Circular 230 has spurred debate about what warnings must be included in tax discussions in offering circulars.

Circular 230 is a set of rules that applies to lawyers and accountants who practice before the IRS. The IRS threatens in the circular — in its most severe sanctions — to disbar entire tax departments in law firms if any lawyers in the firms fail to comply. South Carolina has adopted the same rules as part of its own standards for law practice, and it is moving to disbar 14 tax advisers who violated the terms.

The circular requires that anyone giving a “covered opinion” about a deal must either give a “long form” opinion that recites all the facts, discusses each material tax issue and expresses an opinion not only about each issue but also about the tax treatment of the transaction as a whole. Lawyers complain that clients frequently want quick answers to isolated questions rather than a treatise on the entire deal. The circular requires that any more limited advice given in writing must be accompanied by a warning that there may be other issues that could affect the tax treatment of the transaction that are not addressed and, thus, the client cannot rely on the advice to avoid IRS penalties except on the limited issues the lawyer addressed.

This is why emails from many law firms now have boilerplate warnings at the bottom.

Warnings — or prominent disclosures — are also required in two other circumstances. One is where a third party will use the opinion to market or promote a transaction. Such an opinion must include a warning that the opinion is being written to support such efforts and that the taxpayer should seek advice on the transaction from his own tax adviser. The other situation where a warning is required is where the lawyer fails to express a view at least as strong as “more likely than not” that the taxpayer is taking the right tax position. In that case, the opinion must call attention to the fact and warn that it cannot be used to avoid IRS penalties on positions the taxpayer is taking with such weak support.

Large corporate transactions often involve preparation of an information memorandum or offering circular that includes a discussion about the potential tax consequences to companies that invest or lend money.

In July, two lawyers with prominent New York firms discussed what tax warnings are required in such tax discussions with Cono Namorato, the head of the IRS office that administers Circular 230, and shared a letter they sent Namorato summarizing their conclusions with other large law firms.

The letter says that warnings are required in the tax disclosure sections of prospectuses that will not be filed with the US Securities and Exchange Commission, but the warnings are not required in the following other circumstances. They are not required in prospectuses that are filed with the SEC. They are not required in opinion letters that counsel to the issuer or underwriter gives expressing agreement with the discussion in the information memorandum or offering circular, including an opinion that the tax disclosure in the offering circular is a “fair and accurate summary.” (This assumes the warning either is already in the offering circular or is not required.)

They are also not required in so-called 10b-5 letters where the law firm acting for the issuer or investment bank distributing the securities says that it is not aware of any false or misleading statements or omissions in the offering materials.

Keith Martin