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Regulations amending Circular 230 governing practice before the Internal Revenue Service: May 3, 2005.

On May 3, 2005, TEI filed the following comments with the Department of the Treasury and the Internal Revenue Service concerning recent amendments to Circular 230, which sets forth rules for "practice before the IRS." The Institute's comments and recommendation focus on in-house tax professionals, their distinct role, and the importance of developing rules applicable to this group of tax practitioners.

On behalf of the Tax Executives Institute, I respectfully submit the following comments related to the recent regulations amending Circular 230 governing practice before the Internal Revenue Service. 69 Fed. Reg. 75,839 (Dec. 20, 2004); 31 C.F.R. [subsection] 10.33, 10.35, 10.36, 10.37, 10.38 & 10.52. As discussed during TEI's recent liaison meetings with the Commissioner, officials of the Office of Tax Policy and the Office of Chief Counsel, and separate conversations with representatives of the Office of Professional Responsibility, TEI recommends that the regulations be modified to acknowledge "in-house tax professionals" as a distinct category of tax professionals. We elaborate on our recommendation below.

About TEI

TEI is the preeminent association of business tax executives in North America with approximately 5,700 members representing 2,800 of the leading corporations in the United States, Canada, Europe, and Asia. TEI represents a crosssection of the business community, and is dedicated to the development and effective implementation of sound tax policy, to promoting the uniform and equitable enforcement of the tax laws, and to reducing the cost and burden of administration and compliance to the benefit of taxpayers and the government alike. As a professional association, TEI is firmly committed to maintaining a tax system that works--one that is administrable and with which taxpayers can comply.


On December 17, 2004, the Treasury Department published final regulations amending the tax shelter provisions of Circular 230, which imposes duties on practitioners representing taxpayers before the Internal Revenue Service. Scheduled to become effective on June, 20, 2005, these regulations represent the most recent development in the Treasury Department's continuing effort to deter abusive tax shelters and otherwise enhance professionalism among tax practitioners. We applaud the efforts and support reasonable measures to deter the use of tax shelter schemes. The latest amendments to Circular 230, however, if left unchanged, will have the presumably unintended effect of subjecting in-house tax professionals to Circular 230's mechanical and burdensome requirements, even in respect of the most routine communications concerning the most routine matters.

The new rules apply to tax professionals eligible to practice before the Internal Revenue Service. Inasmuch as in-house tax professionals can and do execute powers of attorney on behalf of their employers, they are subject to Circular 230. See Circular 230, 31 C.F.R. [section] 10.7(c) (1) (iv) (2004).

Under the new rules, tax practitioners (including in-house professionals) are required to comply with a series of substantive and compliance rules related to the type of written tax advice that they render. As referred to in the regulations, these "covered opinions" include written advice regarding:

(a) a listed transaction,

(b) a transaction whose principal purpose is avoidance or evasion of federal tax; and

(c) a transaction a significant purpose of which is the avoidance or evasion of any tax.

Covered opinions also include "reliance" and "marketed opinions," opinions that contain "conditions of confidentiality," and opinions featuring "contractual protection." Each is a defined term with specific compliance-related obligations. For example, a reliance opinion is any advice with a conclusion of more likely than not (or stronger). A reliance opinion, however, does not include an opinion that prominently discloses that the opinion cannot be used for the purpose of avoiding penalties. "Prominently disclosed" is defined as text that is set forth in a separate section at the beginning of the written advice in a bolded typeface that is larger than any other typeface used in the written advice. 31 C.F.R. [section] 10.35(b)(4). For written advice to be excluded from the "marketed opinion" category, the following three items must be prominently disclosed: (1) that the intent of the advice was not to avoid penalties; (2) that the advice was written to support the promotion/ marketing of a transaction; and (3) that the taxpayer should seek independent tax advice. 31 C.F.R. [section] 10.35(b) (ii).


In-house tax professionals include tax directors, vice presidents of tax, compliance managers, analysts, and specialists, as well as a whole host of other professionals with varying titles who work in corporate tax departments. These professionals, the backbone of a traditional corporate tax department, are engaged in the regular, day-to-day operation and management of the tax affairs of their employers, including tax compliance, tax accounting, management of tax controversies, and planning. Their activities run the gamut of tax-related matters, from the regular and routine, to the iterative and repetitive, to the complex, uncommon, and controversial.

Notwithstanding the scope of an in-house tax department's operational responsibilities, in the overwhelming majority of cases, the written tax advice rendered both intra- and inter-departmentally rarely if ever falls within the category of guidance that was the principal target of the regulations: tax shelter opinions. There are many reasons for this conclusion. While in-house tax departments certainly may be capable of rendering formal tax opinions supporting the federal income tax consequences of their companies' transactions, they do so infrequently. In some instances, in-house tax professionals may not have the substantive capability. Even where the appropriate subject matter expertise resides in house, corporate policies and procedures (e.g., internal risk management, audit committee guidelines, etc.) frequently mandate that external advice be obtained. Indeed, the need for external tax guidance has become even more prevalent given the heightened scrutiny and demand for transparency engendered by the Sarbanes-Oxley Act of 2002 and related developments.

The factors militating in favor of external guidance are especially relevant in respect of tax shelter opinions. In the tax shelter area, the absence of well-settled definitions, boundaries, interpretations, and safe-harbors regarding what is, is not or could be a tax shelter virtually requires that external tax advice be obtained. Mastering the shifting rules, nuanced judicial opinions, and changing policy guidance may well be beyond the capabilities of most if not all corporate tax departments--even the largest and most sophisticated--without outside assistance.

Thus, the routine activities and advice rendered by in-house tax professionals fall outside the scope of activities and advice the government properly desires to staunch by, among other things, amending Circular 230. Because applying the rules to in-house tax professionals could significantly disrupt the operations of corporate tax departments without achieving any salutary end, TEI recommends that appropriate modifications be made.

I. Allow the Regulations to Become Effective Unchanged

Given the emphasis placed by the Treasury and IRS on curtailing tax shelter schemes, a policy decision could be made to leave the rules unchanged. That decision would presumably be grounded in the belief that an all or nothing/line in the sand rule would advance the government's anti-tax shelter policy objective and the collateral effect on in-house tax professionals is an unavoidable but necessary cost. TEI disagrees. Adopting an all-or-nothing approach would reflect a misapprehension of the duties, responsibilities, and day-to-day activities of the in-house practitioner community and how they differ in both kind and degree from the activities intended to be discouraged by the amendments to Circular 230.

II. Wholly Exempt In-House Tax Practitioners

While wholly exempting in-house tax practitioners from the reach of the amendments to Circular 230 would address TEI's concerns and therefore is facially appealing, the Institute acknowledges that such an approach could be criticized as inadequately balancing the needs and interests of all the stakeholders here. There may be technical arguments to support the position that in-house tax professionals should be wholly exempt from Circular 230; e.g., internal advice (either intra- or inter-departmental) does not constitute advice at all, since no third person is involved. Because we do not believe this to be the correct answer as a matter of policy and practicality, we do not discuss these arguments.

III. Establish a Rebuttable Presumption that Internal Tax Advice Rendered by In-House Professionals Is Not Governed by Circular 230

TEI strongly supports a rule creating a rebuttable presumption that "internal tax advice" rendered by in-house tax professionals is exempt from the scope of Circular 230. Operationally, "internal tax advice" would be defined to include regular, day-to-day and transactional guidance, as well as advice rendered intra- or interdepartmentally by in-house tax professionals. The definition would include drafts (whether or not shared externally) as long as they are clearly marked as drafts. Tax advice rendered by in-house tax professionals to third parties, however, would not be covered by the presumption, and therefore would be subject to the current rules concerning tax shelter opinions. Thus, if a corporate taxpayer renders both internal tax advice as well as covered advice, the former would be subject to the rebuttable presumption while the latter would not.

The proposed rebuttable presumption would cover the overwhelming bulk of guidance provided by in-house tax professionals while acknowledging that in exceptional cases the advice of in-house professionals may properly be subject to the tax-shelter opinion rules. It thus acknowledges that in-house tax professionals represent a distinct category of tax professionals for whom rules appropriate to their function must be fashioned. It facilitates predictability by providing practical, workable rules that can be readily implemented. At the same time, this approach preserves the ability of the Service to scrutinize guidance that may fall outside the boundaries of regular, day-to-day practice. Finally, it balances the important enforcement needs of the Service with the practice realities of tax professionals employed to administer the day-to-day activities of their tax departments.

TEI urges your careful consideration of this approach with a view toward its adoption and implementation prior to the current June 20, 2005, effective date for the final regulations. We would be pleased to provide you with additional information on the foregoing or to answer any questions that you may have.

Please feel free to contact me on 847.735.4687 or Eli Dicker, the Institute's Chief Tax Counsel, on 202.638.5601.
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Publication:Tax Executive
Date:May 1, 2005
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