policy acquisition expenses of insurance companies.
25. Certain imputed income and deductions. Imputed interest income or deductions under sections 483, 1274, 7872, or Treas. Reg. § 1.1275-4.
26. Certain foreign currency items. Gains and losses arising under sections 986(c), 987, and 988.
27. Certain exclusions from income of foreign corporations. Items excluded under section 883 (exclusion of certain ship and aircraft income from foreign corporations), section 921 (foreign sales corporations), or an applicable treaty from a foreign corporations income that would otherwise be subject to tax under section 882.
28. Change in accounting method adjustments. Section 481 adjustments.
29. Inventory valuation. Section 481 adjustments.
30. Environmental remediation costs. Section 198 deductions for environmental remediation costs.
31. Grouping mortgages as a single asset. Items resulting from the treatment of a group of mortgages as a single asset for book purposes but as multiple assets for tax purposes.
32. Differences based solely on gross versus net reporting differences for book and tax. Items that are reported on a gross basis for tax and on a net basis for book, or on a net basis for tax and a gross basis for book, if the differing reporting produces no net book-tax difference for the taxable period; for example, in situations in which the amount reported for book purposes by a holder of a mortgage pass-through certificate is equal to the gross interest reported for tax purposes reduced by the holder’s separate tax deduction for mortgage servicing fees.
33. Different book and tax treatment of OID, market discounts, bond premiums etc. Any item resulting from the use of different book and tax treatment of original issue discount, market discount, acquisition discount, de minimis original issue discount, qualified stated interest, amortizable bond premium, bond issuance premium, or debt issuance costs.
34. Specialized tax accounting capitalization methods. Items resulting from the application of specialized accounting methods for capital expenditures under section 263A, Rev. Proc. 2001-46, or Rev. Proc. 2002-65.
35. Blue Cross Blue Shield organization adjustments. Items resulting from adjustments to taxable income under section 833(b).
Question. Individual and Pubco (an SEC registrant under the 1934 Act) are equal partners in Partnership. Partnership owns $100 million of gross assets. Partnership reports a tax loss of $25 million and no book loss in a transaction resulting in a book-tax difference within the meaning of the section 6011 regulations (i.e., it is not on the angel list). Is Partnership or any of its partners required to report this book-tax difference?
Answer. Although Partnership’s book-tax difference is over $10 million, Partnership is not required to report book-tax disparities because its gross assets are below the $250 million minimum threshold (and it is not subject to the rules due to a related party). But each partner’s share of the disparity is greater than $10 million, so each partner must also determine whether they have a book-tax difference reportable transaction.Although individuals are not subject to book-tax difference reporting, public corporations required to file with the SEC under the 1934 Act are subject to the rules. Thus, Pubco has to report the transaction because of its $12.5 million share of Partnership’s book-tax difference.
Question. A and B are equal owners in Partnership 1 and Partnership 2. Each partnership has gross assets of $150 million. Are the partnerships below the $250 million gross asset threshold for purposes of the book-tax difference reportable transaction rules?
Answer. For purposes of applying the $250 million threshold, the regulations aggregate the assets of all related business entities as defined in section 267(b) or 707(b). Under section 707(b), two partnerships are related if the same persons own more than 50 percent of the capital or profits interests in each partnership. Because A and B own 100 percent of both partnerships, the partnerships are treated as related under this rule. Because the gross assets of both partnerships combined are greater than $250 million, each partnership is subject to the reportable transaction book-tax difference rules if the partnership generates a book-tax disparity greater than $10 million.
Question. Partnership generates tax depreciation of $15 million and book depreciation of $4 million. Is this a reportable book-tax result difference if the result is due solely to a difference between accelerated and straight-line depreciation? Alternatively, is this a reportable book-tax difference if the difference is due to the fact that Partnership has depreciation from a basis increase that is not recognized for GAAP purposes?
Answer. Book-tax disparities due solely to differences between methods of depreciation between GAAP and tax do not create a book-tax difference reportable transaction. Therefore, the first disparity does not cause a book-tax difference reportable transaction. But the disparity in the alternative is due to the different bases for GAAP and tax purposes. Therefore, if the partnership is subject to the book-tax test (e.g., over $250 million in gross assets), it must report the $11 million disparity.
[e] Brief Asset Holding Period Transactions.
A transaction involving a brief asset holding period is any transaction resulting in the taxpayer claiming a tax credit exceeding $250,000 (including a foreign tax credit) if the taxpayer holds the underlying asset giving rise to the credit for 45 days or less. Excluded from this category are transactions resulting in a foreign tax credit for withholding taxes or other taxes imposed in respect of a dividend that are not disallowed under section 901(k) (including transactions eligible for the exception for securities dealers under section 901(k)(4)).
A taxpayer has participated in a transaction involving a brief asset holding period if the taxpayer’s tax return reflects items giving rise to a tax credit described Treas. Reg. § 1.6011-4(b)(7).
If a taxpayer is a partner in a partnership, shareholder in an S corporation, or beneficiary of a trust and the items giving rise to a tax credit described in Treas. Reg. § 1.6011-4(b)(7) flow through the entity to the taxpayer (disregarding netting at the entity level), the taxpayer has participated in a transaction involving a brief asset holding period if the taxpayer’s tax return reflects the tax credit and the amount of the tax credit claimed by the taxpayer exceeds $250,000.
[i] Angel List Exceptions.
Rev. Proc. 2004-68 creates an angel list of four transactions that are not reportable transactions under the brief-asset-holding-period category. The following list describes those exceptions.
1. Sales of inventory. In the case of transactions involving solely foreign tax credits, sales made in the ordinary course of the taxpayer’s trade or business of property described in section 1221(a)(1), are excluded provided, however, that this exception applies only to credits with respect to sales proceeds and not to the receipt of other income, such as interest received on bonds held in inventory.
2. Certain transactions with a tolled holding period under the DRD rules. Transactions involving a brief asset holding period under the principles of section 246(c)(4) (deemed stay on holding period for dividends received deduction purposes where risk of loss diminished) solely by reason of (i) a hedge that reduces only the risk of interest rate or currency fluctuations, or (ii) a guarantee issued by a person that is related to the taxpayer within the meaning of sections 267(b) or 707(b) are excluded.
3. Debt instruments held for entire term. Transactions involving a debt instrument that has a term of 45 days or less are excluded if the taxpayer’s holding period in the debt instrument equals the debt instrument’s entire term. For purposes of this paragraph, the taxpayer’s holding period in the debt instrument is determined under Treas. Reg. § 1.6011-4(b)(7), except that the taxpayer’s holding period is not reduced as a result of a hedge or guarantee described in § 4.02(2) of Rev. Proc. 2004-68 (relating to section 246(c)(4) described immediately above).
4. Foreign tax credits for withholding purposes if not disallowed under section 901(l). Transactions resulting in a foreign tax credit for withholding taxes imposed in respect of non-dividend income or gain with respect to any property that are not disallowed under section 901(l) (including transactions eligible for the exception for securities dealers under section 901(l)(2)) are excluded. 1.03 Circular 230.
 Recent Amendments to Circular 230.
As part of the strategy to eliminate abusive tax transactions laid out in the Jobs Act, Treasury issued final regulations affecting individuals who practice before the IRS (the “Circular 230 Regulations”) in December 2004.The revised Circular 230 regulations cover a very broad range of tax transactions and will affect tax advice given in many common transactions. As a result, attorneys and accountants responded to the Treasury and IRS with significant commentary. While commentators recognized the need to regulate abusive tax transactions, they criticized the breadth and lack of clarity under the new regulations. The New York State Bar Tax Section stated “the December regulations as currently drafted are ill-suited to the vast bulk of tax practice. The constraints of the regulations will impede taxpayers’ ability to receive timely tax advice. . . . [W]e believe that . . . they will do more harm than good.” In response, the Treasury and the IRS have stated on several occasions that the rules under Circular 230 will be applied with reason. And in May 2005, the Treasury amended the regulations to provide a few additional clarifications, although far short of the kind of guidance hoped for by tax advisors. The Treasury also has announced that it plans to issue additional guidance to “better focus” the new rules and that this guidance will be issued within months, not years. However, in view of the minor May 2005 amendments and the government’s “apply common sense” response to complaints about Circular 230’s breadth, tax advisors will likely have to live with these tough new regulations for some time to come.
 Who Is Subject to the Rules Under Circular 230?
All attorneys and CPAs who are licensed and in good standing under the laws of one of the States are authorized to practice before the Internal Revenue Service regardless of whether or not that right is exercised.As a result, any attorney, including a non-tax attorney, who provides written advice concerning a federal tax issue may, unknowingly, be subject to the rules under Circular 230. An individual may also practice before the IRS by becoming an Enrolled Agent. An Enrolled Agent must pass a written exam and not engage in disreputable conduct to practice before the IRS. In addition, former IRS employees with at least 5 years of IRS employment who apply within 3 years of separation from the Service may be granted rights to practice before the IRS as enrolled agents. Tax Return Preparers are not currently regulated by Circular 230. However, Congress and Treasury are interested in regulating the conduct of preparers. Bills addressing return preparer issues have been introduced in both Houses of Congress, and the National Taxpayer Advocate has proposed a return preparer registration system.
The Office of Professional Responsibility (OPR), formerly the Director of Practice, administers Circular 230 and functions under the Commissioner of the Internal Revenue Service. In light of the government’s push to shut down abusive transactions, the Commissioner is devoting significant resources to OPR. Over the last few years, OPR has been significantly “beefed-up.” For example, formerly a criminal defense and DOJ Criminal Division attorney, Cono Namorato, now heads OPR, and it employs more than twice the staff than it did a few years ago. In light of the additional resources dedicated to enforcing these more complex Circular 230 regulations, practitioners must be familiar with these new requirements. Moreover, those responsible for tax matters in a firm, must now take steps to ensure that any individual who provides tax advice is aware of and complies with the new rules.
 What Advice is Covered under Circular 230?
[a] Advice Concerning Federal Tax Issues.
Under Circular 230, tax advice is divided into “covered opinions” and “other written tax advice.” Under this dichotomy, covered opinions are subject to arduous compliance requirements while other written tax advice is subject to much more flexible compliance standards. Thus, the determination of whether or not the contemplated tax advice constitutes a covered opinion or not is critical in terms of cost to the client, compliance time for the advisor and, in the vast majority of circumstances, the client’s ability to rely on the advice to avoid penalties.
In general, the rules apply to practitioners who give written advice regarding a federal tax issue. Determining whether the advice concerns a “federal tax issue” or a “significant federal tax issue” is important in determining whether or not the advice constitutes a covered opinion. “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.” A significant Federal tax issue is one in which the IRS 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.”Written advice that does not deal with significant Federal tax issues will not be treated as a covered opinion unless it deals with a listed transaction, a principal purpose of tax avoidance transaction, a marketed opinion, or an opinion subject to conditions of confidentiality or contractual protection. In addition, several other exceptions are discussed below.
[b] Covered Opinions.
Opinions covered under Section 10.35 of the Circular 230 Regulations include written advice (including electronic communications) concerning one or more Federal tax issues arising from: (1) a “listed” transaction, (2) a “principal purpose or tax avoidance” transaction, or (3) certain “significant purpose” transactions. A listed transaction is a transaction that is the same or substantially similar to a listed tax avoidance transaction under Treas. Reg. Section 1.6011-4(b)(2).[104 ] A “principal purpose of tax avoidance” transaction includes 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. If the transaction constitutes a listed transaction or a principal purpose of tax avoidance transaction, any written advice concerning the transaction must comply with the covered opinion standards regardless of whether or not it involved significant tax issues and the practitioner may not opt out of compliance with the requirements.
When Treasury amended the regulations in May 2005, it attempted to clarify the definition of principal purpose. The preamble states that the definition is “similar to the definition in 26 CFR 1.6662-4(g)(2)(ii),”which, in the context of the penalty rules, states that entering into an arrangement to obtain tax benefits such as the tax exemption for municipal bond interest or available elections under subchapter S will not be considered as having as its principal purpose tax avoidance or evasion.[107 ] With the IRC § 6662 regulations as guidance, the Circular 230 regulations state that for a partnership or other entity, investment plan or arrangement, or other plan or arrangement, the principal purpose is tax avoidance or evasion if that purpose exceeds any other purpose. For such transactions, the principal purpose is not to avoid or evade Federal tax if that transaction has as its purpose the claiming of tax benefits in a manner consistent with the statute and Congressional purpose. However, such transaction may be a listed transaction or have a significant purpose of avoidance or evasion even though it does not have the principal purpose of avoidance or evasion. The regulations do not provide the definition of a “significant purpose.”
A “significant purpose” transaction may also be treated as a covered opinion if it has a significant purpose of tax avoidance or evasion and the written advice is (1) a reliance opinion, (2) a marketed opinion, (3) subject to conditions of confidentiality, or (4) subject to contractual protection. The most significant of these are the reliance opinion and the marketed opinion because they are more common and thus more likely to cause the tax advisor to run afoul of the covered opinion requirements.
Written advice constitutes a reliance opinion if the advice concludes more likely than not that one or more significant tax issues will be resolved in the taxpayer’s favor. For a reliance opinion that is not in a “bad” category, such as a listed transaction opinion or a principal purpose of tax avoidance transaction opinion, the tax advisor can opt out of the covered opinion rules by prominently disclosing that the advice cannot be used for penalty protection.
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 in promoting, marketing or recommending a partnership or other entity, investment plan or arrangement to one or more taxpayers, the opinion is considered a marketed opinion. For a marketed opinion that is not a listed transaction opinion or a principal purpose of tax avoidance transaction opinion, the tax advisor can avoid the covered opinion rules if the advice prominently discloses: (1) the opt-out disclosure discussed for reliance opinions; (2) that the opinion is written to support the promotion or marketing of the transaction; and (3) that the taxpayer should seek independent tax advice.
Covered opinions also include written advice that is subject to conditions of confidentiality or contractual protections. If the practitioner imposes a limitation on disclosure of the tax treatment or tax structure of the transaction and the disclosure limitation protects the confidentiality of the practitioner’s tax strategies, regardless of whether the disclosure limitation is legally binding, the advice is subject to a condition of confidentiality.If the practitioner claims that the transaction is proprietary or exclusive, but confirms to all recipients disclosure of the tax treatment or tax structure of the transaction is not restricted, the advice is not subject to a condition of confidentiality. If the taxpayer has the right to a full or partial refund of fees paid depending upon whether (1) all or part of the intended tax consequences are not sustained or (2) the fees paid are contingent on the taxpayer’s realization of the tax benefits from the transaction, the advice is subject to contractual protection.
Given the broad scope of advice subject to the detailed (and expensive) covered opinion requirements, the tax advisors clamored for additional guidance on routine types of advice that should be excepted from the rules. While the December 2004 version of the regulations contained exclusions for preliminary advice, advice concerning a qualified plan, state or local bond opinions, and documents required to be filed with the Securities and Exchange Commission, commentators urged the Treasury to expand the list to cover additional situations. In May 2005, the Treasury did expand the list of exceptions, although the additions clearly fell short of what practitioners had requested.
[c] Advice Not Considered a “Covered Opinion.”
Formally excluded advice. The regulations exclude several types of written advice from the covered opinion requirements. Preliminary written advice provided to a client during the course of an engagement is not considered a covered opinion if the practitioner is reasonably expected to provide subsequent written advice to the client that will satisfy the requirements for covered opinions.
Written advice2 will not be considered a covered opinion if it: (1) concerns 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. A covered opinion does not include a post-return opinion 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. This exclusion will not apply if the practitioner knows or has reason to know that the advice will be relied on by the taxpayer to take a position on a subsequent tax return. If an employee provides written advice to his or her employer solely for purposes of determining the tax liability of the employer, the covered opinion requirements will not apply to that advice.
Negative advice is also excluded from the covered opinion requirements. Negative advice is defined as written advice that does not resolve a Federal tax issue in the taxpayer’s favor. If 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, it is not considered negative advice and is subject to the covered opinion requirements. If the advice concerns more than one Federal tax issue, the advice must satisfy the covered opinion requirements for any Federal tax issue that is not subject to the negative advice.
Informally excluded advice. Based on conversations between tax practitioners and Treasury officials, the IRS has stated that several other types of communications will not be considered “advice” covered under Circular 230. Transaction agreements, other operative agreements and proposed revisions to those agreements entered into between parties to a transaction should not be within the meaning of a covered opinion because these agreements and drafts do not constitute tax advice, but are the binding agreements between the parties to the transaction. Term sheets are the preliminary versions of the transaction and operative agreements and should also be excluded under the same reasoning. Articles, training outlines, presentations, and books are not covered opinions because they are intended to be educational and not to transmit specific tax advice.
[d] Other Written Advice.
Written advice that is not a covered opinion is subject to § 10.37 of the Circular 230 Regulations. This category called Other Written Advice includes emails, faxes, letters, handwritten notes, and memoranda relating to a Federal tax issue. This advice is subject to a set of principals describing when a practitioner should not provide tax advice. These guidelines are discussed in section 1.01(2)(c).
[e] Best Practices.
The final Circular 230 Regulations include a set of aspirational “best practices for tax advisors.” These guidelines apply to the individual practitioner and to all individuals employed by the practitioner’s firm.These guidelines are designed to “provide clients with the highest quality representation concerning Federal tax issues” and “to preserve the public confidence in the tax system.” Best practices include compliance with all other standards of practice and four additional guidelines. First, advisors should communicate clearly with the client on the terms of the engagement. The advisor needs to determine the client’s expected purpose for and use of the advice. Furthermore, the advisor should have a clear understanding with the client regarding the form and scope of the advice or assistance. Second, the advisor needs to establish the facts, determine the relevant facts, and evaluate the reasonableness of assumptions or representations. The advisor should then relate the applicable law (including potentially applicable judicial doctrines) to the relevant facts to arrive at a conclusion supported by the law and the facts. Third, the advisor should advise the client about the importance of the conclusions reached. For example, the advisor needs to discuss whether or not the taxpayer can avoid accuracy-related penalties if the taxpayer relies on the advice. Finally, the advisor should act fairly and with integrity in practice before the IRS.
[i] Responsibilities for Firm Compliance.
Tax advisors with responsibility for the firm’s tax practice should take reasonable steps to ensure that the firm’s procedures for providing advice to clients are applicable to all members, associates, and employees of the firm and are consistent with the best practices under Circular 230. Although the regulations state that these “best practices” are aspirational, many tax advisors are concerned that these guidelines might be used to determined malpractice standards. Furthermore, the guidelines apply to “tax advisors” which is presumably broader than practitioners although not defined in the regulations.
Perhaps the Treasury intended to include those individuals permitted to engage in “limited practice” under Section 10.7 who are not defined as “practitioners,” although the flush language is certainly subject to broader interpretation.
Once the practitioner ferrets through the determination of whether or not the advice is a covered opinion or other written advice, the next step is to comply with the requirements for that type of opinion. The requirements for covered opinions are specific, detailed and burdensome. This type of lawyer regulation stands in sharp contrast to state ethics codes that provide broad guidelines subject to the lawyer’s interpretation as to specifics. These ethical protocols are increasingly the trend in lawyer regulation changing the lawyer’s relationship with the client and the lawyer’s role in enforcing the law.
 What Are the Requirements for Opinions Covered Under Circular 230?
[a] Covered Opinions.
When issuing a covered opinion, a practitioner must comply with detailed protocols regarding factual matters, relating the law to the facts, evaluating the significant federal tax issues, and providing an overall conclusion. When evaluating significant federal tax issues, additional rules apply for marketed opinions, and limited scope opinions are permitted in certain circumstances. In addition, the practitioner must meet certain competency standards and provide specific disclosures in order to satisfy the practitioner’s obligations under the regulations. Because these requirements apply to many routine non-abusive types of tax advice, many tax advisors contend that their reach is over-broad and beyond the scope of Congress’ objectives attacking abusive tax shelters. Nonetheless, unless and until these regulations are amended, practitioners must understand and comply with their requirements. The regulations state that opinions meeting the covered opinion requirements will satisfy the practitioner’s responsibilities under Circular 230. However, the opinion’s persuasiveness regarding the tax issues in question and the taxpayer’s good faith reliance on the opinion will be determined separately under applicable law and regulations.
Factual Matters. The practitioner must use due diligence to identify and consider facts relevant to the opinion. The opinion cannot be based on any unreasonable factual assumptions including reliance on a projection, financial forecast or appraisal. A practitioner cannot 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. The opinion must not be based on any unreasonable factual representations, statements or findings.[152 ] For example, a practitioner may not rely on a factual representation that a transaction has a business purpose without a specific description of the business purpose. A separate section of the opinion must identify all factual assumptions, factual representations, statements and findings that are relied on by the practitioner.
Relate law to facts. The opinion must relate the applicable law to the relevant facts. The practitioner must not base the opinion on any unreasonable legal assumptions, representations, or conclusions. Except in the case of limited scope opinions or when the practitioner is permitted to rely on the opinion of another practitioner, the practitioner must not assume the favorable resolution of any significant Federal tax issue. The opinion must not contain internally inconsistent legal analyses or conclusions.
Evaluation of Significant Federal Tax Issues and Overall Conclusion. Except in the case of limited scope opinions or when the practitioner is permitted to rely on the opinion of another practitioner, the opinion must consider all significant Federal tax issues. Because the requirement applies only to “significant Federal tax issues,” an opinion need not consider all federal tax issues. As to each significant Federal tax issue, the opinion must conclude as to the likelihood that the taxpayer will prevail on the merits. If the practitioner is unable to reach a conclusion with regard to one or more of these issues, this must be stated in the opinion.Furthermore, the opinion must include the reasoning, facts and analysis supporting the conclusion or the failure to reach a conclusion. If the practitioner fails to reach a “more likely than not” conclusion regarding one or more significant Federal tax issues, the opinion must contain the appropriate disclosures. Finally, when evaluating the significant Federal tax issues addressed in the opinion, the practitioner must not consider audit or settlement possibilities. A covered opinion must also provide the overall conclusion as to the likelihood that the Federal tax treatment of the subject matter of the opinion is the proper treatment and the reasons for the conclusion. If no overall conclusion can be reached, this must be stated in the opinion along with the reasons why.
Special Requirements for Marketed Opinions. Marketed opinions must conclude at a confidence level of at least “more likely than not” that the taxpayer will prevail on the merits with respect to each significant Federal tax issue. If the practitioner cannot reach a “more likely than not” conclusion with respect to these issues, a marketed opinion cannot be provided. However, the practitioner can provide written advice if the opinion prominently discloses that (1) the advice cannot be used for penalty protection, (2) the advice was written to support the marketing of the transaction, and (3) the taxpayer should seek advice from an independent tax advisor.
Limited Scope Opinions. The practitioner may provide an opinion that considers less than all the significant Federal tax issues if additional requirements are met. First, both the practitioner and the taxpayer must agree that reliance on the opinion for penalty protection will be limited to Federal tax issues addressed in the opinion.[167 ] Second, the opinion cannot be advice concerning a listed transaction, a principal purpose of tax avoidance transaction or a marketed opinion.[168 ] Finally, the opinion must contain the appropriate disclosures. A practitioner may reasonably assume the favorable resolution of a Federal tax issue (or an assumed issue) for purposes of a limited scope opinion, but these issues must be identified in a separate section of the opinion.
Competency. The covered opinion regulations provide minimum competency requirements and also specify a number of disclosure requirements. First, the practitioner must be knowledgeable in all aspects of the relevant Federal tax law.[171 ] Second, the practitioner may reasonably rely on another practitioner’s opinion with respect to significant Federal tax issues, but must identify the relied-upon opinion and its conclusions. Lastly, the practitioner must be satisfied that the combined analysis of all opinions including the overall conclusion satisfies the requirements for covered opinions.
Disclosures. A covered opinion must contain any of the disclosures that apply to that opinion. First, an opinion must prominently disclose the existence of any compensation arrangement or referral arrangement between the practitioner and any person (other than the client) with respect to promoting, marketing or recommending the entity, plan, or arrangement. Second, marketed opinions must prominently disclose that (1) the opinion was written to support the promotion or marketing of the transaction and (2) the taxpayer should seek advice from an independent tax advisor. Third, limited scope opinions must prominently disclose that (1) the opinion is limited to the specific issues addressed, (2) additional issues may exist that could affect the Federal tax treatment of the transaction and the opinion does not consider or provide a conclusion with respect to any additional issues, and (3) with respect to any significant Federal tax issues not considered, the opinion cannot be used for the purpose of avoiding penalties. Fourth, an opinion that fails to reach a conclusion at a confidence level of at least “more likely than not” for any significant Federal tax issue must prominently disclose this fact and that with respect to those issues, the opinion cannot be used for the purpose of avoiding penalties. To the extent that disclosures are required, the practitioner may not provide advice to any person that is contrary to or inconsistent with the required disclosure.
[b] Other Written Advice.
The requirements for tax advice that is not considered a “covered opinion” stands in dramatic contrast to the laborious covered opinion requirements. Other written advice is subject to broad guidelines and not specific protocols. In fact, these guidelines describe when a practitioner should not give advice. These regulations do not include guidance as to what a practitioner should provide in other written advice.Presumably, the practitioner will follow the “best practices” which furnish direction for what information should be included in other written tax advice. The regulations under section 10.37 state that a practitioner must not give written advice concerning one or more Federal tax issues if the advice (1) is based on unreasonable factual or legal assumptions (including assumptions as to future events), (2) unreasonably relies on representations, statements, findings or agreements of the taxpayer or any other person, (3) fails to consider all relevant facts the practitioner knows or should know, (4) takes into account the possibility 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. In determining whether or not a practitioner has complied with 10.37, all facts and circumstances, including the scope of the engagement and the type and specificity of the advice is to be considered. Finally, in the case of a marketed opinion, the regulations apply “a heightened standard of care because of the greater risk caused by the practitioner’s lack of knowledge of the taxpayer’s particular circumstances.”
 When Is Circular 230 Violated?
[a] Disreputable Conduct.
With a brief description of the opinion requirements digested, conduct that violates the rules and the applicable penalties are equally important to understand. In general, Circular 230 is violated when a practitioner engages in “disreputable conduct.” Although Circular 230 lists nine specific classes of disreputable conduct, providing false or misleading opinions, engaging in a pattern of providing incompetent tax opinions, providing unwarranted opinions, and giving false or misleading information to the IRS are more likely to cause practitioners difficulty in the context of providing tax advice. False or misleading opinions give a false opinion, knowingly, recklessly or through gross incompetence including opinions which are intentionally or recklessly misleading. Unwarranted opinions are opinions that reflect or result from an assertion of a position known to be unwarranted under existing law. Information that is false or misleading includes facts, Federal tax returns, financial statements, or any other document or statement, written or oral.
[b] Firm Leadership Responsibilities and Procedures to Ensure Compliance.
In addition to the general rules regarding disreputable conduct, the revised Circular 230 regulations add a new category of conduct subject to discipline applicable to covered opinions. The rules impose an oversight responsibility and a duty to end noncompliance. Under section 10.36, any practitioner who has or shares principal authority and responsibility for overseeing a firm’s practice of providing tax advice must take reasonable steps to ensure that the firm has adequate procedures in place for all members, associates and employees to comply with the covered opinion requirements. A practitioner can be disciplined 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 the covered opinion requirements, and one or more members of the firm fail to comply with the covered opinion requirements or, (2) such practitioner knows or should know that one or more individuals who are members of the firm have failed to comply with the covered opinion requirements, and the practitioner, through willfulness, recklessness, or gross incompetence, fails to take prompt action to correct the noncompliance.[190 ] These new requirements impose a heavy burden on firm members with oversight responsibility.
 Risk Mitigation under Circular 230 for the Practitioner.
Although many questions remain, practitioners and their firms with written internal guidelines and quality control procedures, initial and continuing education, and good record keeping should be able to demonstrate good faith compliance with the Circular 230 rules if the Office of Professional Responsibility undertakes an investigation. Firms have employed and continue to design new strategies for dealing with these new rules. This section discusses a few of the strategies employed by practitioners and firms.
Circular 230 Committee. Depending on the size of the firm and the size of the tax practice, firms might establish a Circular 230 Committee to monitor firm compliance with Circular 230. The Committee might also institute educational components to ensure that attorneys understand the requirements and responsibilities in opinion writing. Such a committee might also set up additional review procedures for all firm opinions.
Decision-Tree or Checklist Approach to Complying with Circular 230. Firms should develop a checklist or decision-tree approach to analyzing how to treat advice under the Circular 230 requirements. Many such decision-trees and checklists have been developed and can be modified to meet the needs of each firm.
Best Practices and Other Written Advice. Although the specific compliance procedures of Section 10.36 do not apply to Other Written Advice, under Section 10.37, such other written advice would still be subject to the best practice guidelines. As a result, a breakdown of supervisory oversight by a tax practitioner that results in gross failures to comply with Circular 230, Section 10.37, could result in discipline. In addition, best practices should also be followed by the firm’s paralegals and other staff.
Engagement Letters. Under the new Circular 230 regime, engagement letters are vital and should be reaffirmed (perhaps re-executed) for each new matter. The engagement letter provides a record of the scope of the engagement and the understandings of the client and practitioner regarding the reasons for, character of, and use of the advice.
Non-Tax Attorneys. It will be difficult to control or eliminate the risk that a non-tax practitioner will informally provide a client with written tax advice that constitutes a covered opinion. For example, the litigator who emails the client either, “The damage award will be deductible,” or “The settlement will not be taxable to you.” Therefore, firm-wide education and internal control mechanisms are recommended, particularly in light of the potential for disciplinary action against the members of the firm responsible for oversight.
Initial and Continuing Education. All firms must ensure that its attorneys and other employees are educated about the new Circular 230 requirements. Some firms have adopted “Written Tax Advice Procedures” requiring all firmmembers (or at least the tax practitioners) to read, sign, and agree to abide by the procedures outlined in the document. For example, the firm might formulate a policy of who cannot provide tax advice for the firm and who can provide tax advice for the firm and under what circumstances. All listed transactions and principal purpose transactions are subject to the covered opinion requirements. At a minimum, tax attorneys should be familiar with those transactions that are listed transactions or substantially similar transactions.
Good Record Keeping. Contemporaneous records about the nature of the process in which advice was formulated and rendered can protect the practitioner and client if the IRS later attempts to second-guess the opinion.
Oral Advice. While oral advice is not generally covered under Section 10.35 and Section 10.37, it is still covered under the Circular 230, § 10.22 general due diligence and § 10.51 competence provisions. In addition, section 10.35 states that a practitioner may not provide advice that is contrary to or inconsistent with the required disclosures. Presumably this includes oral advice. A good practice is to follow up any oral advice with an internal written record of the communication that is not delivered to the client (i.e., a file memo).
Email Disclaimers. Many practitioners and their firms have statements permanently embedded in emails cautioning the recipient not to rely on any information in the communication as marketing information or to avoid penalties.
Example No-reliance Legend. “To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication (including any attachments) was 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 example comes from a group of 55-60 law firms that are working together to deal with Circular 230 compliance issues.
Provide an Opinion at a Lower Confidence Level. In certain situations, a taxpayer may avoid penalties even though the opinion level is lower than “more likely than not.” For example, non tax shelter transactions may avoid certain penalties if there is “substantial authority” for the position.
Certain other penalties require only a “reasonable basis” to avoid. Thus, the practitioner may be able to avoid the Covered Opinion standards by issuing an opinion at a lower confidence level while still providing penalty protection for the client.
f. Identified Problems with the Current Regulations.
In addition to criticisms as to their overall breadth, commentators have identified many areas where the Circular 230 regulations need to be clarified. This section lists several, but by no means all, of the problems identified in interpreting the Circular 230 regulations. Perhaps these concerns will be taken into account in the next version of these evolving rules.
Definition of Employee for Purposes of Excluded Advice. In the May 2005 amendments, the regulations added an exception to the covered opinion rules for advice provided by an employee- practitioner to his or her employer when acting in an employee capacity. The guidelines do not mention whether employees of related entities or partners in a partnership, members of LLCs, and fiduciaries and beneficiaries of trusts and estates are included as “employees” for purposes of the exception. Furthermore, the only advice excluded from the covered opinion requirements is advice given “solely for the purpose of determining the tax liability of the employer.”[204 ] Depending on how broadly this requirement is interpreted, employee-practitioners may find themselves subject to discipline for failing to comply with the covered opinion requirements in cases where the advice is deemed to fall outside this exception.
Definition of principal purpose. Despite the added definition of principal purpose, it will often be very difficult to determine whether a transaction has tax avoidance as its principal purpose. In addition, the regulations provide no guidance with regard to what constitutes a “significant purpose.”
To eliminate the possibility that the advice (significant purpose or less) constitutes a covered opinion, use of disclaimer language is already becoming standard. Clients pay the price for uncertainty here.
Use of Disclaimers in all communications. Practitioners, en masse, have added to almost every written communication to clients and others, Circular 230 disclaimers and legends stating that the written advice in the communication cannot be relied upon for penalty protection. The rationale for such widespread use is to protect the practitioner from inadvertently being subject to the arduous covered opinion requirements and such disclaimer is required in some cases. Wholesale use of a disclaimer saves time and analysis, particularly when distinctions are difficult. A number of commentators have argued persuasively against the indiscriminate use of disclaimers that notify clients in writing that their advice cannot be relied upon for penalty protection. Absent such a disclaimer (and perhaps even with such disclaimer), the client might, under longstanding principles of IRC § 6664, be entitled to rely on the advice to avoid penalties. Circular 230 appears to inappropriately induce practitioners to make statements to clients that not only can damage the relationship with the client, but may also be incorrect as a matter of law.
Common sense is no comfort. The IRS has indicated that a common-sense approach should be applied in interpreting Circular 230 and that the regulations should be construed more narrowly in their application. Despite such assurance, most practitioners are uncomfortable ignoring the express language of the regulations even if common sense suggests that the rules should not apply.
The goal of this article is not merely to demonstrate the complexity of the new tax shelter rules, but to also help you to successfully navigate them. The article is not complete without answers to the questions we posed at the outset:
 There are so many rules – which apply to taxpayers and which apply to advisors?
The Circular 230 rules are intended to be limited to outside advisors and specifically carve out in-house counsel. However, for taxpayers who want to understand why the bill for a Covered Opinion is so large or why the advisor adds a caveat to every email, Circular 230 is worth reading.
The Section 6011 disclosure rules apply to taxpayers only, although the definition of reportable transaction and listed transaction is relevant in the rules that apply to advisors. Also, advisors will often be asked by their clients whether the Section 6011 rules apply.
The Section 6111 and 6112 rules apply to advisors only. They involve required disclosures and taxpayer listing requirements. However, taxpayers may find these rules interesting reading because they will learn which advisors are sending their name to the IRS.
 Do I need to worry about disclosure even when I don’t have a tax-motivated transaction?
Yes. Neither reportable transactions nor listed transactions require a taxpayer to intend to take advantage of a tax loophole. The rules, although more refined than ever, are still extremely broad and can require the reporting of many non-tax motivated transactions. Moreover, the penalties for non-disclosure are significant, even if the taxpayer’s tax position is ultimately upheld.
 What if I didn’t disclose a transaction that I now understand to be a reportable transaction? What are my options?
Although the rules provide for strict liability for failure to disclose, taxpayers should consider disclosure at this time under the unofficial “better late than never” principal.
 My partnership sent me a listed transaction “protective disclosure” – does this affect my personal return?
Yes. In this case, although the disclosure was “protective,” the partner will likely want to include a similar protective disclosure on its personal return. Moreover, if the IRS concludes that the transaction was accurately classified as a listed transaction, two disclosed listed transactions may cause the IRS to broaden its request for tax accrual work papers upon audit.206
 I am a taxpayer – should I care if my advisor’s correspondence states that it does not provide me penalty protection – What am I paying them for?
Penalty protection can be a valuable tool, and it is more difficult than ever to achieve.
For taxpayers who anticipate difficulty on an issue in audit, it may be worth incurring the extra cost for a Covered Opinion.
 I am an advisor – if I add the Circular 230 caveat to all of my correspondence, is it business as usual?
A simple caveat is not enough. Even with the Circular 230 caveat, new “Other Tax Advice” standards apply along with new aspirational standards that advisors and liability insurance carriers should also review. Finally, some opinions cannot avoid the new Covered Opinion standard, even with a caveat.
206 See Announcement 2002-63 and I.R.M. § 220.127.116.11.2.
 If I prepare tax returns, am I governed by the Circular 230 rules on “covered opinions”? What if I prepare studies or reports for taxpayers under section 382 or section 482?
For practitioners, return preparation is practice before the IRS, so Circular 230 covers return preparation. The covered opinion rules should not affect return preparers to the extent that they do not provide tax advice and perform a purely ministerial function, but that distinction might be harder to draw when the preparer gives the taxpayer some direction about how to report certain items on the return, especially if there is written correspondence between the preparer and the taxpayer. Section 382 and section 482 reports look even more like written advice, but again depends on whether the report applies the law to the facts or is merely computational.
 Should I be nervous if someone tells me my email was a “Covered Opinion” on transaction where I am a “Material Advisor” on an undisclosed “reportable transaction” that is also a “listed transaction”?
Yes, be nervous.
;1 ‘The authors would like to thank the individuals from Miller & Chevalier who provided invaluable comments on prior versions of this article. S.R. Schneider, S.R. Dixon, & M. Hymel copyright 2006, all rights reserved.
;2’ For a discussion of the legislative changes from the American Jobs Creation Act of 2004, see Richard M. Lipton, Robert S. Walton & Steven R. Dixon, The World Changes: Broad Sweep of New Rules in AJCA and Circular230 Affect Everyone, 102 J. TAX 134 (2005).
[3 ]For more on state tax shelter rules, see, e.g., Richard M. Lipton & Steven R. Dixon, Implications of California’s Tough New Anti-Tax Shelter Rules, 72 PRACTICAL TAX STRATEGIES 338 (2004).
 Treas. Reg. § 1.6011-4.
The IRS updates this list on its website. http://www.irs.gov/businesses/corporations/article/0,,id=120633,00.html
 Treas. Reg. § 1.6011-4.
 See infra section 1.02[d]
 See Notice 2006-6, 2006-5 I.R.B.
[10 ]Rev. Proc. 2004-67.
 American Jobs Creation Act of 2004, Pub. L. No. 108-357, 118 Stat. 1418, § 822 (Oct. 22, 2004).
 Section 6501(c)(10) and Announcement 2002-63. The IRS will also generally request all tax accrual workpapers if two or more listed transactions are disclosed on a taxpayer’s return. Id.
 Form 8886.
 Sections 6111 and 6112.
 Under section 6111 as amended by the Jobs Act, an advisor is a material advisor on a transaction if her fee exceeds the applicable threshold ($50,000 for natural persons and $250,000 for all others) and she provides any material aid, assistance, or advice with respect to organizing, managing, promoting, selling, implementing, or carrying out any reportable transaction. But in Notice 2004-80 (as modified by Notices 2005-17 and 2005-22), the Service provides that it will apply the “material advisor” definition that appears in the regulations under section 6112. See generally Treas. Reg. § 301.6112-1(c)(2).
[16 ]Section 6707(b).
 Section 6707(b)(2).
 Section 6708(a)(1).
 Regulations Governing the Practice Before the Internal Revenue Service, 31 C.F.R. Part 10 (June 20, 2005) (hereinafter “Circular 230”).
 See Circular 230, § 10.50.
 The Senate Committee Report states that the Secretary may impose a monetary penalty of up to 100% of the gross income derived from conduct that violates Circular 230 on the representative or the representative’s employer. See Senate Committee Report, S. Rep. No. 108-192. The Jobs Act also permits the Secretary to enjoin conduct that violates Circular 230. See American Jobs Creation Act of 2004, Pub. L. No. 108-357, 118 Stat. 1418, § 820 (October 22, 2004).
[22 ] T.D. 9165, Regulations Governing Practice Before the Internal Revenue Service, 69 Fed. Reg. 75,839 (Dec. 20, 2004). On May 19, 2005, Treasury amended and supplemented these regulations. T.D. 9201, Regulations Governing Practice Before the Internal Revenue Service, 70 Fed. Reg. 28824 (May 19, 2005).
[23 ] See Preamble to T.D. 9165.
[24 ] See Circular 230, § 10.35.
 31 C.F.R. § 10.35(b)(4).
 See Circular 230, § 10.37.
 See Circular 230, § 10.33.
 Stephen Joyce, Desmond Says New Circular 230 Guidance Will Remove Unintended Effects of Standards, Daily Tax Report, G-7, Aug. 17, 2005.
 See Circular 230, § 10.35(a)(2).
 See Circular 230, § 10.35(a)(2)(i)(B).
 See Circular 230, § 10.35(a)(2)(i)(C).
 See Circular 230, § 10.35(a)(4)(ii).
 See Circular 230, § 10.35(c).
 See Circular 230, § 10.35(d) and (e).
 See Circular 230, § 10.37(a).
 Treas. Reg. § 1.6011-4(c)(3)(i)(A).
[38 Treas. Reg. § 1.6011-4(e)(2)(i).
 Rev. Rul. 90-105 as amplified by Rev. Rul. 2002-46 and Rev. Rul. 2002-73.
 See also IR-2004-21, the proposed section 402 regulations, Rev. Proc. 2004-16, and Rev. Rul. 2004-21, relating generally to abusive life insurance policies in retirement plans.
 201 F.3d 505 (2000).
 157 F.3d 231 (1998).
 See also Rev. Rul. 99-14 (superseded by Rev. Rul. 2002-69).
[44 ]Treas. Reg. § 1.6011-4(b)(3).
 Treas. Reg. § 1.6011-4(b)(3)(iv).
 Treas. Reg. § 1.6011-4(c)(3)(i)(B).
 Treas. Reg. § 1.6011-4(b)(3)(ii).
 See T.D. 9108, 2004-6 I.R.B. 429, 430. See also Richard M. Lipton & Steven R. Dixon, ‘Tax Shelter’ and ‘Tax Opinion’ — IRS, in Another Try at Circular 230, Strikes Out Again, 100 J. TAX 134, 135-36 (2004).
 See T.D. 9108, 2004-6 I.R.B. 429, 430.
 Treas. Reg. § 1.6011-4(b)(4)(i).
 Treas. Reg. § 1.6011-4(c)(3)(i)(C).
 Treas. Reg. § 1.6011-4(b)(4)(iii)(A).
 Treas. Reg. § 1.6011-4(b)(4)(iii)(B).
 Treas. Reg. § 1.6011-4(b)(5).
 Treas. Reg. § 1.6011-4(b)(5)(iii)(B).
 Treas. Reg. § 1.6011-4(b)(5)(iii)(A).
 Treas. Reg. § 1.6011-4(c)(3)(i)(D).
 Treas. Reg. § 1.6011-4(b)(6)(i).
 Treas. Reg. § 1.6011-4(c)(3)(i)(E).
 Treas. Reg. § 1.6011-4(b)(6)(ii)(A)(2).
[79 ]Treas. Reg. § 1.6011-4(b)(6)(ii)(D).
 Treas. Reg. § 1.6011-4(b)(6)(ii)(B).
 Treas. Reg. § 1.6011-4(b)(6)(ii)(C).
 See also Rev. Proc. 2005-75, 2005-50 I.R.B. 1137 (relating to adequate disclosure for penalty protection).
 Treas. Reg. § 1.6011-4(b)(7).
 Treas. Reg. § 1.6011-4(c)(3)(i)(F).
[88 ]Regulations Governing Practice Before the Internal Revenue Service, 69 Fed. Reg. 75,839 (Dec. 20, 2004). On May 19, 2005, Treasury amended and supplemented these regulations. T.D. 9201.
 See, e.g., American College of Trust and Estate Counsel, Comments on Circular 230 Regulations, 2005 TNT 71-30 (April 14, 2005); New York State Bar Association, Comments on Circular 230 Regulations, 2005 TNT 43-56 (March 7, 2005); William M. Paul and Ronald M. Weiner, The Final Regulations Under Circular 230, 107 Tax Notes 119 (April 4, 2005); New York State Bar Association Tax Section, Recommendations for Improving the Circular 230 Regulations, 107 Tax Notes 91 (April 4, 2005); Arthur L. Bailey and Alexis A. Maclvor, New Circular 230 Regulations Impose Strict Standards for Tax Practitioners, 107 Tax Notes 341 (April 18, 2005); Burgess J.W. Raby and William L. Raby, Penalty Protection for the Taxpayer: Circular 230 and the Code, 107 Tax Notes 1257 (June 6, 2005); Jonathan G. Blattmachr, Mitchell M. Gans, Tracy L. Bentley, Circular 230 Redux:Questions of Validity and Compliance Strategies, 107 Tax Notes 1533 (June 20, 2005).
 New York State Bar Association Tax Section, Recommendations for Improving the Circular 230 Regulations, 107 Tax Notes 91, 92 (April 4, 2005).
 See Allen Kenney, Korb: Use Common Sense When It Comes to Circular 230, 107 Tax Notes 1636 (June 27, 2005) (stating “It’s our objective here to apply common sense.”); Raby and Raby, supra note 89, at 1259(June 6, 2005) (arguing that “without something in writing, the assurance of the current IRS executives that they will administer the new rules in a reasonable manner may be no protection against the next generation of IRS executives”).
[92 ]T.D. 9201.
 Stephen Joyce, Desmond Says New Circular 230 Guidance Will Remove Unintended Effects of Standards, Daily Tax Report, G-7, Aug. 17, 2005. The two areas that the additional guidance will address are the definition of marketed opinions and how the government will enforce monetary penalties.
 See Circular 230, § 10.3(a) and (b).
 See Circular 230, § 10.3(c). Enrolled actuaries may also engaged in limited practice before the IRS. See Circular 230, § 10.3(d).
 See Circular 230, § 10.4(b).
 See Allen Kenney, “GRASSLEY, BAUCUS REVISE PROPOSAL FOR RETURN PREPARER REGULATION,”
105 Tax Notes 163 (October 11, 2004).
 See IR-2003-3 (Jan. 8, 2003); Steven C. Salch, Tax Advice (Circa 2005): The December 20, 2004 Amendments to Circular 230, ALI-ABA Course of Study Materials, How to Handle a Controversy at the IRS and in the Court, at 2 (April 2005).
 See Salch, supra note 98, at 2.
 Circular 230, § 10.36(a).
 See Circular 230, § 10.35 (b)(3).
 The Circular 230 Regulations changed the terminology for opinions from “tax shelter opinions” to “covered opinions.” Many perceive the name change as corresponding to a broadening of the kinds of opinions subject to detailed requirements. Mezzullo, “Circular 230: Estate Planning Issues” (5/31/2005) Louis A. Mezzullo, McGuire Woods LLP, Richmond, Virginia, “Final Amendments to Circular 230: Estate Planning Issues,” at page 1, ABA Section of Taxation – 2005 May Meeting, Washington, DC, http://www.abanet.org/tax/home.html.
 See discussion in section 1.02 for a description of the current listed transactions.
[105 ] T.D. 9201.
 See Preamble, T.D. 9201.
 See Treas. Reg. 1.6662-4(g)(2)(ii).
 Circular 230, § 10.35 (b)(10); see also Mark E. Bert, Practitioners’ Reaction Indicates Need for Clearer Circ. 230 Rules, 108 Tax Notes 245, 246 (July 11, 2005).
 Circular 230, § 10.35(b)(4).
[111 ]An item is prominently disclosed if it is readily apparent to a reader of the written advice. See Circular 230, § 10.35(b)(8). Whether an item is considered 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 in any discussion of the facts or law in the written advice. Id.
 Circular 230, § 10.35(b)(4)(ii).
 See Circular 230, § 10.35(b)(5)(i). This rule, along with the rules on confidentiality provisions and contractual protections, also includes a person who is a member of, associated with, or employed by the practitioner’s firm. Id.
 Circular 230, § 10.35(b)(5).
 Circular 230, § 10.35(b)(6). The rule applies if the disclosure limitation applies any recipient.
 Circular 230, § 10.35(b)(6).
 Circular 230, § 10.35(b)(7). The rules also state that in determining whether a fee is refundable or contingent, including reimbursements of amounts not designated as fees or agreements to provide services without reasonable compensation, the facts and circumstances relating to the matters addressed in the advice will be considered. Id.
 See Bailey and MacIvor, supra note 89, at 347-50; New York State Bar Association Tax Section, supra note 89, at 96.
 Circular 230, § 10.35(b)(2)(ii)(A).
 Excluding listed transaction opinions or a principal purpose of tax avoidance transaction opinions. Circular 230, § 10.35(b)(2)(ii)(B).
 Circular 230, § 10.35(b)(2)(ii)(B).
 Circular 230, § 10.35(b)(2)(ii)(C).
 Circular 230, § 10.35(b)(2)(ii)(C). A subsequent return includes an amended return that claims tax benefits not reported on a previously filed return or any other return filed after the date on which the advice is provided to the taxpayer. Id.
 Circular 230, § 10.35(b)(2)(ii)(D). The employee must be acting in the capacity as an employee of that employer when the advice is provided.
127 Circular 230, § 10.35(b)(2)(ii)(E).
128 Circular 230, § 10.35(b)(2)(ii)(E).
 Circular 230, § 10.35(b)(2)(ii)(E). In other words, any advice regarding a federal tax issue that reaches a conclusion favorable to the taxpayer at any confidence level is still subject to the covered opinion requirements. Id. Although this section refers to a “federal tax issue” and not a “significant federal tax issue,” advice regarding a “federal tax issue” that is not a listed transaction, principal purpose of tax avoidance transaction, a marketed opinion, subject to conditions of confidentiality or contractual protections should not be subject to the covered opinion requirements.
 Stephen Joyce, Daily Tax Report, Aug. 15, 2005); Leslie B. Samuels and Diana L Wollman, “Circular 230 Treatment of Transaction Documents, Training Materials,” 108 Tax Notes 955 (Aug. 22, 2005). In another article, a Treasury official stated that transfer pricing documentation is probably excluded from the definition of a covered opinion. See Molly Moses, Official Says Transfer Pricing Documentation Unlikely Circular 230 Covered Opinion, BNA Daily Tax Report at J-1 (July 6, 2005). Of course, oral assurances from the government are only worth the paper they are written on.
 Circular 230, § 10.33.
 Circular 230, § 10.33(b).
 Circular 230, § 10.33(a).
 Preamble to the December regulations, T.D. 9165.
 Circular 230, § 10.33(a)(1).
 Circular 230, § 10.33(a)(2).
 Circular 230, § 10.33(a)(2).
 Circular 230, § 10.33(a)(3).
 Circular 230, § 10.33(a)(4).
 Circular 230, § 10.33(b).
 See Paul and Wiener, supra note 89, at 119.
 See Mona L. Hymel, Controlling Lawyer Behavior: The Sources and Uses of Protocols in Governing Law Practice, 44 Ariz. L. Rev. 873 (Fall/Winter2002); Dustin Stamper and Sheryl Stratton, “Solomon suggests IRS and Treasury May Need to Rethink Circular 230 Approach,” 2005 TNT 237-2 (December 12, 2005).
 Circular 230, § 10.35(c).
 Circular 230, § 10.35(c)(3)(iv) and (v).
 Circular 230, § 10.35(d) and (e).
 See New York State Bar Association Tax Section, Recommendations for Improving the Circular 230 Regulations,
106 Tax Notes 91 (April 4, 2005).
 Circular 230, § 10.35(f).
 Circular 230, § 10.35(f).
 Circular 230, § 10.35(c)(1)(i). Relevant facts may relate to future events if a transaction is prospective or proposed. Id.
 Circular 230, § 10.35(c)(1)(ii). An unreasonable factual assumption includes a factual assumption, projection, financial forecast or appraisal that the practitioner knows or should know is incorrect or incomplete or prepared by a person lacking the skills or qualifications necessary to prepare the relied-on materials. Id.
 Circular 230, § 10.35(c)(1)(iii). This requirement includes information from the taxpayer or any other person. Id.
 Circular 230, § 10.35(c)(1)(ii) and (iii).
[154 ]Circular 230, § 10.35(c)(2)(i) (including potentially applicable judicial doctrines).
 Circular 230, § 10.35(c)(2)(ii).
 Circular 230, § 10.35(c)(2)(ii).
[157 ]Circular 230, § 10.35(c)(2)(iii).
 Circular 230, § 10.35(c)(3)(i).
 Circular 230, § 10.35(c)(3)(ii).
 Circular 230, § 10.35(c)(3)(ii).
 Circular 230, § 10.35(c)(3)(ii). The required disclosures are described in Circular 230, § 10.35(e)(4).
 Circular 230, § 10.35(c)(3)(iii).
 Circular 230, § 10.35(c)(4).
 Circular 230, § 10.35(c)(3)(iv).
 Circular 230, § 10.35(c)(3)(iv).
[166 ]Circular 230, § 10.35(c)(3)(v)(A).
Circular 230, § 10.35(c)(3)(v)(A)(1).
 Circular 230, § 10.35(c)(3)(v)(A)(2).
 Circular 230, § 10.35(c)(3)(v)(A)(3). The required disclosures are described in Circular 230, § 10.35(e)(3).
 Circular 230, § 10.35(c)(3)(v)(B).
 Circular 230, § 10.35(d)(1).
 Circular 230, § 10.35(d)(1). The practitioner cannot rely on the opinion of another practitioner if the practitioner knows or should know that the other opinion should not be relied on. Id.
 Circular 230, § 10.35(d)(2).
 Circular 230, § 10.35(e)(1). The term “practitioner” includes the practitioner’s firm, any firm member, firm employee or any person associated with the firm. Id.
 Circular 230, § 10.35(e)(2).
 Circular 230, § 10.35(e)(3).
 Circular 230, § 10.35(e)(4).
[178 ]Circular 230, § 10.35(e)(5).
 However, the New York State Bar Association Tax Section suggests that the Section 10.35 standards are arguably included in the Section 10.37 standards. If correct, the requirements for other written advice would be equally comprehensive. See NYSBA Tax Section, supra note 87, at 107 n. 38.
 Circular 230, § 10.37.
 Circular 230, § 10.37.
 Circular 230, § 10.51.
[183 ]Circular 230, § 10.51(l).
 Circular 230, § 10.51(l).
 Circular 230, § 10.51(d).
Circular 230, § 10.36.
 Circular 230, § 10.36(a).
 Members of the firm include individuals who are members of, associated with, or employed by, the firm. Circular 230, § 10.36(a)(1).
 Circular 230, § 10.36(a)(1).
 Circular 230, § 10.36(a)(2).
 See Stephen Joyce, Law Firms Enhancing, Revising Practices to Ensure Circular 230 Compliance, DTR at J-1 (4-07-05); Jonathan G. Blattmachr, Mitchell Gans, Diana Zeydel, and Tracy Bentley, Circular 230 Redux: Questions of Validity and Compliance Strategies, 107 Tax Notes 1533, 1545 (June 20, 2005).
 See ABA Section of Taxation, Circular 230 Resource Guide (2005) (this guide can be accessed at http://www.abanet.org/tax/); Kathleen McKay Giancana, Circular 230 Decision Matrixes, 107 Tax Notes 1295 (March14, 2005); Jonathan G. Blattmachr, Mitchell Gans, Diana Zeydel, and Tracy Bentley, Circular 230 Redux: Questions of Validity and Compliance Strategies, 107 Tax Notes 1533, 1545 (June 20, 2005).
 See Salch, supra note 98 at 7.
 See Kenneth M. Horowitz, Attorney Urges Reconsideration of Circular 230 Provisions, 205 TNT 106-21 (June 3, 2005) (including an example of a law firm document; TNT Doc 2005-12125).
 For the most recent list of “listed transactions,” see http://www.irs.gov/businesses/corporations. Click on “Abusive Tax
Shelters and Transactions.” Then click on “Listed Abusive Tax Shelters and Transactions.”
 See Molly Moses, Official Says Transfer Pricing Documentation Unlikely Circular 230 Opinion, Daily Tax Report J-1, J-3 (July 6, 2005) (listing a number of law firm and accounting firm disclaimers).
[198 ]See Sheryl Stratton, Circular 230 E-mails, T-Shirts Attain ‘Legendary’ Status, 108 Tax Notes 48 (July 4, 2005).
[199 ]See I.R.C. § 6662(b)(2) and Treas. Reg. § 1.6662-4(d).
 See I.R.C. § 6662(b)(1) and Treas. Reg. § 1.6662-(3)(b)(3).
 See Jonathan G. Blattmachr, Mitchell Gans, Diana Zeydel, and Tracy Bentley, Circular 230 Redux: Questions of Validity and Compliance Strategies, 107 Tax Notes 1533, 1545 (June 20, 2005).
[202 ]See Stamper and Stratton, Solomon Suggests IRS and Treasury May Need to Rethink Circular 230 Approach, 2005 TNT 237-2 (December 12, 2005).
 Circular 230, § 10.35(b)(2)(ii)(D).
 Circular 230, § 10.35(b)(2)(ii)(D).
 New York State Bar Assn, TAX SECTION, supra note 77, at 92 n.3 (April 4, 2005); see also discussion regarding Informally Excluded Advice in Section 1.03[c].
THE UNIVERSITY OF ARIZONA®
JAMES E. ROGERS COLLEGE OF LAW
Arizona Legal Studies
Discussion Paper No. 06-13
The University of Arizona
James E. Rogers College of Law
64th Institute on Federal Taxation:
Impact of the New Anti-Tax Shelter Rules on
Non-Tax Shelter Lawyers and Accountants
Steven R. Schneider, Miller & Chevalier Chartered
Steven R. Dixon, Miller & Chevalier Chartered
Mona L. Hymel, Professor of Law, James E. Rogers College of Law, The University of Arizona