[Federal Register Volume 69, Number 243 (Monday, December 20, 2004)]
[Proposed Rules]
[Pages 75887-75891]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-27679]


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DEPARTMENT OF THE TREASURY

Office of the Secretary

31 CFR Part 10

[REG-159824-04]
RIN 1545-BE13


Regulations Governing Practice Before the Internal Revenue 
Service

AGENCY: Office of the Secretary, Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This notice proposes amendments to the regulations governing 
practice before the Internal Revenue Service (Circular 230). These 
regulations affect individuals who are eligible to practice before the 
IRS. The proposed modifications set forth standards for State or local 
bond opinions. This document also provides notice of a public hearing 
regarding the proposed regulations.

[[Page 75888]]


DATES: Written or electronically generated comments and outlines of 
topics to be discussed at the public hearing scheduled for March 22, 
2005, must be received by March 1, 2005.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-159824-04), room 
5203, Internal Revenue Service, POB 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG-
159824-04), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue, NW., Washington, DC. Alternatively, taxpayers may submit 
comments electronically via the IRS Internet site at: http://www.irs.gov/regs. The hearing will be held in the Internal Revenue 
Service auditorium on the seventh floor.

FOR FURTHER INFORMATION CONTACT: Concerning issues for comment, Heather 
L. Dostaler at (202) 622-4940 or Vicki Tsilas at (202) 622-3980; 
concerning submissions of comments, Treena Garrett of the Publications 
and Regulations Branch at (202) 622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information contained in this notice of proposed 
rulemaking has been submitted to the Office of Management and Budget 
for review in accordance with the Paperwork Reduction Act of 1995 (44 
U.S.C. 3507). Comments on the collection of information should be sent 
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, with copies to the Internal Revenue 
Service, Attn: IRS Reports Clearance Officer, SE:W:CAR:MP:T:T:SP, 
Washington, DC 20224. Comments on the collection of information should 
be received by February 18, 2005. Comments are specifically requested 
concerning:
    Whether the proposed collection of information and retention is 
necessary for the proper performance of the Office of Professional 
Responsibility, including whether the information will have practical 
utility;
    The accuracy of the estimated burden associated with the proper 
collection and retention of information (see below);
    How the quality, utility, and clarity of the information to be 
collected may be enhanced;
    How the burden of complying with the proposed collection and 
retention of information may be minimized, including through the 
application of automated collection techniques or other forms of 
information technology; and
    Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of services to provide information.
    The collection of information in these proposed regulations is in 
Sec.  10.39. This information is required to ensure practitioners 
comply with minimum standards when writing a State or local bond 
opinion. This information will assist the Commissioner, through the 
Office of Professional Responsibility, to ensure that practitioners 
properly advise taxpayers regarding state or local bonds. The 
collection of information is mandatory. The likely recordkeepers and 
respondents are individuals.
    To comply with Sec.  10.39, a practitioner may provide a single 
State or local bond opinion or may provide a combination of documents, 
but only if the documents, taken together, satisfy the requirements of 
Sec.  10.39. The estimates below are based on an average of 10 opinions 
given by a practitioner per year with an average increased time of 1 to 
3 hours per opinion.
    Estimated total record keeping and reporting burden is 30,000 
hours.
    Estimated annual burden per practitioner varies from 10 to 30 
hours, depending on individual circumstances, with an estimated average 
of 20 hours.
    Estimated number of affected practitioners is 1,500.
    Estimated annual frequency of responses (providing a State or local 
bond opinion or a combination of documents) 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 assigned by the Office of Management and Budget.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by section 6103 of 
the Internal Revenue Code.

Background

    Section 330 of title 31 of the United States Code authorizes the 
Secretary of the Treasury to regulate the practice of representatives 
before the Treasury Department. The Secretary has published the 
regulations governing standards of practice in Circular 230 (31 CFR 
part 10). Municipal bond opinions have been excluded from the standards 
for tax shelter opinions since the Treasury Department and the IRS 
first published standards for tax shelter opinions in Circular 230. On 
December 30, 2003, the Treasury Department and the IRS proposed 
amendments to the standards of practice that would have eliminated the 
exclusion for municipal bond opinions. See 68 FR 75186. Public comments 
were submitted in response to the proposed amendments addressing the 
special characteristics of the market for 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 other practitioners. Recognizing the 
special characteristics of the bond market, the Treasury Department and 
the IRS are proposing regulations that provide standards of practice 
for practitioners rendering municipal bond opinions.
    The proposed regulations are substantially similar to the standards 
of practice for covered opinions that were promulgated on December 20, 
2004, which included final regulations providing best practices for tax 
advisors, minimum standards for covered opinions and other written 
advice and procedures to ensure compliance with the minimum standards. 
Under the final regulations, a practitioner providing a covered opinion 
must comply with the minimum standards set forth in Sec.  10.35. 
Specifically, a practitioner providing a covered opinion must: (1) 
identify and ascertain all relevant facts; (2) relate the applicable 
law to the relevant facts; (3) evaluate each significant Federal tax 
issue; and (4) provide an overall conclusion. In addition, covered 
opinions may be required to contain certain disclosures provided in 
Sec.  10.35(e), if applicable. Under Sec.  10.35, the definition of a 
covered opinion excludes State or local bond opinions. The definition 
of a State or local bond opinion contemplates opinions that issuers 
routinely receive at the time bonds are issued. Specifically, a State 
or local bond opinion is written advice that is included in the 
offering materials for the issuance of a State or local bond and that 
concerns only the excludability of interest on a State or local bond 
from gross income under section 103, the application of section 55, the 
status of the bond as a qualified tax-exempt obligation under section 
265(b)(3), the status of the bond as a qualified zone academy bond 
under section 1397E, or any combination of these issues. Offering 
materials include any written material delivered to a purchaser of a 
State or local bond in connection with

[[Page 75889]]

the issuance of the bond in a private or public placement (bond 
offering materials).

Explanation of Provisions

    Under Sec.  10.35(b)(2)(ii)(B)(2), a covered opinion does not 
include a State or local bond opinion. Under proposed Sec.  
10.35(b)(9), a State or local bond opinion is written advice, included 
in bond offering materials for the issuance of a State or local bond, 
if (1) the written advice as to Federal tax matters addressed in the 
bond offering materials consists only of advice that concerns specified 
issues under section 103, section 55, section 265(b)(3), or section 
1397E, or any combination of those issues; and (2) the practitioner 
separately provides to the issuer of the bond, and includes in the 
transcript of proceedings if one is prepared, written advice that 
satisfies the requirements set forth in Sec.  10.39.
    An opinion is a State or local bond opinion even if the written 
advice addresses matters not directly related to a Federal tax issue, 
e.g., a State law issue. An opinion also is a State or local bond 
opinion if the opinion is redelivered unchanged, e.g., if the opinion 
is redelivered with a qualified tender bond that is tendered to the 
remarketing agent and remarketed. If the State or local bond opinion 
with respect to that bond issue is changed or otherwise updated after 
bonds are issued, the altered opinion is not a State or local bond 
opinion, and is subject to the requirements of Sec.  10.35.
    The Treasury Department and the IRS recognize the special 
characteristics of the market for municipal bonds and are proposing 
amendments to the requirements of Circular 230 that take into account 
these characteristics. The manner in which practitioners provide State 
or local bond opinions suggests that the form of these bond opinions 
should be more flexible than Sec.  10.35 permits. The proposed 
regulations exclude a State or local bond opinion from the requirements 
of Sec.  10.35, if the practitioner provides the issuer with separate 
written advice that satisfies the requirements of Sec.  10.39.
    Proposed Sec.  10.39 sets forth the minimum requirements for a 
State or local bond opinion. Although the minimum requirements are 
substantially similar to those of Sec.  10.35(c), Sec.  10.39 is 
tailored to take into account the customary practice and special 
circumstances of the market for municipal bonds. Furthermore, the 
proposed regulations provide practitioners flexibility in determining 
how the separate written advice should be conveyed. The practitioner 
may provide the separate written advice in a tax certificate that 
customarily would be prepared for inclusion in the transcript of 
proceedings, or in a tax certificate and an additional memorandum or 
letter, or in any other combination of documents that are made 
available to the issuer and included in the transcript of proceedings, 
if one is prepared. The requirements for all State or local bond 
opinions include: (1) Identifying and considering all relevant facts 
and not relying on unreasonable factual assumptions or unreasonable 
representations; (2) relating the applicable law (including potentially 
applicable judicial doctrines) to the relevant facts and not relying on 
any unreasonable legal assumptions, representations or conclusions; and 
(3) considering all significant Federal tax issues relevant to reaching 
the overall conclusion with respect to the Federal tax treatment of the 
bonds and reaching a conclusion, supported by the facts and the law, 
with respect to each significant Federal tax issue. As provided in 
Sec.  10.35(b)(3), 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.
    A practitioner must not base the written advice on an assumption or 
factual representation, statement or finding of any person unless the 
practitioner has exercised due diligence in identifying and 
ascertaining the relevant facts. Even if a third party has certified a 
representation, the practitioner is responsible for exercising due 
diligence. For example, a practitioner may not rely on a 
representation, certified or otherwise, to conclude that the 
requirements of the safe harbor for establishing the fair market value 
of a guaranteed investment contract in 26 CFR 1.148-5(d)(6)(iii) were 
met if the representation does not include a specific description of 
how those requirements were satisfied or if the practitioner knows or 
should know that the representation was incorrect or incomplete.
    Proposed Sec.  10.39 permits a practitioner to incorporate the 
facts, factual assumptions, and findings, representations and 
statements of any person by reference to another document, such as a 
tax certificate, provided that the document is included in the 
transcript of proceedings. Similarly, the legal analysis may be 
appended or included in a tax certificate or similar document, provided 
that it is clear that the practitioner provided the written advice. 
Unlike Sec.  10.35(e) with respect to covered opinions, proposed Sec.  
10.39 does not require any disclosures in the written advice.
    Proposed Sec. Sec.  10.35(b)(9) and 10.39 will require that the 
written advice the practitioner is required to provide separately to 
the issuer of a state or local bond be included in the transcript of 
proceedings if one is prepared or in a document available to the issuer 
if no transcript is prepared. Inclusion of the written advice in the 
transcript of proceedings is intended to ensure that the practitioner's 
written advice is made available to the issuer and is intended to be 
consistent with the current practice of including the tax certificate 
and other documents supporting the State or local bond opinion in the 
transcript of proceedings. The Treasury Department and the IRS request 
comments regarding this requirement.

Proposed Effective Date

    Consistent with Announcement 2004-29 (2004-17 I.R.B. 828) (April 
26, 2004), these proposed regulations will be applicable no sooner than 
120 days after the final regulations are published in the Federal 
Register.

Special Analyses

    It has been determined that this notice of proposed rulemaking 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. 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, 
this notice of proposed rulemaking will be submitted to the Chief 
Counsel for Advocacy of the Small Business Administration for comment 
on its impact on small businesses.

Comments and Public Hearing

    Before the regulations are adopted as final regulations, 
consideration will be given to any written comments and electronic 
comments that are submitted timely to the IRS. The Treasury Department 
and the IRS specifically request comments on the clarity of the 
proposed regulations and how they can be made easier to understand. All 
comments will be available for public inspection and copying.

[[Page 75890]]

    The public hearing is scheduled for March 22, 2005, at 10 a.m., and 
will be held in the Internal Revenue Service auditorium on the seventh 
floor. Due to building security procedures, visitors must enter at the 
Constitution Avenue entrance. All visitors must present photo 
identification to enter the building. Visitors will not be admitted 
beyond the immediate entrance area more than 30 minutes before the 
hearing starts. For information about having your name placed on the 
building access list to attend the hearing, see the FOR FURTHER 
INFORMATION CONTACT section of this preamble.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to present oral comments at the hearing must submit written or 
electronic comments and submit an outline of the topics to be discussed 
and the time to be devoted to each topic by March 1, 2005. A period of 
10 minutes will be allocated to each person for making comments.
    An agenda showing the scheduling of the speakers will be prepared 
after the deadline for receiving outlines has passed. Copies of the 
agenda will be available free of charge at the hearing.

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, and Vicki Tsilas of the Office of the Associate 
Chief Counsel (Tax Exempt/Government Entities).

List of Subjects in 31 CFR Part 10

    Administrative practice and procedure, Lawyers, Accountants, 
Enrolled agents, Enrolled actuaries, Appraisers.

Proposed Amendments to the Regulations

    Accordingly, 31 CFR part 10 is proposed to be 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, as amended by Pub. 
L. 108-357; Reorg. Plan No. 26 of 1950, 15 FR 4935, 64 Stat. 1280, 3 
CFR, 1949-1953 Comp., p. 1017.

    Par. 2. Section 10.35 is amended by revising paragraph (b)(9) to 
read as follows:


Sec.  10.35  Requirements for covered opinions.

* * * * *
    (b) * * *
    (9) State or local bond opinion. Written advice, included in bond 
offering materials (as defined in Sec.  10.39(c)) for the issuance of a 
State or local bond, is a State or local bond opinion if--
    (i) The written advice as to Federal tax matters addressed in the 
bond offering materials consists only of advice that concerns 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; 
and
    (ii) The practitioner separately provides to the issuer of the bond 
written advice that satisfies the requirements set forth in Sec.  
10.39.
* * * * *
    Par. 3. Section 10.36 is revised to read as follows:


Sec.  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 Sec. Sec.  10.35 and 10.39, as 
applicable. 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 Sec. Sec.  10.35 and 10.39, as 
applicable, 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 Sec. Sec.  10.35 and 10.39, as applicable; 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 Sec. Sec.  
10.35 and 10.39, as applicable, 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 on the date that is 
120 days after publication of the final regulations in the Federal 
Register.
    Par. 4. Section 10.38 is revised to read as follows:


Sec.  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 Sec. Sec.  10.35, 10.36 or 10.39.
    (b) Effective date. This section is applicable 120 days after 
publication of the final regulations in the Federal Register.
    Par. 5. Section 10.39 is added to read as follows:


Sec.  10.39  Requirements for State or local bond opinions.

    (a) In general. A practitioner who provides a State or local bond 
opinion shall comply with the standards of practice in this section.
    (b) Requirements for separately provided written advice. A 
practitioner providing a State or local bond opinion must separately 
provide to the issuer of the bond written advice that satisfies each of 
the following requirements. For purposes of this section, the written 
advice may be set forth in a tax certificate or in other documents 
included in the transcript of proceedings, or, if no transcript is 
prepared, in one or more other documents made available to the issuer, 
provided that the documents constituting the written advice taken 
together satisfy each of the following requirements.
    (1) Factual matters. (i) The practitioner must use reasonable 
efforts to identify and ascertain the facts,

[[Page 75891]]

which may relate to future events, and to determine which facts are 
relevant. The written advice must identify and consider all facts that 
the practitioner determines to be relevant.
    (ii) The practitioner must not base the written advice 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. 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 written advice must 
identify in a separate section all factual assumptions relied upon by 
the practitioner.
    (iii) The practitioner must not base the written advice on any 
unreasonable factual representations, statements or findings of any 
person. An unreasonable factual representation includes a factual 
representation that the practitioner knows or should know is incorrect 
or incomplete. The written advice must identify in a separate section 
all factual representations, statements or findings relied upon by the 
practitioner.
    (iv) If the facts required to be identified and considered under 
this paragraph (b)(1) are set forth in a tax certificate or other 
similar document that is included in the transcript of proceedings and 
the analysis required by paragraphs (b)(2) and (b)(3) of this section 
is set forth in a separate document, the practitioner may incorporate 
the facts required to be identified or considered in the separate 
document by reference to the tax certificate or other document.
    (2) Relate law to facts. (i) The written advice 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 paragraph (d) 
of this section, or otherwise base an opinion on any unreasonable legal 
assumptions, representations, or conclusions.
    (iii) The written advice must not contain internally inconsistent 
legal analysis or conclusions.
    (3) Evaluation of significant Federal tax issues--(i) In general. 
The written advice must consider all significant Federal tax issues 
that are relevant to the overall conclusion provided in the State or 
local bond opinion with respect to the application of section 103 of 
the Internal Revenue Code, section 55 of the Internal Revenue Code, 
section 265(b)(3) of the Internal Revenue Code, or section 1397E of the 
Internal Revenue Code, or any combination thereof, except as provided 
in paragraph (d) of this section.
    (ii) Conclusion as to each significant Federal tax issue. The 
written advice must provide the practitioner's conclusion as to the 
likelihood that a taxpayer will prevail on the merits with respect to 
each significant Federal tax issue considered in the written advice. 
The written advice must describe the reasons for the conclusions, 
including the facts and analysis supporting the conclusions.
    (iii) Evaluation based on chances of success on the merits. In 
evaluating the significant Federal tax issue(s) addressed in the 
written advice, 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.
    (c) Bond offering materials. The term bond offering materials means 
any written 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).
    (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 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 regarding a significant Federal tax issue, the relying 
practitioner must identify the other opinion and set forth in the 
written advice the conclusions reached in the other opinion.
    (2) The practitioner must be satisfied that the combined analysis 
of the opinions, taken as a whole satisfy the requirements of this 
section.
    (e) Effective date. This section applies to State or local bond 
opinions that are rendered on a date that is on or after 120 days after 
publication of the final regulations in the Federal Register.
    Par. 6. Section 10.52 is revised to read as follows:


Sec.  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 Sec.  
10.33) contained in this part; or
    (2) Recklessly or through gross incompetence (within the meaning of 
Sec.  10.51(l)) violating Sec. Sec.  10.34, 10.35, 10.36, 10.37 or 
10.39.
    (b) Effective date. This section is applicable 120 days after 
publication of the final regulations in the Federal Register.

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. 04-27679 Filed 12-17-04; 8:45 am]
BILLING CODE 4830-01-P