Ed Smith will present the Knoxville Bar Association’s seminar entitled “Nonprofit Law Update: Information Board Members and Staff Need to Know.” Ed will provide a comprehensive checklist of best practices for a nonprofit to ensure its board and staff are keeping themselves and the organization compliant. Afterwards, a panel of attorneys will discuss issues faced by nonprofit board members. The seminar will take place on Wednesday, October 28, 2015 at the UT Conference Center.
“Close don’t count in baseball. Close only counts in horseshoes and hand grenades.”
– Hall of Fame baseball player Frank Robinson
When is a will not a will, even when the testator, witnesses and drafting lawyer intend it to be a will? When the statutory requirements for execution are not strictly followed. The Tennessee Court of Appeals recently reiterated that point in In re Estate of Morris. The opinion should lead lawyers to check their will forms and clients’ existing wills to make sure they comply with the statute of wills.
Bill Morris Sr. purported to execute a will leaving his estate to two of his four living children and three of his four grandchildren by a deceased fifth child. Mr. Morris’s signature appeared at the end of the body of the will, immediately followed by the caption “Affidavit.” Underneath “Affidavit” appeared testimony from putative witnesses, followed by the witnesses’ signatures and then a notary acknowledgement. The witnesses signed nowhere else.
Mr. Morris’s two children who were omitted from the will filed a will contest, arguing that the will was invalid due to improper execution. At issue was whether the witnesses signed the will in attestation, which is mandatory, or signed a self-proving affidavit, which is optional. If they signed the will but not a self-proving affidavit, the will was validly executed but should not have been admitted to probate until the proponents produced affidavits of proof (or live testimony) from the attesting witnesses. If the witnesses signed only a self-proving affidavit, an essential element of will execution was missing. Can witness signatures on a self-proving affidavit, signed at the same time as the testator signed the will and claiming that the witnesses signed the will, be treated as signatures on the will? Does it matter that the testator and the witnesses intended valid will execution? Is close good enough, i.e., will Tennessee (as several states have done) apply a “substantial compliance” standard rather than “strict compliance?”
Morris was controlled by two prior cases. In In re Estate of Stringfield, the testator signed the will but the witnesses signed only a self-proving affidavit. It is unclear whether the witnesses signed the affidavit on the same day the testator signed the will or at a later date. The Court of Appeals ruled that absence of the necessary witness signatures on the will invalidated the will.
In the 2012 Tennessee Supreme Court case In re Estate of Chastain, even though the testator initialed the first two pages of the will and signed the self-proving affidavit on the same day as the witnesses signed the will, the absence of the testator’s signature at the end of the will invalidated the will. The court held that Tennessee requires strict compliance with will execution formalities. Close is not good enough.
Chastain tells us that signing the self-proving affidavit cannot be treated as signing the will: “By requiring the affidavit to ‘be written on the will or, if that is impracticable, on some paper attached to the will,’ Tenn. Code Ann. § 32-2-110, a clear distinction is drawn between an affidavit of attesting witnesses and a will.” The Supreme Court declined to adopt the doctrine of integration, by which the affidavit could be deemed a part of the will. The will and the self-proving affidavit are legally separate and distinct documents.
In Morris, the witnesses clearly signed on the same day as the testator did and the “Affidavit” began on the same page as the testator’s signature. The Court of Appeals found that neither fact made the witnesses’ signatures on the affidavit proper attestation of the will.
The opinion notes that the statute expresses a preference (but not a requirement) for the self-proving affidavit to begin on the same page as the end of the will.
The fact that a lawyer drafted the documents required legal words to be honored: “Where a will is drafted by a lawyer, technical words used therein must be given technical meanings … and [e]very word used by the testator is presumed to have some meaning.” Use of the title “Affidavit” meant that what followed was an affidavit, and the reference in the affidavit to the “foregoing” will was evidence that the affidavit was preceded by, not a part of, the will. Because the witnesses signed only a self-proving affidavit and failed to sign the will, the will was found to be invalid.
Is this result fair to Mr. Morris and the intended beneficiaries of the will? A substantial compliance standard surely would work a fairer result in many cases where intention to make a will can be proved. However, a strict compliance standard reflects the General Assembly’s public policy choice to reduce litigation. A “close is good enough” standard would encourage wide variation in will formats and execution procedures, leading to an endless procession of litigated cases to determine which purported wills are good enough. In the three legislative cycles since Chastain, the General Assembly has not adopted a substantial compliance standard or the doctrine of integration, or otherwise relaxed the statutory requirements for executing a will.
What should lawyers do in light of Stringfield, Chastain and Morris? First, check the execution language in your will forms. If there is any question whether all necessary elements are present, modify the forms. Consider referring to “this will” in the attestation clause and “the will” or “the foregoing will” in the self-proving affidavit. Make sure the testator signs the will above the attestation clause and that the witnesses sign twice, once on the will and once on the self-proving affidavit. No shortcuts.
Second, check whether any of your clients’ previously executed wills fail to comply with the statute of wills. If so, contact the affected clients and suggest that they sign new wills (hoping that all such clients are still living and competent to do so).
Third, make sure your office meticulously follows a uniform procedure every time a will is executed. If you are ever called to be a witness regarding the execution of a specific will, you likely won’t remember that occasion specifically, but can testify that your firm does it the same way every time, without exception.
Perhaps one day the General Assembly will relax will execution standards. Until then, close counts only in horseshoes, hand grenades — and substantial compliance states.
- “More Info on Frank Robinson,” ESPN Classic, http://espn.go.com/classic/000728frankrobinsonadd.html, citing Timemagazine (July 31, 1973).
- In re Estate of Morris, 2015 Tenn. App. LEXIS 62, cert. denied, No. M2014-00874-SC-R11-CV (Tenn. June 15, 2015).
- The relevant portions of the will are reproduced in the Court of Appeals opinion at http://tncourts.gov/sites/default/files/inreestateofmorrisopn.pdf.
- Tenn. Code Ann. section 32-1-104, which has remained largely unchanged for more than seven decades, provides as follows:
The execution of a will, other than a holographic or nuncupative will, must be by the signature of the testator and at least two witnesses as follows:
(1) The testator shall signify to the attesting witnesses that the instrument is the testator’s will and either:
(A) The testator sign;
(B) Acknowledge the testator’s signature already made; or
(C) At the testator’s direction and in the testator’s presence have someone else sign the testator’s name; and
(D) In any of the above cases the act must be done in the presence of two attesting witnesses.
(2) The attesting witnesses must sign:
(A) In the presence of the testator; and
(B) In the presence of each other. (Emphasis added.)
- Tenn. Code Ann. section 32-2-110 allows the use of a “self-proving affidavit” in lieu of the witnesses’ live testimony to establish the facts necessary to admit the will to probate:
Any or all of the attesting witnesses to any will may, at the request of the testator or, after the testator’s death, at the request of the executor or any person interested under the will, make and sign an affidavit before any officer authorized to administer oaths in or out of this state, stating the facts to which they would be required to testify in court to prove the will, which affidavit shall be written on the will or, if that is impracticable, on some paper attached to the will, and the sworn statement of any such witnesses so taken shall be accepted by the court of probate when the will is not contested as if it had been taken before the court. (Emphasis added.)
- See Dan Holbrook, “Questionable Will Executions: Should ‘Substantial Compliance’ Suffice?,” Tennessee Bar Journal, April 2012, http://www.tba.org/journal/questionable-will-executions-should-substanti…, for discussion of the strict compliance and substantial compliance standards.
- In re Estate of Stringfield, 283 S.W.3d 832 (Tenn.Ct.App. 2008).
- In re Estate of Chastain, 401 S.W.3d 612 (Tenn. 2012).
- Id., at 620.
- See In re Estate of Morris, 2015 Tenn. App. LEXIS 62, at *8-9, citing In re Estate of Chastain, 401 S.W.3d 612, 622 (Tenn. 2012):
In essence, Appellees are asking this Court to apply the doctrine of integration by which “a separate writing may be deemed an actual part of the testator’s will, thereby merging the two documents into a single instrument.” In re Will of Carter, 565 A.2d 933, 936 (Del. 1989). In In re Estate of Chastain, 401 S.W.3d 612 (Tenn. 2012), the Tennessee Supreme Court held that the decedent’s signature on the affidavit did not satisfy the statute requiring the testator’s signature on a will. The Chastain court explained that, in these types of cases, Tennessee has not adopted the doctrine of integration “because doing so would amount to a relaxation of statutory requirements.”
- Id., at *6-7, quoting Daugherty v. Daugherty, 784 S.W. 2d 650, 653 (Tenn. 1990).
- Referring to the “foregoing” will in the attestation clause need not be fatal. Tennessee Legal and Business Forms, section 28:273, does so, but explicitly says the clause is part of the will: “the foregoing instrument, consisting of [____] pages, including the page on which we have signed as witnesses. …” 4 Tenn. Legal & Bus. Forms, § 28:273.
- When using commercial forms, take care to understand how the forms are structured. Form resources routinely provide complete and partial will forms. Some include an attestation clause and self-proving affidavit, but others, to avoid repetition, require the user to add those elements from another form.
- Also contact your malpractice insurance carrier if required under the policy.
There are planning options to protect inherited retirement accounts from the beneficiaries’ creditors.
At the end of the third quarter of 2014, an estimated $7.3 trillion was held in Americans’ individual retirement accounts (IRAs), almost 11 percent of all household financial assets in the United States. A recent United States Supreme Court ruling means that, without good estate planning, a significant portion of that wealth might not be protected from creditors when it passes to beneficiaries at the owners’ deaths.
In Tennessee, retirement accounts are well protected from creditors while the initial owner is living.
In federal bankruptcy. Tennessee is in the majority of states that have “opted out” of Bankruptcy Code section 522(b)(2) exemptions, meaning Tennessee bankruptcy debtors are limited to the exemptions in Bankruptcy Code section 522(b)(3). Section 522(b)(3) exempts (among other things) property exempt under state law and “retirement funds” held in a fund or account exempt under various Internal Revenue Code (IRC) sections, which include individual retirement accounts (IRAs) and qualified plans under the Employee Retirement Income Security Act (ERISA), such as 401(k) plans. Thus, in bankruptcy the initial owner’s IRAs and ERISA-qualified plan accounts are generally protected.
Outside federal bankruptcy. If a creditor pursues the retirement account of an initial owner not in bankruptcy, the creditor will be similarly out of luck. The anti-alienation provisions of ERISA section 206(d) and IRC section 401(a)(13) prohibit creditors (with some exceptions) from reaching ERISA plan accounts. In Tennessee, IRAs are exempt from any and all claims of the initial owner’s creditors (except the state of Tennessee) under Tenn. Code Ann. section 26-2-105(b).
After the initial owner dies, creditor protection for beneficiaries is uncertain.
Inherited IRAs. In Clark v. Rameker, the U. S. Supreme Court held that inherited IRAs are not “retirement funds” for purposes of Bankruptcy Code section 522(b)(3)(C), because the inheritor, unlike the original owner, (1) may not contribute to the IRA, (2) must withdraw from the IRA annually regardless of age, and (3) may withdraw the entire IRA balance at any time without penalty. Therefore, inherited IRAs will be exempt in Tennessee only if they are exempt under state law that applies inside or outside bankruptcy.
Tenn. Code Ann. section 26-2-105(b) provides the following (emphasis added):
[Except for claims under a “qualified domestic relations order,”] any funds or other assets payable to a participant or beneficiary from, or any interest of any participant or beneficiary in, a retirement plan which is qualified under §§ … 408 and 408A … of the Internal Revenue Code … are exempt from any and all claims of creditors of the participant or beneficiary, except the state of Tennessee. All records of the debtor concerning such plan and of the plan concerning the debtor’s participation in the plan, or interest in the plan, are exempt from the subpoena process.
This provision exempts traditional IRAs (IRC section 408) and Roth IRAs (IRC section 408A) from the claims of creditors of a participant or “beneficiary,” which is not defined. Does this mean an IRA beneficiary named by the initial owner? If yes, does this protection apply after the beneficiary inherits the IRA or only during the initial owner’s lifetime?
Contrast Tenn. Code Ann. section 26-2-111(1)(D), which provides that the assets of a “stock bonus, pension, profitsharing, annuity, or similar plan or contract on account of death, age or length of service” (which includes IRAs) are not exempt under that section “if the debtor may, at the debtor’s option, accelerate payment so as to receive payment in a lump sum or in periodic payments over a period of sixty (60) months or less.” Because the beneficiary of an IRA may withdraw the entire balance at any time (though required to recognize it as taxable income), an inherited IRA does not appear to be protected by that provision.
Regardless of one’s confidence in Tennessee’s state law protection of inherited IRAs, because beneficiaries move and because so few states explicitly exempt inherited IRAs, it is likely that a beneficiary’s interest in an inherited IRA will not be protected from creditors.
Inherited ERISA qualified plan accounts. The U. S. Supreme Court’s Clark rationale should mean inherited qualified plan accounts also are not “retirement accounts” for purposes of Bankruptcy Code section 522(b)(3)(C), for all the same reasons inherited IRAs are not. However, ERISA’s anti-alienation provision might continue to protect an inherited ERISA account.
There are planning options to protect inherited retirement accounts from the beneficiaries’ creditors.
Given the uncertainty of creditor protection for inherited IRAs (and perhaps inherited ERISA accounts), lawyers need to look for ways to help clients plan for their retirement account beneficiaries. The following are a few options.
A surviving spouse should consider rolling over to her own IRA any IRAs inherited from her spouse. The Supreme Court did not speak to whether an IRA inherited by a spouse and rolled over or not rolled over to his or her own IRA is an inherited IRA for purposes of Bankruptcy Code section 522(b)(3)(C). Until we get guidance, an IRA in the survivor’s name looks less like an inherited IRA than an IRA left in the deceased spouse’s name.
A non-spouse beneficiary should consider not rolling over inherited qualified plan accounts into inherited IRAs. The Clark rationale likely undermines Bankruptcy Code section 522(b)(3)(C) protection for inherited ERISA accounts, but the ERISA anti-alienation provisions might continue to offer protection.
Name a spendthrift trust as the beneficiary of the retirement account. A basic estate planning strategy is to leave inheritance to a spendthrift trust that protects trust assets from the trust beneficiaries’ creditors. The retirement account owner can name a spendthrift trust as the beneficiary of a retirement account, but doing so requires carefully navigating complex tax rules if the owner wants to preserve “stretch out” of income tax benefits.
After the death of the initial account owner, the income tax benefits of traditional and Roth retirement accounts may be extended over the life expectancy of the beneficiary if the beneficiary is a “designated beneficiary.” An individual can be a designated beneficiary, but a trust, estate, business entity or charity cannot. However, “accumulation trusts” and “conduit trusts” allow “looking through” the trust to one or more trust beneficiaries as the designated beneficiaries, with stretch out of the tax benefits.
If an “accumulation trust” satisfies four requirements for the beneficiaries of the trust to be considered designated beneficiaries, the life expectancy of the oldest current or “contingent” beneficiary (but not any mere “successor” beneficiary) will be used to determine the annual “required minimum distribution” (RMD) that must be withdrawn from the IRA by the trustee. The advantage of an accumulation trust over a conduit trust is that any amounts withdrawn from the IRA may be accumulated in the trust or distributed to or for the beneficiaries, pursuant to the trust terms. The disadvantage is that it is not always clear, without precise drafting, which beneficiaries must be considered in determining the oldest.
A “conduit trust” allows the trust to use the life expectancy of someone other than the oldest beneficiary, provided the trust requires that the annual RMD, and any other amounts withdrawn from the IRA by the trustee, be distributed from the trust to the younger beneficiary (or perhaps used for the beneficiary’s immediate benefit). Because the beneficiary will receive all RMDs (calculated using the beneficiary’s life expectancy) and no one else will receive anything distributed from the IRA during the beneficiary’s lifetime, the IRA tax benefits may be stretched out over the beneficiary’s lifetime. The disadvantage of a conduit trust compared to an accumulation trust is that RMDs must be paid outright to the beneficiary (inappropriate in some situations) and no longer will be protected from creditors.
Use a Trusteed IRA. An alternative to using a separately drafted trust is a “trusteed IRA” or “IRA trust,” offered by some financial institutions and approved under tax law as an alternative to the more common custodial IRA. The trusteed IRA, if it includes spendthrift provisions, should provide the same creditor protection as a separately drafted spendthrift trust. The advantage of a trusteed IRA is that the trust form is provided by the financial institution, so no lawyer is needed to draft the trust. The disadvantage of a trusteed IRA is that the trust form is provided by the financial institution, so the financial institution must be the trustee and the client’s lawyers might be unable to craft personal and flexible provisions. A trusteed IRA is to a lawyer-drafted spendthrift trust what a Uniform Transfers to Minors Act custodial account is to a trust: cheaper to create, sufficient in some situations, and deficient in others.
- “Retirement Assets Total $24.2 Trillion in Third Quarter 2014,” Investment Company Institute (Feb. 26, 2:05 PM), http://www.ici.org/research/stats/retirement.
- Tenn. Code Ann. § 26-2-112.
- The amount of an IRA protected in bankruptcy is subject to a generous dollar limit under 522(n). Because a named beneficiary of an IRA or qualified plan account (other than a spouse for certain purposes) has no rights in the account until the owner dies, the account cannot be reached by the beneficiary’s creditors while the initial owner is living.
- 29 U.S.C. § 1056(d)(1), 26 U.S.C. § 401(a)(13). To the extent that Tenn. Code Ann. Section 26-2-111 (1)(D) addresses ERISA accounts, it is preempted by ERISA. In re Seller, 107 B.R. 152 (Bankr. E.D. Tenn 1989); see also ERISA § 514(a), 29 U.S.C. § 1144(a).
- Clark v. Rameker, 134 S.Ct. 2242 (2014).
- At least six states have explicitly exempted inherited IRAs from creditor claims. See Fla. Stat. § 222.21; Ohio Rev. Code § 2329.66; Mo. Rev. Stat. § 513.430; Alaska Stat. § 09.38.017; Tex. Prob. Code § 42.0021; N.C. Gen. Stat. § 1C-1601. In states that have not, many court cases, applying rationale similar to that in Clark, have found that inherited IRAs do not afford the same creditor protection as IRAs held by the initial owner.
- Tenn. Code Ann. § 26-2-111(1)(D).
- The issue is moot for some qualified plans, which require a lump sum or relatively short-term payout to beneficiaries. Any amounts distributed from a retirement account to an individual lose whatever creditor protection the account offered.
- IRC § 401(a)(9). Traditional IRAs allow pre-tax (tax-deductible) contributions and deferral of all income taxation until assets are withdrawn from the account, at which time the entire withdrawal is taxable. Roth IRAs are funded by after-tax (nondeductible) contributions, but all growth within the IRA is tax-free. Generally, the longer value can be left in the IRA with compounding growth, the greater the income tax benefits of the IRA. The same advantages are available under federal law for traditional and Roth 401(k) accounts, but, as noted above, some plans do not allow beneficiary stretch out. If the IRA owner dies before her required beginning date (April 1 of the calendar year following the calendar year of death) (RBD) and there is no designated beneficiary, then the entire balance of the IRA must be distributed no later than the end of the fifth calendar year after the year of the owner’s death. If the IRA owner dies before her RBD and there is a designated beneficiary, RMDs are based on the beneficiary’s life expectancy (all life expectancies determined under IRS tables). If the IRA owner dies on or after her RBD and there is no designated beneficiary, RMDs are based on the owner’s life expectancy (without regard to death). If the IRA owner dies on or after her RBD and there is a designated beneficiary, RMDs are based on longer of the owner’s life expectancy (without regard to death) and the beneficiary’s life expectancy.
- To avoid the owner’s estate being deemed a beneficiary of a revocable trust to which a retirement account is payable, the trust should include a provision prohibiting using retirement assets to pay any estate obligations (taxes, debts, expenses) after Sept. 30 of the year following the year of death (the date as of which the designated beneficiary determination is made).
- (1) The trust is valid under state law; (2) the trust is irrevocable or will become irrevocable upon the death of the IRA owner; (3) the trust beneficiaries who may benefit from the IRA are identifiable from the IRA beneficiary designation or the trust instrument; and (4) a copy of the trust or specified alternate documentation is given to the IRA plan administrator by Oct. 31 of the year following the year of the owner’s death. Treas. Reg. § 1.409(a)(9)-4(a)(5)(b).
- Treas. Reg. § 1.409(a)(9)-5, A-7.
In a will contest case, HPS attorney Ed Smith represented two siblings who argued that their father’s will (which left them nothing) was not properly executed in accordance with the requirements of Tennessee law, because the witnesses to the will signed only the affidavit of attesting witnesses and not the will itself. The Court of Appeals agreed and found the will invalid. In re Estate of Bill Morris. The case reinforces the Tennessee Supreme Court’s standard of strict compliance with the statutory requirements for the execution of a will.
R.I.P. Circular 230 Disclosures, or How the IRS Saved the Planet and Returned 30 Minutes of Your Day
How many times per day do you see something like this?
Required Circular 230 Tax Advice Disclosures:
- Nothing contained in this column and any attachments is intended to be used, may be used, or may be relied upon by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer under the Internal Revenue Code of 1986, as amended.
- Any written statement contained in this column and any attachments relating to any Federal tax transaction or matter may not be used by any person to support the promotion or marketing of or to recommend any Federal tax transaction(s) or matter(s).
The Internal Revenue Service isn’t famous for giving presents, but in June it gave a wonderful gift to everyone who writes or reads letters or emails from lawyers, CPAs, financial service professionals and so many others: it eliminated the need for language like the example above, which for years has clogged computer servers, killed countless trees, and stolen minutes from your day and mine through unnecessary appending and scrolling. Thankfully, Circular 230 disclosures are now dead.
Circular 230 Governs Practice Before the IRS
The IRS issues and maintains rules, known as Circular 230, providing minimum standards of conduct for practice before the IRS (preparing tax returns, representing taxpayers in disputes, etc.). Those who do not meet Circular 230’s standards are subject to disciplinary action, including suspension or disbarment from practicing before the IRS. Among the goals of Circular 230 is to improve and safeguard the quality of tax counsel and advice provided to taxpayers.
‘Covered Opinions’ and Circular 230 Disclosures
In an effort to serve that purpose, in 2004 the IRS revised Circular 230. New language in Section 10.35 created rules and standards for written tax advice called “covered opinions,” which included advice on a transaction that had tax avoidance as a significant purpose and which advice concluded one or more significant federal tax issues were more likely than not to be resolved in the taxpayer’s favor. Any written tax advice that did not meet the covered opinion requirements had to “prominently display” a disclosure that the taxpayer could not rely on the advice to avoid potential tax penalties.
While well intended, the new rules were a failure. First, the requirements for writing a covered opinion were so onerous that few clients were willing to pay a lawyer to meet them. Instead of leading to better tax advice, it led practitioners, who continued to provide the best advice they could give, to slap the disclosure language on the 99.9 percent of written tax advice that did not meet the covered opinion requirements. Clients thought tax professionals were disclaiming their own advice, until the clients were taught to ignore the language altogether. Second, while the language applied only to federal tax advice, it has been grossly overused, being added without thought to emails forwarding jokes or making lunch plans and to letters that never mention or imply a single tax issue, reinforcing the perception that the language was meaningless.
New Final Regulations Reverse Course
Recognizing the failure, the IRS in June issued final regulations applying to written tax advice rendered on or after June 12, 2014. The Preamble to the regulations notes that the covered opinion rules “increased the burden on practitioners and clients, without necessarily increasing the quality of the tax advice that the client received[,] … were burdensome and provided minimal benefit to taxpayers[,] … [and] contributed to overuse, as well as misleading use, of disclaimers on most practitioner communications even when those communications did not constitute tax advice.”
The regulations modify Circular 230 in five key ways.
First, the covered opinion rules are eliminated from Section 10.35. Section 10.35 now simply says “[c]ompetent practice” requires “the knowledge, skill, thoroughness, and preparation necessary for the matter.” Instead of a wide chasm between covered opinions on which taxpayers could rely and all other “unreliable” advice with required disclosures, all written tax advice now is subject to the same standard, contained in Section 10.37. Practitioners must base all written advice on reasonable factual and legal assumptions, exercise reasonable reliance on the representations of others, use reasonable efforts to identify and ascertain the facts relevant to the written advice, and consider all relevant facts that the practitioner knows or reasonably should know. The determination of whether a practitioner has complied with the requirements of Section 10.37 will be based on all facts and circumstances.
Second, the regulations define what constitutes written advice on a federal tax matter, subject to the rules. Among the items excluded are continuing education presentations provided solely to enhance practitioners’ knowledge of federal tax matters, provided the presentation does not market or promote particular transactions. Including the presenter’s contact information, by itself, does not constitute marketing or promoting a transaction.
Third, while the 2004 revisions prohibited practitioners, when issuing written tax advice, from taking into account the possibility that an issue will be resolved through settlement, practitioners now may consider possible settlement factors. The preamble to the revised rules recognizes that “the existence or nonexistence of legitimate hazards that may make settlement more or less likely may be a material issue for which the practitioner has an obligation to inform the client.” Practitioners still may not consider audit risk when issuing written tax advice.
Fourth, Section 10.36 expands the duty of those within a law firm who have “principal authority and responsibility” for overseeing the firm’s federal tax practice to take “reasonable steps” to ensure that the firm has adequate procedures for complying with Circular 230 requirements. Managing or supervisory tax lawyers can be disciplined by the IRS (suspension or disbarment from practice before the IRS) for failing to implement firm policies and procedures in support of Circular 230 requirements.
Fifth, and of broadest application to the U.S. economy and Americans’ quality of life, no covered opinions means no mindless appending of meaningless disclosure language to every email, letter, website post, fax, telegram and smoke signal emanating from law firms and other tax advisors. The rules now require only those disclosures, disclaimers and warnings that are necessary for the specific written advice. If your knowledge of the facts is limited, describe the limitations. If you relied on information from the taxpayer or someone else, say so. If additional research might change the conclusions, warn the client. In short, do what wise law practice requires to protect the client and yourself.
Starting today, never, ever send another written communication with the pointless disclosure found at the beginning of this article. Eliminate it from your email signature. Delete it from form letters. If someone sends it to you, take the time to enlighten them. It is time for computer servers to rejoice, for trees to celebrate, and for you and me to think of all the things we’ll do with the time we used to spend scrolling through Circular 230 language. Now, if we could just stop warning that forwarded jokes and business lunch plans might contain “privileged and confidential information.”
- See Dan W. Holbrook, “Revenge of the IRS: Circular 230 Changes Law Practice,” Tenn.B.J., August 2005, page 28.
- Treasury Decision 9668, available at http://www.irs.gov/pub/irs-utl/TD_9668_6-9-14_Cir%20230_6-9-14_Final_Reg….
- Under IRC Section 6694, a “tax return preparer” [defined more broadly in IRC Section 7701(a)(36) than you might expect, to include not only the signer of a return but also those who advise on the tax treatment of a transaction reported on a return] is subject to a penalty for any understatement of liability based on an “unreasonable position,” if the preparer knew (or reasonably should have known) of the position. An “unreasonable position” is a disclosed position for which there is not a “reasonable basis,” an undisclosed position for which there is not “substantial authority” (greater than “reasonable basis” but less than “more likely than not”), or a position with respect to a “tax shelter” or “reportable transaction” that is not “more likely than not [to] be sustained on its merits.” However, no penalty is imposed if there is reasonable cause for the understatement and the tax return preparer acted in good faith.
- In fact, the IRS now threatens to sanction law firms that not only persist in using the old language but also state that it is required by the IRS.