The Internal Revenue Service adopted regulations amending IRS Circular 230 (the "Circular 230 Regulations") governing practice before the Internal Revenue Service.  The Circular 230 Regulations are effective for written Federal tax advice rendered after June 20, 2005.  This memorandum briefly describes the Circular 230 Regulations and how they may affect our written tax advice to our clients.

The Circular 230 Regulations set mandatory standards for certain written advice (which the regulations refer to as "Covered Opinions") whether such advice is delivered via email or otherwise.  Any attorney that provides Federal tax advice can be sanctioned for failing to comply with the Circular 230 Regulations.

Under the Circular 230 Regulations, Covered Opinions include, among other things, written advice, including email, addressing Federal tax issues arising from any "partnership, or other entity, any investment plan or arrangement, or any other plan or arrangement a significant purpose of which is avoidance of any tax imposed by the Internal Revenue Code".  The new rules do not provide precise standards to determine when "a significant purpose" of federal tax avoidance exists.  As a practical matter we will have to assume, as will all other Federal tax practitioners, that the term is broadly defined and, consequently, that the rules applicable to Covered Opinions described below potentially apply to a broad range of our written communications with our clients. 

The Circular 230 Regulations generally require that Covered Opinions relating to “significant purpose transactions” either contain a disclaimer (described below) or meet all of the following requirements:

    (i) identify and consider all relevant facts,
    (ii) relate the law to the relevant facts,
    (iii) avoid unreasonable factual assumptions or representations, and
    (iv) consider all significant federal tax issues. 

The Circular 230 Regulations permit a tax advisor to legend written communications with certain disclaimers, which if provided, remove the written tax advice from Covered Opinion status.  We have decided that, given the nature of email messages, such a disclaimer is appropriate for all our emails.  As a result, beginning Monday, June 20, 2005 all of our emails will include the following disclaimer:

    To ensure compliance with requirements imposed by the IRS, Morrison & Foerster LLP informs you that, if any advice concerning one or more U.S. Federal tax issues is contained in this communication (including any attachments), such advice 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 another party any transaction or matter addressed herein.

As the foregoing demonstrates, the Circular 230 Regulations will change the way all law and accounting firms, including our Firm, provide written Federal tax advice.  In some cases, it will not be possible to give written advice on a single Federal tax issue that is part of a larger transaction.  Also, clients can expect, as a general matter, to see certain disclaimers, like the one above, in written tax advice and in tax-related disclosure documents in securities offerings.  While we expect that such disclaimers will become a standard part of Federal tax practice, we wish to emphasize that the disclaimers are not indicative in any manner of a deficiency in the advice we render or in the legal conclusions we reach.

A complete explanation of the Circular 230 Regulations can be found here

If you have any questions, call Stephen Feldman (212-336-8470), Thomas A. Humphreys (212-468-8006), or any of our other tax lawyers.

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