The Reaction to the 1980 Proposed Amendments to Circular 230

By Dennis J. Ventry Jr. Dennis J. Ventry Jr. is a visiting scholar in taxation at the UCLA School of Law and an assistant professor of law at the American University Washington College of Law (beginning fall 2006). Copyright 2006 Dennis J. Ventry Jr. All rights reserved. I. Breaking Down the Proposed Amendments On September 4, 1980, the Treasury Department re- leased proposed amendments to federal regulations gov- erning practice before the IRS. Amended Circular 230 set new standards for legal opinions used in the promotion of tax shelters. Treasury reported that it had identified 7,000 new shelter schemes since January 1980 and that lost revenue from abusive tax shelters had gone over $5 billion. 1 That widespread noncompliance threatened to undermine the public’s confidence in the fairness of the tax system and, in turn, the self-assessment component of the federal income tax. Echoing earlier comments from IRS Commissioner Jerome Kurtz and Treasury General Counsel Robert Mundheim, 2 the proposed amendments noted the ‘‘critical element’’ of the tax lawyer’s opinion in the promotion of abusive shelters. It also recited Trea- sury’s earlier typology of four particularly troublesome opinions: (1) the intentionally false or incompetent opin- ion; (2) the opinion that relied on factual representations of the promoter even when some critical facts were questionable given other facts and circumstances of the transaction; (3) the opinion that never offered a conclu- sion on the tax aspects of the shelter offering; and (4) the ‘‘reasonable basis’’ opinion that may or may not have indicated a tax position’s low likelihood of success. The 1980 amendments added new section 10.51(j), which treated as an instance of disreputable conduct Proposed Amendments, Tax Shelters; Practice Before the Internal Revenue Service, 45 Fed. Reg. 58594 (Sept. 4, 1980), at Supplementary Information. See, e.g., Jerome Kurtz, ‘‘Kurtz on ‘Abusive Tax Shelters,’’’ Tax Notes, Feb. 18, 1980, p. 213; Robert H. Mundheim, ‘‘Mund- heim on ‘Abusive Tax Shelters,’’’ Tax Notes, Feb. 18, 1980, p. 213. For a fuller discussion, see Dennis J. Ventry Jr., ‘‘Tax Shelter Opinions Threatened the Tax System in the 1970s,’’ Tax Notes, May 22, 2006, p. 947. TAX NOTES, June 5, 2006 (itself a basis for suspension or disbarment under Circu- lar 230 rules) the rendering of intentionally or recklessly misleading tax shelter opinions, as well as patterns of providing incompetent opinions in other federal tax matters. The proposed amendments also revised section 10.52, dispensing with the willfulness requirement for prosecuting violators of the new rules. Thus, misconduct rising only to the level of negligence or incompetence might be grounds for suspension or disbarment from practice before the IRS. Section 10.33 contained the heart of the amendments. The new section required practitioners providing tax shelter opinions to conform their behavior to standards of practice that exceeded existing ethical standards pro- mulgated by professional organizations. In particular, the amendments required practitioners to exercise elevated due diligence standards to ensure (1) that opinions (or offering materials) fully and fairly disclose facts affecting each important federal tax issue; (2) that opinions fully and fairly describe and state a conclusion as to the likely outcome of each important federal tax issue; and (3) that opinions were accurately and clearly described in discus- sions of tax considerations in the offering materials. 3 The proposed amendments also prohibited opinions that failed to reach a ‘‘more likely than not’’ conclusion that ‘‘the bulk’’ of the tax benefits flowing from the shelter were allowable under the tax law. 4 Thus, practitioners were prevented from issuing negative opinions as well as the industry standard, reasonable basis opinions. Limited scope opinions were restricted, too. The amendments were designed to shut down the mass marketing of tax shelters to nonclient investors. Tax shelter promoters were using legal opinions to sell and mass-market tax shelters. The proposed amendments to Circular 230 exempted written advice provided to the practitioner’s own client (or clients) on the theory that an individual client could meet face-to-face with his attor- ney to discuss participation in a prospective shelter investment. A nonclient investor did not have the same opportunity. The frontal attack on the tax shelter industry prompted Treasury to define broadly ‘‘tax shelter’’ and ‘‘tax shelter opinion.’’ A tax shelter opinion under the proposed regulations was written advice relating to federal tax law that the opinion writer ‘‘knows or reason- ably should know’’ would be used in offering materials distributed to nonclients in connection with the promo- tion of a tax shelter. 5 A tax shelter was defined even more broadly: a sale, offering, syndication, promotion, invest- ment, or other transaction ‘‘in which the claimed tax Section 10.33(a)(1). Section 10.33(a)(2). Section 10.33(c)(3). (C) Tax Analysts 2006. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content. The Reaction to the 1980 Proposed Amendments to Circular 230