Circular 230.

Proposed regulations on Circular 230 (NPRM REG-111835-99) would clarify general standards of practice before the IRS and modify the standards for providing tax shelter advice.

Two sections of the proposed regulations provide standards for tax shelter opinions. One section would apply to all shelter opinions that conclude that the Federal tax treatment of a tax-shelter item(s) is (are) more likely than not the proper treatment. The proposals would apply to all shelter opinions not governed by the new section that a practitioner knows (or has reason to believe) will be used or referred to by persons other than him to promote, market or recommend a tax shelter.

The proposed regulations would exclude opinions on municipal bonds and qualified retirement plans. Comments are requested on whether the regulations should exempt other transactions from the requirements for shelter opinions and, if so, the types of other transactions that should be exempted.

The current regulations govern advice by a practitioner on the Federal tax aspects of a tax shelter appearing or referred to in offering materials, or used or referred to in connection with sales promotion efforts and directed to persons other than the client who engaged the practitioner to give the advice. The proposed regulations would include a tax-shelter opinion that does not conclude that the Federal tax treatment of an item(s) is more likely than not the proper treatment and that a practitioner knows (or has reason to believe) will be used or referred to by persons other than he to promote, market or recommend the tax shelter to one or more taxpayers.

The proposed regulations would govern shelter opinions prepared for use by third parties that are promoting the shelter, regardless of whether the promotional efforts are conducted publicly or privately. They would modify the definition of a material Federal tax issue and define a "shelter item" as an item of income, gain, loss, deduction or credit if it is directly or indirectly attributable to a tax shelter.

Under the proposals, a practitioner who provides a written opinion on a tax-shelter item(s) would be required to comply with each's requirements. He would be required to inquire as to all relevant facts, be satisfied that the opinion takes account of all relevant facts and that the material facts are accurately and completely described in the opinion. Further, the opinion could not be based (directly or indirectly) on any unreasonable factual assumptions.

The proposed regulations would permit a practitioner, when reasonable based on all the facts and circumstances, to rely on factual representations, statements, findings or agreements. A practitioner need not conduct an audit or independent verification of a factual representation, but reliance would not be permitted on factual representations that the practitioner knows (or has reason to believe) are unreasonable, incorrect, incomplete, inconsistent or implausible.

A practitioner would be required to ascertain that all material Federal tax issues as to the tax-shelter item(s) have been considered and that all of the material Federal tax issues involving the reasonable possibility of a challenge by the IRS are fully and fairly addressed. The opinion would be required to state that the practitioner has considered the possible application to the facts of all potentially relevant judicial doctrines (including the step-transaction, business purpose, economic substance, substance-over-form and sham-transaction doctrines), as well as potentially relevant statutory and regulatory anti-abuse rules. The opinion would also be required to analyze whether the tax-shelter items are vulnerable to challenge under all such potentially relevant doctrines and anti-abuse rules.

The proposed regulations would require that the opinion clearly provide the practitioner's conclusion as to the likelihood that a typical investor of the type to whom the tax shelter is (or will be) marketed will prevail on the merits of each material Federal tax issue that involves the reasonable possibility of a challenge by the IRS, or clearly state that the practitioner is unable to reach a conclusion on one or more issues. If an overall conclusion cannot be reached, the opinion would be required to fully describe why the practitioner cannot reach an overall conclusion.

The proposals would require a practitioner to take reasonable steps to assure that any written materials or promotional efforts that distribute, reflect or refer to the tax-shelter opinion correctly and fairly represent its the nature and extent. The proposed regulations also would address reliance on others' opinions.

New standards would apply to practitioners who provide shelter opinions that conclude that the Federal tax treatment of a tax-shelter item(s) is more likely than not the proper treatment. The proposals would apply to all such opinions, regardless of whether they were rendered in connection with promotional efforts conducted by a third party or directly to a potential shelter investor.