Reg 122379-02_Supplmnt

Federal Register 1 Vol 69, No. 243 1 hlonday, December 2 0 , 2004 1 Rules and Regulations
.
..
. . - .- .
sub.ctantia1 number IJT ~ m a l lnilt tics In
makine t h e d e t ~ r m i n n t i n nas in whcthcr
this rulr: luould hovc a significant
cronomic impact, the Lleparrinenl relied
upon the dntn nnd nssunlptlons for ihc
countcrpnrt Pcdcrnl rcgulations The
Drparimcnt of thc Interior also certifies
that the provisions in this rule lhat A r t .
not based u p o ~counierparls Federal
rel:ulaljon~ will 11ul have a significant
~r:r>nomic:impact (In a substantial
number of small entities under thc
Rt:gl~l;ttoryFlrxibility Act ( 5 U.S.C. DO1
et seq.).This determination is bascd on
the kict that thc provisions are
adrninistrativc and procedural in rlature
and are not expected to have a
substanlive effect on the rt:g~~loted
irldustry.

con~pctitiot~,
cn~ploymsnt,investment,
productlvlty, illnovation, or the ability
of U.S.-Lased etlterprisss LO corrlpstt:
with roreign-bawd rnterprises. This
dotcrmina~iunis based upon [lie fact
t h a t a porliun ufthe Slate provisions are
based upon cou~llt.r~)art
FrrleraI
regulaiions h r which nn 2nnlysis was
prepared and n determinniinn madc that
thc Federal regulation was not
considered a major rule. For the p ~ r t i o n
of the State provisions that is not bdsed
upon counterpart Federal regulations.
is based upor1 [he
this deter~nina~ion
fact that the State provisions art!
adniirlistrative and prrlcedural in naturv
and are not cxpectcd to hnvc n
substantivc effect on the regulated
industry.

Small Busi~lessHegulntnry Enforcement
F a i r ~ ~ eAct
ss

Unfundcd Mandates

This rule is not a major rulc under 5
I1.S.C. 804[2), the Small Business

Regulatory Enfurcement Fairness Act.
This rule: (a) Does not have an annual
effect on the economy or $100 million;
(b) will rlot cause a majur increase in
costs r l r prices for consumers,
individual industries, Fcdernl, Statc, or
local government agencies, or
geographic regions; and (c) does not
have significant adverse effects on
Original amendment

date

May 14, 2004

submission

This rule will not impose an
unfunded mandate on State, local, or
tribaI governments or the private sector
of $100 million or nlorc in any given
ycar. This determination is bascd upon
the fact that a portion of the Statc
submittal, which is the subject of this
rule, is based upon counterpart Federal
regulations for which an analysis was
prepared and a determir~ationmade that
the Federal regulatiorl did not impose
a n u n h n d e d mandate. For the portion

75839

of the State provisiuns that is not Ilasetl
upon counterpart Federal regulalions,
this rletsrmination is bascd upon the
fact that the Stntc provisions arc
administrative and p r o c c d ~ ~ rin
a l nature
a n d are n r ~ expected
t
to hnve a
su11xt:lntive effect on the regulated
industry.
List of Subjects in 30 CFR Part 917

Datcd. Octut16:r 18. 2 0 0 4 .
Brent Wahlquisl.
Rt:giranr~/Clrrr!c.lor. Apptrltrr,htnn R e g i n n r ~ l
(7rvrdinniing Cen tpr

m Fur the l.enscrns sel oul in h e preamble,
30 C F R par1 91; is amended as set forth

b~l0\%..
PART 917-KENTUCKY
1 . The duthurjly ~ i l d l i ~ r1 1~ pdrl
r Y17
c o n t i ~ ~ i i10
r sread a:: Iulluw~:
Aulhorily: 30 L1 S.C. 1701 e l seq.
2 . S r r t i o n 91 7 . 1 5 is amended in ihe
table by adding a new eniry in
chro~~ological
order by ihe "Date of Final
Publicalicln" to read as folluws:

5 917.15

Approval of Kentucky regulatory
program amendments.
*

a

*

*

*

Date of final

publication

......................,,.....,.,.December 20,2004 .......................K R S 350.280, subsecllons ( I ) (b), ( I ) ( c ) , 1 (e),I (f), (2), (3), (4); subsections 4(a)-(d), (5), (61, (7) and (8) are deleted.

IFR Dur:. 04-27754 Filed 12-1 7-04: U:45 am]

Service. These final regulatioris set forth Reductin11 Act of 1995 (44 U.S.C.
best practices for tax advisors providing 3507(d)) under control number 1545advice to taxpayers relating to Federal
1871. The collections of information
tax issues or submissions to tlie IRS.
(disclusure requirements) in these final
These final regulations nlsa prar:iilc
regulations are in g 10.35(c). Sucliorl
DEPARTMENT OF THE TREASURY
s t a ~ ~ d a r dTr~r
s covered opiniorls and
10.35(e) requires a practitio~ier
othpr writtcn adricc.
Office of the Secretary
providing a covercd opinion to make
DATES: E{,~ctivcP C I ~Tllrsr
P:
reg~~lations certain disclosures i r ~the heginning of
31 CFR Part 10
are effect[vc Dct.t~rnhcr2 0 , 2003
marketcd opinions, limited scope
Applirnhtlrty Khtr: Pot dates of
ouinions and ooinior~s[hat Fdil to
VD 91 651
applir:dt~~lity,
srr 5 5 111 3 3 ( c ) ,10 J5(g),
conclude at a conficlellce level of at least
i u 3rj(b)>10 3;(6), 10.3a(t)i.1 n . ~ i y i 1 ) ,
RIN 1545-BA70
more likely than not. In addition,
a11d 10 9 3 .
certain relationships between the
Regulations Governing Practice Before FOR FURTHER INFORMATION CONTACT:
practitioner and a person promoting or
the Internal Revenue Service
Hrath?r 1. nostnlcr at ( 2 0 2 ) 0 2 2 -4940,
marketing a tax shclter must be
nr Rrintotl T W n r r c ~at (2021 ti2'1-?800 disclosed. A practitioner may bc
AGENCY: Office of the Secrelary.
(not ioll-free uutnbers)
Treasury.
rcquircd to makc one or more
SUPPLEMENTARY INFORMATION:
disclosures. Thc collection of this
ACTION: Final renulntions.
material helps to ensure that taxpayers
SUMMARY: This doctlrnant colltajns final
PapprwOrk
Act
whn rsr:eive a tax shelter opinion are
The c u l l ~ ~ i i ouTn i l l li:rlr~alic~~~
reg~rlationsrevising ~ h rrgtilatiol~s
r
informcd of any facts or circumstanccs
contained i n these f ~ n reguliitions
~l
has
governing practirr: brforr: the Internal
that might limit the
o f t h e opinion,
Rcvcnuc Scrvicc [Circular 301,These
been reviewed and ripproved hy the
Thc collection of information is
OITict! of Mnnogcrnt:nt nnd Budgct in
regulations affect intlivjduals whu
rr,arlrliltrlry,
a c c u r r i a n ~ ewith ih(: Pi~perwork
prncticc before thc Inlrrnal Revenue
BILLING CODE 431W5-P

75840

Federal Register 1 Vol. 69, No. 243 / Monday, December 20, 2004 1 Rules and Regulations

Eslirnated total annl~aldisclosure
burden is 1 3 , 3 3 3 hours.
Estimated annual burden per
disclosing prar:tiiiu~lervaries from 5 to
10 minutes, depending on individual
c:irr:umstances, will1 an estinlated
overage uf 8 minutes.
Eslirnated number of disclosing
praclitioners is 100,000.
Estimated annual frequency of
responses is on occasion.
An agency may not conduct or
sponsor, and a person is not required to
respond to, a collcction of information
unless it displays a valid contrul
number.
Commcnts concerning thc accuracy of
this burden estimate and s~~ggestions
for
reducing this burden should be sent to
the Internal Revenue Service, Attn: IRS
Reports Clearance Officer,
W:SE:CAR:MP:T:T:SP, Washington, DC
20224, and to the Office of Managemci~t
and Budget, Attn: Desk Officer for the
Departnlent of the Treasury, Office of
Information and Regulatory Affairs,
Washington, DC 20503. Books or
records relating to a collection of
information must be retained as long as
their contents might become material in
the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential,
as required by 26 U.S.C. 6103.
Background
Scction 330 of title 31 of the United
States Code authorizes the Secretary of
the Trcasury to regulate practice before
the Treasury Dcpartmcnt. The Secretary
has publishcd the regulations in
Circular 230 (31 CPR part 10). On
Der:ember 30,2003, the Treasury
Department and the IHS published iri
the Federal Register (68 FR 751861
proposed amendments to the
regulations ( R E G 122379-02) (the
proposcd rcgulntions) to set Forth bcst
practices for tax advisors provirling
advice to taxpayers relating to Federal
tax issucs or subn~issionsto the TRS and
to modify the standards for certain tax
shelter rlpiniuns. A public hearing was
held or1 February 19, 2004. Written
pubIic comments responding to thc
proposcd regulations wcrc received.
After thoruugh cunsideratiun u l the
the proposed
public co~~irrlents,
regulations are urlupted as revised by
this Treasury decision.
Explanation uf Pruvisions
Tax advisors play a critical role in the
Federal tax system, which is founded on
principles of compliance and voluntary
self-assessmcnt. Thr: tax systcm is bcst
served when the public has confidcncc
in the honesty ancl integrity of the
profcssionais providing tax ndvicc. To

written advice (A) is a, reliance opinion,
restore, promote, and maintain the
pul11ic:'s r;onfirlenct: in those individuals (B) is a marketed opinion, (C) is subject
of c o ~ ~ f i d e n t i a l ior
~ v[Dl
, is
and firr~ls,these 1inal regulatiorls set
to co~ldilior~s
subjcct to contractual protcction. A
forth best practiccs applicable to all tax
advisors. These regulations alsu pruvide reliance opinion is written advice that
crlncludt:~at a. confirlence level uf .at
mandntory requircmcnts fur
least more likely than nr~tt h a ~one or
practitiuners who pruvide covereti
opinions. The scope of these regulations mrlrt: signific:ant Federal tax issues
woulrl t)e resolved in tilt! taxpayer's
is limitcd to practice bcfore the IRS.
favor.
Tbcsc rcgulntions do not alter or
Written advicc will not bc treated as
supplant other ethical stanrlarrls
a reliance opinioil if the practitioner
applicable to practitioners.
prominently discloscs in thc written
On October 22, 2004, the President
advicc that it was not written t n bc uscd
signed the Arncricnn Jobs Crcation Act
and cannot be used 10r [he purpose of
of 2004, Pub. 1,. 208-357, (I 18 Stilt.
avoiding penalties. Similarly, written
1428)(theAct), which arncndcd section
advice generally will not be treated as
330 of title 31 of the United States Code
to clarify thnt the Secretary may impose n markctcd opinion if it docs not
concern a listcd transaction or a plan or
standards for written advicc rclating to
arrnngcmcnt having the principal
a matter that is identified as having a
purpose 01 avoidarlce or evasion of lax
potential for tax avoidancc or cvasion.
and the written advice contains this
The Act also authorizes the Trcasury
disclosure. The Treasury Department
Dcpartmcnt and the IRS to impose a
and the IRS intend to nmcnd 28 CFR
monctary peilalty against a practitioner
1.66644 to clarify that a taxpayer may
who violates any provisioi~of Circular
n u t rely upon written advice that
230. Thcsc final regulations d o not
contains this dist:losure tu establish the
reflect amendments made by the Act.
reasonable cause and good faith defense
The Treasury Department and the IRS
expect to propose additional rcg~~lationsto thc accuracy-related cnalties.
Wrillerr advice regacing a plan or
implcmcnting the Act's provisions.
arrangement having a significant
Best Practices
purpose of tax avoidance or evasion is
excluded from the definition of a
The final regulations adopt the best
covered opinion if the written advicc
practices set forth in the proposed
concerns the qualification of a qualificd
regulations with modifications. These
plan or is included in documents
beit practices are aspirational. A
required to be filed with the Securities
practitioner who fails to comply with
and Exchange Commission. The final
bcst practices will not bc subject to
regulations also adopt an exclusion for
r
rcgulntions.
discipline ~ i n d c these
Similarly, the provision rclnting to steps preliminary advice i l the practitioner is
reasonably expected to provide
cs
to cnsure thnt n firm's p r o c c d ~ ~ r are
subsequent advice that satisfies the
c:rlnsistent with hest practices, nrlw set
requiremcnts of the regulations.
forth in 5 10.33(b), is aspiratiunal.
Written advice that is not a covered
Although best praclices are solely
opinion for purposes of $10.35 is
aspirational, tax professiollals are
subject to the standards set forth in new
expected to observe these practiccs to
5 10.37.
prcscrvc public confidcncc in the tax
system.

Sion riards for Covered Opinions
The opinion standards of 5 1 0 . 3 5 are
adopted with mur1ifir:atirlns. The
provisions 01 5 10.35 irl the Final
regulations are reorganizecl to clarify the
provisions. Opinions subject to 5 10.35
rire defined as covered opinions.

Definition of Covered Opinion
Under the final regulatic~ns,the
definitiun of a covered opinion includes
written advice (including electronic
communications) that coi~cernsone or
]nore Fecleral tax issue(s) arising from:
( 1 ) a listed transactioi~;( 2 ) any plan or
arrangement, the prinr:ipal purpose o f
which is thc avoidancc or cvasioil of
any tax; or (3) any plan or arrangement,
a significant purpose ofwllich is the
ovoidnncc or evasion of tax if thc

Aft cr carcful consideration, thc
Treasury Dcpartmcnt and thc IRS havc
concluded that practitioners rendering
opirlioris c o ~ ~ c e r n ithe
~ l gtax treatme~itof
nlunicipal bonds should be subject to
the samc profcssionnl standards that are
applicablc to all other practitioners. The
standards fur r:ertain opiniuns
c o ~ l c e r r ~the
i ~ ~lax
g Lrealrnent of
municipal bonds (State or local bond
opinions) that arc included in offcring
matcrials that otherwise would be
covered opinions are being issued
separately in proposed form. The
proposed standards will require
practitioners to exercise the same degree
of diligence with respect to ascertaining
the relevant facts and discussing the
significant Federal tax issucs, but will
tnkc into account thc unique

Federal Register I Vnl. 69. No. 243 / Mondav, Deccmbcr 20. 200 4 /Rules a n d Regulatinns
r:ir[:urnsianct:r of thr: municipal hond
market.
To give bond practitioners a n
ilpportunity tu r:ornment on the
proposed standards for State or local
bond opinions, opinions that arc
inclucled in offering materials, inclucling
a n official statement, arc excluded from
thc definition of covered opinio~lsin
tlieve final regulations. Thus, Slate rlr
local bond opinions incIuder1 in offering
m;itrrials will not be subject to the
opinion standards of 5 10.35 or
proposed 5 10.39 until 120 days after the
p r o r s e d reg!ilstions arc finalized,
T t. e x c l u s ~ o nfor State or lucal l o n J
u p i t ~ i o t ~applies
u
o r ~ l yto the
~ e q u i r e r ~ i e nlor
t s covered opinions set
follrtli i t 1 5 10.35. State ur local brlnd
o p i ~ ~ i oarc
t ~ usubject to the standards sel
forth in 5 10.37 relating to requirerner~ts
far ilthcr r*-ritten advice, and
ptactitiot~erswho prepare bond
o p i r ~ i o t ~must
u comply with arly other
applicable rrquirenler~tprovideti in
Circr,lar 230.
Requirern~;?ts
fL>rCovered Opinions
In general, the requirements for all
covered opinions are adopted as
proposed. The final regulations providc
that a practitioner providing a c o v ~ m d
opinion, including a marke~edoprnion,
must not assume that n transaction has
a business purpose or is potentially
profitable apart from tax bencfits, or
make an assumption with resprct to a
material valuation issuc.

Iri general, the required disclosurrs of
$10.35(e) are adopted as proposed.
These disclosures ensure that taxpayrrs
receive information that is necessary to
their evaluation of, and reliance un, a
covered opinion.

Requirements for Other Written Advice
Thc final regulations also set rorlh
rcquircmci~tsfor written advice that is
not a covered opinion. Under 5 10.37 a
praclitiorler rnust nut give written
advice if the practitioner: (11 Bases the
written advicc o n unreasonable factudl
or legal assumptions: ( 2 ) unreasonably
relies upon representations, statemenis,
[indings ur agreements of the taxpayer
or any other person; ( 3 ) fails to c,onsirier
all relevant facts; or (4) takes intri
acr:uunt the possil~ilitythat a tax rcturn
will not b e nuditcd, that an issue will
not hc raiscd on audit, or that at1 issue
will bc scttlcd. Section 10.37. ~ t r ~ l i b e
5 10.35, does not require that the
practitioner describe i r the
~ written
advic,e the relrvilnt f;~c:ts[inct~tding
assumptirins ;lnd rcprcscntntiot~s),the
application nf the lilct, to thnuu h c t s , or
the pritr.titinn~r'sconclusion with

rcspect to the law and the facts. T l ~ e
scope of the engagement and the type
and specificity of thc advice sougl~lby
the clicnt, in addition to all othcr facls
and r:irc:umstanr:ss, will he (:onsidered
in determining whuthcr a practitioner
has Failed to comply with the
requirements of (j 10.37.
Procedures To Ensure Compliance
In general, the procedures lo erisure
complia~lcewith requirer~lerltsof
5 10.35 are adopted as prrlprlser1 and set
lorth in I L I . ~ ~ .

Advisory Corr~rr~illess
or1 !heIr~tegrityof
Tax Projessior~uls
Newly designated 5 10.38, formcrly
5 10.37 in the proposcd rcg~ilations,is
adopted as proposed with thr: following
rriodifir:iltiuns. Section 10.38 is modified
Lo clarify that an advisory comrnittec
may not make recornmcndations about
actual practitioner cases, or havc access
to information pertaining to actual
c:ases. The section also is modified to
c:larify that the Director o f t h c Officc of
Professional Responsibility shou Id
ensure that membership of thcsc
cornrnittces is h;ll?nccd among thosc
individuals who practice as attorrleys.
accountants and cnrollcd agents.
Applicability Dates
To eliminate any adverse itnpact that
the adoption of the new requirer~ier~ts
for covered o p i n ~ o r ~
ors orller writter~
advice could have 011 pertdirig or
ilnminel~llransactiuus, tlie applicabilily
date of t h slalldards
~
torhcovered
L?~~IIIL?~.F under
3 0.35 and otlier
w ~ i t t ~advice
11
under $ 10.37 lartd the
proccrl~~rcs
lo ensure coinpliatlce as
thry rclalc lo coverer1 opinions under
5 10.36) is Junc 20. 2005.
Special Analyses
I t h a s been deicrmincd ihnt this final
rule is nol n ~ignificnntrcgulninry action
a s defined in Bxccut~vcnrdcr 1 2 8 6 6 .
Thererore, a r e j i u l a ~ u r yassessment is not
roquircd. 11 js hcrcby certified that these
regulations will not havc a significant
ecunomic impact on o substantial
number uf small entities. Persons
authorized to practice befure the IRS
have long been required lo cornply wilh
certain staildards of conduct. The added
disclosure requirements for tax sheller
opinions imposed l y these regulatiuns
will not have it significant cconomic
irnpar:t on a substantial number of small
entities because, a s prcviously noted,
the estimated burden of disclosures is
minimal. Practitioners havc the
information needed to determine
whether ariy of the disclusurcs will bc
required belure Ihe opinion is prepared
and, fur sor11e clisr:losures, the

75841

regulalions provide praclilioners wilh
tha language to be i~lcludedin the
npininn. T h c r ~ f o r ca, rcg~ilatory
nrxibilily arlalysis under the Reguliitory
Flexihilily Act (5 IJ.S.C. chapter R) is
nal rcquirrd. Pursuant to scction 7805(t)
nf ihc Inirrnnl Rrvr.nuc C:odc, thc
prr,l)r)w~lrre~ulaliunsprcct:d i ng t hcsc
rrguld~iunswere ~ u i m i i l e !n
~ l thty C:hicf
I : o u n s ~ lfor Advocacy of thc Small
B u s i ~ ~ e Administralion
as
ftlr r:r,mment
011 ils ilnpdcl on sr11al1 busirlesses
Drafting Informalion
']'he Ixinc;i~)dauihork t,r rhr
reguld~innsa r e Healher L. Dnsloler a n d
Brintrm T. Warren uf lhe Orfice of ihe
Associate Chief Counsel (Procedure and
Administrntinn), Administrnlivc
Prvvisiunr a n d J11dir.lalPractice
Divisitlrl.
List of Subjects in 31 CFR Part 10
hdministrativc practicc and
proccdure, ~ o w ~ e rAccountants,
s,
Enrolled agents, Enrollcd actuarics,

Adoption of Amendments to the
Regulatiuns
Accordingly, 31 CFR part 10 is
amended as follows:
PART ISPRACTICE BEFORE THE
INTERNAL REVENUE SERVICE

Paragraph 1.The authority citation for
subtitle A , part 10 is revised 10 read as
follows:
Authority: Sec. 3, 23 Stat. 258, secs. 2-12,
et seq.; 5 U.S.C. 301, 500, 551559: 31 U.S.C. 330; Reorg. Plan No. 26 of
1950. 1 5 FR 4935, fi4 Stat.1 2 8 0 , 3 CFR.
1Y4%lY53 Comp., p. lU17.
Par. 2 . Section 10.33 is revised to read

GO Stat. 2 3 7

as lollows:
6 10.33 Best practices for tax advisors.
( a ) BPS!pmc!ices. Tax advisors shuuld
p r o v ~ d eclients with the highest quality
ruprcscntation concerning Federal tax
issups by adher~ne,to bpst practices in
pruviding advice a n d in preparing or
assisting in the prepardliun uf a
submission to the Inlrrnal Reuerlue
Service. In addition to compliance with
thc standards of prncticc p r o v i d ~ d
elsewhere in this port, b r ~ tpracliccs
inc:lurle the Fr~llowing:
(1) Communicati~lgclearly with the
clierit regarding [he terms nf t h ~
engagement. For examplc, lhc advisor
should determine the clicnt's cxpcclrd
purpose for and use of the advicc and
w~lh
should havc a clcar ui~dcrstar~ding
the client regarding the form a n d scope
of the advice or assistance to be
rendered.
(2) Establishing thc facts, d c l r r m i n ~ ~ ~ g
which facts arc rclernnt, evaluating r h ~

75842

Federal Register1 Vol. 69, No. 243 /Monday, December 2 0 , 2004 /Rules a n d Regulations

(1) Is a reliunce opinion;
used or referred tu by a persrln nther
reasonableness of any assumptiuns u r
( 2 )Is a n~orkeredopinior~;
than the ~~ractitirlner
(ar n person wha
reprcscntations, relating the applicable
(3) Is subject to conditions of
is a merriber or,associated with, or
law (including poteiltiallv applicablc
cortfiden tinlity; or
eniployed by the practitioner's firm) in
judicial doctrines) to the relevant facts,
(4) Is subject to contmctrlnl
promoting, marketing or recommending
and arriving at a conclusion supported
protectio:~.
a partnership or other entity, invcstmcnt
by the law and the facts.
(ii) Excluded udvice. A covered
plan or arrangement ta one or more
(3) Advising the client regarding the
opinion does not includttaxpaver(s).
import of the conclusiuns reached,
(A) Written advice prnvideri to a
(ii) For purposes of this section,
including, for cxamplc, whcthcr n
client during thc coursc of an
written advice, other than advice
taxpayer may avoid accuracy-related
cngagemcnt if a practitioner is
described in paragraph [b)(Z)(i)(A)of
penalties under the Internal Revenue
this section [concerning listed
Cnde if a taxpayer acts in r s l i a ~ ~ con
e 11ie reasonably expected to provide
subsequent written ac1vir:e to the client
transactions) or paragraph [b)(2)[i)[B)of
advice.
f
that satisfies the requirements c ~ this
this scction (concerning thc principal
(4) Ac:ling fairly and with integrity in
section; or
purpose of avoidance or evasion), is nut
practice before the Internal Revenue
[Bj Written advice, r~therthan iirlvice
treated as a marketed opinion if thc
Scrvice.
practitioner prominently discloses i n
(11) Procedures lo ensure l e s t prucfices described in paragraph (b)(Z)(i](A)of
this section (cuncerning listed
[he written advice thatfor trrx udvisors. 'Tax atlvisors with
transactions) or paragraph (b)(Z)(ii)(R)o f
(A] The advice was not intended or
responsibility for overseeing a firm's
written hy th~:practitic~nerto he used,
practice or providir~gadvice cu~~cernirlg this section (concerning the principal
purpose of a v o i d a ~ ~ cure evasiori) thatand that it cannot be used by any
Federal tax issues or ol preparing or
( I ) Co~lcernsthe qualificatiun of a
taxpayer, for the purpose of avoiding
assislirlg in the preparation of
qualified plan;
penalties that may be imposed on the
submissions to the I~iterrlalRevenue
( 2 )Is a State or local bond opinion;or taxpay er;
Service should take reasonable steps to
(3) Is included in documents required
(B] The advice was written to support
ensure that the firm's procedures for all
to
bc filed with the Securities and
the pronlotion or marketing of the
meml~ers,assnciates, and employees are
Exchange Commission.
transaction(s) or rnatter(s1 adclressed by
c:onsistent with the best prar:tices set
{3) A Federal tax issue is a question
the written advice; and
forth in paragra h [a) of this section.
concerning the Federal tax treatment of
(C) The taxpayer should seek advice
(c)~ ~ ~ i i c a b i !dta~t e This srctiun i s
an item of income, gain, loss, deduction, based on the taxpayer's particular
effective after June 20, 2005.
or credit, the existence or absence of a
circumstances from an independent tax
w Par. 3. Sections 10.35,10.36,10.37and
taxable transfer nf property, or the value advisor.
10.38 are added to subpart B to read as
(6) Conditions of uonfidentiulity.
or property for Federal tax purposes. Fur
follows:
Writien advice i s subject to conditions
purposes of this subpart, a Federcrl tnx
of confidentiaiityif the practitioiler
issue is significant if the Internal
5 10.35 Requirements for covered
imposes on one or more recipierlts of
opinions.
Revenue Service has a reasonable basis
the written advicc a limitation on
for a successfi~lchallenge and its
(a) A practitioncr who provides a
disclosure of thc tax treatment or tax
resolution could havc a significant
covered opinion shall compIy with the
structure of the transaction and thc
impact, whether bcncficial or advcrsc
standards of practice in this section.
limitation on disclosure protects the
and under any reasonably foreseeable
(11)Definitions. Fnr purposes of this
circumstance, on thc overall Federal tax confidentiality of that practitioner's tax
subpartstrategies, rcgardlcss of whcthcr thc
treatment of the transaction(s) or
(1) A practitioner includes nny
limitation on disclosure is legally
individual described in 10.2(e).
matter[sj addresscd in the opinion.
binding. A claim that n transaction is
( 2 ) Covered opinior~-(i) 1r1gtmerul. A
(4) neliance opinion-(i) Written
advice is n reliance opinion i f the advice proprietary or cxclusivc is not a
covered opinior~is writterl advice
cor~cludesat a confidence level of mure limitation on disclosurf: i f the
(including clcctronic communications)
likely than not (a greater [ha11 50 percent practitioner confirms to all recipients of
by a practitioner concerning onc or
likelihood) that onc or more significant
the written advicc that there is no
more Federal tax issues arising from(A) A transaction that is the same as
Federal tax issues would he rcsolved in
limitation nn disclosurr: of the tax
or substantialIy similar to a transaction
treatment or tax structure of the
the taxpayer's Favor.
(ii) For purposes of this section,
thai, at the time the advice is rendered,
transaction that is the s ~ h j e c ut l the
written advice, other than advice
thc Intcrnal Rcvcnuc Scrvicc has
written tldvicc,
(7) Corrtmctual protection. Written
rletsrminerl tu be a tax :~vuidancc
described in paragraph (b)(2)(i)(A)of
advicc is subject to contractual
transac:tir~nand identified hy p u b l i s h d this scction (concerning listed
guidance as a listed transaction under
transactions) or paragraph (b)(z](i)(B)of protection if the taxpayer hns the right
tu a full or partial refund of fees paid to
this section (concerning the principal
26 CFR 1 . 6 0 1 1 4 ( b ] ( 2 ] ;
purpose of avnidanr:~nr evasion), is not the practitio~ler(or a person whu is a
(B) Any partnership or other entity,
member of, associated with, or
any investment plan or arrangement, or
treated as a reliunot: opinion i l the
employed by the praciitir~ner'sfirm) if
ally other plan or arrangement, the
prac:titinner pruminently riiscloses in
priilcipal purpose of which is the
all or tl part uf the intended tax
the writtcn advicc that it was not
avoidarice ur evasiun c ~ any
f
tax imposed intended or written by the practitioner
conscqucnccs from the rnattcrs
addressed in the written advice are not
11y the Internal Revenue Code; or
to be used, and that it cannot be used
(C)Any partnership or other entity,
sustai~led,or if the fees paid to the
by the taxpayer, For the purpose r)T
[ r ~ r persrm WIIO is a
any investment plan or nrra~lgcrnent,or avuirlir~g~ler~iilt
iss Ihat rnay be irr~~lr~serlprac:li!ir~r~er
any other plan or arrangement, a
member of, associated with, or
on the taxpayer.
significant purposc of which is the
(51 Marketed opinion-(i] Written
employed by the practitioner's firm) are
avoidance or evasion of any tax imposed advice is n marketed opinion if the
contingent on the taxpayer's realization
by the Internal Revenue Code i f the
practitioner knows or has reason to
o f tax bcncfits from thc transaction. All
lvri tten adviceknow that thc writtcn advicc will bc
the facts and circumstances relating to

Federal Register / Vol. 69, No. 243 /Monday, December 20, 2004 /Rules and Regulat~ons
the matters addressed in thc written
advice will be consiclered when
dctcrmining u-hcthcr a fee is refundable
or contingent, inr:ludi~lgthe right to
reimburseineilts of amounts that the
parties to a transaction have not
designated as fees or any agreement to
provide services without rcasonablc
corn cnsation.
( B f ~ r o m i n e n ldiscl~sed.
i~
An ifem
rcquircd to be pro~~~inently
riisclosed
must be set forth in a separate section
at thc bcginning of the written advicc i n
a bolded typeface that is larger than any
other typehce used in the written
advice.
IY)
. , Strrle or loco1 Imnd oninion. A
Stnte or Iocul bond opinion is written
advice with respect to a Federul tax
issue included in any materials
delivered to a purchaser of a State or
local bond in r:onnection with the
issuance uf the bond in a public or
private offering, including a n official
statemcnt (if one is prepared), that
conrcrns only the excludability of
interest on a State or 1ur:al brlnrl from
gross income under section 103 of the
Internal Revenue Cclde. t h r application
of section 55 of the lntcrnal R r v m u ~ !
Codc to a Stntc nr local bond. t h r status
of a State or local bond as n qualifird
tax-cxcmpt obligation undrr srction
265(b](3)of the Internal R e v ~ n u Cnde.
r
the status of a State or local bond d s a
qualified zonc academy bond under
section 1397E of the Internal Revenue
Codc, or any combination of t h r ahovr.
( c )Requiwn~ents lor covered
opinions. A practitioner providing a
covered opinion must (:omply with each
of the followjng requlraments.
( I ) Fvotuul muiierc. ( i ) The
practitioner musl uLe reasfillable efforts
to identify and ascerlain the hcts,
which may relate lo fulure events i f a
transaction 1s prospective or proposed.
and ta determine which facts are
relevant. The opinion milst ider~tilyand
consldcr all facts tho! thc psactitiot~er
determinks t o he relevant.
(ii) Thc; pmci!tioncr nliist not base tllr
opinion rjn a n y unrensnnohlc fnctunl
as~umpliuris( i ~ i c l ~ ~ r assumptiuns
lir~g
as
to futurc cvct~ts],h u i ~ ~ ~ r c n s o t i a b l e
factual assumption includcs n factual
assumptir~nthat the prnctitinner knows
or should know i s incorrcct or
incomplctc. For example, it is
unreasonable to assume that a
transaction has a business purpose or
that a trallsactio~lis potenlially
prr~fitat~le
apart from tax benefits. A
F:lctual tlssumptiun includes reliance on
a projcction, financial forecast or
appraisal. It is iinreasonable For a
practitioner to rely 011 a projection,
financial forecast or appraisal if the
practitioner krlows or shuuld know thal

the projcction, financial forecast or
appraisal is incorrcct or incomplete or
was prppareri by a person lacking the
skills or qualifications necessary to
prcpare such projcction, financia1
forecast or appraisal. The opinlon must
idciltify i n a separate section all factual
assumptions rclicd upon by the
practitioner.
(iii) The practitioncr must not base
the opinion on any unreasonable factual
rcprcscntations, statenlcilts or findings
of the taxpaycr or ally othcr person. An
unreasonable factual rcprescntntion
includes a far:tual represrntation thnt
the practitioner knows or shuuld know
IS incorrect or incomplete. For example,
a practitioncr may not rcly o n a factual
rcprcscntation that a transaction has n
business purpose if the represcntntion
does not include a specilir: descriptiorl
of the business purpose or the
practitioner knows or should know that
t h e representation is incorrcct or
incomplete. The opi~liorlmust irientiry
in a separate section all factual
representations, statements or findings
of the taxpayer rclied upon by thr:
practitioner.
(2) Relate lori. i o f i r f s . [ i ) TIP opinion
~
law
must r c l a t ~t h applicable
(including potcntinlly applicabIc
iltdicial doctrines) to the relevant facts.
( 1 1 ) The practitioner mus! nu! assume
~ I I P favorable resolution of any
significant Frdcral tax issue except as
provldrd in paragraphs ( c ] ( 3 ) ( v ]and (dl
of t h ~ s ~ c t ~ oor
n ,otherwise base a n
opinton on any unreasollable legal
nssumptions, rcprcscntations, ur
conclusinns.
(iii) TIE opinion must nut contain
internally inconsistent legal analyses or
conclusions.
(3) Evuluulion of signijicant F p d e m l
lux issues-(i) Irl genemi. The opinion
m u s t consider all sig~liricantFederal lax
i s s ~ ~ excsp!
es
as provided In paragraphs
( ~ 1 ( 3 ) ( v )a n d [dl of t h ~ ser
s lion.
(ii) I..onclusion as tn r n s h significnnt
F ~ d r m tlu x isAue The oplni& must
1.3ruvitlr thy practitioner's conclusiorl as
to thc lil;clihaod that t l ~ ctaxpaycr will
prevail o n the merits with respcct to
each sigriificar~tFederal tax issue
considcrcd i t 1 thc opinion. IF the
p r n c t i t i ~ n ~isr unablr to reach a
conclusiot~with respect to one or more
of those issues, the upitiiot~rnusl state
that the practitioner is uriablt: to reach
a corlclusion with respect t r ~t hasp
issues. The opinion must dcscribe the
rcasons for the conclusions. including
the facts and analysis supporting t h ~
conclusions, or describe the reasons t h ~ t
the practiiiorler i s ur~ableto rear:h A
coriclusiun as to one rlr more issues. I f
the practiliuner rails tu reach a
cur~clusionat a cor1fideni:e level c ~ a1
f

75843

Icast mnrc 1ikr;ly than no1 with rrsprct
to onc or mom significnnt Federal t a s
issues ~:i,nsi~lere~l,
Ihe npinion must
i~icludeIhe a p p r o p r i ~ l e ~ d i s c l u s u ~ - ~ )
rcquircd undcr paragraph (c) of this
section.
[iii) Evuluulion I~rlsedo n c hmnr:~,.;
r~{
success on i h merits.
~
In evnlunting t h y
sigrlificen~Federal lax issues a d d ~ ~ r s s r t i
in the apininn, the practitioncr inust not
tnkc into account thc possibiliiv that n
tax return will not bc auditcd, thnt an
issue will not be raiscd on nudii, or ihnt
;In issrle will he resolvcd thmugh
s e t t l e ~ n e nirraised.
~
(iv] Mnrkefed opinions.In !he case nf
a rr~urkrteilopinion, the opir~illr~
rnuSI
provide t h r pradilinner's conclusion
t h a ~the taxpayer will prevail on the
rneri!s at a cunridence lervel of a1 Least
rnure likely tl~iinrlut with respect tcl
each s~gnificat~t
Federal tax issue. It'tlle
practit~oneris ~ u ~ a bLO
l ereach a rnore
likely tliarl not coriclusiori st-illi respect
to eacli sigtliflcant Federal tax issue, the
practiticlrler must not provide the
marketed opinion, but may provide
written advice that satislies the
requirements in paragraph (b){s)[ii)of
this section.
(v) Limited scope opinions. (A) Thc
practitioncr may provide an opinion
that considers less than all of the
significant Federal tax issues if[ I ) The practitioner and the taxpayer
agree that the scope of the opinion and
the taxpayer's potential reliance on the
opinion for pllrposes of avoiding
penalties that may be imposed on the
taxoaver are limited to the Federal tax
issue(sj addressed i n the o inion
(2) The npinion is not afvice
described in paragraph (b)(Z)(i)(A)of
this section (concerning listed
transactinns), paragraph (h)(Z)(i)(B)of
this section (cuncerning the principal
purpose of avoidance or evasion) nr
paragraph (b)[5)of this section ( a
morketed opinion); and
(3) The opinion includes the
apprupriate iiisr:losure[s] required under
paragraph (e) o l this section.
(B) A practitinner may make
reasonable assunlptions regarding the
Favorable resolution of a Fcdcral tax
issue (an assumed issue) for purposcs of
providing an upinion i)n less than all r~f
the significant Fcdcrnl tax issues as
providcd i n this paragraph (c)(3)(v).The
opinion musl identify iirl a separate
section all issues for which the
practitiuner assumed a favorable
rcsoltition.
(4)Overall conclusior~.(i] 'The opinion
must provide t t ~ epractitiuner's overall
c:r)nr:lusinn ;$sto thc likelihond that the
Ft:drrnl tax Ircatmrnl of thr: transaction
nr matter that i s the sl~bjerinf the
npininn i s iht: proprr trcaimcnt and the
I

,

'

75844

Federal RegisterlVol. 69, No. 243 /Monday, December 20, 2004 /Rules and Regulations

reasons for that r:onr:lusion. If the
practitioner is unable to rcach an ovcrall
conclusion, the opinion must state that
the practitioner is unnhlr: to reat:h an
overall conclusiorl and describe the
reasons for the orar:titiorler's irlat>ilitvto

( 2 ) ~Murkeledopinions. A rnurkefed
advice that is nut a cuvered opiniorl for
opinion must I~ruminently
disc:lose
purposes of this sectiun is subjecl Lo the
thatrequirenle~itsof 5 1U.37.
(i] The opinion was writtcn to support
(6) Effective date. This ser:tiun applies
the promotion or marketing of the
to written advice that is rc~ldcredafter
tmnsaction[s) or matter(s1 nddrcssed in
Iune 20, 2005.
the opinion; and
5 10.36 Procedures to ensure compliance.
(ii) The taxpayer should scck adricc
[ii) In the case of a rr~arketedopinion,
(a] Regrlirernents fur covered
based on the taxpayer's particular
the opinior~rnust provide the
opinions.
Any practitioner who has (or
circunlstances
from
an
independent
tax
~iraclilioner'soverall c:oric:Iusion that the
practitioilers who hnrr: or shnrc)
Federal tax treatrrlsr~tuf the trarlsactio~~ advisor.
principal authority and responsibility
(3) Limited scope opinions. A limited
or matter that is thc subjcct of the
for overseeing a firm's practice of
scopc
opinion
must
prominently
opinion is tbc propcr trentmcnt at a
providing advice concerning Fcderal tax
disclose thatconfidence lcvcl of a t least more likcly
issues must take reasonable steps to
(i) The opinion is limitcd to thc onc
than not.
ensure that the Cirnl has adequate
or more Federal tax i s s ~ ~ addressed
cs
in
(d) Con~petenceto provide oplniort;
procedures in effect for all rncmbcrs,
the opinion;
relior~ceor] opinions of others. (11Thc
{ii) Additional issues may exist that
associales, and emplovees for purposes
practitioner rriust be knuwledgeable i r i
could affect the Federal tax treatrnerlt of of cornplyirlg with 5 10.35. Any such
all of [he asuects or Federal tax law
the lransactio~ior rnatter thal is [he
praclilio~lerwill be subject to discipline
relevanl Lo the opinion being rencleretl,
subject of the opinion and the opinion
fr~rFailing to cumply with the
except that the practitioner may rely c)n dues not cunsider or pruvide a
requirements of this paragraph ifthe opinion olarlother practitiuner wilh cu~lclusiuriwilh respect Lo any
(1) The practitiorler through
respecl to orle or more sigrlifica~it
addiliorlal issues; and
willfulr~ess,recklessr~ess,or gross
Federal tax issues, urlless the
(iii) With rcspcct to any significant
incompetence does not take reasonable
s sliould know [hat Federal tax issues outside the Iirnited
practitioner h ~ o w or
steps to ensure t h a ~the firm has
[he opinion of the other practitioner
scopc of thc opinion, thc opinion was
adequate procedures to co~nplywith
should not be relied on. If a practilioner not writtcn, and cannot be used by thc
5 30.35, and one or more individuals
relies on the opinion of another
taxpayer, for the purposc of avoiding
who are members of, associated with, or
practitioncr, the relying practitioner's
penaltics that may bc imposcd on thc
employed by, the firm are, or have,
opinion must identify the other opinion taxpnycr.
engaged in a pattern or practice, in
and set forth the conclusions reached in
( 4 )Opinions !/tat foil lo reach u more
connection with their practice with the
the other opinion.
likely than not conclusion. An opinion
firm, of failing to comply with 5 10.35:
(21 The practitioner must be satisfied
that does not reach a conclusion at s
or
confidenr:e level of at least more likely
that the combined analysis of the
(2)The practitioner knows or shuuld
than not with respect to a significant
opinions, taken as n wholc, and the
know that one or more individuals who
Federal tax issue must prominently
overall conclusion, if any, satisfy the
are members of, associated with, or
requirements of this scction.
disclosc thatemployed by, the firm are, or have,
(i) The opinion does not reach H
engaged in n pattern or practice, in
(e) Required disclosures. A covered
conclusion at A confidence level of at
connection with thcir prncticc with the
opinion must contain all of the
least more likely than not with respect
firm, that does not comply with 10.35
rollowing disclosures that applyto
orie ur more significant Federal tax
and the practitioner, through
(1) Relationship hetween promoter
issues addressed by the opinion; and
willfulness, recklessness, or gross
and pwclitioner. An upiniun must
(ii) With rcspcct to those significant
irlcompelence, fails to take prompt
prominently disclose the existence ofFcdcral tax issucs, the opinion was not
action to correct the noncompliance.
[i) Any cornpensotion armngcmcnt,
writtcn, and cannot bc used by the
(b) Effective dote. This section is
such as a referral fcc or a fce-sharing
taxpayer, for thc purposc of avoiding
applicable after June 20, 2005.
arrangement, between the practitioner
penalties thnt may hr: imposcd on thc
(or the practitioner's firm or any pcrson
5 10.37 Requirements for other written
taxpayer.
who is a mernber of, assuciated with, ur
advice.
( 5 ) Advice regurding required
enlployed by the practitioner's Grm) and disclosures. In the casu of any d i s c l o s ~ ~ r e (a) Reqrlirements. A practitioner must
any pcrson (other than the client for
not give writtcn advice (including
rcquired under this scction, the
whom the opinion is prepared) with
concerning
electronic comm~~nications)
practitioner m a y not provide advicc to
respect to promr~ting,marketing or
one or 111oreFederal tax issues i l the
any persun that is cuntrary tu ur
recornnlerlding the erltity, plan, or
practitioner bases the written advice on
inconsistent with the required
arrangement (or a substantially similar
unreasonable factual or legal
disclosure.
arrangement) thnt is thc subject o f thc
assumpiions (including assumptiuns as
[F) Effect of opinion that meets these
opinion; or
tu future events), unreasunably relies
standards-(1) In geneml. An opinion
(ii] Any referral agreement between
upon representations, statcmcnts,
that meets the requirements of this
the practitioner (or the practitioner's
[indings or agreements of the taxpayer
section satisfies the practitioner's
firm or any pcrson who is a member of, resoonsibilities under this section. but
or any other person, does not consider
all relevanl facts that the practitioner
associated with, or employed by the
the p~rsuasivenessof the upinion with
knorvs or shuuld knuw, or, in evaluating
practitioner's firm) and a person [other
reRird tn the tax issues in h e s t i o n and
than the client for whom [he opinion is
the taxpayer's good faith reiiancc on the a 1:cderal tax issue, takes into account
prepared) engaged in promoting,
the possibility that a tax return will 1101
opinion will be determined separatelv
be audited. that an issue will not be
marketing or recommending the entity,
under applicable provisions of the law
plan, or arrangement (or a substantially
raised r l r ~audit. ur hat a11 issue will be
and regulatio~ls.
( 2 ) Slandaru's for ullrer wriilerl arlvics. resulved thruugli settlement ilraised.
similar arrangcmcnt) that is the subject
o f thc opinion.
A practitioner who provides written
All facts and circumstatlces, including