Reading Room

Circular 230–A Banal Brouhaha

Copyright 2006, John B. Payne

There was an astounding proliferation of tax disclaimers in 2005. Circular 230 warnings of 110 words and up started appearing on posts to list serves, fax cover sheets, letters, websites, and newsletters. Some firms have adopted such a rigorous belt-and-suspenders philosophy that they require the disclaimer on every written communication from the firm, including the pizza order for a working lunch. This article will analyze whether Circular 230 covers routine tax advice, written or not. Based on the definitions set forth in 31 C.F.R. § 10.35, Circular 230 warnings are only necessary for tax advice that makes claims of legitimacy for transactions that equate to, or approach, tax evasion.

The Circular 230 business is overblown, just like the idea that giving an agent the power to make gifts could make the principal's estate part of the agent's for estate tax purposes. Ordinary attorneys giving mundane tax advice do not have to put disclaimers in their letters. It is the attorneys who are providing opinions for aggressive tax-avoidance schemes who are required to post Circular 230 notices in their documents.

The reason for the confusion is inherent in the name of the publication. The service calls it Circular 230 because it is based on circular reasoning: Circular 230 applies to tax advice that covered by Circular 230 because it is Circular 230 tax advice. Of course, Circular 230 is so opaque that one can never determine what is not covered by it, so all tax advice must be covered.


Reading carefully enough, it is plain that Circular 230 tax advice contains an element of risk that the Service will find the tax position fraudulent or legally unsound. In other words, Circular 230 covers a memorandum that provides a plausible rationale for what is essentially tax fraud, not a letter in which the attorney explains why a particular estate plan yields a basis stepup.

Circular 230 tax advice is like obscenity. It is pretty hard to define, but the attorney who is giving Circular 230 advice will know it because the advice is promoting or providing a rationale by which tax fraud is not tax fraud. That is, any advice that warrants a Circular 230 warning is bad tax advice. The reason the Service issued Circular 230 is to provide an additional tool to penalize bad tax advice, not to require a surgeon general's warning on bona fide tax advice. It is analogous to requiring illegal drug dealers to declare earnings on their tax returns. Even if the creator of bad tax advice cannot be convicted of tax fraud, he or she can be cited under Circular 230. It is necessary to examine the tax regulations to understand why warnings are only required for bad tax advice.

The motor under the hood of Circular 230 is 31 C.F.R. § 10.35. That is where one looks to determine whether it is necessary to decorate letters, emails, brochures, faxes, and other communications with the Circular 230 legend.

There are two elements to a Circular 230 communication, or “covered opinion.” First, it must be written. 31 CFR § 10.35(b)(2)(i). Second, it must concern a transaction that is substantially similar to a transaction that the Internal Revenue Service has determined to be a tax avoidance transaction; or a plan or arrangement, the principal purpose of which is the avoidance or evasion of a tax. 31 CFR § 10.35(b)(2)(i)(A)-(C). The definition of “principal purpose” is also extremely limited.

The principal purpose of a partnership or other entity, or other plan or arrangement is the avoidance or evasion of taxonly if that purpose exceeds any other purpose. Furthermore, the principal purpose is not to avoid or evade tax if the partnership, entity, plan or arrangement has as its purpose the claiming of tax benefits in a manner consistent with the Code. 31 CFR § 10.35(b)(10). It is not clear whether the “stupid but pure” test would satisfy § 10.35, but it clearly would be satisfied by an entity or arrangement that applies the tax code in a reasonable manner.

Most of the routine tax advice attorneys give their clients will not concern “tax avoidance transactions.” For example, a letter explaining when a client can deduct a portion of the expenses of maintaining a residence for a home office would not fall under any of the above criteria. Nor would advice about the tax effects of different estate-planning options.

More telling, the regulation specifically excludes several types of communications. The most important and relevant of these is an exception for written advice that does not resolve a Federal tax issue in the taxpayer's favor, unless the advice reaches a conclusion favorable to the taxpayer at any confidence level (e.g., not frivolous, realistic possibility of success, reasonable basis or substantial authority) with respect to that issue. 31 CFR § 10.35(b)(2)(ii)(E). Under this clause, if the tax practitioner gives advice to a client that is at least “not frivolous,” the advice is not a “covered opinion.” However, there are other seeming hazards in Circular 230.

Many practitioners are concerned that when they give advice they are issuing a “reliance opinion.” They need not worry. A reliance opinion is not ordinary tax advice. To be a reliance opinion for Circular 230 purposes, the advice must conclude at “a greater than 50 percent likelihood” that “significant Federal tax issues would be resolved in the taxpayer's favor.” 31 CFR § 10.35(b)(4)(I). This would seem to cover most tax advice, except that Circular 230 provides an extremely restrictive definition of the phrase “significant Federal tax issues.”

A Federal tax issue, logically enough, 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.” However, the tax issue is “significant” only if the Internal Revenue Service has a reasonable basis for a successful challenge and the challenge would have a significant impact on the overall Federal tax treatment of the issues addressed in the opinion. 31 CFR § 10.35(b)(3). Briefly stated, under § 10.35(b)(4)(I), the advice must advise the client that tax issues which the Service would consider abusive or fraudulent are likely to be resolved in the taxpayer's favor.

Applying these principles to the question of whether an attorney needs to add a Circular 230 warning to routine tax advice, the answer is no. The warning must be attached to a “covered opinion.” To be a covered opinion, it must a) concern a tax avoidance transaction, or b) fail the “not frivolous” test, or c) propound a tax issue that the Services could probably challenge successfully. Giving reasonable advice to a partnership, entity, plan or arrangement that has as its purpose the claiming of tax benefits in a manner consistent with the Code is not a “covered opinion” and does not require a Circular 230 legend.

An argument in favor of affixing Circular 230 warnings to all firm communications is that it is better to be safe than sorry. The potential penalties for failure to comply with Circular 230 are draconian, including suspension or disbarment from practice before the IRS, not just fines. If penalties are severe enough, almost any measure to ward off sanctions becomes reasonable.

The belt-and-suspenders philosophy prevalent among tax practitioners makes it difficult not to say, “The likelihood that this writing is a covered opinion is vanishingly small, but, just in case it is, I will attach the disclaimer.” This is the same mind set that leads august and powerful multinational law firms to attach meaningless, even silly, disclaimers to their emails and faxes. Because others are attaching disclaimers, the firm is concerned that it will be seen as not covering all the bases if it does not do likewise. However, is this behavior consistent with a rational approach to risk?

Are the partners who insist on attaching warnings and disclaimers to everything similarly risk-averse in all other areas of their lives? Do they drive at minimum speeds? Do they avoid red meat and all deleterious substances? After all, the sanction for these behaviors, if the driver or consumer is unlucky, is early, gruesome death. An interesting survey would determine how many attorneys in silk-stocking firms who will go to any length to avoid the tiniest likelihood of risk in professional matters regularly drive in excess of the speed limit.

Assuming that the “legend everything” crowd are right, what does that mean for the unbeliever? Will the Regional Director disbar the practitioner if it comes to his attention that a letter containing routine tax advice did not bear a Circular 230 legend? Even attributing the most punitive, irrational possible philosophy to the Service, it would be incredible for an earnest advisor who is delivering routine and fairly accurate tax advice to be sanctioned for failure to include a Circular 230 warning. It is silly to presume that there is a real risk of significant penalties in such a situation, so why do pillars of the legal community put ridiculous boilerplate into their written materials?

The most obvious reason would be that an influential partner had read that a Circular 230 warning should be printed on everything and the firm chose the “better safe than sorry” option. However, it is more subtle than that.

There are many phantom tax problems and opportunities that tax “experts” dream up and publish on, because there is a “publish or perish” regime in the tax community. Tax practitioners are strongly motivated to publish new tax issues that no one has written about and law firms are eager to identify problems that no one else sees, so they can “protect” their clients and point out to them that if they had consulted the firm across the street they would be exposed to risk.

Tax firms will prefer to affix the Circular 230 legend to their documents so they present the appearance of perceiving and solving every problem, no matter how illusory. If nothing else, it adds the weight of serious and legal-sounding words to the firm’s output. Therefore it is likely that Circular 230 warnings will continue to appear on every written piece produced by many tax practitioners and law firms. This will be the case despite the fact that the Circular 230 legend tells the reader that the writing to which it is attached contains bad tax advice.

In conclusion, a Circular 230 legend is unnecessary when the practitioner is giving reasonable advice to a partnership, entity, plan or arrangement that has as its purpose the claiming of tax benefits in a manner consistent with the Code. Such advice is not a “covered opinion.” To be a covered opinion, it must a) concern a tax avoidance transaction, or b) fail the “not frivolous” test, or c) propound a tax issue that the Services could probably challenge successfully. Even if the Service decided that the Circular 230 requirement applies to writings that do not appear to be within § 10.35, there is no realistic danger that the service will apply a significant penalty for failure to include the warning in routine and fairly accurate tax advice.

Therefore, barring new information, my law firm will not adorn writings with a Circular 230 warning, even when tax matters are discussed.

By: John B. Payne, principal shareholder of Garrison LawHouse, PC, Dearborn, Michigan, and Wexford, Pennsylvania. He practices in tax, Medicaid, estate planning, elder law, as well as general practice. He received an LL.M. in Taxation in 1988 from Wayne State University. He graduated cum laude from Detroit College of Law in 1983 and received a B.S. from Grand Valley State Colleges in 1976. John has eight years experience administering welfare programs, including Medicaid, and is Chairman of the Board of Directors of Lincoln Behavioral Services in Dearborn and Redford. He is a frequent lecturer on elder law and estate planning and is the current author of MICHIGAN PROBATE (West Group 2002) and COUNSELING THE ELDERLY CLIENT IN MICHIGAN (West Group 2002). He is a member of the National Academy of Elder Law Attorneys. His website is:

1800 Grindley Park Street, Suite 6
Dearborn, MI 48214
tel: 313.563.4900
fax: 313.583.3100
8135 Perry Highway
Pittsburgh, PA 15237

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