Standards for Written Tax Advice

Today I am interested in Circular 230 and its standards for written tax advice. Though I may later address how written tax advice relates to penalty issues, my primary concern is how the standards fit in with Circular 230 after Loving and Ridgely. I am not entirely certain that they do fit in. So let's rewind a few years.



It was 2004. The tax shelter wars were raging and Congress took action. One of the legislative reforms was the enactment of 31 U.S.C. § 330(d). (Though most tax practitioners are familiar with Title 26 of the United States Code, many overlook Title 31, section 330 of which authorizes Circular 230.) This new subsection appeared fairly straightforward:

(d) Nothing in this section or in any other provision of law shall be construed to limit the authority of the Secretary of the Treasury to impose standards applicable to the rendering of written advice with respect to any entity, transaction plan or arrangement, or other plan or arrangement, which is of a type which the Secretary determines as having a potential for tax avoidance or evasion.

Congress had clearly given Treasury the power to regulate written tax advice. Treasury ran with this new power and, in final regulations issued in 2007, redefined practice before the Service to include rendering that kind of written tax advice. These overly complex regulations became known as the Covered Opinion rules. For most of us, the story ended here. Some, however, became embroiled in litigation with the government over the meaning of practice before the Service. This was the now-famous Loving decision, in which the D.C. Circuit held that preparing tax returns was not practice before the Service. Why does this matter?

At first glance, subsection 330(d) is not related to Loving. It is not mentioned in the opinion. I cannot recall seeing it mentioned in any of the briefs supporting the government, which confused me. After all, if writing tax opinions constitutes practice, why not preparing tax returns? 

Eventually, my confusion let me back to the statute. After closely reading the statute, I discovered that Congress had not redefined practice to include writing tax opinions. Instead, Congress had prohibited using section 330 to challenge Treasury's authority to create standards for some written tax advice. This means that written tax advice was, at a minimum, not already a part of practice before the Service. From here, things can get messy.

If written tax advice is not practice before the Service, then it would not be subject to Circular 230. Treasury can come up with standards for some written tax advice, but there is no obvious enforcement mechanism, except, possibly, certain Title 26 penalties. A side effect of this interpretation would be to restore to the states some of their potential jurisdiction over UPL and UPA.