Law Geek: The Circular 230 Ward Against Evil

 Posted on September 13,2011 in Uncategorized

Have you ever wondered about the "IRS Circular 230 Notice" language you often see at the bottom of lawyers' emails? Here's a sample, from the email of a criminal-defense lawyer:

IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication (or in any attachment).

Here's another:

IRS Circular 230 Disclosure: This communication (including any attachments) is not intended or written by the sender to be used, and cannot be used, by any recipient for the purpose of avoiding any penalties that may be imposed under U.S. tax laws.

And another:

Treasury Circular 230 Disclosure – To comply with requirements imposed by the Internal Revenue Service, we inform you that any tax advice contained in this written communication (including any attachment) is not intended or written to be used, and cannot be used, by any person for the purpose of avoiding tax penalties that may be imposed on the person. If this written communication contains any tax advice that is used or referred to in connection with the promoting, marketing or recommending of any transaction(s) or matter(s), this written communication should be construed as written to support the promoting, marketing or recommending of the transaction(s) or matter(s) addressed by this written communication, and the taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor. No limitation has been imposed by [law firm name] on disclosure of the tax treatment or tax structure of the transaction(s) or matter(s).

Seeing these disclaimers, and not employing one myself, I wondered about-and eventually got around to reading-Treasury Circular 230, which led me to believe that (tl;dr version:) reading Circular 230 is more than any criminal-defense lawyer who has a Circular 230 disclaimer has done.

Here's one disclosure that the IRS might require, from section 10.35(b):

(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.

another from that section:

(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.

a third, from section 10.35(e):

(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.

a fourth, from that section:

(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.

and finally, also from 10.35(e):

(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.

Treasury Department Circular 230, Regulations Governing Practice before the Internal Revenue Service, 31 CFR, Subtitle A, Part 10, published 3 June 2011.

Those are the five disclosures that Circular 230 might require.

Our first two exemplars give the first disclosure. The first exemplar also includes language contrary to the second disclosure (that the advice was not written to support marketing), which suggests that the lawyer using the first exemplar had not read Circular 230. If a lawyer is so cavalier about the law, how can she be trusted with people's futures?

When is the first disclosure required? When a lawyer does not want his tax advice to be treated as a reliance opinion. Generally, a reliance opinion is written tax advice that "concludes at a confidence level of at least 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." If tax advice would otherwise be a reliance opinion and the advice is not for the purpose of tax avoidance or evasion, the disclosure saves it from being a reliance opinion.

Why does it matter whether a tax opinion is a reliance opinion? I have no idea: the only other reference in Circular 230 to a reliance opinion says that a reliance opinion regarding an arrangement for the purpose of avoiding taxes is a covered opinion. If it's not for the purpose of avoiding taxes, it's not a covered opinion. But the disclaimer doesn't save a tax-avoidance opinion from being a reliance opinion, so it doesn't save a reliance opinion from being a covered opinion.

Why else why would it matter that a tax opinion is a reliance opinion? For no reason disclosed in Circular 230.

So: what good does the first Circular 230 disclosure, as given in our first two exemplars, do the criminal practitioner? If the criminal lawyer is not giving tax advice, none (not a reliance opinion). If the criminal lawyer is giving tax advice, but not at a greater-than-fifty-percent confidence level, none (not a reliance opinion). If the criminal lawyer is giving tax advice at a greater-than-fifty-percent confidence level, but not tax avoidance advice, none (reliance opinion depending on disclosure, but not a covered opinion regardless). If the criminal lawyer is giving tax avoidance or evasion advice at a greater-than-fifty-percent confidence level, none (reliance opinion regardless of disclosure, and covered opinion).

(It looks to me like the disclosure never has any legal effect with regard to a reliance opinion, so at this point in the writing, I'm expecting someone smarter than me to come along tomorrow and explain exactly why I'm a moron who shouldn't be allowed within fifteen feet of the tax regs. I'm cool with that.)

In writing a covered opinion, the practitioner must:

1. Be competent to give the opinion;

2. Use reasonable efforts to identify and reveal the relevant facts;

3. Not base the opinion on any unreasonable factual assumptions, factual representations, statements or findings;

4. Relate the law to the facts;

5. Evaluate all significant federal tax issues;

6. Give an overall conclusion; and

7. Make certain disclosures.

The benefit to the lawyer of a tax opinion not being a covered opinion is that the lawyer doesn't have to follow those particular (section 10.35) procedures. But she has to follow Section 10.37, which requires some of the same diligence.

Our third exemplar correctly gives the second disclosure: (A) that the advice cannot be used to avoid tax penalties; (B) that the advice was written to support marketing; and (C) that the taxpayer should seek particularized advice.

When is the second disclosure required? When a lawyer does not want his tax advice to be treated as a marketed opinion. Generally, a marketed opinion is written tax advice that the practitioner should know will be used by someone else to recommend a partnership or other entity, investment plan or arrangement to a taxpayer. So the field of advice that might need the first disclosure is already very narrow. The disclaimer saves from being a marketed opinion only certain advice that would otherwise be marketed opinions-if the tax advice recommends an arrangement to avoid taxes, for example, it is a marketed opinion despite the disclaimer.

Why does it matter whether a tax opinion is a marketed opinion? If a marketed opinion is intended for tax avoidance, it is a covered opinion, but such an opinion is not saved by the disclosure from being a marketed opinion. So that's not the motivation for the disclosure. A marketed opinion must provide 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"; otherwise the lawyer is in violation of the regulations.

So the second disclosure only helps the lawyer if the lawyer is if she is giving tax advice that she should know will be used to recommend some arrangement to a taxpayer that is not to avoid taxes and that gives a more-likely-than-not prognosis of success.

The third disclosure contains two elements of the second disclosure; by satisfying the second, the lawyer satisfies the third, applicable to marketed opinions. These have nothing to do with the practice of criminal-defense law. In fact, we almost always see the Circular 230 disclosure coupled with the worse-than-useless confidentiality claim, which negates the marketing purpose of the opinion:

The content of this e-mail is intended solely for the use of the Individual or entity to whom it is addressed. If you have received this communication in error, be aware that forwarding it, copying it, or in any way disclosing its content to any other person, is strictly prohibited.

Assume that the users of our three exemplars sometimes give tax advice, and have the Circular 230 disclosure on every email in an excess of caution. They're still screwed if they give, in the case of our first two exemplars, a marketed tax opinion; or, in the case of all three, a limited-scope opinion or an opinion that fails to reach a more-likely-than-not conclusion.

Because different types of tax advice require different disclosures, I hunch that tax lawyers pay attention to which disclaimer their advice requires, and apply that disclaimer. The Circular 230 language we see every day is, I suspect, folkloric. Lawyers don't use it because it has some effect, but because they see other people using it.

Real criminal-defense lawyers don't put irrelevant and ineffectual disclaimers in their email footers.

Speaking of real criminal-defense lawyers, here's the relevant portion of Brian Tannebaum's email footer: "Also, I don't give Tax advice, so I'll spare you the CIRCULAR 230 NOTICE language."

On second thought, here's the entire paragraph from Tannebaum's email footer:

CONFIDENTIALITY NOTE: This is my "I'm a big bad lawyer" paragraph.This e-mail may be privileged and confidential, or it may just be in good fun and some of that typical banter that friends send around the internet. If you are not the intended recipient, pretend you didn't read it, ignore it, delete it, but please don't forward it. I could say that "dissemination, distribution or copying of this communication is strictly prohibited, but I'm not sure by whom. Also, I don't give Tax advice, so I'll spare you the CIRCULAR 230 NOTICE language.