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Thursday, September 4, 2008

All Screwed Up, Vol. I - Circular 230 and ERISA

With the impending release of Black Ice (which looks to be awesome), it's time to focus on the venerable AC/DC. They've apparently seen fit to name one of their relatively recent tunes in honor of our practice area. So, with power chords and the best possible high-pitched screaming echoing in my head, I thought I would try to find something that's . . . "All Screwed Up." Surely, in the world of ERISA, that shouldn't be too difficult (although actually, to be honest, there have been a number of developments, like for example the PPA, that seem to be un-screwing up ERISA).

One of my pet peeves is the concern caused by the potential overbreadth of the Circular 230 rules, to the extent they could theoretically be viewed as applying to essentially non-tax ERISA (e.g., fiduciary) matters. Putting aside broader nightmares that Circular 230 has generally begotten (like the mass inclusion of 230 legends in law-firm (and many other) emails and other communications), the ERISA issue strikes me as particularly unfortunate.

The whole mess arises because of an errant, imprecise turn of phrase in the Circular 230 definition of a covered federal tax issue. Under a strained reading of the defined term, Circular 230 can maybe (maybe!) be read to implicate any indirect tax effect where an underlying fact involves (i) an item of income, gain or loss, (ii) any taxable transfer of property, or (iii) the value of property for Federal tax purposes. It seems apparent that they didn't mean to pursue a reductio ad absurdum resulting in such extensive reach.

In this regard, note the following contemporaneous report (32 BNA Pens. & Benefits Rep. 1811) of a comment made by a Treasury official at an ABA teleconference: "However, Desmond said that if a communication does constitute advice . . . it would only constitute advice under Circular 230 if it addressed a federal tax issue. Advice concerning such issues as anything under Titles I or IV of ERISA or, generally, excise tax matters arising under either the prohibited transactions rules or Consolidated Omnibus Budget Reconciliation Act continuation of health care coverage rules would be exempt from Section 10.35, the officials said. This is because such issues are not federal tax issues, as defined by Circular 230, the officials said." See also the September 27, 2005 multi-firm Circular 230 letter to Cono R. Namorato (wasn't that a Styx song?) and Stephen A. Whitlock, Section B (109 Tax Notes 538).

Is there a real possibility that the IRS would go after someone for not stickering a VCOC opinion, securitization disclosure, etc.? And if the IRS did so, and tried to take down the many firms that don't do so, is there really a risk the IRS would prevail?

Further, the easy conservative route - mass ERISA stickering ("MES") of everything in creation - is not without downside. Clients will have lesser levels of assurance, and the stickering itself adds language and resulting klunkiness. While non-ERISA tax lawyers are understandably a bit skittish about all this, I for one would like to see an increasing number of firms trend away from ERISA stickering (with apologies to Roberto Durán: No MES!) and join the many firms that have concluded that general stickering of ERISA discussions is not needed.

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