Robert Rizzi William Pauls

 The   New   Circular   230   Rules   and   Their   Impact   on
In ‐ House   Practitioners
 "Disclaimers"   on   Tax   Advice
 OPR   Guidance   on   When   Employee   of   Corporate
Taxpayer   Needs   To   Submit   POA   on   Form   2848
 Ethics   of   Petitioning   the   Government
 Duty   to   Minimize   Taxes
 Privilege   for   Tax   Accrual   Workpapers
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 Largely   in   response   to   the   expansion   of   corporate   tax   shelters   in   the   late   1990s   and   early   2000s,   Treasury   issued   regulations   (Circular   230)   in   2004   to   set   forth   "best   practices"   for   tax   advisors   and   required   standards   for   written   tax   advice
• See   T.D.
9165,   69   Fed.
Reg.
75839   (Dec.
20,   2004)
 Those   regulations   generally   were   viewed   by   practitioners   as   overbroad,   difficult   to   apply,   and   not   likely   to   achieve   their   intended   purpose   of   producing   higher   quality   tax   advice
 Treasury   now   agrees   that   those   rules   were   burdensome   and   provided   only   minimal   taxpayer   protection
• See   T.D.
9668,   79   Fed.
Reg.
33685   (June   12,   2014)
4

 Circular   230   provides   regulations   governing   practice   before   the   IRS
• Practice   before   the   IRS:    All   matters   connected   with   a   presentation   to   the
IRS   relating   to   a   taxpayer's   rights,   privileges,   or   liabilities   under   the   laws   or   regulations   administered   by   the   IRS
• Generally   considered   to   apply   to   employees   who   represent   their   employers   on   tax   matters   before   the   IRS
 Authority   is   based   on   Title   31,   not   the   Internal   Revenue   Code
 5   subparts
• A   – Rules   Governing   Authority   to   Practice
• B   – Duties   and   Restrictions   Relating   to   Practice   Before   the   IRS
• C   – Sanctions   for   Violation   of   the   Regulations
• D   – Rules   Applicable   to   Disciplinary   Proceedings
• E   – General   Provisions
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Former Circular 230 Rules:
"Covered Opinions"
 The   former   Circular   230   rules   contained   detailed   requirements   for   any   " covered   opinion ,"   which   generally   meant   any   written   advice   (including   electronic   communications)   arising   from   certain   transactions   or   arrangements
 For   purposes   of   the   covered   opinion   rules,   relevant   transactions   or   arrangements   included:
• A   listed   transaction   (or   similar   transaction)
• An   entity,   plan,   or   arrangement   the   "principal   purpose"   of   which   was   tax   avoidance   or   evasion
• An   entity,   plan,   or   arrangement   a   "significant   purpose"   of   which   was   tax   avoidance,   if   the   advice   was:
• A   " reliance   opinion ,"
• A "marketed   opinion,"
• An   opinion   subject   to   confidentiality   conditions,   or
• An   opinion   subject   to   contractual   protection
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Former Circular 230 Rules:
"Covered Opinions" (cont'd)
 Reliance   opinion
• Advice   concludes,   on   at   least   a   MLTN   basis,   one   or   more   significant   issues   in   the   taxpayer's   favor
• Exception: The   advice   discloses   that   it   cannot be   relied   on   for   purposes   of   avoiding   penalties
• Note: This   exception   was   the   origin   of   the   ubiquitous   Circular   230   disclosure   statement
7

Former Circular 230 Rules:
"Covered Opinions" (cont'd)
 Exclusions   to   the   covered   opinion   rules
• Preliminary   opinions
• Opinions   included   in   SEC   filings
• Post ‐ return   advice
• Negative   advice,   but   only   if   there   was   no taxpayer ‐ favorable   conclusion
• Advice   from   an   employee   to   an   employer,   but solely   for   purposes   of   determining   the   tax   liability   of   the   employer
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Former Circular 230 Rules:
Covered Opinion Requirements
 All   relevant   facts must   be   included,   and   the   drafter   must   use   reasonable   efforts   to   determine   them
 No   "unreasonable"   assumptions,   including   the   following:
• Business   purpose   exists
• Transaction   is   potentially   profitable   apart   from   tax   benefits
• Reliance   on   projections   or   appraisals   without   due   inquiry   regarding   basis
 No   reliance   on   "unreasonable"   representations
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Former Circular 230 Rules:
Covered Opinion Requirements (cont'd)
 Must   relate   the   applicable   law   to   the   identified   facts
 Must   discuss   all   significant   federal   tax   issues   unless the   opinion   is   a   "limited   scope   opinion"   (with   disclosure   to   that   effect)
 Must   provide   the   practitioner's   overall   conclusion   as   to   the   likelihood   that   the   federal   tax   treatment   of   the   relevant   transaction   or   matter   was   the   proper   treatment   and   the   reasons   for   that   conclusion
• Note: If   the   practitioner   was   unable   to   reach   an   overall   conclusion,   the   opinion   had   to   state   that   the   practitioner   was   unable   to   reach   an   overall   conclusion   and describe   the   reasons   for   the   practitioner's   inability   to   reach   an   overall   conclusion
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Former Circular 230 Rules:
Covered Opinion Requirements (cont'd)


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Problems With Former Circular 230 Rules
 "Many   and   varied"
 Definitions   were   ambiguous   in   many   respects
 For   example,   it   oftentimes   was   unclear   whether   an   opinion   fell   within   the   definition   of   a   "reliance   opinion"
• Does   the   opinion   relate   to   "any"   partnership   or   other   entity,   plan,   or   arrangement?
• If   so,   does   the   arrangement   have   a   "significant   purpose"   to   avoid   tax?
 Interference   with   attorney ‐ client   relationship
 The   rules   were   avoidable   if   "no   reliance"   language   was   added   to   the   opinion,   rendering   the   purpose   of   the   rules   moot   in   many   cases
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New Circular 230 Rules:
Overview
 Comprehensive,   principles ‐ based   approach   applies   to   all   written   advice   per   revised   § 10.37
• Covered   opinions   are   a   thing   of   the   past   (former   § 10.35)
• Circular   230   disclaimers   no   longer   needed   (or   effective)
 General   competency   requirement   for   tax   practitioners   added
• Competent   practice   requires   the   appropriate   level   of   knowledge,   skill,   thoroughness,   and   preparation   necessary   for   the   matter   for   which   the   practitioner   is   engaged
• May   become   competent   by   consulting   with   experts   or   studying   relevant   law
 Practitioners   who   have   principal   authority   and   responsibility   for   overseeing   a
"firm's"   tax   practice   (including   advice,   return   preparation,   and   refund   claims)   must   ensure   procedures   are   in   place   (and   implemented)   for   complying   with
Circular   230
• Query   whether   this   compliance   requirement   applies   to   corporate   tax   departments
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New Circular 230 Rules:
Written Advice Requirements
 For   written   advice   concerning   federal   tax   matters,   a   practitioner   must:
• Base   written   advice   upon   reasonable   factual   and   legal   assumptions
• Reasonably   consider   all   relevant   facts   that   the   practitioner   knows   or   reasonably   should   know
• Use   reasonable   efforts   to   identify   and   ascertain   relevant   facts
• Not rely   on   representations,   statements,   findings,   or   agreements   (projections,   appraisals,   etc.)   if   reliance   would   be   unreasonable
• Reliance   unreasonable   if   practitioner   knows   or   reasonably   should   know   that   representations/assumptions   are   incorrect,   incomplete,   or   inconsistent
• Relate   applicable   law   and   authority   to   the   facts
• Not rely   on   the   "audit   lottery"
• However,   a   practitioner   may   rely   on   the   possibility   of   settlement   in   rendering   written   advice   under   the   new   Circular   230   rules
 In   addition,   a   practitioner   can   rely   on   other   "persons"   when   rendering   written   advice,   if   reliance   on   another   person   is   reasonable   and   in   good   faith
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New Circular 230 Rules:
Reasonable Practitioner Standard
 IRS   will   apply   a   "reasonable   practitioner   standard,   considering   all   facts   and   circumstances,   including   …   the   scope   of   the   engagement   and   the   type   and   specificity   of   the   advice   sought   by   the   client"   in   determining   whether   a   practitioner   giving   written   advice   has   complied   with   the   applicable   requirements
• "Heightened   standards"   will   be   applied   by   the   IRS   for   marketed   opinions   with   a   "significant   purpose"   of   tax   avoidance   or   evasion
• In   applying   "reasonable   practitioner   standard,"   emphasis   will   be   given   to   additional   risk   caused   by   the   practitioner's   lack   of   knowledge   of   taxpayer's   particular   circumstances
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New Circular 230 Rules:
Items Not Constituting Written Advice
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
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New Circular 230 Rules:
Sanctions and Suspension
 Sanction   possible   for   willful   violations,   recklessness,   and   gross   incompetence   if   steps   not   taken   to   ensure   firm   has   adequate   procedures   in   place
 Expedited   suspension   now   applicable   for   those   practitioners   that   have   engaged   in   a   pattern   of
"willful   disreputable   conduct"
• Failure   to   file   annual   returns   in   4   of   5   immediately   preceding   years
• Failure   to   file   quarterly,   etc.,   returns   in   5   of   7   immediately   preceding   taxable   periods 17

New Circular 230 Rules:
Issues To Consider
 "Reasonable   practitioner   standard"
• Extent   of   fact   development   is   based   on   what   is   reasonable,   considering   the   scope   of   the   engagement   and   the   type   and   specificity   of   advice   sought
• Extent   of   legal   analysis   explicitly   included   in   the   advice   also   is   based   on   what   is   reasonable
 Formal   opinions
• Consider   when   a   formal   opinion   would   be   more   appropriate   than   just   a   memo
• No   longer   have   the   bright   line   of   the   covered   opinion   rules
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Reactions to the New Circular 230 Rules
 Practitioners   generally   pleased   with   the   revisions,   as   the   new   Circular   230   rules   provide   more   flexibility   in   rendering   tax   advice
 However,   some   concern   has   been   expressed   that   the   tax   profession   should   not   be   trusted   to   self ‐ police   with   respect   to   aggressive   transactions
• "Turn[ing]   the   keys   to   the   kingdom   over   to   the   inmates[.]"    Jackel,   "Proposed   Regs Change
Landscape   of   Tax   Practice,"   Tax   Notes   Today
(October   22,   2012).
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CIRCULAR 230 DISCLOSURE : In order to comply with Treasury Department regulations, you hereby are informed that, unless otherwise expressly indicated, any tax advice contained in this document is not intended or written to be used, and cannot be used, for the purpose of
(i) avoiding penalties that may be imposed under the Internal Revenue Code of 1986, as amended, or any other applicable tax law, or (ii) promoting, marketing or recommending to another party any transaction, arrangement or other matter.
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 Circular   230   disclaimers   were   created   by   practitioners   to   limit   the   practical   impact   of   Circular   230   on   "reliance   opinions"   and   to   reduce   the   emails ‐ as ‐ tax ‐ opinions   problem   created   by   IRS
• The   effect   of   the   disclaimers   was   to   render   Circular   230   largely   ineffective   for   purposes   of   IRS   jurisdiction   over   most   day ‐ to ‐ day   tax   advice   to   clients
• The   effect   of   standardized   language   was   to   eliminate   potential   impact   on   opinion   practice,   and   confusion   among   clients   as   to   the   effect   of
Circular   230
• Some   practitioners   believed   (hoped?)   that   disclaimers   might   mitigate   professional   liability   concerns   with   regard   to   tax   advice   – probably    not   realistic
 Standardized   Circular   230   disclaimers   offset   IRS   attempts   to   regulate   tax   opinions   outside   the   tax   shelter   context
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 2014   changes   in   Circular   230   eliminate   need   for   disclaimers   from   many   client   communications
 IRS   has   "required"   disclaimers   to   be   deleted   from   such   communications
 According   to   the   Director   of   OPR:    "[I]f   a   disclaimer   says
'The   Internal   Revenue   Service   says'   or   'I   am   required   under
Circular   230,'   I   can   promise   you   that   you   will   get   a   letter   from   my   office   asking   you   to   cease   and   desist   using   that   kind   of   language   because   I   don't   want   taxpayers   to   be   misinformed.
We   do   not   require   that   language   after   last   week."
 IRS   did   not   say   if   other   types   of   disclaimers   might   be   permissible   and   firms   are   considering   alternative   forms
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 Notwithstanding   the   admonition   to   eliminate   Circular
230   disclaimers,   some   practitioners   have   suggested   substitute   disclaimers   to   address   concern   that   advice   might   be   misconstrued   as   a   "tax   opinion"
 For   example:
• "Any   accounting,   business,   or   tax   advice   contained   in   this   communication,   including   attachments   and   enclosures,   is   not   intended   as   a   thorough,   in ‐ depth   analysis   of   specific   issues,   nor   is   it   a   substitute   for   a   formal   opinion,   nor   is   it   sufficient   to   avoid   tax ‐ related   penalties."    Dellinger,   "The   E ‐ Mail   Caveat   Is   Dead!
Long   Live   the   E ‐ Mail   Caveat!"   Tax   Notes   Today
(October   8,   2014).
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 IRS   recently   announced   that   in ‐ house   tax   advisors   will   be   required   to   provide   a   power   of   attorney   (Form   2848)   in   an   expanded   range   of   contacts   with   IRS
 IRS   also   announced   that   providing   Form   2848   will   automatically   give   IRS   jurisdiction   under
Circular   230,   thus   "bootstrapping"   jurisdiction   over   wide   range   of   in ‐ house   tax   personnel
 Circular   230   &   Form   4764,   LB&I   Examination
Plan ‐ Guidance,   IRS   Bulletin   2014 ‐ 12   (Sept.
9,
2014) 26

‐
 Highlights
• Bulletin   issued   in   context   of   preparing   IRS   Form   4764   –
"Examination   Plan"   form   used   for   planning   IRS   exams
• "When   a   corporate   employee   is   merely   providing   or   accepting   information   to,   or   from,   the   IRS,   there   is   no   representation   activity   or   'practice'   occurring   and   the   Form   4764   will   suffice.
However,   when   the   employee   advocates,   negotiates,   disputes   or   does   anything   which   goes   beyond   mere   delivery   of   facts,   general   explanation,   or   acceptance   of   materials,   the   employee   is   engaged   in   representation   activities   (practicing)   before   the   agency   and   the   Form   4764   is   not   sufficient."
 Bulletin   2014 ‐ 12   potentially   expands   situations   in   which   IRS   will   require   employees   to   obtain   Form   2848,   then   subject   them   to
OPR
27

‐
 If   taxpayer ‐ corporation   wants   a   specific   employee   to   advocate,   negotiate,   or   dispute   issues   with   IRS,   Form   2848   must be   obtained
 Form   2848   submitted   to   IRS   is   "one   source   of   evidence   of   practice"   for   purposes   of   establishing   Circular   230's   jurisdiction   over   the   individual   designated   on   the   Form   2848
 Other   evidence   of   practice   includes:
• Tax   opinion   written   for   corporation   to   support   taking   a   position   in   its   tax   return
• Conduct   that   involves   the   "preparation   for   compensation   of   all   or   a   substantial   portion   of   a   document   for   submission   to   the   IRS"   with   respect   to   a   corporate   taxpayer's   tax   liabilities
 Bulletin   2014 ‐ 12   represents   formal   expansion   of   jurisdiction   of   IRS   over   personnel
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 According   to   OPR   Director   Karen   Hawkins   (June   17,   2014):
• Filing   a   Form   2848   extends   beyond   the   authority   addressed   in
Loving   v.
IRS (limiting   scope   of   Circular   230   for   tax   preparers):
"We   can't   be   expected   to   guess   when   the   next   time   is   that   you   might   make   yourself   a   practitioner,   so   we   treat   you   as   a   practitioner   for   all   purposes."
• Lawyers   who   practice   in   other   areas,   such   as   family   or   bankruptcy   law,   and   who   file   a   Form   2848,   for   example,   to   obtain   their   client's   tax   returns   are   subject   to   OPR   jurisdiction   the   minute   they   put   their   power   of   attorney   into   the   system,
Hawkins   said.
• A   line   item   on   Form   2848   says   explicitly   that   the   signer   acknowledges   that   he   or   she   is   covered   by   Circular   230:    "You   may   never   read   that   stuff,   but   you   acknowledge   by   signing   it."
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 First   Amendment   prohibits   Congress   from   abridging   "the   right   of   the   people   ...
to   petition   the   Government   for   a   redress   of   grievances."
 However,   comprehensive   government   ethics   rules   control   interaction   between   government   officials   and   citizens   (and   their   counsel)   seeking   redress   or   other   access
 Rules   create   ethical   "bubble"   around   tax   officials,   among   others
31

 "Government   ethics"   – complex   scheme   to   regulate   (and   criminalize)   interaction   between   government   officials   and   private   citizens,   including   employment   ( i.e.
,   "revolving   door")   restrictions
 Government   ethics   "has   really   nothing   to   do   with   ethics   or   morality   as   one   might   learn   it   in   church.
It   is   more   like   math."    "Scandal   Proof:
Do   Ethics   Laws   Make   Government   Ethical?"
(2002)
32

 Regulation   of   Lobbying:    United   States   v.
Harriss,
347   U.S.
612   (1954)   (upholding   1946   Lobbying
Act)
 Lobbying   Disclosure   Act   of   1995
 Honest   Leadership   and   Open   Government   Act   of
2007
• Stricter   limitations   on   gifts   and   entertainment   of   government   officials
 Proposed   restrictions   on   "political   intelligence" 33

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 "Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes.
"
• Helvering   v.
Gregory,   69   F.2d.
809,   810   (2d   Cir.
1934)   (Learned   Hand)
 "The legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by means which the law permits, cannot be doubted."
• Gregory   v.
Helvering,   293   U.S.
465,   469   (1935)
 "Over and over again courts have said that there is nothing sinister in so arranging one's affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant."
• Commissioner   v.
Newman,   159   F.2d
848,   850 ‐ 851   (2d   Cir.
1947)   (dissenting   opinion)
 "Tax   reduction   is   not   evil   if   you   do   not   do   it   evilly."
• Murphy   Logging   Co.
v.
United   States,   378   F.2d
222,   223   (9th   Cir.
1967)
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 ABA   Formal   Opinion   85 ‐ 352
A   lawyer   may   advise   reporting   a   position   on   a   tax   return   so   long   as   the   lawyer   believes   in   good   faith   that   the   position   is   warranted   in   existing   law   or   can   be   supported   by   a   good   faith   argument   for   an   extension,   modification   or   reversal   of   existing   law   and   there   is   some   realistic   possibility   of   success   if   the   matter   is   litigated.
 AICPA   Statement   on   Standards   for   Tax   Services   No.
1   (2010)
5.
If   the   applicable   taxing   authority   has   no   written   standards   with   respect   to   recommending   a   tax   return   position   or   preparing   or   signing   a   tax   return,   or   if   its   standards   are   lower   than   the   standards   set   forth   in   this   paragraph,   the   following   standards   will   apply: a.
A   member   should   not   recommend   a   tax   return   position   or   prepare   or   sign   a   tax   return   taking   a   position   unless   the   member   has   a   good ‐ faith   belief   that   the   position   has   at   least   a   realistic   possibility   of   being   sustained   administratively   or   judicially   on   its   merits   if   challenged.
b.
Notwithstanding   paragraph   5(a),   a   member   may   recommend   a   tax   return   position   if   the   member   (i)   concludes   that   there   is   a   reasonable   basis   for   the   position   and   (ii)   advises   the   taxpayer   to   appropriately   disclose   that   position.
Notwithstanding   paragraph
5(a),   a   member   may   prepare   or   sign   a   tax   return   that   reflects   a   position   if   (i)   the   member   concludes   there   is   a   reasonable   basis   for   the   position   and   (ii)   the   position   is   appropriately   disclosed.
36

 Shareholder   derivative   suit   in   Delaware
• Seinfeld   v.
Slager,   C.A.
No.
6462 ‐ VCG   (Del.
Ch.
June   29,   2012),   available   on   Westlaw   at   2012
WL   2501105
 Failure   to   minimize   taxes   alleged   to   be   a   breach   of   fiduciary   duty
• Executive   compensation   breached   IRC   § 162(m)   limitation
• Time ‐ vesting   stock   units   granted   employees   were   not   tax   deductible
37

"This   Court   has   concluded   that   'there   is   no   general   fiduciary   duty   to   minimize   taxes.'    There   are   a   variety   of   reasons   why   a   company   may   choose   or   not   choose   to   take   advantage   of   certain   tax   savings,   and   generally   a   company's   tax   policy   'typif[ies]   an   area   of   corporate   decision ‐ making   best   left   to   management's   business   judgment,   so   long   as   it   is   exercised   in   an   appropriate   fashion.'    I   am   not   foreclosing   the   theoretical   possibility   that   under   certain   circumstances   overpayment   of   taxes   might   be   the   result   of   a   breach   of   a   fiduciary   duty.
I   am   simply   noting   that   a   decision   to   pursue   or   forgo   tax   savings   is   generally   a   business   decision   for   the   board   of   directors.
Accordingly,   despite   the   Plaintiff's   contentions,   Delaware   law   is   clear   that   there   is   no   separate   duty   to   minimize   taxes,   and   a   failure   to   do   so   is   not   automatically   a   waste   of   corporate   assets.
"   (footnotes   omitted;   emphasis   added)
38

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


40

 Wells   Fargo   proffered   five   defenses:
• Certain   documents   sought   were   protected   by   the   attorney ‐ client   privilege;
• Much   of   the   information   sought   by   the   summonses   was   protected   by   the   work   product   doctrine;
• IRS   had   an   improper   purpose   in   issuing   the   summonses;
• Information   sought   about   Wells   Fargo's   state   and   local   tax   returns   were   irrelevant   to   the   IRS's   audit;   and
• Information   about   Wachovia's   financial   statements   and   tax   returns   were   irrelevant   to   the   IRS's   audit   of   Wells
Fargo 41

 Attorney ‐ client   privilege   attached   as   asserted   by
Wells   Fargo
 Mixed   decision   on   work   product
• Identification   and   facts   of   uncertain   tax   positions   were   not prepared   in   anticipation   of   litigation
• Recognition   and   measurement   analysis   had   been   prepared   in   anticipation   of   litigation   and   was   protected
• Work   product   protection   was   not   waived   for   tax   accrual   workpapers   when   they   were   shared   with   the   company's   outside   auditor
42

 IRS   had demonstrated   a   legitimate   purpose   to   support   its   summonses
• Wells   Fargo   had   complex   tax   returns   and   engaged   in
"questionable   tax   practices"   in   the   past
• IRS   had   a   legitimate   purpose   in   seeking   tax   accrual   workpapers   to   confirm   the   accuracy   of   the   tax   returns
 IRS   had   not   shown   that   information   about   Wells   Fargo's   state   and   local   taxes   was   relevant
 IRS   had   not   shown   that   information   about   Wachovia   was   relevant
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