Certain of the matters discussed herein are borrowed from “Fundamentals of Municipal Bond Law 2008” published by the National Association of Bond Lawyers. Circular 230 includes rules governing the practice of representatives before the Treasury Department, including the provision of tax advice relating to tax shelters. They are referred to as “Circular 230” rules because they are published by the Treasury Department in a booklet of that name. A practitioner may be censured, suspended or disbared from practice before the IRS if the practitioner fails to comply with the Circular 230 rules.
The Circular 230 rules were amended in 1984 to include rules relating to “tax shelter” arrangements. Municipal bonds were excluded from the application of those rules. There has been subsequent development relating to exclusion of municipal bonds:
- 2003: The Treasury Department proposed changes that would make the rules generally applicable to municipal bonds. See 68 Fed. Reg. 75186 (Dec. 30, 2003).
- April 2004: Based on input from the municipal bond community, in Announcement 2004-29 (Apr. 26, 2004), the Treasury Department stated that any final regulations would “not apply, if at all, to written advice concerning municipal bonds rendered less than 120 days after the publication of final regulations.”
- December 2004: The Treasury Department published final regulations under Circular 230 as well as special proposed regulations relating to municipal bond opinions that were intended to take into account the “unique characteristics” of the municipal bond market.
- May 2005: The final regulations (not the 2004 proposed regulations relating to municipal bonds) were amended in minor respects.
- June 2005: The IRS issued Notice 2005-47, which expanded the “State or local bond” definition to include all opinions relating to the tax-exempt status of bonds (not just those rendered in connection with a new issuance of bonds). The notice states that a “State or local bond opinion is not subject to the requirements of section 10.35 [(of the final regulations)], but will be subject to proposed section 10.39 when it is finalized.” See the expanded definition below. The expanded definition includes all opinions relating to the tax-exempt status of bonds (not just those rendered in connection with a new issuance of bonds).
- February 2006: IRS published proposed changes to Circular 230 with respect to contingent fees, conflicts of interest, standards with respect to tax returns, sanctions and certain other matters. See 71 Fed. Reg. 6421.
- 2007: IRS announces settlement with bond lawyers in connection with an audited municipal bond issue for alleged violations of Circular 230. The settlement involved agreements by the attorneys to follow certain procedures in future bond transactions (including approval of opinions by the leader of the firm’s public finance group).
- September 2012: IRS publishes proposed regulations amending Circular 230, specifically removing the covered opinions requirements. (REG-138367-06) These regulations would significantly modify the covered opinion and written opinion standards. The proposed amendments do away will the concept in rule 10.35 of “covered opinions” entirely. Therefore, the proposed amendments from 2005 regarding municipal bond opinions become unnecessary. Municipal bond opinions would be subject to a modified rule 10.37 (to which all other opinions would also be subject) that contain certain “basic principles” to which practitioners must adhere when providing written advice. Pursuant to these basic principles, the practitioner must “base all written advice on reasonable factual and legal assumptions, exercise reasonable reliance and consider all relevant facts that the practitioner knows or should know.” These facts and assumptions would not need to be reflected in the actual opinion. The proposed amendments are quite extensive. There is a statement to the effect that Treasury and the IRS believe that the amendments, if adopted, will make it unnecessary to include any disclaimers in written advice – those disclaimers only had the intended effect of avoiding an opinion to be considered a “covered opinion.
- June 2014: IRS publishes final regulations amending Circular 230, removing the covered opinions requirements, and therefore making Notice 2005-47 meaningless. (T.D. 9668)
- (i) The excludability of interest on a State or local bond from gross income under section 103 of the Internal Revenue Code;
- (ii) The status of a State or local bond as a qualified zone academy bond under section 1397E of the Internal Revenue Code;
- (iii) One or more other Federal tax issues reasonably related and ancillary to advice described in paragraph (b)(9)(i) or (ii) of this section. Such issues include, but are not limited to—
- (A) The application of section 55 of the Internal Revenue Code to a State or local bond;
- (B) Whether a State or local bond has been reissued for Federal tax purposes;
- (C) The status of a State or local bond as a qualified tax-exempt obligation under section 265(b)(3) of the Internal Revenue Code;
- (D) The treatment of original issue discount or premium on a State or local bond under the Internal Revenue Code; and
- (E) Whether the organization that is borrowing the proceeds of the State or local bond is described in section 501(c)(3) of the Internal Revenue Code; or
- (iv) Any combination of the above.
The final 2004 regulations state that written advice includes advice relating to an entity or any investment plan or arrangement a significant purpose of which is the avoidance or evasion of tax. The principal purpose is not to avoid or evade tax if the entity, plan or arrangement has as its purpose the claiming of tax benefits consistent with the applicable statute and congressional purpose (e.g., Section 1603 Grants, ITCs, PTCs, NMTCs).
“Written advice” is “written advice” only if it is (a) a reliance opinion, (b) a marketed opinion, (c) subject to conditions of confidentiality, or (d) subject to contractual protection:
- “Marketed Opinion” is an opinion for which the practitioner knows or should know that it will be used in promoting, marketing or recommending an investment arrangement. Marketed opinion status can be avoided, however, if the opinion is neither a listed transaction nor has a principal purpose to avoid or evade taxes, and if the opinion includes prominent disclosure that (i) it was not intended to be used, and cannot be used, to avoid penalties that may be imposed on the taxpayer, (ii) the advice was written to support the promotion or marketing of the transaction, and (iii) the taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.
- “Reliance Opinions” is [to come as needed]
Example Paragraph relating to Bonds:
Interest on the [Taxable] Bonds is not excludible from gross income of the owners thereof for federal and [State of XYZ] income tax purposes. This opinion is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding any penalties that may be imposed on the taxpayer under the Code. We express no opinion herein regarding other federal, [State of XYZ] or local tax consequences arising with respect to the [Taxable] Bonds.