Sec. 10.35: Requirements for Covered Opinions
Sec. 10.35(a): A tax practitioner who provides a “covered opinion” shall comply with the standards of practice under Sec. 10.35.
Sec. 10.35(b)(2)(i): A “Covered Opinion” is written advice on one or more federal tax issues, arising from:
(A) A transaction, that at the time the advice is rendered, the IRS has determined to be a tax-avoidance transaction and identified by published guidance as a listed transaction under 26 CFR 1.6011-4(b)(2);
(B) Any partnership/entity or investment plan/arrangement the “principal purpose” of which is tax avoidance or evasion;
(C) As Sec. 10.35(b)(2)(i)(B), the “Significant Purpose” is the avoidance or evasion of tax, if the written advice is:
1. A reliance opinion;
2. A marketed opinion;
3. Is subject to conditions of confidentiality;
4. Is subject to contractual protection.
Sec. 10.35(b)(2)(ii): Excluded Advice.
A “Covered Opinion” does not include:
(A) Written advice provided to a client during the course of an engagement, if a practitioner is reasonably expected to provide subsequent written advice to the client;
(B) Written advice re: qualified plan, bond opinion, SEC documents;
(C) Written advice prepared for and provided to a taxpayer solely for the use by that taxpayer after the taxpayer has filed a tax return with the IRS reflecting the tax benefits of the transaction. This section does not apply if the tax practitioner “knows, or has reason to know” that the written advice will be relied upon by the taxpayer to take a position on a tax return (including an amended return that claims tax benefits not reported on a previously filed return), filed on or after the date on which the advice is provided to the taxpayer.
Sec. 10.35(b)(3): A federal tax issue is a question concerning the federal tax treatment of an item of income, gain, loss, deduction or credit, the existence or absence of a taxable transfer of property, or the value of property for federal tax purposes.
Sec. 10.35(b)(3): A federal tax issue is significant if the Internal Revenue Service has a reasonable basis for a successful challenge and its resolution could have a significant impact whether beneficial or adverse? and under any reasonably foreseeable circumstance on the overall federal tax treatment of the transaction or matter addressed in the opinion.
Sec. 10.35(b)(4): Reliance Opinion.
(i) 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% likelihood that one or more significant federal tax issues would be resolved in the taxpayer’s favor.
(ii) Written advice, other than for listed transactions or transactions with the principal purpose of avoidance or evasion, is not treated as a Reliance Opinion if the tax practitioner prominently discloses in the written advice that it was not intended or written to be used for the purpose of avoiding penalties that may be imposed on the taxpayer.
Sec. 10.35(b)(5): Marketed Opinion.
Written advice is a marketed opinion if the tax practitioner knows or has reason to know that the written advice will be used or referred to by a person other than the practitioner in promoting, marketing or recommending a partnership or other entity, investment plan or arrangement to one or more taxpayers.
Sec. 10.35(b)(10): Principal Purpose.
The principal purpose of a partnership or other entity, investment plan or arrangement is the avoidance or evasion of any tax imposed by the Internal Revenue Code, if that purpose exceeds any other purpose. The principal purpose is not to avoid or evade federal tax if that purpose is the claiming of tax benefits in a manner consistent with the statute and congressional purpose.
Sec. 10.35(c): Requirements for Covered Opinions.
(c)(i) Factual Matters.
The tax practitioner must use reasonable efforts to identify and ascertain the facts, which may relate to future events if a transaction is prospective or proposed, and to determine which facts are relevant. The opinion must identify and consider all facts that the practitioner deems to be relevant.
(c)(ii) The tax practitioner must not base the opinion on any unreasonable factual assumptions (including assumptions as to future events). An unreasonable factual assumption includes a factual assumption that the tax practitioner knows or should know is incorrect or incomplete. A factual assumption includes reliance on a projection, financial forecast or appraisal. The opinion must identify all factual assumptions relied upon by the tax practitioner.
(c)(iii) The tax practitioner must not base the opinion on any unreasonable factual representations, statements or findings of the taxpayer or any other person (i.e., a representation that the practitioner knows or should know is incomplete).
(C)(2) Relate Law to Facts.
(i) The opinion must relate the applicable law to the relevant facts;
(ii) The practitioner must not base an opinion on unreasonable legal assumptions, representations or conclusions;
(iii) The opinion must not contain internally inconsistent legal analyses or conclusions.
(C)(3) Evaluation of Significant Federal Tax Issues.
(i) The opinion must consider all significant federal tax issues;
(ii) The opinion must provide the practitioner’s conclusions as to the likelihood that a taxpayer will prevail on the merits with respect to each federal tax issue considered in the opinion. The opinion must describe the reasons for the conclusions, including the facts and analysis supporting the conclusions, or describe the reasons that the practitioner is unable to reach a conclusion as to one or more issues;
If the practitioner fails to reach a conclusion at the confidence level of at least more likely than not with respect to one or more significant federal tax issues considered, the opinion must include the appropriate disclosures required;
(iii) In evaluating the significant federal tax issues addressed in the opinion, the practitioner must not take into account that a tax return will not be audited, that an issue will not be raised on audit, or that an issue will be resolved through settlement if raised.