Federal Register / Vol. 69, No. 243 / Monday, December 20, 2004 / Rules and Regulations 75839

substantial number of small entities. In 

making the determination as to whether 

this rule would have a significant 

economic impact, the Department relied 

upon the data and assumptions for the 

counterpart Federal regulations. The 

Department of the Interior also certifies 

that the provisions in this rule that are 

not based upon counterparts Federal 

regulations will not have a significant 

economic impact on a substantial 

number of small entities under the 

Regulatory Flexibility Act (5 U.S.C. 601 

et seq.). This determination is based on 

the fact that the provisions are 

administrative and procedural in nature 

and are not expected to have a 

substantive effect on the regulated 

industry. 

Small Business Regulatory Enforcement 

Fairness Act 

This rule is not a major rule under 5 

U.S.C. 804(2), the Small Business 

Regulatory Enforcement Fairness Act. 

This rule: (a) Does not have an annual 

effect on the economy of $100 million; 

(b) will not cause a major increase in 

costs or prices for consumers, 

individual industries, Federal, State, or 

local government agencies, or 

geographic regions; and (c) does not 

have significant adverse effects on 

competition, employment, investment, 

productivity, innovation, or the ability 

of U.S.-based enterprises to compete 

with foreign-based enterprises. This 

determination is based upon the fact 

that a portion of the State provisions are 

based upon counterpart Federal 

regulations for which an analysis was 

prepared and a determination made that 

the Federal regulation was not 

considered a major rule. For the portion 

of the State provisions that is not based 

upon counterpart Federal regulations, 

this determination is based upon the 

fact that the State provisions are 

administrative and procedural in nature 

and are not expected to have a 

substantive effect on the regulated 

industry. 

Unfunded Mandates 

This rule will not impose an 

unfunded mandate on State, local, or 

tribal governments or the private sector 

of $100 million or more in any given 

year. This determination is based upon 

the fact that a portion of the State 

submittal, which is the subject of this 

rule, is based upon counterpart Federal 

regulations for which an analysis was 

prepared and a determination made that 

the Federal regulation did not impose 

an unfunded mandate. For the portion 

of the State provisions that is not based 

upon counterpart Federal regulations, 

this determination is based upon the 

fact that the State provisions are 

administrative and procedural in nature 

and are not expected to have a 

substantive effect on the regulated 

industry.

List of Subjects in 30 CFR Part 917 

Intergovernmental relations, Surface 

mining, Underground mining.

Dated: October 18, 2004. 

Brent Wahlquist, 

Regional Director, Appalachian Regional 

Coordinating Center.

■ For the reasons set out in the preamble, 

30 CFR part 917 is amended as set forth 

below:

PART 917—KENTUCKY

■ 1. The authority citation for part 917 

continues to read as follows:

Authority: 30 U.S.C. 1201 et seq.

■ 2. Section 917.15 is amended in the 

table by adding a new entry in 

chronological order by the ‘‘Date of Final 

Publication’’ to read as follows:

§ 917.15 Approval of Kentucky regulatory 

program amendments.

* * * * *

Original amendment submission 

date 

Date of final

publication Citation/description 

* * * * * * * 

May 14, 2004 ................................. December 20, 2004 ....................... KRS 350.280, subsections (1) (b), (1) (c), 1(e), 1(f), (2), (3), (4); subsections 4(a)–(d), (5), (6), (7) and (8) are deleted. 

[FR Doc. 04–27754 Filed 12–17–04; 8:45 am] 

BILLING CODE 4310–05–P

DEPARTMENT OF THE TREASURY

Office of the Secretary 

31 CFR Part 10 

[TD 9165] 

RIN 1545–BA70 

Regulations Governing Practice Before 

the Internal Revenue Service

AGENCY: Office of the Secretary, 

Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final 

regulations revising the regulations 

governing practice before the Internal 

Revenue Service (Circular 230). These 

regulations affect individuals who 

practice before the Internal Revenue 

Service. These final regulations set forth 

best practices for tax advisors providing 

advice to taxpayers relating to Federal 

tax issues or submissions to the IRS. 

These final regulations also provide 

standards for covered opinions and 

other written advice.

DATES: Effective Date: These regulations 

are effective December 20, 2004. 

Applicability Date: For dates of 

applicability, see §§ 10.33(c),10.35(g), 

10.36(b), 10.37(b), 10.38(b), 10.52(b), 

and 10.93.

FOR FURTHER INFORMATION CONTACT:

Heather L. Dostaler at (202) 622–4940, 

or Brinton T. Warren at (202) 622–7800 

(not toll-free numbers).

SUPPLEMENTARY INFORMATION: 

Paperwork Reduction Act 

The collection of information 

contained in these final regulations has 

been reviewed and approved by the 

Office of Management and Budget in 

accordance with the Paperwork 

Reduction Act of 1995 (44 U.S.C. 

3507(d)) under control number 1545–

1871. The collections of information 

(disclosure requirements) in these final 

regulations are in § 10.35(e). Section 

10.35(e) requires a practitioner 

providing a covered opinion to make 

certain disclosures in the beginning of 

marketed opinions, limited scope 

opinions and opinions that fail to 

conclude at a confidence level of at least 

more likely than not. In addition, 

certain relationships between the 

practitioner and a person promoting or 

marketing a tax shelter must be 

disclosed. A practitioner may be 

required to make one or more 

disclosures. The collection of this 

material helps to ensure that taxpayers 

who receive a tax shelter opinion are 

informed of any facts or circumstances 

that might limit the use of the opinion. 

The collection of information is 

mandatory. 

75840 Federal Register / Vol. 69, No. 243 / Monday, December 20, 2004 / Rules and Regulations 

Estimated total annual disclosure 

burden is 13,333 hours. 

Estimated annual burden per 

disclosing practitioner varies from 5 to 

10 minutes, depending on individual 

circumstances, with an estimated 

average of 8 minutes. 

Estimated number of disclosing 

practitioners 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 collection of information 

unless it displays a valid control 

number. 

Comments concerning the accuracy of 

this burden estimate and suggestions 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 Management 

and Budget, Attn: Desk Officer for the 

Department 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 

Section 330 of title 31 of the United 

States Code authorizes the Secretary of 

the Treasury to regulate practice before 

the Treasury Department. The Secretary 

has published the regulations in 

Circular 230 (31 CFR part 10). On 

December 30, 2003, the Treasury 

Department and the IRS published in 

the Federal Register (68 FR 75186) 

proposed amendments to the 

regulations (REG–122379–02) (the 

proposed regulations) to set forth best 

practices for tax advisors providing 

advice to taxpayers relating to Federal 

tax issues or submissions to the IRS and 

to modify the standards for certain tax 

shelter opinions. A public hearing was 

held on February 19, 2004. Written 

public comments responding to the 

proposed regulations were received. 

After thorough consideration of the 

public comments, the proposed 

regulations are adopted as revised by 

this Treasury decision. 

Explanation of Provisions 

Tax advisors play a critical role in the 

Federal tax system, which is founded on 

principles of compliance and voluntary 

self-assessment. The tax system is best 

served when the public has confidence 

in the honesty and integrity of the 

professionals providing tax advice. To 

restore, promote, and maintain the 

public’s confidence in those individuals 

and firms, these final regulations set 

forth best practices applicable to all tax 

advisors. These regulations also provide 

mandatory requirements for 

practitioners who provide covered 

opinions. The scope of these regulations 

is limited to practice before the IRS. 

These regulations do not alter or 

supplant other ethical standards 

applicable to practitioners. 

On October 22, 2004, the President 

signed the American Jobs Creation Act 

of 2004, Pub. L. 108–357, (118 Stat. 

1418)(the Act), which amended section 

330 of title 31 of the United States Code 

to clarify that the Secretary may impose 

standards for written advice relating to 

a matter that is identified as having a 

potential for tax avoidance or evasion. 

The Act also authorizes the Treasury 

Department and the IRS to impose a 

monetary penalty against a practitioner 

who violates any provision of Circular 

230. These final regulations do not 

reflect amendments made by the Act. 

The Treasury Department and the IRS 

expect to propose additional regulations 

implementing the Act’s provisions. 

Best Practices 

The final regulations adopt the best 

practices set forth in the proposed 

regulations with modifications. These 

best practices are aspirational. A 

practitioner who fails to comply with 

best practices will not be subject to 

discipline under these regulations. 

Similarly, the provision relating to steps 

to ensure that a firm’s procedures are 

consistent with best practices, now set 

forth in § 10.33(b), is aspirational. 

Although best practices are solely 

aspirational, tax professionals are 

expected to observe these practices to 

preserve public confidence in the tax 

system. 

Standards for Covered Opinions 

The opinion standards of § 10.35 are 

adopted with modifications. The 

provisions of § 10.35 in the final 

regulations are reorganized to clarify the 

provisions. Opinions subject to § 10.35 

are defined as covered opinions.

Definition of Covered Opinion 

Under the final regulations, the 

definition of a covered opinion includes 

written advice (including electronic 

communications) that concerns one or 

more Federal tax issue(s) arising from: 

(1) a listed transaction; (2) any plan or 

arrangement, the principal purpose of 

which is the avoidance or evasion of 

any tax; or (3) any plan or arrangement, 

a significant purpose of which is the 

avoidance or evasion of tax if the 

written advice (A) is a reliance opinion, 

(B) is a marketed opinion, (C) is subject 

to conditions of confidentiality, or (D) is 

subject to contractual protection. A 

reliance opinion is written advice that 

concludes at a confidence level of at 

least more likely than not that one or 

more significant Federal tax issues 

would be resolved in the taxpayer’s 

favor. 

Written advice will not be treated as 

a reliance opinion if the practitioner 

prominently discloses in the written 

advice that it was not written to be used 

and cannot be used for the purpose of 

avoiding penalties. Similarly, written 

advice generally will not be treated as 

a marketed opinion if it does not 

concern a listed transaction or a plan or 

arrangement having the principal 

purpose of avoidance or evasion of tax 

and the written advice contains this 

disclosure. The Treasury Department 

and the IRS intend to amend 26 CFR 

1.6664–4 to clarify that a taxpayer may 

not rely upon written advice that 

contains this disclosure to establish the 

reasonable cause and good faith defense 

to the accuracy-related penalties. 

Written advice regarding a plan or 

arrangement having a significant 

purpose of tax avoidance or evasion is 

excluded from the definition of a 

covered opinion if the written advice 

concerns the qualification of a qualified 

plan or is included in documents 

required to be filed with the Securities 

and Exchange Commission. The final 

regulations also adopt an exclusion for 

preliminary advice if the practitioner is 

reasonably expected to provide 

subsequent advice that satisfies the 

requirements of the regulations. 

Written advice that is not a covered 

opinion for purposes of § 10.35 is 

subject to the standards set forth in new 

§ 10.37. 

Municipal Bond Opinions 

After careful consideration, the 

Treasury Department and the IRS have 

concluded that practitioners rendering 

opinions concerning the tax treatment of 

municipal bonds should be subject to 

the same professional standards that are 

applicable to all other practitioners. The 

standards for certain opinions 

concerning the tax treatment of 

municipal bonds (State or local bond 

opinions) that are included in offering 

materials 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 issues, but will 

take into account the unique 

Federal Register / Vol. 69, No. 243 / Monday, December 20, 2004 / Rules and Regulations 75841

circumstances of the municipal bond 

market.

To give bond practitioners an 

opportunity to comment on the 

proposed standards for State or local 

bond opinions, opinions that are 

included in offering materials, including 

an official statement, are excluded from 

the definition of covered opinions in 

these final regulations. Thus, State or 

local bond opinions included in offering 

materials will not be subject to the 

opinion standards of § 10.35 or 

proposed § 10.39 until 120 days after the 

proposed regulations are finalized. 

The exclusion for State or local bond 

opinions applies only to the 

requirements for covered opinions set 

forth in § 10.35. State or local bond 

opinions are subject to the standards set 

forth in § 10.37 relating to requirements 

for other written advice, and 

practitioners who prepare bond 

opinions must comply with any other 

applicable requirement provided in 

Circular 230. 

Requirements for Covered Opinions 

In general, the requirements for all 

covered opinions are adopted as 

proposed. The final regulations provide 

that a practitioner providing a covered 

opinion, including a marketed opinion,

must not assume that a transaction has 

a business purpose or is potentially 

profitable apart from tax benefits, or 

make an assumption with respect to a 

material valuation issue. 

Required Disclosures 

In general, the required disclosures of 

§ 10.35(e) are adopted as proposed. 

These disclosures ensure that taxpayers 

receive information that is necessary to 

their evaluation of, and reliance on, a 

covered opinion.

Requirements for Other Written Advice 

The final regulations also set forth 

requirements for written advice that is 

not a covered opinion. Under § 10.37 a 

practitioner must not give written 

advice if the practitioner: (1) Bases the 

written advice on unreasonable factual 

or legal assumptions; (2) unreasonably 

relies upon representations, statements, 

findings or agreements of the taxpayer 

or any other person; (3) fails to consider 

all relevant facts; or (4) takes into 

account the possibility that a tax return 

will not be audited, that an issue will 

not be raised on audit, or that an issue 

will be settled. Section 10.37, unlike 

§ 10.35, does not require that the 

practitioner describe in the written 

advice the relevant facts (including 

assumptions and representations), the 

application of the law to those facts, or 

the practitioner’s conclusion with 

respect to the law and the facts. The 

scope of the engagement and the type 

and specificity of the advice sought by 

the client, in addition to all other facts 

and circumstances, will be considered 

in determining whether a practitioner 

has failed to comply with the 

requirements of § 10.37. 

Procedures To Ensure Compliance 

In general, the procedures to ensure 

compliance with requirements of 

§ 10.35 are adopted as proposed and set 

forth in § 10.36. 

Advisory Committees on the Integrity of 

Tax Professionals 

Newly designated § 10.38, formerly 

§ 10.37 in the proposed regulations, is 

adopted as proposed with the following 

modifications. Section 10.38 is modified 

to clarify that an advisory committee 

may not make recommendations about 

actual practitioner cases, or have access 

to information pertaining to actual 

cases. The section also is modified to 

clarify that the Director of the Office of 

Professional Responsibility should 

ensure that membership of these 

committees is balanced among those 

individuals who practice as attorneys, 

accountants and enrolled agents. 

Applicability Dates 

To eliminate any adverse impact that 

the adoption of the new requirements 

for covered opinions or other written 

advice could have on pending or 

imminent transactions, the applicability 

date of the standards for covered 

opinions under § 10.35 and other 

written advice under § 10.37 (and the 

procedures to ensure compliance as 

they relate to covered opinions under 

§ 10.36) is June 20, 2005. 

Special Analyses 

It has been determined that this final 

rule is not a significant regulatory action 

as defined in Executive Order 12866. 

Therefore, a regulatory assessment is not 

required. It is hereby certified that these 

regulations will not have a significant 

economic impact on a substantial 

number of small entities. Persons 

authorized to practice before the IRS 

have long been required to comply with 

certain standards of conduct. The added 

disclosure requirements for tax shelter 

opinions imposed by these regulations 

will not have a significant economic 

impact on a substantial number of small 

entities because, as previously noted, 

the estimated burden of disclosures is 

minimal. Practitioners have the 

information needed to determine 

whether any of the disclosures will be 

required before the opinion is prepared 

and, for some disclosures, the 

regulations provide practitioners with 

the language to be included in the 

opinion. Therefore, a regulatory 

flexibility analysis under the Regulatory 

Flexibility Act (5 U.S.C. chapter 6) is 

not required. Pursuant to section 7805(f) 

of the Internal Revenue Code, the 

proposed regulations preceding these 

regulations were submitted to the Chief 

Counsel for Advocacy of the Small 

Business Administration for comment 

on its impact on small businesses. 

Drafting Information 

The principal authors of the 

regulations are Heather L. Dostaler and 

Brinton T. Warren of the Office of the 

Associate Chief Counsel (Procedure and 

Administration), Administrative 

Provisions and Judicial Practice 

Division.

List of Subjects in 31 CFR Part 10 

Administrative practice and 

procedure, Lawyers, Accountants, 

Enrolled agents, Enrolled actuaries, 

Appraisers.

Adoption of Amendments to the 

Regulations

■ Accordingly, 31 CFR part 10 is 

amended as follows:

PART 10—PRACTICE BEFORE THE 

INTERNAL REVENUE SERVICE

■ Paragraph 1. The authority citation for 

subtitle A, part 10 is revised to read as 

follows:

Authority: Sec. 3, 23 Stat. 258, secs. 2–12, 

60 Stat. 237 et seq.; 5 U.S.C. 301, 500, 551–

559; 31 U.S.C. 330; Reorg. Plan No. 26 of 

1950, 15 FR 4935, 64 Stat. 1280, 3 CFR, 

1949–1953 Comp., p. 1017.

■ Par. 2. Section 10.33 is revised to read 

as follows:

§ 10.33 Best practices for tax advisors. 

(a) Best practices. Tax advisors should 

provide clients with the highest quality 

representation concerning Federal tax 

issues by adhering to best practices in 

providing advice and in preparing or 

assisting in the preparation of a 

submission to the Internal Revenue 

Service. In addition to compliance with 

the standards of practice provided 

elsewhere in this part, best practices 

include the following: 

(1) Communicating clearly with the 

client regarding the terms of the 

engagement. For example, the advisor 

should determine the client’s expected 

purpose for and use of the advice and 

should have a clear understanding with 

the client regarding the form and scope 

of the advice or assistance to be 

rendered. 

(2) Establishing the facts, determining 

which facts are relevant, evaluating the 

75842 Federal Register / Vol. 69, No. 243 / Monday, December 20, 2004 / Rules and Regulations 

reasonableness of any assumptions or 

representations, relating the applicable 

law (including potentially applicable 

judicial doctrines) to the relevant facts, 

and arriving at a conclusion supported 

by the law and the facts. 

(3) Advising the client regarding the 

import of the conclusions reached, 

including, for example, whether a 

taxpayer may avoid accuracy-related 

penalties under the Internal Revenue 

Code if a taxpayer acts in reliance on the 

advice. 

(4) Acting fairly and with integrity in 

practice before the Internal Revenue 

Service. 

(b) Procedures to ensure best practices 

for tax advisors. Tax advisors with 

responsibility for overseeing a firm’s 

practice of providing advice concerning 

Federal tax issues or of preparing or 

assisting in the preparation of 

submissions to the Internal Revenue 

Service should take reasonable steps to 

ensure that the firm’s procedures for all 

members, associates, and employees are 

consistent with the best practices set 

forth in paragraph (a) of this section.

(c) Applicability date. This section is 

effective after June 20, 2005.

■ Par. 3. Sections 10.35, 10.36, 10.37 and 

10.38 are added to subpart B to read as 

follows:

§ 10.35 Requirements for covered 

opinions. 

(a) A practitioner who provides a 

covered opinion shall comply with the 

standards of practice in this section. 

(b) Definitions. For purposes of this 

subpart—

(1) A practitioner includes any 

individual described in § 10.2(e). 

(2) Covered opinion—(i) In general. A 

covered opinion is written advice 

(including electronic communications) 

by a practitioner concerning one or 

more Federal tax issues arising from—

(A) A transaction that is the same as 

or substantially similar to a transaction 

that, at the time the advice is rendered, 

the Internal Revenue Service has 

determined to be a tax avoidance 

transaction and identified by published 

guidance as a listed transaction under 

26 CFR 1.6011–4(b)(2); 

(B) Any partnership or other entity, 

any investment plan or arrangement, or 

any other plan or arrangement, the 

principal purpose of which is the 

avoidance or evasion of any tax imposed 

by the Internal Revenue Code; or 

(C) Any partnership or other entity, 

any investment plan or arrangement, or 

any other plan or arrangement, a 

significant purpose of which is the 

avoidance or evasion of any tax imposed 

by the Internal Revenue Code if the 

written advice—

(1) Is a reliance opinion;

(2) Is a marketed opinion;

(3) Is subject to conditions of 

confidentiality; or 

(4) Is subject to contractual 

protection.

(ii) Excluded advice. A covered 

opinion does not include—

(A) Written advice provided to a 

client during the course of an 

engagement if a practitioner is 

reasonably expected to provide 

subsequent written advice to the client 

that satisfies the requirements of this 

section; or 

(B) Written advice, other than advice 

described in paragraph (b)(2)(i)(A) of 

this section (concerning listed 

transactions) or paragraph (b)(2)(ii)(B) of 

this section (concerning the principal 

purpose of avoidance or evasion) that—

(1) Concerns the qualification of a 

qualified plan; 

(2) Is a State or local bond opinion; or 

(3) Is included in documents required 

to be filed with the Securities and 

Exchange Commission. 

(3) A Federal tax issue is a question 

concerning the Federal tax treatment of 

an item of income, gain, loss, deduction, 

or credit, the existence or absence of a 

taxable transfer of property, or the value 

of property for Federal tax purposes. For 

purposes of this subpart, a Federal tax 

issue is significant if the Internal 

Revenue Service has a reasonable basis 

for a successful challenge and its 

resolution could have a significant 

impact, whether beneficial or adverse 

and under any reasonably foreseeable 

circumstance, on the overall Federal tax 

treatment of the transaction(s) or 

matter(s) addressed in the opinion. 

(4) Reliance opinion—(i) Written 

advice is a reliance opinion if the advice 

concludes at a confidence level of more 

likely than not (a greater than 50 percent 

likelihood) that one or more significant 

Federal tax issues would be resolved in 

the taxpayer’s favor. 

(ii) For purposes of this section, 

written advice, other than advice 

described in paragraph (b)(2)(i)(A) of 

this section (concerning listed 

transactions) or paragraph (b)(2)(i)(B) of 

this section (concerning the principal 

purpose of avoidance or evasion), is not 

treated as a reliance opinion if the 

practitioner prominently discloses in 

the written advice that it was not 

intended or written by the practitioner 

to be used, and that it cannot be used 

by the taxpayer, for the purpose of 

avoiding penalties that may be imposed 

on the taxpayer. 

(5) Marketed opinion—(i) Written 

advice is a marketed opinion if the 

practitioner knows or has reason to 

know that the written advice will be 

used or referred to by a person other 

than the practitioner (or a person who 

is a member of, associated with, or 

employed by the practitioner’s firm) in 

promoting, marketing or recommending 

a partnership or other entity, investment 

plan or arrangement to one or more 

taxpayer(s). 

(ii) For purposes of this section, 

written advice, other than advice 

described in paragraph (b)(2)(i)(A) of 

this section (concerning listed 

transactions) or paragraph (b)(2)(i)(B) of 

this section (concerning the principal 

purpose of avoidance or evasion), is not 

treated as a marketed opinion if the 

practitioner prominently discloses in 

the written advice that—

(A) The advice was not intended or 

written by the practitioner to be used, 

and that it cannot be used by any 

taxpayer, for the purpose of avoiding 

penalties that may be imposed on the 

taxpayer; 

(B) The advice was written to support 

the promotion or marketing of the 

transaction(s) or matter(s) addressed by 

the written advice; and 

(C) The taxpayer should seek advice 

based on the taxpayer’s particular 

circumstances from an independent tax 

advisor. 

(6) Conditions of confidentiality.

Written advice is subject to conditions 

of confidentiality if the practitioner 

imposes on one or more recipients of 

the written advice a limitation on 

disclosure of the tax treatment or tax 

structure of the transaction and the 

limitation on disclosure protects the 

confidentiality of that practitioner’s tax 

strategies, regardless of whether the 

limitation on disclosure is legally 

binding. A claim that a transaction is 

proprietary or exclusive is not a 

limitation on disclosure if the 

practitioner confirms to all recipients of 

the written advice that there is no 

limitation on disclosure of the tax 

treatment or tax structure of the 

transaction that is the subject of the 

written advice. 

(7) Contractual protection. Written 

advice is subject to contractual 

protection if the taxpayer has the right 

to a full or partial refund of fees paid to 

the practitioner (or a person who is a 

member of, associated with, or 

employed by the practitioner’s firm) if 

all or a part of the intended tax 

consequences from the matters 

addressed in the written advice are not 

sustained, or if the fees paid to the 

practitioner (or a person who is a 

member of, associated with, or 

employed by the practitioner’s firm) are 

contingent on the taxpayer’s realization 

of tax benefits from the transaction. All 

the facts and circumstances relating to 

Federal Register / Vol. 69, No. 243 / Monday, December 20, 2004 / Rules and Regulations 75843

the matters addressed in the written 

advice will be considered when 

determining whether a fee is refundable 

or contingent, including the right to 

reimbursements of amounts that the 

parties to a transaction have not 

designated as fees or any agreement to 

provide services without reasonable 

compensation. 

(8) Prominently disclosed. An item 

required to be prominently disclosed

must be 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. 

(9) State or local bond opinion. A 

State or local bond opinion is written 

advice with respect to a Federal tax 

issue included in any materials 

delivered to a purchaser of a State or 

local bond in connection with the 

issuance of the bond in a public or 

private offering, including an official 

statement (if one is prepared), that 

concerns only the excludability of 

interest on a State or local bond from 

gross income under section 103 of the 

Internal Revenue Code, the application 

of section 55 of the Internal Revenue 

Code to a State or local bond, the status 

of a State or local bond as a qualified 

tax-exempt obligation under section 

265(b)(3) of the Internal Revenue Code, 

the status of a State or local bond as a 

qualified zone academy bond under 

section 1397E of the Internal Revenue 

Code, or any combination of the above. 

(c) Requirements for covered 

opinions. A practitioner providing a 

covered opinion must comply with each 

of the following requirements. 

(1) Factual matters. (i) The 

practitioner must use reasonable efforts 

to identify and ascertain the facts, 

which may relate to future events if a 

transaction is prospective or proposed, 

and to determine which facts are 

relevant. The opinion must identify and 

consider all facts that the practitioner 

determines to be relevant. 

(ii) The practitioner must not base the 

opinion on any unreasonable factual 

assumptions (including assumptions as 

to future events). An unreasonable 

factual assumption includes a factual 

assumption that the practitioner knows 

or should know is incorrect or 

incomplete. For example, it is 

unreasonable to assume that a 

transaction has a business purpose or 

that a transaction is potentially 

profitable apart from tax benefits. A 

factual assumption includes reliance on 

a projection, financial forecast or 

appraisal. It is unreasonable for a 

practitioner to rely on a projection, 

financial forecast or appraisal if the 

practitioner knows or should know that 

the projection, financial forecast or 

appraisal is incorrect or incomplete or 

was prepared by a person lacking the 

skills or qualifications necessary to 

prepare such projection, financial 

forecast or appraisal. The opinion must 

identify in a separate section all factual 

assumptions relied upon by the 

practitioner. 

(iii) The practitioner must not base 

the opinion on any unreasonable factual 

representations, statements or findings 

of the taxpayer or any other person. An 

unreasonable factual representation 

includes a factual representation that 

the practitioner knows or should know 

is incorrect or incomplete. For example, 

a practitioner may not rely on a factual 

representation that a transaction has a 

business purpose if the representation 

does not include a specific description 

of the business purpose or the 

practitioner knows or should know that 

the representation is incorrect or 

incomplete. The opinion must identify 

in a separate section all factual 

representations, statements or findings 

of the taxpayer relied upon by the 

practitioner. 

(2) Relate law to facts. (i) The opinion 

must relate the applicable law 

(including potentially applicable 

judicial doctrines) to the relevant facts. 

(ii) The practitioner must not assume 

the favorable resolution of any 

significant Federal tax issue except as 

provided in paragraphs (c)(3)(v) and (d) 

of this section, or otherwise base an 

opinion on any unreasonable legal 

assumptions, representations, or 

conclusions. 

(iii) The opinion must not contain 

internally inconsistent legal analyses or 

conclusions. 

(3) Evaluation of significant Federal 

tax issues—(i) In general. The opinion 

must consider all significant Federal tax 

issues except as provided in paragraphs 

(c)(3)(v) and (d) of this section. 

(ii) Conclusion as to each significant 

Federal tax issue. The opinion must 

provide the practitioner’s conclusion as 

to the likelihood that the taxpayer will 

prevail on the merits with respect to 

each significant Federal tax issue 

considered in the opinion. If the 

practitioner is unable to reach a 

conclusion with respect to one or more 

of those issues, the opinion must state 

that the practitioner is unable to reach 

a conclusion with respect to those 

issues. The opinion must describe the 

reasons for the conclusions, including 

the facts and analysis supporting the 

conclusions, or describe the reasons that 

the practitioner is unable to reach a 

conclusion as to one or more issues. If 

the practitioner fails to reach a 

conclusion at a confidence level of at 

least more likely than not with respect 

to one or more significant Federal tax 

issues considered, the opinion must 

include the appropriate disclosure(s) 

required under paragraph (e) of this 

section. 

(iii) Evaluation based on chances of 

success on the merits. In evaluating the 

significant Federal tax issues addressed 

in the opinion, the practitioner must not 

take into account the possibility that a 

tax return will not be audited, that an 

issue will not be raised on audit, or that 

an issue will be resolved through 

settlement if raised. 

(iv) Marketed opinions. In the case of 

a marketed opinion, the opinion must 

provide the practitioner’s conclusion 

that the taxpayer will prevail on the 

merits at a confidence level of at least 

more likely than not with respect to 

each significant Federal tax issue. If the 

practitioner is unable to reach a more 

likely than not conclusion with respect 

to each significant Federal tax issue, the 

practitioner must not provide the 

marketed opinion, but may provide 

written advice that satisfies the 

requirements in paragraph (b)(5)(ii) of 

this section. 

(v) Limited scope opinions. (A) The 

practitioner may provide an opinion 

that considers less than all of the 

significant Federal tax issues if—

(1) The practitioner and the taxpayer 

agree that the scope of the opinion and 

the taxpayer’s potential reliance on the 

opinion for purposes of avoiding 

penalties that may be imposed on the 

taxpayer are limited to the Federal tax 

issue(s) addressed in the opinion; 

(2) The opinion is not advice 

described in paragraph (b)(2)(i)(A) of 

this section (concerning listed 

transactions), paragraph (b)(2)(i)(B) of 

this section (concerning the principal 

purpose of avoidance or evasion) or 

paragraph (b)(5) of this section (a 

marketed opinion); and

(3) The opinion includes the 

appropriate disclosure(s) required under 

paragraph (e) of this section. 

(B) A practitioner may make 

reasonable assumptions regarding the 

favorable resolution of a Federal tax 

issue (an assumed issue) for purposes of 

providing an opinion on less than all of 

the significant Federal tax issues as 

provided in this paragraph (c)(3)(v). The 

opinion must identify in a separate 

section all issues for which the 

practitioner assumed a favorable 

resolution. 

(4) Overall conclusion. (i) The opinion 

must provide the practitioner’s overall 

conclusion as to the likelihood that the 

Federal tax treatment of the transaction 

or matter that is the subject of the 

opinion is the proper treatment and the 

75844 Federal Register / Vol. 69, No. 243 / Monday, December 20, 2004 / Rules and Regulations 

reasons for that conclusion. If the 

practitioner is unable to reach an overall 

conclusion, the opinion must state that 

the practitioner is unable to reach an 

overall conclusion and describe the 

reasons for the practitioner’s inability to 

reach a conclusion. 

(ii) In the case of a marketed opinion,

the opinion must provide the 

practitioner’s overall conclusion that the 

Federal tax treatment of the transaction 

or matter that is the subject of the 

opinion is the proper treatment at a 

confidence level of at least more likely 

than not. 

(d) Competence to provide opinion; 

reliance on opinions of others. (1) The 

practitioner must be knowledgeable in 

all of the aspects of Federal tax law 

relevant to the opinion being rendered, 

except that the practitioner may rely on 

the opinion of another practitioner with 

respect to one or more significant 

Federal tax issues, unless the 

practitioner knows or should know that 

the opinion of the other practitioner 

should not be relied on. If a practitioner 

relies on the opinion of another 

practitioner, the relying practitioner’s 

opinion must identify the other opinion 

and set forth the conclusions reached in 

the other opinion. 

(2) The practitioner 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. 

(e) Required disclosures. A covered 

opinion must contain all of the 

following disclosures that apply—

(1) Relationship between promoter 

and practitioner. An opinion must 

prominently disclose the existence of—

(i) Any compensation arrangement, 

such as a referral fee or a fee-sharing 

arrangement, between the practitioner 

(or the practitioner’s firm or any person 

who is a member of, associated with, or 

employed by the practitioner’s firm) and 

any person (other than the client for 

whom the opinion is prepared) with 

respect to promoting, marketing or 

recommending the entity, plan, or 

arrangement (or a substantially similar 

arrangement) that is the subject of the 

opinion; or 

(ii) Any referral agreement between 

the practitioner (or the practitioner’s 

firm or any person who is a member of, 

associated with, or employed by the 

practitioner’s firm) and a person (other 

than the client for whom the opinion is 

prepared) engaged in promoting, 

marketing or recommending the entity, 

plan, or arrangement (or a substantially 

similar arrangement) that is the subject 

of the opinion. 

(2) Marketed opinions. A marketed 

opinion must prominently disclose 

that—

(i) The opinion was written to support 

the promotion or marketing of the 

transaction(s) or matter(s) addressed in 

the opinion; and 

(ii) The taxpayer should seek advice 

based on the taxpayer’s particular 

circumstances from an independent tax 

advisor. 

(3) Limited scope opinions. A limited 

scope opinion must prominently 

disclose that—

(i) The opinion is limited to the one 

or more Federal tax issues addressed in 

the opinion; 

(ii) Additional issues may exist that 

could affect the Federal tax treatment of 

the transaction or matter that is the 

subject of the opinion and the opinion 

does not consider or provide a 

conclusion with respect to any 

additional issues; and 

(iii) With respect to any significant 

Federal tax issues outside the limited 

scope of the opinion, the opinion was 

not written, and cannot be used by the 

taxpayer, for the purpose of avoiding 

penalties that may be imposed on the 

taxpayer. 

(4) Opinions that fail to reach a more 

likely than not conclusion. An opinion 

that does not reach a conclusion at a 

confidence level of at least more likely 

than not with respect to a significant 

Federal tax issue must prominently 

disclose that—

(i) The opinion does not reach a 

conclusion at a confidence level of at 

least more likely than not with respect 

to one or more significant Federal tax 

issues addressed by the opinion; and 

(ii) With respect to those significant 

Federal tax issues, the opinion was not 

written, and cannot be used by the 

taxpayer, for the purpose of avoiding 

penalties that may be imposed on the 

taxpayer. 

(5) Advice regarding required 

disclosures. In the case of any disclosure 

required under this section, the 

practitioner may not provide advice to 

any person that is contrary to or 

inconsistent with the required 

disclosure. 

(f) Effect of opinion that meets these 

standards—(1) In general. An opinion 

that meets the requirements of this 

section satisfies the practitioner’s 

responsibilities under this section, but 

the persuasiveness of the opinion with 

regard to the tax issues in question and 

the taxpayer’s good faith reliance on the 

opinion will be determined separately 

under applicable provisions of the law 

and regulations. 

(2) Standards for other written advice.

A practitioner who provides written 

advice that is not a covered opinion for 

purposes of this section is subject to the 

requirements of § 10.37. 

(g) Effective date. This section applies 

to written advice that is rendered after 

June 20, 2005.

§ 10.36 Procedures to ensure compliance. 

(a) Requirements for covered 

opinions. Any practitioner who has (or 

practitioners who have or share) 

principal authority and responsibility 

for overseeing a firm’s practice of 

providing advice concerning Federal tax 

issues must take reasonable steps to 

ensure that the firm has adequate 

procedures in effect for all members, 

associates, and employees for purposes 

of complying with § 10.35. Any such 

practitioner will be subject to discipline 

for failing to comply with the 

requirements of this paragraph if—

(1) The practitioner through 

willfulness, recklessness, or gross 

incompetence does not take reasonable 

steps to ensure that the firm has 

adequate procedures to comply with 

§ 10.35, and one or more individuals 

who are members of, associated with, or 

employed by, the firm are, or have, 

engaged in a pattern or practice, in 

connection with their practice with the 

firm, of failing to comply with § 10.35; 

or 

(2) The practitioner knows or should 

know that one or more individuals who 

are members of, associated with, or 

employed by, the firm are, or have, 

engaged in a pattern or practice, in 

connection with their practice with the 

firm, that does not comply with § 10.35 

and the practitioner, through 

willfulness, recklessness, or gross 

incompetence, fails to take prompt 

action to correct the noncompliance. 

(b) Effective date. This section is 

applicable after June 20, 2005.

§ 10.37 Requirements for other written 

advice. 

(a) Requirements. A practitioner must 

not give written advice (including 

electronic communications) concerning 

one or more Federal tax issues if the 

practitioner bases the written advice on 

unreasonable factual or legal 

assumptions (including assumptions as 

to future events), unreasonably relies 

upon representations, statements, 

findings or agreements of the taxpayer 

or any other person, does not consider 

all relevant facts that the practitioner 

knows or should know, or, in evaluating 

a Federal tax issue, takes into account 

the possibility that a tax return will not 

be audited, that an issue will not be 

raised on audit, or that an issue will be 

resolved through settlement if raised. 

All facts and circumstances, including 

Federal Register / Vol. 69, No. 243 / Monday, December 20, 2004 / Rules and Regulations 75845

the scope of the engagement and the 

type and specificity of the advice sought 

by the client will be considered in 

determining whether a practitioner has 

failed to comply with this section. In the 

case of an opinion the practitioner 

knows or has reason to know will be 

used or referred to by a person other 

than the practitioner (or a person who 

is a member of, associated with, or 

employed by the practitioner’s firm) in 

promoting, marketing or recommending 

to one or more taxpayers a partnership 

or other entity, investment plan or 

arrangement a significant purpose of 

which is the avoidance or evasion of 

any tax imposed by the Internal 

Revenue Code, the determination of 

whether a practitioner has failed to 

comply with this section will be made 

on the basis of a heightened standard of 

care because of the greater risk caused 

by the practitioner’s lack of knowledge 

of the taxpayer’s particular 

circumstances. 

(b) Effective date. This section applies 

to written advice that is rendered after 

June 20, 2004.

§ 10.38 Establishment of advisory 

committees. 

(a) Advisory committees. To promote 

and maintain the public’s confidence in 

tax advisors, the Director of the Office 

of Professional Responsibility is 

authorized to establish one or more 

advisory committees composed of at 

least five individuals authorized to 

practice before the Internal Revenue 

Service. The Director should ensure that 

membership of an advisory committee is 

balanced among those who practice as 

attorneys, accountants, and enrolled 

agents. Under procedures prescribed by 

the Director, an advisory committee may 

review and make general 

recommendations regarding 

professional standards or best practices 

for tax advisors, including whether 

hypothetical conduct would give rise to 

a violation of §§ 10.35 or 10.36. 

(b) Effective date. This section applies 

after December 20, 2004.

■ Par. 4. Section 10.52 is revised to read 

as follows:

§ 10.52 Violation of regulations. 

(a) Prohibited conduct. A practitioner 

may be censured, suspended or 

disbarred from practice before the 

Internal Revenue Service for any of the 

following: 

(1) Willfully violating any of the 

regulations (other than § 10.33) 

contained in this part; or 

(2) Recklessly or through gross 

incompetence (within the meaning of 

§ 10.51(l)) violating §§ 10.34, 10.35, 

10.36 or 10.37. 

(b) Effective date. This section applies 

after June 20, 2005.

■ Par. 5. Section 10.93 is revised to read 

as follows:

§ 10.93 Effective date. 

Except as otherwise provided in each 

section and subject to § 10.91, Part 10 is 

applicable on July 26, 2002.

Mark E. Matthews, 

Deputy Commissioner for Services and 

Enforcement, Internal Revenue Service. 

Approved: December 8, 2004. 

Arnold I. Havens, 

General Counsel, Department of the Treasury.

[FR Doc. 04–27678 Filed 12–17–04; 8:45 am] 

BILLING CODE 4830–01–P

DEPARTMENT OF HOMELAND 

SECURITY 

Coast Guard 

33 CFR Part 117 

[CGD08–04–040] 

RIN 1625–AA09 

Drawbridge Operation Regulation; 

Mississippi River, Iowa, and Illinois

AGENCY: Coast Guard, DHS.

ACTION: Final rule.

SUMMARY: The Coast Guard is changing 

the regulation governing the Clinton 

Railroad Drawbridge, across the Upper 

Mississippi River at Mile 518.0, at 

Clinton, Iowa. The drawbridge would 

open on signal if at least 24 hours 

advance notice is given from 7:30 a.m., 

on December 17, 2004, until 7:30 a.m. 

on March 1, 2005. This rule allows time 

for making upgrades to critical 

mechanical components and perform 

scheduled annual maintenance and 

repairs.

DATES: This rule is effective 7:30 a.m., 

December 17, 2004, until 7:30 a.m., 

March 1, 2005.

ADDRESSES: Comments and material 

received from the public, as well as 

documents indicated in this preamble as 

being available in the docket, are part of 

the docket [CGD08–04–040] and are 

available for inspection or copying at 

room 2.107f in the Robert A. Young 

Federal Building at Eighth Coast Guard 

District, between 8 a.m. and 4 p.m., 

Monday through Friday, except Federal 

holidays. Commander (obr), Eighth 

Coast Guard District, maintains the 

public docket for this rulemaking.

FOR FURTHER INFORMATION CONTACT: Mr. 

Roger K. Wiebusch, Bridge 

Administrator, (314) 539–3900, 

extension 2378.

SUPPLEMENTARY INFORMATION: 

Regulatory History 

On November 9, 2004, we published 

a notice of proposed rulemaking 

(NPRM) entitled Drawbridge Operation 

Regulation; Mississippi River, Iowa and 

Illinois in the Federal Register (69 FR 

64875). We received no comment letters 

on the proposed rule. No public meeting 

was requested, and none was held. 

Good Cause for Making Rule Effective 

in Less Than 30 Days 

Under 5 U.S.C. 553(d)(3), the Coast 

Guard finds that good cause exists for 

making this rule effective in less than 30 

days after publication in the Federal 

Register. This drawbridge requires 

upgrades to critical mechanical 

components and annual maintenance 

that necessitate it to remain in the 

closed-to-navigation position from 7:30 

a.m., December 17, 2004, until 7:30 

a.m., March 1, 2005. Navigation on the 

waterway consists primarily of 

commercial tows and recreational 

watercraft that will not be significantly 

impacted due to the reduced navigation 

in winter months and due to the fact 

that the drawbridge will open upon 24 

hours advanced notice. Thus, to keep 

the closure within the primary winter 

months this rule must go into effect by 

December 17, 2004. 

Background and Purpose 

On September 7, 2004, the Union 

Pacific Railroad Company, requested a 

temporary change to the operation of the 

Clinton Railroad Drawbridge across the 

Upper Mississippi River, Mile 518.0, at 

Clinton, Iowa to open on signal if at 

least 24 hour advance notice is given to 

facilitate critical bridge repair and 

annual maintenance. Advance notice 

may be given by calling the Clinton 

Yardmaster’s office at (563) 244–3204 at 

any time; or (563) 244–3269 weekdays 

between 7 a.m. and 3:30 p.m.; or Mr. 

Tomaz Gawronski, office (515) 263–

4536 or cell phone (515) 229–2993. 

The Clinton Railroad Drawbridge 

navigation span has a vertical clearance 

of 18.7 feet above normal pool in the 

closed to navigation position. 

Navigation on the waterway consists 

primarily of commercial tows and 

recreational watercraft and will not be 

significantly impacted due to the 

reduced navigation in winter months. 

Presently, the draw opens on signal for 

passage of river traffic. The Union 

Pacific Railroad Company requested the 

drawbridge be permitted to remain 

closed-to-navigation from 7:30 a.m., 

December 17, 2004, until 7:30 a.m., 

March 1, 2005, unless 24 hours advance 

notice is given of the need to open.