Bond lawyers are asking the Treasury Department for clarification about whether they can opt out of Circular 230 requirements that are scheduled to take effect June 20 for bond-related post-issuance or other collateral opinions if they add a prominent disclaimer stating that such an opinion will not protect the taxpayer from penalties.
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The National Association of Bond Lawyers inquired about the "opt-out" issue and several others in a brief communication with Treasury last week. Treasury is expected to issue clarifications on Circular 230's final regulations before Friday, when the American Bar Association's tax-exempt financing committee meets in Washington.
The final regulations, which deal with "covered opinions," set forth requirements for written advice that presents a greater potential for concern, and minimum standards for other advice. The requirements prohibit practitioners from providing advice that relies on incorrect factual assumptions or representations, does not consider all relevant facts, or fails to analyze important legal issues.
These rules appear to apply to bond-related collateral opinions or written advice about 501(c)(3) organizations and events that occur after issuance such as arbitrage that must be rebated, changes in the trustee, or the impact of the sale of a bond-financed project.
The final regulations do not apply to the main state and local bond opinions on tax-exemption, which are instead covered by proposed rules that have not yet been finalized. Those rules require bond lawyers to detail in a separate written document from the opinion their tax rationale for the opinion and address all significant federal tax issues that arise.
Under the final regulations, parties to taxable transactions are given the choice of opting out of Circular 230 under certain circumstances. A practitioner may exclude a covered opinion from treatment as a reliance or marketed opinion by making a forthright disclosure that the opinion will not protect the taxpayer from penalties, provided the transaction is not a listed transaction or a transaction with the principal purpose of tax evasion.
Bond lawyers argue that collateral opinions do not address significant federal tax issues and are not used in the marketing or promotion of bonds. Therefore, they should not be required to detail the tax rationale for their advice in the opinion, they say.
Elizabeth Wagner, NABL's director of government affairs, said the association is seeking equal footing with all other tax lawyers practicing before the Internal Revenue Service.
"We're asking for parity from the standpoint that we ought to be treated [the same way as other practitioners] now that they've brought us into 230," she said. "We're not taking a position on opting out but we are trying to reiterate the points that were made in our March comment letter."
David Caprera, a tax partner with Kutak Rock LLP in Denver, said that with the exception of 501(c)(3) opinions and the post-issuance opinions often seen in multimodal bond remarketings, the types of written advice in question "are not going out to bondholders and are not being used in the marketplace."
Plus, he said, paying for lawyers' "full-blown" opinions may not be economical in every situation for some issuers. "I could write you a long, Circular 230-compliant opinion, but I may have to charge you five or ten times as much," he said.
"Absent something from Treasury in the next month, my guess is that we're going to see a disclaimer [used]," Caprera said. "To tell your typical bondholder, 'You can't rely upon this for penalty protection,' ought in almost all circumstances not be a problem."
He predicted that many or all law firms will adopt some type of legend or standard disclaimer to use in informal correspondence such as email unless they get definitive word from Treasury that indicates otherwise. "People have said we may get some clarification on the email issue but Circular 230 basically tells you what to say. They want to make sure that readers of this advice understand they shouldn't rely on it for penalty protection."
Whatever happens outside the tax-exempt world with regard to disclaimers is worth watching because acceptable practices in the investment world at large may prove to be acceptable in the muni market, Caprera added.
"The syndicated partnership and tax credit people; the leasing people; interest rate hedging transactions; futures trading -- they're all facing the same issues we are. I've seen a fair amount suggested in many of those areas -- but not consistently -- that legends are probably going to be a matter of course," he said.
NABL also sought Treasury advice about when bond-related collateral opinions or written advice would fall under the category of "covered opinions" that are subject to the final Circular 230 rules. (c) 2005 The Bond Buyer and SourceMedia, Inc. All rights reserved. http://www.bondbuyer.com http://www.sourcemedia.com
