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Circular 230: estate planners take note: Circular 230 standards can apply to you.

Much has been discussed about Circular 230's implications on CPAs regarding income tax advice and written communications. But the rules can apply to estate tax advice, including planning recommendations. What's more, the application of the rules is a little different when it comes to estate planning.

Written communications involved in estate and gift issues are likely:

* To be fewer in number than with regard to everyday tax advice;

* To constitute preliminary advice when communicated via e-mail;

* To commonly address "principal purpose" safe harbor advice;

* To be construed more often as a marketing opinion;

* To generate the "clash" between substantial authority vs. more likely than not permissible levels of assurance necessary for penalty protection; and

* Are less likely to take the form of e-mail communications.

Estate and gift tax planning written communications usually are tailored to a client's situation, which may make compliance with Circular 230's covered opinion regulations (Sec. 10.35) and other written advice standards (Sec. 10.37) somewhat less onerous than it may appear.

However, CPAs who provide estate planning services frequently will be able to exclude their written advice from the strict covered opinion standards as preliminary advice because the covered opinion will later come from the attorney, who will advise on or describe the plan that has evolved from the preliminary advice.

Still, it is fair to assume that even preliminary written advice is governed by Sec. 10.37 for other written advice.

Advice Directed to Clients

Communications directed to a specific client sometimes encourage the client to consider a particular technique. Such communication will explain the objective, structure and operational characteristics of the technique in broad terms.

This type of communication is usually not intended to be the final word; it is preliminary advice that falls outside of Circular 230's "written advice" with respect to a given client.

But a question arises whether or not such advice is a marketed opinion. This is not likely because it is intended to be read and used by the specific client and not third parties.

Firm Newsletters, Seminars and Sales Pitches

Another type of communication used by firms is the sales pitch, sometimes found in newsletters and seminars or similar gatherings. Sales pitches also are used by promoters of estate planning services, such as living trust seminars, or the ever-growing number of firms and advisers that are pitching a particular estate or other tax planning techniques, such as the private annuity trust, which is a hot trend.

It would seem that written communication of this nature, including seminar materials, likely rises to the level of a marketed opinion. The targeted recipients are either clients or the marketing materials are intended to be used to garner clients.

Unlike the general overview given to a specific client--intended to be followed by an authorization from the client to implement a particular structure that will be explained in additional written advice, and may be either a covered opinion under Sec. 10.35 or "other written advice" subject to the standards in Sec. 10.37--newsletter or seminar advice may be used by a person who is promoting or marketing or recommending a partnership or other entity, investment plan or arrangement to one or more taxpayers.

This type of advice seems to fall within the scope of Circular 230.

Professional Seminars, Articles and Classroom Materials

A third category of written communication common to estate and gift tax practitioners, as well as income tax practitioners, includes materials generated for seminars, published articles or course materials.

These types of materials can be considered prepared specifically for the consideration and evaluation of other tax practitioners or students. It is certain that the recipient tax practitioner might rely on these materials to provide an opinion to clients.

Be aware that this area raises an important federal tax issue when it comes to the treatment of an item of income, gain, loss, deduction or credit; the existence or absence of taxable transfer of property; or the value of property.

A federal tax issue is significant if the IRS has a reasonable basis for a successful challenge and its resolution could have a significant impact, whether beneficial or adverse, on the overall federal tax treatment of the transaction(s) or matter(s) addressed in the opinion (i.e. written advice).

However, the recipient tax practitioner in such a case is required to identify the other opinion and set forth the conclusions in the other opinion, and the tax practitioner using these materials must be satisfied that the combined analysis of the opinions, taken as a whole, and the overall conclusion, if any, satisfy the requirements of this section.

The requirements imposed on the tax practitioner relying upon these types of materials are so strict that, using a common sense approach, it is difficult to fathom that the IRS Office of Professional Responsibility would initiate an action against the author except in those obvious situations where unsavory conduct is in effect being promoted.

For example, written material about the virtues of the private annuity trust incorporated into an opinion by another practitioner in rendering an opinion favorable to a client in encouraging the implementation of such a trust probably would not raise an eyebrow at the OPR.

However, material about the virtues of reporting on a tax return only income described in Internal Revenue Code Sec. 861 with respect to foreign sources and advocating exclusion of U.S. sourced income that is incorporated into an opinion by another practitioner in rendering an opinion favorable to a client in encouraging such return treatment would likely result in the opening of two disciplinary cases at the OPR.

Specific Estate Planning Advice Conveyed to Clients

Much estate planning involves strategies and using entities to minimize the impact of estate tax. It is arguable that the estate planning activity of a CPA can only consist of tax advice because a CPA cannot render legal services, such as preparation of the documents essential to an estate plan.

Again, the written advice of the CPA often will be characterized as "preliminary" because it is reasonable to assume that the particular strategies recommended will be explained in more detail either when the client chooses to undertake the strategy and asks how it will specifically affect their estate plan, or the client's lawyer will explain the strategies, which include significant federal tax issues, in a written communication accompanying the estate planning documents transmitted to the client for review.

In cases where the CPA, as the primary professional, is providing written advice to the taxpayer with respect to estate planning strategies, attention must be given to compliance with the covered opinion standards. This will often occur when a client presents completed estate documents to the CPA with a request that the CPA "explain to me how this works."

However, in estate planning, many of the usual strategies recommended and adopted encompass an entity, investment plan or arrangement that has as its purposes the claiming of tax benefits in a manner consistent with the statute and Congressional purpose.

For example, recommending a bypass trust designed to avoid estate tax at the survivor's death that is consistent with the statute and intent of Congress, would not be covered opinion advice. Nor would advice concerning a GRAT, CRT or CRUT if the IRS-approved traditional form of the particular trust is used. In the case of the latter entities, the IRS has issued so much advice, including model documents, that it is difficult to believe it could find a "reasonable basis" for challenging the federal tax treatment.

Even with respect to rather traditional estate tax planning strategies there may be ancillary significant federal tax issues where the law is sufficiently unclear as to bring the advice within their reach, such as when a QPRT or other entity is funded with a fractional interest arguably subject to a discount for lack of marketability.

Another estate planning area where it will be difficult to avoid covered opinion status is when a family limited partnership is part of the recommended strategy.

As virtually every estate planner knows, an FLP is not a favored creature with the IRS. Consequently, while it may be possible to fit an FLP into the intended principal purpose category, it still must be vetted under the significant purpose rules.

The FLP is so often a target for IRS challenge that the better part of valor is likely to issue limited-scope written advice (which is likely not subject to the covered opinion rules) with respect to all other aspects of an estate plan, and issue a separate opinion (which is probably subject to covered opinion status) with respect only to the FLP.

If one thinks carefully about estate tax planning, much of the written advice given by tax professionals to their clients will be excluded from the covered opinion standards.

Common Sense

Representatives of the OPR have repeatedly encouraged tax practitioners to use common sense in evaluating, vetting, applying and implementing the written advice or "covered opinion" provisions of Circular 230.

Sec. 10.33--"best practices for tax advisers"--provides a calculus for taking a second, common sense look at such advice, and Sec. 10.36 requires someone or some persons in a firm to be very responsible for the second, common sense look.

There seems to be no reason not to take them at their word. By doing so, tax professionals may find themselves able to define, or at least become participants in defining, the scope of the written advice standards to tax practice, as well as define whether advice falls within the category of a covered opinion (Sec. 10.35) or whether it is "other written advice" governed by Sec. 10.37, and qualitatively subject to Sec. 10.34, "standards for advising with respect to tax return positions and for preparing or signing returns."

By Kip Dellinger, CPA

Kip Dellinger, CPA is senior tax partner at Kallman And Co. LLP in Los Angeles. You can reach him at kip@kallmanandco.com. For more information on the CalCPA Estate Planning Committee, visit www.calcpa.org/estate.
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Author:Dellinger, Kip
Publication:California CPA
Geographic Code:1U9CA
Date:Mar 1, 2006
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