Two “occurrences” in 2005 had enormous ramifications for estate planning. The first was actually a nonevent; the dog didn't bite the man: The Republicans failed to eliminate permanently the estate tax — or even reform it in any way. While the threat of permanent repeal is still out there, at least in Senator Bill Frist's rhetoric, its prospects are dim as long as President Bush's popularity is in the doldrums, with little hope of reviving while the war rages in Iraq, the budget deficit grows and the average Joe feels financially insecure.
The second event is technical but overwhelmingly significant: The Internal Revenue Service issued new final regulations under Circular 230 — which became effective June 20, 2005. While the circular generated a lot of buzz in the upper echelons of the wealth management industry, it is not widely understood. And even if you think you understand it, the circular is so important that it bears reviewing. So Trusts & Estates asked the chairman of our advisory board, Roy Adams of Sonnenschein, Nath & Rosenthal LLP, in its New York office, to outline Circular 230 and talk about who it affects and how, and when we might see that effect.
Here's what he had to say:
Trusts & Estates: Who, exactly, does Circular 230 impact?
Roy Adams: The answer is: Circular 230 impacts absolutely anybody who practices before the IRS. The circular is aimed at “practitioners,” by which the IRS throughout the final regulations — effective on June 20, 2005 — means attorneys, certified public accountants (CPAs), enrolled agents or enrolled actuaries.
T&E: What are the most common applications of Circular 230?
Adams: The standards apply to “covered opinions” by a practitioner concerning one or more federal tax issues arising from a “listed transaction,” any entity, plan or arrangement the principal purpose of which would be the avoidance or evasion of any tax imposed by the Internal Revenue Code, and any entity, plan or arrangement a significant purpose of which is the avoidance or evasion of any tax imposed by the IRC.
T&E: Practically, what does this really mean?
Adams: Here are several examples of when a “covered opinion” could be necessary:
if a practitioner is recommending a family limited partnership (FLP) or limited liability company (LLC) whose principal purpose is to avoid or evade estate or gift taxes;
if a practitioner is recommending a Crummey trust, which has as its principal purpose the avoidance or evasion of gift taxes;
correspondence by practitioners outlining intentionally defective trusts, grantor retained annuity trusts (GRATs), charitable lead annuity trusts (CLATs), and charitable remainder trusts (CRTs) whose principal purpose is federal tax avoidance or evasion;
correspondence or other written communication concerning valuation discounts for gift or estate tax purposes, when the principal purpose might well be the avoidance or evasion of federal taxation.
T&E: What is a “significant purpose transaction”?
Adams: It is a transaction in which the avoidance or evasion of federal tax is a significant part of the transaction, as opposed to the principal purpose. The written advice concerning a significant purpose transaction may be a reliance opinion, a marketed opinion, an opinion subject to confidentiality or an opinion subject to contractual protection. If any of these is the case, a covered opinion is necessary.
If you have an opinion that is potentially a reliance or marketed opinion and you want to get out of writing it as such (because this requires substantial time for the lawyer and expense for the client), you can do this by putting in the opinion what Circular 230 calls a “prominent disclosure” stating that the taxpayer may not rely upon it to avoid tax penalties. With potential “marketed opinions,” you must also add that the advice contained in the opinion was written to support the promotion or marketing of the transaction being written about. Plus you have to say that the recipient of the opinion should seek advice from an independent tax advisor, based upon his own particular circumstances.
T&E: Besides “practitioners,” as defined in the IRS regulations, is anyone else affected?
Adams: No. Only those who are defined as practitioners are affected.
But remember that the term practitioner means any lawyer or CPA, enrolled agent or enrolled actuary. He can be working at a bank, trust company, financial planning company, insurance company or financial services marketing group and be giving advice as we've described.
When a trust officer at a bank is a lawyer or CPA, he should comply. So too should any registered representative who is an attorney or CPA.
In other words, because of Circular 230, being a lawyer or CPA sure as Dickens means you have a much heavier accountability these days.
T&E: So what happens if you don't comply? What are the consequences?
Adams: Any practitioner may be censored, suspended or disbarred from practicing before the IRS for willfully violating any of the regulations under Circular 230.
It is as sweeping as many people feared.
T&E: What does it mean to a person's career to be barred from practice before the IRS?
Adams: You mean besides the shame, humiliation and public disgrace? It's a death sentence for an estate planning and tax lawyer's practice.
But say you're a lawyer or CPA and your time is not totally engaged with that profession because you're at a bank, trust company, investment firm or the like, then the relevant questions are: Are you making recommendations in writing? Is it important for you to practice before the IRS? Do you attend tax conference hearings, submit tax forms, or prepare data and information that will be used to make a case for the taxpayer with the IRS?
If you're at a bank, you might say, “Oh, I don't care if I practice before the IRS.” My response would be: “Really? You don't care if you can't file gift tax or estate tax returns and you can't in any way communicate with the IRS?
Not being able to practice before the IRS is a big loss.
T&E: How will we know how Circular 230 is being applied?
Adams: The issue is only going to surface when the IRS is meeting with a practitioner who gave written tax advice and that advice did not follow Circular 230.
Others won't know at first — just the person affected.
Of course, we don't know yet if the IRS is going to publish a list of those who have been barred from practicing before the agency.
But even if there isn't a formal list, the information will get out.
Any attorney barred from practicing before the IRS should notify his firm, the firm should notify the local bar association, and much of what the bar association does is public. An enterprising reporter probably could figure out who's been suspended, censored or disbarred for Circular 230 violations.
Accountants don't have it any easier. The American Institute of Certified Public Accountants (AICPA), the national professional association for CPAs in the United States, is now regularly publishing in the The Wall Street Journal a list of names of those against whom the group has taken disciplinary action.
Face it: There is no hiding.
T&E: When will we start hearing about such disbarments and suspensions?
Adams: Start looking for them a year or so from now. Names will start to surface. Unless of course there's been complete compliance. And do you think that's possible? I certainly don't.
Edward Broida Collection: American abstract artist Philip Guston's 1938 oil “Gladiators” was one of 174 works of art donated by real estate mogul Broida in October of 2005 to the Museum of Modern Art in New York.