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Winter 2013

Winter 2013
From the Colorado Bar Association
Tax Law Section
In this issue...


Attorneys may obtain CLE credit for authoring published articles. To request CLE credit, use Colorado Supreme Court Board of Continuing Legal and Judicial Education Form 6. Anyone interested in publishing an article in this newsletter can contact Tyler Murray of The Law Offices of Murray & Wright, P.C., 303-785-2875.

The Colorado Lawyer Request for Article Ideas

The Colorado Lawyer publishes practical, substantive articles on topics relevant to Tax Law. Send us ideas for articles you’d like to see in the journal or hot topics in your practice area. We’ll do the outreach for authors, but if you’d like to write, let us know that, too! Contact Tracy Rackauskas at

CBA Tax Section Topical Lunches





March 11

John Wilson

FATCA—the Final Regulations and Beyond

Davis Graham & Stubbs, LLP

April 10

Eric Zinn

Exercise of Non-Compensatory Options, Final Partnership Regulations

Davis Graham & Stubbs, LLP

May 8

Jennifer Brenda

Update on IRS Penalties and litigation Regarding Substantial Misstatements

Davis Graham & Stubbs, LLP

June 12


Legislative Update

Warwick Hotel

Notice of Pro Bono Opportunity

Volunteer at the U.S. Tax Court Docket Call—April 17, April 29

The U.S. Tax Court will hold the next Denver session at 9:30 a.m. on April 17 and April 29. Tax attorneys are invited to volunteer their assistance for a few hours on any of these dates. Attorneys interested in helping Pro Se taxpayers with docketed U.S. Tax Court cases should appear at 9:30 a.m. in Room C502 of the Byron G. Rogers U.S. Courthouse, 1929 Stout Street, Denver, CO 80294. Program guidelines are available here. Anyone wishing to volunteer should contact Tyler Murray of The Law Offices of Murray & Wright, P.C., 303-785-2875 for more information.

Tax Section Executive Council News

ABA Liason to Council Needed

The Tax Section Executive Council is seeking a volunteer to be the ABA liaison to the Council. The ideal candidate is actively involved with the ABA Tax Section and can attend the Executive Council meetings, either in person or via telephone, to provide updates on the activities of the ABA Tax Section. Any interested candidates can contact Andrew Elliot at 303-223-1154.

US District Court Strikes Down IRS’s Registered Tax Return Preparer Regulations
by Tram Le1

On Jan. 18, 2013, the U.S. District Court for the District of Columbia issued a decision enjoining the IRS from enforcing its new registered tax return preparer program. See, Loving v. IRS, No. 12-385, 2013 WL 204667 (D.D.C. Jan. 18, 2013).

In 2011, the IRS issued final regulations requiring all paid tax return preparers, who were not otherwise regulated by the IRS, to comply with Circular No. 230. Specifically, the regulations required tax return preparers who are not attorneys, CPAs or enrolled agents to pass a qualifying exam, pay an annual fee, and take 15 hours of continuing education courses each year.

In promulgating the regulations, the IRS relied on 31 U.S.C. Sec. 330, which gave them the authority to regulate individuals who “practice” before it.

Factual and Procedural History

Three paid tax return preparers, who were not previously regulated, filed suit against the IRS in federal court. The individuals argued that the IRS had no authority under 31 U.S.C. Sec. 330 to regulate tax return preparers who only prepare and sign tax returns, and file claims for refund and other documents with the IRS.

The tax return preparers claimed that the new IRS regulations would likely cause them to lose customers and close their business due to the increased costs and burdens associated with compliance. Therefore, they sought for injunctive and declaratory relief and moved for summary judgment.

Issue and Decision

The issue before the court was whether all paid tax return preparers are “representatives” who “practice” before the IRS under 31 U.S.C. Sec. 330 and therefore, are properly subject to the new IRS regulations. In deciding the case, the court applied the two prong Chevron test. Chevron U.S.A. Inc. v. Natural Resources Defense Council, 467 U.S. 837 (1984). The first step asks whether “the intent of Congress is clear.” Under this test, if the intent is clear, then the court “must give effect to the unambiguously expressed intent of Congress” and does not need to address the second step.

In this case, the court found that the intent of Congress was clear under 31 U.S.C. Sec. 330 and preparers who are limited to preparing and signing tax returns and claims for refund, and other documents to the IRS are not “representatives” who “practice” before the IRS.

The court reasoned that under 31 U.S.C. Sec. 330(a)(2)(D), the definition of “practice of representatives” does not include tax return preparation. The court equates “practice” as advising and assisting taxpayers in presenting their cases. The court stated that merely filing a tax return would never in its normal usage be described as “presenting a case.”

The court also reasoned that the IRS’s interpretation of 31 U.S.C. Sec. 330 would displace an existing statutory scheme that regulates penalties on tax return preparers. The court referred to Title 26 of the U.S. Code, which provides for a “careful, regimented schedule of penalties for misdeeds by tax-return preparers.” For example, a tax return preparer would be subject to a fine of $50 (with an annual maximum of $25,000) for failing to sign a return without reasonable cause under 26 U.S.C. Sec. 6695(c). If tax return preparers were subject to 31 U.S.C. Sec. 330, the IRS would have a considerable amount of discretion to impose penalties ranging from $0 and the “gross income derived (or to be derived) from the conduct giving rise to the penalty.”

Furthermore, the court stated that a federal penalty provision pursuant to 26 U.S.C. Sec. 7407, which remedies abusive practice by tax return preparers, would be irrelevant under the IRS’s interpretation.

The court held that the statute was not ambiguous based on the plain language and does not clearly cover individuals who prepare and sign tax returns, file claims for refund and other documents to the IRS. Since the regulations failed under the first prong of the Chevron test, the court did not consider the second prong. As such, the court granted a declaratory judgment and permanent injunctive relief, enjoining the IRS from enforcing its new regulations.

Appeal of Ruling

In response to the district court’s decision, the IRS filed a motion to suspend the permanent injunction against the tax return preparer regulations. On Feb. 1, 2013, the court denied the IRS’s motion. However, the court agreed to modify the ruling to clarify that IRS could continue its Preparer Tax Identification Number (PTIN) program and was not required to close its testing and continuing-education centers.

1 Tram Le is a State and Local Tax Consultant at Eide Bailly LLP. She can be reached at

New IRS Home Office Rules Make Taking Your Deduction Much Easier
by David Sprecace2

Good news for taxpayers with home offices: Revenue Procedure 2013-13 provides an easier safe harbor method to determine the amount of deductible expenses attributable to certain business use of a residence. This safe harbor method is an alternative to the calculation, allocation, and substantiation of actual expenses for purposes of satisfying the requirements of Section 280A of the Internal Revenue Code. Rev. Proc. 2013-13, I.R.B. 2013-6, Jan. 15, 2013.

Under this safe harbor method, taxpayers determine their allowable deduction for business use of a residence by multiplying a prescribed rate by the square footage of the residence that is used for business purposes. Id. It is effective for taxable years beginning on or after Jan. 1, 2013, and applies only to individuals who elect this safe-harbor method instead of using the 43-line Form 8829. Taxpayers may change from this safe-harbor method to the actual-expense method year-to-year, but the election on the timely-filed tax return to use the safe harbor is irrevocable.

The various subsections of Section 280A permit taxpayers to deduct expenses attributed to operating a business, storage of inventory or product samples, rental of the dwelling unit, or providing day care for children or those who have attained age 65. For purposes of this revenue procedure, “home” means a dwelling unit used by the taxpayer during the taxable year as a residence, as defined in Sections 280A(d) and (f)(1), including a dwelling unit leased by a taxpayer. However, only a dwelling unit that is Section 1250 property (generally depreciable real property) and MACRS property (generally defined in Section 1.168(b)-1(a)(2) as tangible, depreciable property subject to Section 168 that is placed in service after Dec. 31, 1986) qualifies as a home.

Computation of the safe-harbor deductible expense is so easy my 6-year old can do it—simply multiply the allowable square footage by the prescribed rate of $5.00 per square foot (up to 300 square feet). Certain limitations apply, though. For example:

  • This method can’t be used by an employee who receives advances, reimbursements, or allowances from her employer, related to the business use of the home office.
  • Mortgage interest, property taxes, and casualty losses must still be deducted on Schedule A, and no part of them can also be deducted under this safe-harbor method.
  • A taxpayer cannot deduct any depreciation (including any additional first-year depreciation) or Section 179 expense for the portion of the home that is used in a qualified business for that taxable year. The depreciation deduction allowable for that portion of the home for that taxable year is deemed to be zero.
  • This safe harbor method is an alternative to the calculation and allocation of actual expenses otherwise required by Section 280A, so actual expenses can’t also be deducted (except as provided in section 4.04 of the revenue procedure).
  • The amount of the deduction using this method cannot exceed the gross income from the qualified business use of the home for the taxable year, reduced by the other business deductions, such as advertising, that are unrelated to the qualified business use of a home). Any amount in excess of this gross income limitation is disallowed and may not be carried over and claimed as a deduction in any other taxable year.

Revenue Procedure 2013-13 clarifies a couple of typical situations, and provides several examples to help keep tax preparers on track. For example, a taxpayer with qualified business uses of more than one home for a taxable year may use the safe harbor method for only one home for that taxable year. However, the taxpayer, if otherwise eligible, may calculate and substantiate actual expenses for purposes of Section 280A for the business use of any other homes for that taxable year.

Another example: taxpayers sharing a home (roommates or spouses, regardless of filing status), if otherwise eligible, may each use the safe harbor method provided by this revenue procedure, but not for a qualified business use of the same portion of the home. Therefore, a husband and wife, if otherwise eligible and regardless of filing status, may each use the safe harbor method for a qualified business use of the same home for up to 300 square feet of different portions of the home.

The IRS estimates that taxpayers will save tens of millions of dollars and 1.6 million tax-preparation hours as a result of this easier safe harbor method, which is will probably result in saved examination and audit time as well. Just remember that the election must be made on a timely-filed return.

1 Dave Sprecace has practiced tax controversy and litigation since 1993. He can be reached through his website,

2012 Report from the 33rd Annual Meeting of the National Association of State Bar Tax Sections
by Eric J. Zinn3

The 33nd annual meeting of the National Association of State Bar Tax Sections (NASBTS) was held Oct. 26 and 27 in San Francisco, California. The NASBTS focuses on state and local tax issues throughout the U.S. At the annual NASBTS meeting, attendees hear various lecturers speak on topics ranging from current trends in the federal tax arena to hot topics facing state and local tax practitioners.

Federal tax topics at this year’s annual meeting included discussions regarding (i) the federal codification of the “economic substance” doctrine at Section 7701(o) of the Internal Revenue Code of 1986, as amended (the IRC), (ii) the Foreign Account Tax Compliance Act and the current Offshore Voluntary Disclosure Program offered by the Internal Revenue Service primarily for U.S. taxpayers with undeclared foreign bank accounts, (iii) worker classification, (iv) cloud computing and related tax issues, (v) conflicts of interest in tax representation, and (vi) gift tax valuation.

State and local topics included discussions on (i) the settlement program of California’s Franchise Tax Board, (ii) an overview for business owners and tax professionals appealing rulings within California’s Board of Equalization, and (iii) current state tax developments. This summary will focus on current state tax developments.

Recent Cases and Rulings from Across the Country

I. Economic Substance and Business Purpose:4

  1. Federal Codification of the Economic Substance—IRC section 7701(o) was added to the IRC by the Health Care and Education Reconciliation Act of 2010. IRC section 7701(o) codifies the “economic substance” doctrine for purposes of federal income taxes.
  2. State Legislation:
    1. Effect of Federal Legislation—IRC section 7701(o) could be viewed as a “definition ”of economic substance. Under that reading, states that adopt the definitions of the IRC have already adopted IRC section 7701(o) (e.g., Colorado, Illinois, South Carolina) as a definition for “economic substance” in subsequent state legislation.
    2. Other States Economic Substance Statutes—The following states have enacted tax legislation/statutes dealing with economic substance and business purpose: (a) California, (b) Massachusetts, (c) Ohio, (d) Tennessee, (e) New Hampshire, and (f) Wisconsin.
  3. State Cases Addressing Economic Substance/Business Purpose:
    1. The Talbots, Inc. v. Commissioner of Revenue, 79 Mass. App. Ct. 159, 944 N.E.2d 610 (2011).
      1. The Talbots, Inc. (Talbots) sold its trademarks, trade names, and other intellectual property (collectively, “marks”) to Jusco BV, a wholly-owned subsidiary of Jusco (USA) Inc., which licensed them back to Talbots in return for a royalty payment. A few years later, Talbots had a wholly-owned subsidiary, The Chicago Classics, Inc. (“Classics”), purchase the marks and license them to the Talbots.
      2. Talbots used proceeds from its initial public offering to make Classics a $102 million loan to enable Classics to purchase the marks.
      3. Classics had no employees, and its only source of income other than the royalty payments was the income it received when it deposited the payments. Talbots employees made all of the decisions for Classics.
      4. The Commissioner of Revenue disallowed the deductions Talbots claimed for the royalties it paid to Classics for use of the marks. Talbots appealed from a decision of the Appellate Tax Board affirming the Commissioner’s adjustments.
      5. The court held the “transaction whereby The Chicago Classics acquired and then licensed the Talbots marks lacked economic substance and business purpose aside from state tax avoidance.” Having disregarded the subsidiary’s corporate form, the Board properly treated Talbots, the parent company, as if it owned the marks because Talbots both controlled them and received substantially all of the income.
    2. Petition of Kellwood Company, NYS Division of Tax Appeals, DTA No. 820915 (March 27, 2008), remanded for further factual development, NYS Tax Appeals Tribunal (September 24, 2009), decision on remand (March 18, 2010) decision affirmed (September 22, 2011).
      1. Kellwood challenged the Commissioner’s requirement that Kellwood file a combined report for itself and its subsidiaries, including those to which it sold receivables, in consideration of the subsidiaries servicing the receivables and advancing the face value of the receivables at discounted present value. The Administrative Law Judge (ALJ) found that the conditions authorizing the Commissioner to require a combined report were satisfied because the 80 percent ownership and unitary business requirements were met, in addition to the presumption that separate reporting would distort New York income as a result of the significant intercorporate transaction involving the receivables. The remaining issue was whether Kellwood had sufficiently rebutted this presumption of distortion.
      2. Finding that Kellwood had not, the ALJ rejected Kellwood’s argument that the “profit potential test” of Rice’s Toyota World5 did not apply because it was not specifically applied in Sherwin-Williams6, and it applied this test not to the subsidiaries but to the transactions as a whole. The ALJ found that Kellwood’s stated goal for the transfer of the receivables to the subsidiary, facilitating needed financing, lacked economic substance, as the same result could have been achieved without transfer to an affiliate, better financing terms were available to Kellwood from a non-factoring transaction, and the cost of the transactions did not justify the level of savings from which Kellwood benefited.
      3. The ALJ also found Kellwood’s stated business purposes to be illusory. The ALJ was not convinced that facilitation of asset securitization was an actual motive for the transactions because the subsidiary involved was not bankruptcy remote and thus could not be used for the securitization and because creation of such intermediate entities is not a customary step or means of saving costs in facilitating securitization. The ALJ noted that centralization of credit and collections was a valid business purpose but found that the transactions with the subsidiary were not a legitimate means of accomplishing this purpose because the motivation and costs associated with the transactions reflected financing rather than centralization of credit and collections as the motivation.
      4. On remand from the Tax Appeals Tribunal, the ALJ found that one of the subsidiaries had economic substance and a business purpose and that it had dealt with related corporations on arms-length terms.
      5. The Tribunal affirmed the ALJ’s holding that Kellwood was required to file on a combined basis with one of its subsidiaries but was not required to file on a combined basis with the other. The Tribunal clearly stated that the economic substance/business purpose analysis in New York is a conjunctive test, that is, a taxpayer must show both economic substance and business purpose. The Tribunal made clear that the “profit potential test” was an appropriate test. With respect to the non-combined reporting subsidiary, the Tribunal held that Kellwood’s transfer pricing study established that the transactions were at arm’s length because the Division failed to challenge the report, “did so at is own peril,” and thus the burden shifted back to the Division to prove “with particularity” that the activities resulted in distortion, which the Division did not.
    3. MASSPCSCO v. Board of Assessors of Woburn, 953 N.E.2d 263 (Mass. App. Ct. 2011).
      1. Massachusetts has a property tax exemption for certain personal property (e.g., stock in trade) owned by corporations. A limited partnership (LP) had historically owned certain wireless network equipment (e.g., towers, antennas, switches, software) and leased that equipment to its parent, the entity operating Sprint’s wireless network. When it became clear that limited partnerships did not qualify for the stock-in-trade exemption, the LP transferred its Massachusetts property to a wholly-owned business trust that qualified as a “corporation” for Massachusetts tax purposes.
      2. MASSPCSCO appealed a decision of the Appellate Tax Board in favor of the assessors of the cities of Woburn and Springfield that denied applications for abatement of certain personal property taxes.
      3. The court affirmed the Appellate Tax Board’s decision and disregarded the transfer of the property to MASSPCSCO as a sham because MASSPCSCO was “created solely for the purpose of avoiding tax liability and was not a viable business entity engaging in substantial business activities.”
      4. The court noted that MASSPCSCO did not have any employees, did not maintain separate bank accounts, did not independently invest its profits, did not do business with any unrelated parties, did not maintain any office space, and did not prove it had dealt with its affiliates in an arms-length manner.
      5. The court was persuaded by the decision in Brown, Rudnick, Freed & Gesmer v. Board of Assessors of Boston, 389 Mass. 298 (1983), which stated that an entity’s mere compliance with the statutory definition of a corporation does not necessarily entitle the entity to claim exemption. Rather, “it must still be shown that the corporation was, in fact, engaged in business.”

II. Business Activity Tax Nexus:

  1. Economic Nexus Developments:
    1. Griffith v. ConAgra Brands Inc., __ W.Va. __ (2012).
      1. Taxpayer, an intangible holding company, lacked taxable nexus and was not taxed on royalty income from licensees of its trademarks that were doing business and selling ConAgra products in West Virginia.
      2. The court distinguished FIA Card Services. In that case, the taxpayer “continuously and systematically engaged in direct mail and telephone solicitation and promotion in West Virginia.” 220 W.Va. at 172, 640 S.E.2d at 235. Here, there was no solicitation. The licensees determined how products were to be sold.
      3. The court confirmed that physical presence was not required for there to be nexus.
    2. Scioto Insurance Co., ____ OK. ___ (2012)
      1. The taxpayer licensed intellectual property to an affiliate, which sublicensed it to Wendy’s restaurants in Oklahoma.
      2. The court held that the taxpayer had no nexus in Oklahoma because of the license to a non-Oklahoma affiliate. The fact that the licensee sublicensed the property to users of the property in Oklahoma did not affect the taxpayer.
  2. Attributional Nexus Developments:
    1. BIS LP, Inc. v. Division of Taxation, 25 N.J. Tax 88 (New Jersey Tax Court 2009), aff’d (New Jersey App. Div. 2011).
      1. BIS was a wholly-owned subsidiary of BISYS. BIS and BISYS formed Solutions, a limited partnership. BISYS was the general partner of Solutions and owned a 1 percent interest. BIS was the limited partner of Solutions and owned a 99 percent interest. Solutions did business in New Jersey; BIS did not. The Tax Court held that BIS was not subject to New Jersey’s Corporation Business Tax. BIS’s 99 percent interest in Solutions did not create nexus. BIS was only a limited partner and not a general partner and BIS did not control Solutions. BIS was only a passive investor in Solutions and, hence, they were not engaged in a unitary business.
    2. UTELCOM, Inc. v. La. Dep’t of Rev. (La. Ct. App. (2011).
      1. Passive ownership of a limited partnership interest in a partnership that did business in Louisiana did not subject a foreign corporation to tax. A regulation that held to the contrary impermissibly expanded the statute and was invalid.
    3. Marshall v. Commonwealth of Pennsylvania, 41 A.3d 667 (Pa. Cmwlth Ct. 2012), aff’d on rehearing (Aug. 16, 2012).
      1. Individual nonresident partner was held to be taxable on foreclosure gain respecting Pennsylvania real estate. The court said that Lanzi and BIS LP were distinguishable because here Marshall invested in the partnership knowing that its business would be owning and operating Pennsylvania real estate.
    4. The California Franchise Tax Board has ruled that the activities of a disregarded LLC will be viewed as if they were conducted by its owner for nexus purposes. Legal Ruling No. 2011-01 (2011); General Rules for Doing Business in California (2011).
  3. Sufficiency of Contacts with State:
    1. Telebright Corporation, Inc. v. Director, Division of Taxation, 25 N.J. Tax 333 (N.J. Tax Ct. 2010), aff’d (New Jersey App. Div. 2012).
      1. A corporation was held taxable in New Jersey because of the presence of a single telecommuting employee, even though her work had nothing to do with New Jersey.
      2. The result might have been different if she had been an independent contractor and not an employee.

III. Apportionment Developments:

  1. Cost of Performance:
    1. AT&T Corp v. Commissioner of Rev. (Mass. App. Tax Bd. 2011).
      1. The Board accepted the taxpayer’s argument that cost of performance should be based on its overall income-producing activity, which was operating a national integrated telecommunications network based in New Jersey.
      2. The Board rejected the Commissioner’s transactional approach that compared the costs of providing calls for Massachusetts customers to the costs of providing calls for other customers.
      3. The operational approach had been approved by the Supreme Judicial Court in Boston Professional Hockey Ass’n, Inc. v. Commissioner of Revenue, 443 Mass. 276 (2005) (income producing activity was operating a NHL franchise and not each game; operational approach was advocated by the Commissioner, contrary to her approach in the AT&T case).
  2. Throwout and Throwback Issues:
    1. Indiana Dep’t State Rev. Letter of Findings 02-20100173 (2011).
      1. Throwback was held inapplicable because the taxpayer proved that its activities in other states exceeded “solicitation” so that Public Law No. 86-272 did not prevent it from being taxed in those states.
      2. There is no indication as to whether the taxpayer in fact filed returns and paid tax in the other states. The Indiana rule literally provides that throwback is not permitted if the other state has “jurisdiction to impose a net income tax” on the corporation.
  3. Other Business v. Nonbusiness Income Cases:
    1. Final Agency Decision No. 09 REV 5669 (N.C. Dep’t of Rev. 2011).
      1. Gain on the sale of limited partnership interest was not apportionable because the taxpayer was a passive investor in the partnership and was not unitary with it, even though the partnership was closely held and operated a series of related businesses.
      2. The fact that the taxpayer had reported income from the partnership as apportionable business income was irrelevant.
    2. Legal Ruling 2012-01 (Cal. Franchise Tax Board 2012).
      1. Corporation buys 20 percent of target corporation’s stock in hopes of acquiring a majority interest and integrating its business and the target’s business but for business reasons the integration never occurs. Gain on the later sale of the target’s stock is nonbusiness income.
      2. Same, except that the corporations are in the same line of business and have a continuing business relationship. The taxpayer is a distributor of the target’s products and after buying the stock the taxpayer becomes the target’s principal distributor. Gain on the later sale of the target’s stock is business income.
      3. Corporation buys a minority interest in target to gain information about target’s technology and it gains that information. Gain on the later sale of the target’s stock is business income.

IV. Sales and Use Tax Nexus:

  1. Scholastic Book Clubs Inc. v. Conn. Commissioner of Revenue Services, __ Conn. _ (2012).
    1. Out-of-state bookseller was held to have taxable nexus.
    2. Teachers in schools who brought the taxpayer’s books to their students’ attention and helped them place orders were acting as the taxpayer’s representatives and established the taxpayer’s physical presence. The teachers received bonus points that enabled them to buy other items from the taxpayer.
  2. Scholastic Book Clubs Inc. v. Farr (Tenn. Ct. App. 2012).
    1. Out-of-state bookseller was held to have taxable nexus.
    2. The facts were basically the same as in the Connecticut case.
    3. The court said that the taxpayer’s use of the schools and the teachers created “a de facto marketing and distribution mechanism” that satisfied the physical presence requirement of Quill.7

3 Eric Zinn concentrates on the practice of tax law at the Denver law firm of Krendl Krendl Sachnoff & Way Professional Corporation.
4 Note: This discussion of recent cases and rulings was drawn from an outline entitled “State Tax Developments: A National View” dated October 27, 2012 and prepared by Peter L. Faber of the law firm of McDermott Will & Emery LLP in New York, New York.
5Rice’s Toyota World, Inc. v. Comm’r., 752 F.2d 89 (4th Cir. 1985).
6Sherwin-Williams Co. v. Comm’r., 438 Mass. 71 (Mass. 2002).
7Quill Corp. v. North Dakota, 504 U.S. 298 (1992).

Written Advice Under Circular 230:
Problems with the Current Rules, Solutions via Proposed Regulations, and the Interplay with the Colorado Rules of Professional Conduct
by Ashley L. Dietrich8

Treasury Department Circular No. 230 (“Circular 230”) governs the conduct of practitioners who practice before the Internal Revenue Service.9 The Treasury Department recently issued proposed regulations (“Proposed Regulations”) regarding Circular 230.10 In the preamble (“Preamble”) to the Proposed Regulations, the Treasury Department identifies problems with the current version of Circular 230’s written advice standards and explains how the Proposed Regulations addresses these issues.11 Part One of this article explains the problems identified with Circular 230’s written advice standards. Part Two compares the current version of §10.35, covered opinions, with the solutions in the Proposed Regulations. Part Three provides a brief discussion of the interplay between the standards in Circular 230 and the Colorado Rules of Professional Conduct.

Part 1: Problems with Circular 230

The Preamble12 identifies issues with the written advice protocol of Circular 230, especially the covered opinion rules (§10.35). This article focuses on three of those problems: (1) complexity, (2) minimal taxpayer protection, and (3) cost of compliance.

The first problem is complexity. Circular 230’s standards for written advice, in particular, the covered opinion rules (§10.35) discussed in Part Two, are difficult to apply. Diligent statutory interpretation is required to distinguish between the different types of opinions encompassed within the covered opinion rules. The Preamble opines that in order to avoid the time-consuming determination of whether written advice is a covered opinion or not, a common practice of practitioners is to use a Circular 230 disclaimer13 in a document. The disclaimer is included whether or not it is necessary. Circular 230 disclaimers are now widely applied without discretion and automatically incorporated into written documents, including signature blocks of emails.

A second identified problem is minimal taxpayer protection. Section 10.35 of Circular 230 unduly interferes with client relationships because, according to the Preamble, it is not an ethical standard that everyone, including clients, can understand. The unfettered use of the Circular 230 disclaimer does not help protect taxpayers nor improve the quality of tax advice. Further, §10.35 covers written advice, but not oral advice. The Preamble’s concern is that in order to avoid the covered opinion rules, practitioners provide oral advice instead of written advice, even though written advice would be more advisable for the client’s needs.

The third problem is cost of compliance. Covered opinions take more time to produce, and thus are more expensive for the client. The Preamble represents that eliminating the covered opinion rules will save practitioners at least $5,333,200 based on reduction of the burden of disclosures in the covered opinion.14

Part 2: The Current Version of Circular 230 and the Proposed Regulations’ Solutions

Current Version of Circular 230- §10.35: Requirements for Covered Opinions

Under the current version of Circular 230 §10.35, a covered opinion is a practitioner’s written advice concerning one or more Federal tax issues arising from a listed transaction,15 a transaction with the principal purpose of tax avoidance or evasion, or a transaction with the principal purpose of tax avoidance or evasion if the written advice is a reliance opinion,16 marketed opinion,17 subject to conditions of confidentiality,18 or subject to a contractual protection.19, 20

To illustrate the difficulty in applying these rules consider the attorney-client privilege and the conditions of confidentiality clause in §10.35.21 Do the conditions of the confidentiality clause imply that every tax-related communication between an attorney and client is a covered opinion? Is it a covered opinion if an attorney discusses tax strategy with a client via email and limits the disclosure of that strategy because of attorney-client privilege? This simple example helps explain why the widespread use of the Circular 230 disclaimer is so prevalent.

Solution under the Proposed Regulations

Proposed Regulation §10.35 is significantly condensed and is only two sentences long. It simply becomes a standard of competence.22 Proposed Regulation §10.35 states that a practitioner must possess the necessary competence to engage in practice before the Internal Revenue.23 Competent practice requires the knowledge, skill, thoroughness, and preparation necessary for the matter for which the practitioner is engaged.24

The dramatic reduction of §10.35 begs the question: how will the Proposed Regulations govern written tax advice? Current §10.37 governs other written advice, and Proposed Regulation §10.37 would govern all written advice.25 It provides that a practitioner may give written tax advice, but the practitioner must base all written advice on reasonable factual and legal assumptions, reasonably consider all relevant facts as practitioner knows or should know, use reasonable efforts to identify and ascertain facts relevant to written advice, not unreasonably rely on statements, and not take into the account the possibility that a tax return will not be audited or that a matter will not be raised on audit.26

Essentially, Proposed Regulation §10.37 highlights a reasonableness standard. Reliance on representations, statements, findings, or agreements are unreasonable if the practitioner knows or should know that representations are incorrect or incomplete, and a practitioner may only rely on the advice of another practitioner if the advice was reasonable and reliance is in good faith considering all facts and circumstances.27

Part 3: Overlap with the Colorado Rules of Professional Conduct and Circular 230

Attorneys who practice before the Internal Revenue Service are subject to both the state rules of professional conduct and Circular 230. The two doctrines are related. For example, the Colorado Rules of Professional Conduct’s definition of competency is almost identical to the standard used in the Proposed Regulations §10.35. Under the Colorado Rules of Professional Conduct, competent representation requires the legal knowledge, skill, thoroughness, and preparation reasonably necessary for the representation.28

Further, Proposed Regulation §10.36, much like the Colorado Rules of Professional Conduct, contains a duty of supervision. Proposed Regulation §10.36 states that practitioners with principal authority and responsibility for overseeing a firm’s practice governed by Circular 230 must take reasonable steps to ensure that the firm has adequate procedures in effect for all members, associates, and employees for purposes of compliance.29 Under the Colorado rules, a partner in a law firm, and a lawyer who individually or together with other lawyers possesses comparable managerial authority in a law firm, shall make reasonable efforts to ensure that the firm has in effect measures giving reasonable assurance that all lawyers in the firm conform to the Rules of Professional Conduct.30 Additionally, a lawyer having direct supervisory authority over another lawyer shall make reasonable efforts to ensure that the other lawyer conforms to the Rules of Professional Conduct.31


The three main problems with the written advice standards under Circular 230 are complexity, minimal taxpayer protection, and cost of compliance. If finalized, the Proposed Regulations eliminate these problems. In fact, the Preamble states that an intended consequence of changing the covered opinion rules is to eliminate the widespread use of Circular 230 disclaimers in documents.32 The Proposed Regulations replace §10.35, covered opinion rules, with a standard of competence. Proposed Regulation §10.37 will govern all written tax advice, not just advice other than covered opinions. Finally, it is notable that some of the standards in the Colorado Rules of Professional Conduct and Circular 230 are similar.

8 Ashley L. Dietrich is an LL.M. in Taxation candidate at the University of Denver. She received her J.D. from the University of Denver Sturm College of Law in 2011. Ashley is licensed to practice law in Colorado and before the US Tax Court.
9 31 CFR Part 10.
10 Prop. Treas. Reg. 138367-06. 77 Fed. Reg. 180, (Sept. 17, 2012).
13 Sample disclosure: IRS Circular 230 disclosure: A U.S. Treasury regulation requires us to inform you that any U.S. tax advice contained in this communication (including any attachments) 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 any party, who is not the original and intended recipient of this communication, any transaction or matter addressed herein.
14 Prop. Treas. Reg. 138367-06. 77 Fed. Reg. 180, (Sept. 17, 2012).
15 A listed transaction is a transaction that is the same as or substantially similar to one of the types of transactions that the IRS has determined to be a tax avoidance transaction. Treas. Reg. §1.6011-4(b)(2). Additionally, I.R.B. 2009-31 and provides an updated list of listed transactions.
16 Written advice is a reliance opinion if the advice 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 issue would be resolved in taxpayer’s favor. 31 CFR Part 10.35(b)(4).
16 Written advice is a marketed opinion if the practitioner knows or has reason to know that the written advice will be used by a person other than the practitioner (or a person who is a member of, associated with, or employed by the practitioner’s firm) in promoting, marketing or recommending a partnership or other entity, investment plan, or arrangement to one or more taxpayers. 31 CFR Part 10.35(b)(5).
18 Written advice is subject to conditions of confidentiality if the practitioner imposes on one or more recipients of the written advice a limitation on disclosure of tax treatment or tax structure of the transaction and the limitation on disclosure protects the confidentiality of that practitioner’s tax strategies regardless of whether the limitation on disclosure is legally binding. 31 CFR Part 10.35(b)(6).
18 Written advice is subject to contractual protection if the taxpayer has the right to a full or partial refund of fees paid to the practitioner (or a person who is a member of, associated with, or employed by the practitioner’s firm) if all or part of the intended tax consequences from the matters in the written advice are not sustained or if the fees paid are contingent on the taxpayer’s realization of tax benefits from the transaction. 31 CFR Part 10.35(b)(7).
20 31 CFR Part 10.35(b)(2)(i)(A-C).
21 31 CFR Part 10.35(b)(6).
22 Prop. Treas. Reg. 138367-06. 77 Fed. Reg. 180, (Sept. 17, 2012).
28 Colo. RPC 1.1(2012).
29 Prop. Treas. Reg. 138367-06. 77 Fed. Reg. 180, (Sept. 17, 2012).
30 Colo. RPC 5.1(a) (2012).
31 Colo. RPC 5.1(b) (2012).
32 Prop. Treas. Reg. 138367-06. 77 Fed. Reg. 180, (Sept. 17, 2012).

Officers and Committee Members of the CBA Tax Section

Council Officers

Chair: Andrew Elliot

Vice Chair: Hank Vanderhage

Secretary: Peter Rose

Treasurer: Jeremy Wysocki

Section Committees and Chairs

Education Committee

CLE: Gary Abrams

Topical Lunches: Andrea Welter/Doug Becker

Pro Bono: Jeremy Wysocki/Tyler Murray

Legislative Committee

Federal: Greg Berger

State: Michael Valdez

LPC Liaison: Andrew Elliot

Publications Committee

Newsletter: Hank Vanderhage/Tyler Murray

Tax Tips: Adam Cohen/ Steven Weiser

Website: Trevor Crow

Agency Positions

CO Dept. of Revenue: Tram Le

Internal Revenue Service: TBA

Interprofessional Committee

IRS Liaison: Stuart Sargent

ABA Report: TBA

Section Liaisons:

 Business: Trevor Crow

 Trusts & Estates: Andrew Kroll

 Real Estate: Andrew Elliot

CBA Staff Liaison: Jill Lafrenz

Stay up-to-date with the Tax Section by visiting the CBA Tax Section website.

This newsletter is for information only and does not provide legal advice.

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