WASHINGTON — The American Bar Association told the Internal Revenue Service Tuesday that it strongly supports proposed regulations that would eliminate standards for state and local bond opinions under Circular 230.
“The complexity of the covered opinion standards as well as their broad application to routine transactions has come to outweigh their beneficial impact on practitioner conduct and taxpayer compliance,” the group wrote in a 23-page letter to the IRS.
The comments were the group’s first since the proposed regulations were published in September.
Circular 230 contains rules that govern lawyers, accountants and others who prepare tax opinions or returns or otherwise practice before the IRS. They were designed in part to prevent lawyers from writing opinions used in tax shelters and other abusive transactions.
State and local bond opinions were exempt from the rules until December 2004, when a new set of proposed regulations for Circular 230 were introduced.
The final Circular 230 (Section 10.35) regulations went into effect in June 2005, creating standards for “covered opinions” issued by tax practitioners.
After intense lobbying from muni market groups for more equal treatment of the bond market, the IRS and Treasury Department exempted state and local bond opinions from those rules on an interim basis.
“Circular 230 plays an important role in regulating written advice practices, particularly in the context of transactions that have the potential for improper tax avoidance,” the ABA wrote. “It is important, however, that Circular 230 serve that role without unnecessarily burdensome standards that may not fit the particular facts and circumstances of an engagement.”
Although state and local bond opinions have unique elements, a “principles-based approach applicable to all written tax advice should be adequate to address them,” the ABA wrote.
Even in the narrow context of state and local bond opinions, drafting targeted rules creates significant definitional problems, the group said.
Tax-exempt bond lawyers have been concerned that if they were subject to the covered opinion rules it might dictate the form of their written tax advice.
“This changes the whole picture by saying instead of focusing on the form that goes into the written tax advice, it says what the tax practitioner has to do in terms of being competent on reaching a reasonable tax conclusion,” said David Cholst, partner at Chapman and Cutler LLP in Chicago and member of the ABA tax-exempt financing committee.