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Follow-up letter to Department of Treasury and Internal Revenue Service on Circular 230: June 2, 2005.

On June 2, 2005, Tax Executives Institute sent the following letter to the U.S. Department of Treasury and Internal Revenue Service, following-up on previous comments regarding new Circular 230. The comments highlight TEI's concern about the scope of the term "employer."

On behalf of Tax Executives Institute, I am writing to applaud the revisions to the final regulations amending Circular 230 governing practice before the Internal Revenue Service that were released on May 18, 2005. (1) The revisions clarify that in-house tax practitioners are to be treated as a distinct category of tax professionals for purposes of Circular 230 and that written advice provided by in-house counsel to the employer for purposes of determining the employer's tax liability is excluded from the definition of a covered opinion under section 10.35 of Circular 230. (2)

As the preeminent association of business tax executives, TEI commends the Treasury Department and IRS for recognizing that the application of section 10.35 to in-house tax practitioners would have raised numerous issues and might have impaired the provision of sound and timely tax advice to the practitioner's employer. We agree that written advice provided by in-house counsel should be excluded from the definition of a covered opinion under section 10.35 and that the other provisions of Circular 230, especially section 10.37, adequately address the professional responsibility of in-house counsel when providing advice to the employer.

We note that Circular 230 omits an express definition of the term "employer." In recent public remarks, representatives of the IRS and Treasury Department explained that the government declined to define "employer" in order not to unduly limit the scope of the in-house carve-out. In other words, the government's thinking--with which we agree--is that for purposes of Circular 230 "employer" is to be construed broadly to include entities beyond the employee's W-2 employer and even beyond the affiliated group of corporations of which the employee's W-2 employer is a part. See, e.g., Government Officials Take on Tax Bar over Circular 230 Changes, Tax Notes Today 99-5 (May 23, 2005). This approach is wholly sensible since company tax department employees are often expected to render tax advice and compliance services for many entities beyond their immediate W-2 "employer." Hence, TEI recommends that the IRS and Treasury confirm in future guidance that the term employer (i) is to be construed broadly and (ii) encompasses all members of the controlled group of corporations (as defined in section 267(f)(1)(A) without the exclusion of section 267(f)(1)(B)) as well as other controlled entities (e.g., partnerships, which do not pay taxes per se, and controlled foreign and domestic corporations that are owned by any member of the controlled group) for which the in-house counsel is expected to provide tax advice within the scope of his or her employer/employee relationship. The scope of the term employer should also extend to the "employer's" VEBA, charitable foundation, pension or profit sharing plans (as well as other deferred compensation trusts, such as rabbi trusts, established by the employer), and include advising a foreign parent corporation on any U.S. tax obligations or filing requirements. Finally, we note that in some operating partnerships or other arrangements, there may be circumstances where the operating agreements among the joint-venture parties require a non-controlling partner to provide the financial accounting and tax services on behalf of the partnership. Such arrangements should also be included within the scope of the term "employer" if the services performed by the employee are within the scope of the employee's duties and the "employer's" contractual obligations.

Again, TEI applauds the decision to exclude in-house counsel from the application of section 10.35 of Circular 230 and we urge the government to consider defining the scope of the term "employer" in future guidance. We would be pleased to discuss our recommendation and to answer any questions that you may have.

Please feel free to contact me at 847.735.4687 or Eli Dicker, the Institute's Chief Tax Counsel, at 202.638.5601.

(1) 70 Fed. Reg. 28,824 (May 19, 2005); 31 C.F.R. Part 10; T.D. 9201.

(2) 31 C.F.R. [section] 10.35(b)(2)(C).
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Publication:Tax Executive
Date:May 1, 2005
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