No Joke: Circular 230 is Here to Stay

By Dennis J. Ventry Jr. Dennis J. Ventry Jr. is a visiting scholar in taxation at UCLA School of Law and an assistant professor of law at the American University Washington College of law (beginning fall of 2006). Comments are welcome at dventry@wcl.american.edu. Copyright 2006 Dennis J. Ventry Jr. All rights reserved. I. Introduction In the wake of a new American Bar Association formal opinion covering tax shelters and a recently enacted suite of antishelter penalties in 1982, many observers believed that the Treasury Department would withdraw its pro- posed amendments to Circular 230 covering legal opin- ions used in the promotion of tax shelters. They were wrong. Treasury stayed the course. It issued modified proposed regulations in 1982 and final regulations in 1984. Throughout the process, Treasury absorbed input from the practitioner community. And it complemented Congress’s continued efforts to curb tax shelter activity with additional rounds of new and strengthened statu- tory penalties. By the mid-1980s, the Treasury Depart- ment and Circular 230 had become the catalyzing force of a coordinated and aggressive antishelter effort. II. Modified Circular 230 Amendments On December 15, 1982, Treasury issued modified proposed amendments to Circular 230. 1 The modifica- tions responded to widespread outcry from the orga- nized bar, the tax bar, and the practitioner community over Treasury’s promulgation of proposed changes to Circular 230 two years earlier. 2 According to Treasury, over that period it had received 90 written comments to Modified Proposed Regulations, Tax Shelters; Practice Be- fore the Internal Revenue Service, 47 Fed. Reg. 56144 (Dec. 15, 1982), at Supplementary Information. For a discussion of this outcry, see Dennis J. Ventry Jr., ‘‘The Reaction to the 1980 Proposed Amendments to Circular 230,’’ Tax Notes, June 5, 2006, p. 1141, at 1142-1149. For Treasury’s original proposal, see Proposed Amendments, Tax Shelters; Practice Before the Internal Revenue Service, 45 Fed. Reg. 58594 (Sept. 4, 1980). TAX NOTES, June 19, 2006 the proposed amendments from attorneys, CPAs, en- rolled agents, the organized bar, accounting organiza- tions, taxpayers, and special interest groups. 3 In Novem- ber 1980, moreover, 15 persons testified at a public hearing on the proposed rules, offering comments and criticism. 4 Treasury received 30 additional correspon- dences after it invited public comment on the establish- ment of an advisory committee to assist it in administer- ing the proposed new standards for regulating tax shelter opinions. 5 The modified regulations closely paralleled ABA For- mal Opinion 346, 6 with slight modifications. Issued 11 months earlier, Opinion 346 addressed ‘‘many of the fundamental concerns’’ of Treasury for tax shelter opin- ions and appeared ‘‘generally to contain adequate stan- dards for meeting those concerns.’’ 7 Treasury was par- ticularly pleased that Opinion 346 required opinion writers to state whether the aggregate benefits of a shelter were likely to be realized, thereby effectively prohibiting ‘‘reasonable basis’’ opinions (which had allowed lawyers to issue opinions subsequently used in the promotion of tax shelter investments that never offered a prediction on the outcome in the likely event of litigation). ‘‘Accord- ingly,’’ Treasury said, ‘‘the proposed regulation has been substantially modified in order to reflect the principles and ethical considerations delineated in ABA Opinion 346.’’ 8 Treasury’s proposed rules were still justified, be- cause of the ‘‘variation in enforcement’’ of the multiple professional licensing authorities. 9 Circular 230 would provide ‘‘uniform, direct action’’ for regulating the con- duct of tax professionals. 10 A. Treasury’s General Antishelter Philosophy Before describing specific modifications to the original proposal, Treasury enunciated its general philosophy for tax shelter opinions and the regulation of tax advisers. First, Treasury would not budge on negative opinions. Those opinions often stated that aggregate material tax benefits in an offering were not likely to be allowable if Modified Proposed Regulations, supra note 1, at Supple- mentary Information. Id. Practice Before the Internal Revenue Service; Request for Public Comments on Establishing an Advisory Committee on Opinions by Practitioners Before the Internal Revenue Service Used in the Promotion of Tax Shelters, 45 Fed. Reg. 75835 (Nov. ABA Committee on Ethics and Professional Responsibility, Formal Opinion 346 (rev.) (Jan. 29, 1982). Modified Proposed Regulations, supra note 1, at Supple- mentary Information. Id. Id. Id. (C) Tax Analysts 2006. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content. No Joke: Circular 230 Is Here to Stay