3276 Federal Register / Vol. 66, No. 9 / Friday, January 12, 2001 / Proposed Rules

DEPARTMENT OF THE TREASURY

Office of the Secretary

31 CFR Part 10

[REG–111835–99]

RIN 1545–AY05

Regulations Governing Practice Before

the Internal Revenue Service

AGENCY: Office of the Secretary,

Treasury.

ACTION: Notice of proposed rulemaking

and notice of public hearing.

SUMMARY: This notice proposes

modifications of the regulations

governing practice before the Internal

Revenue Service (Circular 230). These

regulations would affect individuals

who are eligible to practice before the

Internal Revenue Service. The proposed

modifications would clarify the general

standards of practice before the Internal

Revenue Service and would modify the

standards for providing advice regarding

tax shelters. This document also

provides notice of a public hearing on

the proposed regulations.

DATES: Comments and requests to speak

and outlines of topics to be discussed

from persons wishing to speak at the

public hearing scheduled for May 2,

2001, in the auditorium of the Internal

Revenue Building at 1111 Constitution

Avenue, NW., Washington, DC 20224,

must be received by April 12, 2001.

ADDRESSES: Send submissions to:

CC:M&SP:RU (REG–111835–99), room

5226, Internal Revenue Service, P.O.

Box 7604, Ben Franklin Station,

Washington, DC 20044. Submissions

may be hand delivered Monday through

Friday between the hours of 8 am and

5 pm to: CC:M&SP:RU (REG–111835–

99), Courier’s Desk, Internal Revenue

Service, 1111 Constitution Avenue,

NW., Washington, DC. Submit

comments and data via electronic mail

(email) to http://www.irs.gov/tax_regs/

regslist.html.

FOR FURTHER INFORMATION CONTACT:

Concerning issues for comment, Richard

Goldstein at (202) 622–7820 or Brinton

Warren at (202) 622–4940; concerning

submissions of comments and

delivering comments, Guy Traynor at

(202) 622–7180; (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information

contained in this notice of proposed

rulemaking has been submitted to the

Office of Management and Budget for

review in accordance with the

Paperwork Reduction Act of 1995 (44

U.S.C. 3507). Comments on the

collection of information should be sent

to the Office of Management and

Budget, Attn: Desk Officer for the

Department of the Treasury, Office of

Information and Regulatory Affairs,

Washington, DC 20503, with copies to

the Internal Revenue Service, Attn: IRS

Reports Clearance Officer,

W:CAR:MP:FP:S:O, Washington, DC

20224. Comments on the collection of

information should be received by

March 13, 2001. Comments are

specifically requested concerning:

Whether the proposed collection of

information is necessary for the proper

performance of the Office of the Director

of Practice, including whether the

information will have practical utility;

The accuracy of the estimated burden

associated with the proper collection of

information (see below);

How the quality, utility, and clarity of

the information to be collected may be

enhanced;

How the burden of complying with

the proposed collection of information

may be minimized, including through

the application of automated collection

techniques or other forms of information

technology; and

Estimates of capital or start-up costs

and costs of operation, maintenance,

and purchase of services to provide

information.

The collection of information in these

proposed regulations is in §§ 10.6,

10.29, and 10.30. Section 10.6 requires

an enrolled agent to maintain records

and educational materials regarding his

or her satisfaction of the qualifying

continuing professional education

credit. Section 10.6 also requires

sponsors of qualifying continuing

professional education programs to

maintain records and educational

material concerning these programs and

those who attended them. The

collection of this material helps to

ensure that individuals enrolled to

practice before the Internal Revenue

Service are informed of the newest

developments in Federal tax practice.

Section 10.29 requires a practitioner

to obtain and retain for a reasonable

period written consents to

representation whenever such

representation directly conflicts with

the interests of the practitioner or the

interests of another client of the

practitioner. The consents are to be

obtained after full disclosure of the

conflict is provided to each party.

Section 10.30 requires a practitioner to

retain for a reasonable period any

communication and the list of persons

to whom that communication was

provided with respect to public

dissemination of fee information. The

collection of consents to representation

and communications concerning

practitioner fees protects the

practitioner against claims of

impropriety and ensures the integrity of

the tax administration system.

Estimated total annual recordkeeping

burden is 50,000 hours.

Estimated annual burden per

recordkeeper varies from 30 minutes to

1 hour, depending on individual

circumstances, with an estimated

average of 54 minutes.

Estimated number of recordkeepers is

56,000.

An agency may not conduct or

sponsor, and a person is not required to

respond to a collection of information

unless it displays a valid control

number assigned by the Office of

Management and Budget.

Books or records relating to a

collection of information must be

retained as long as their contents may

become material in the administration

of any internal revenue law. Generally,

tax returns and tax return information

are confidential, as required by section

6103 of the Internal Revenue Code.

Background

Section 330 of title 31 of the United

States Code authorizes the Secretary of

the Treasury to regulate the practice of

representatives before the Treasury

Department. The Secretary of the

Treasury is authorized, after notice and

an opportunity for a proceeding, to

suspend or disbar from practice before

the Department those representatives

who are incompetent, disreputable, or

who violate regulations prescribed

under section 330 of title 31. Pursuant

to section 330 of title 31, the Secretary

has published the regulations in

Circular 230 (31 CFR part 10). These

regulations authorize the Director of

Practice to act upon applications for

enrollment to practice before the

Internal Revenue Service, to make

inquiries with respect to matters under

the Director’s jurisdiction, to institute

proceedings for suspension or

disbarment from practice before the

Internal Revenue Service, and to

perform such other duties as are

necessary to carry out these functions.

The regulations have been amended

from time to time to address various

specific issues in need of resolution. For

example, on February 23, 1984, the

regulations were amended to provide

standards for providing opinions used

in tax shelter offerings (49 FR 6719). On

October 17, 1985, the regulations were

amended to conform to legislative

changes requiring the disqualification of

an appraiser who is assessed a penalty

Federal Register / Vol. 66, No. 9 / Friday, January 12, 2001 / Proposed Rules 3277

under section 6701 of the Internal

Revenue Code for aiding and abetting

the understatement of a tax liability (50

FR 42014). The regulations were most

recently amended on June 20, 1994 (59

FR 31523), to provide standards for tax

return preparation, to limit the use of

contingent fees in tax return or refund

claim preparation, to provide expedited

rules for suspension, and to clarify or

amend certain other items.

On June 15, 1999, an advance notice

of proposed rulemaking was published

(64 FR 31994) requesting comments on

amendments to the regulations that

would take into account legal

developments, professional integrity

and fairness to practitioners, taxpayer

service, and sound tax administration.

On May 5, 2000, an advance notice of

proposed rulemaking was published (65

FR 30375) requesting comments on

amendments to the regulations relating

to standards of practice governing tax

shelters and other general matters.

Summary of Comments

Twenty-seven written comments have

been submitted concerning the revision

of Circular 230. All comments received

have been considered and are available

for public inspection upon request. The

following paragraphs provide a

summary of significant comments.

A few commentators expressed

concern that, under the current

regulations, a practitioner may be in

violation of the regulations if the

practitioner fails to furnish information

or documents subject to a lawful request

for documents made by an officer or

employee of the Internal Revenue

Service where neither the practitioner

nor the practitioner’s client possesses or

controls the documents. These

commentators suggested that § 10.20 of

the regulations be clarified to provide

that there is no violation of the

regulations if the information or

documents are not in the possession or

control of the practitioner or the

practitioner’s client.

Some commentators expressed

concern about a practitioner’s obligation

when notifying a client of any

noncompliance with the revenue laws.

The commentators recommended that a

practitioner be required to advise the

client of the action necessary to correct

the error or omission and the

consequences of not taking such action

when notifying a client of any

noncompliance with the revenue laws.

Some commentators expressed concern

about the current practice used by some

practitioners to obtain oral consents to

represent parties where there is a direct

conflict of interest. They recommended

that a practitioner be required to obtain

written consents to represent parties

where there is a direct conflict of

interest.

Some commentators suggested that

§ 10.22 be amended specifically to

permit a practitioner to demonstrate due

diligence for purposes of these

regulations based on the practitioner’s

reliance on the work product of an

associate or partner. It also was

suggested that § 10.24 be amended to

permit a practitioner to share fees with

a suspended or disbarred person during

the period of suspension or disbarment,

respectively.

Several commentators noted that the

regulations regarding solicitation are not

consistent with recent court decisions

concerning in-person contacts of

potential clients by certified public

accountants. They suggested that the

restrictions on in-person contacts be

liberalized for all practitioners. It also

was suggested that the prohibition of

deceptive public solicitations be

extended to deceptive private

solicitations and that practitioners be

prohibited from associating with an

individual who uses deceptive

solicitation practices, regardless of

whether the deceptive practices related

to business connected with the

practitioner.

One commentator suggested that the

regulations be modified to require the

Director of Practice to notify a

practitioner whenever a complaint has

been filed against the practitioner,

whether or not any action is taken

against the practitioner as a result of the

complaint.

Several comments were received

recommending changes to the regulation

of opinion writing by practitioners.

Commentators recommended that new

opinion standards be promulgated with

respect to tax shelter opinions that are

rendered for the purpose of establishing

a reasonable cause and good faith

defense to the accuracy-related penalties

under section 6662 of the Internal

Revenue Code (‘‘reasonable cause

opinions’’). These commentators

suggested that standards for such

opinions impose factual due diligence

requirements that, in particular, restrict

the reliance on hypothetical facts or

factual assumptions as the basis for such

opinions. Some commentators suggested

that reliance on factual assumptions

regarding the business purpose or

noneconomic consequences of a

transaction be treated as inherently

unreasonable. Comments also were

received on whether and to what extent

reliance in an opinion on taxpayer

representations or certifications should

be permitted and the conditions under

which a practitioner may rely on the

opinions of other practitioners.

Several commentators recommended

that the new standards impose

requirements with respect to the legal

analysis contained in reasonable cause

opinions, particularly that such

opinions contain no unreasonable legal

assumptions, address all material tax

issues, evaluate relevant legal

authorities and consider applicable

judicial doctrines and statutory and

regulatory anti-abuse rules. One

commentator, however, thought it was

unnecessary to impose an explicit

requirement in Circular 230 that

reasonable cause opinions address the

applicability of relevant judicial

doctrines. Another commentator

considered it sufficient for Circular 230

merely to require that reasonable cause

opinions consider the substance and

purpose of the transaction under

scrutiny.

Comments also were received as to

whether a reasonable cause opinion

should unambiguously opine on a

comfort level of ‘‘more likely than not’’

or higher, should state that it is issued

to establish reasonable cause, and other

matters. A few commentators expressed

concern that the definition of a tax

shelter utilized in any opinion

standards not be overly broad and that

opinion standards under Circular 230 be

coordinated with opinion-related

requirements under the accuracy-related

penalties. One commentator suggested

that the opinion standards provide that

satisfaction of the standards would meet

a practitioner’s obligations under

Circular 230, but would not determine

the persuasiveness of, and the

taxpayer’s good faith reliance on, the

opinion. Two commentators also

suggested that standards be promulgated

for written advice used for marketing

purposes.

Commentators generally did not

oppose the expansion of sanctions to

encompass lesser sanctions such as

censure. Commentators did not support

attribution of practitioner misconduct to

other members of the practitioner’s firm.

Several commentators, however, stated

that in instances where there has been

a knowing participation or acquiescence

in such misconduct by other members

of a firm or a pattern of abuse by

members of a firm, sanctions extending

beyond the individual practitioner may

be appropriate.

The majority of commentators

supported a contingent fee limitation

with respect to original tax returns if the

fee arrangement was contingent on the

return position being sustained. Such

fee arrangements may indicate an

inappropriate reliance on the ‘‘audit

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lottery.’’ The commentators believed

that the same considerations were not as

persuasive with respect to amended tax

returns.

Commentators generally did not favor

the imposition of restrictions in Circular

230 on confidentiality imposed on

practitioners by clients or on clients by

practitioners.

Explanation of Provisions

Who May Practice

Paragraph (d)(2) of § 10.3 of the

regulations provides a list of issues with

respect to which an enrolled actuary is

authorized to represent a taxpayer in

limited practice before the Internal

Revenue Service. This list of issues

would be expanded under the proposed

regulations to include issues involving

26 U.S.C. 419 (treatment of funded

welfare benefits), 419A (qualified asset

accounts), 420 (transfers of excess

pension assets to retiree health

accounts), 4972 (tax on nondeductible

contributions to qualified employer

plans), 4976 (taxes with respect to

funded welfare benefit plans), and 4980

(tax on reversion of qualified plan assets

to employer).

Enrollment

Section 10.6 of the regulations sets

forth the conditions for renewal of

enrollment to practice before the

Internal Revenue Service. One condition

for renewal of enrollment is that the

enrolled agent complete a minimum

number of hours of continuing

professional education. Paragraph (f) of

§ 10.6 of the regulations requires that

there be a written outline and/or

textbook for each course. Under the

proposed regulations, a continuing

education program may qualify for

purposes of this part if the course

requires suitable electronic educational

materials, a written outline, or a

textbook.

The regulations permit any individual

who is enrolled as an actuary by the

Joint Board for the Enrollment of

Actuaries to enroll and qualify to

practice before the Internal Revenue

Service by filing with the Service a

written declaration that such individual

is currently qualified as an enrolled

actuary. New paragraph 10.6(o) would

be added to clarify that the renewal of

enrollment of actuaries also is governed

by the regulations concerning the Joint

Board for the Enrollment of Actuaries at

20 CFR 901.1 et seq.

Information to be Furnished

Section 10.20 of the regulations

requires a practitioner to submit

documents or information whenever a

lawful request for such documents or

information is made by a duly

authorized officer or employee of the

Internal Revenue Service. The provision

does not provide an exception if the

practitioner or the practitioner’s client

does not possess or control the

requested documents or information.

Under the proposed regulations,

paragraph (a) of § 10.20 would be

modified to clarify that a practitioner is

required to promptly respond to a

lawful and proper request for

documents by either submitting the

requested information or advising the

requesting officer or employee why the

information cannot be provided (e.g.,

the documents requested are privileged,

or the documents are not controlled by

either the practitioner or the

practitioner’s client). If the documents

are not controlled by either the

practitioner or the practitioner’s client,

the provision would require the

practitioner, to the extent possible, to

identify any persons who may have the

requested documents in their control.

Knowledge of Client’s Omission

Section 10.21 of the regulations

requires a practitioner to advise a client

promptly of any noncompliance by the

client with the revenue laws. Under the

proposed regulations, a practitioner also

would be required to advise the client

of the manner in which the error or

omission may be corrected and the

possible consequences of not taking

such corrective action.

Diligence as to Accuracy

Section 10.22 of the regulations

requires a practitioner to exercise due

diligence in preparing or assisting in the

preparation, approving, and filing of

documents relating to Internal Revenue

Service matters. Section 10.22 also

requires a practitioner to exercise due

diligence in determining the correctness

of oral or written representations made

to the Department of Treasury or with

reference to any matter administered by

the Internal Revenue Service. The

proposed regulations would clarify that

a practitioner is presumed to have

exercised due diligence if the

practitioner relies on the work product

of another person and the practitioner

used reasonable care in engaging,

supervising, training and evaluating

such person.

Assistance from Disbarred or

Suspended Persons

Section 10.24 of the regulations

prohibits a practitioner, in practice

before the Internal Revenue Service,

from employing, accepting assistance

from, accepting employment from, or

becoming a subagent for, a disbarred or

suspended person. Section 10.24 also

precludes a practitioner from accepting

assistance from any former government

employee where the provisions of

§ 10.26 of the current regulations

(§ 10.25 of the proposed regulations) or

any Federal law would be violated.

Section 10.24 of the proposed

regulations clarifies that a practitioner is

prohibited from accepting assistance

from or assisting a disbarred or

suspended practitioner if the assistance

relates to matters constituting practice

before the Internal Revenue Service. The

proposed regulations, however, would

not require practitioners to disassociate

themselves from a suspended or

disbarred person as long as the other

proscriptions regarding disbarred or

suspended persons are observed.

Practitioners who are partners of a law

or accountancy partnership, for

example, would not be required to expel

another partner who was subject to

discipline simply because the

disciplined partner might otherwise

share in fees derived from services

rendered by others before the Internal

Revenue Service.

Practice by Partners of Government

Employees

Section 10.25 of the regulations

precludes partners of former

Government employees from practice

with respect to matters in which the

employee personally and substantially

participated. This provision would be

removed under the proposed regulations

because the statutory prohibition

implemented by this provision (18

U.S.C. 207(c)) has been repealed.

Practice by Former Government

Employees, Their Partners and Their

Associates

Section 10.26 of the current

regulations places restrictions on the

practice of former Government

employees, their partners, and their

associates with respect to certain

matters that the former Government

employees participated in during the

course of their Government

employment. This section would be

renumbered as § 10.25 under the

proposed regulations and would be

amended to reflect changes to the

Federal statutes governing postemployment restrictions applicable to

former Government employees.

Fees and Confidentiality

Paragraph (b) of § 10.28 of the current

regulations precludes a practitioner

from charging his or her client a

contingent fee for the preparation of an

original tax return, but permits the

Federal Register / Vol. 66, No. 9 / Friday, January 12, 2001 / Proposed Rules 3279

practitioner to charge a contingent fee

for the preparation of an amended tax

return or a claim for refund (other than

a claim for refund made on an original

tax return). Section 10.28 would be

renumbered as § 10.27 and paragraph (b)

would be clarified to provide that a

practitioner is prohibited from charging

a contingent fee not only for preparation

of an original tax return, but also for

advice rendered in connection with a

position taken or to be taken on an

original tax return. A practitioner would

be permitted, however, to charge a

contingent fee both for the preparation

of, and for advice rendered in

connection with a position taken, or to

be taken on, an amended tax return or

a claim for refund if the practitioner

reasonably anticipates that the amended

tax return or refund claim will receive

substantive review by the Internal

Revenue Service. In addition, a

contingent fee would be defined to

include any fee that is based, in whole

or in part, on whether or not a position

taken on a tax return or in a refund

claim is sustained, an indemnity

agreement, a guarantee, recission rights,

insurance or any other arrangement by

which the practitioner will compensate

or reimburse the taxpayer or another

person if a position taken on a tax return

or in a refund claim is not sustained.

The proposed regulations would not

prohibit confidentiality agreements.

Confidentiality restrictions imposed by

clients may raise an ethical inquiry as

to the effects of such arrangements on a

practitioner’s ability to represent his or

her clients. See Illinois State Bar

Association Advisory Opinion on

Professional Conduct 00–01 (October

2000)(a conflict of interest arises with

respect to other similar clients when a

lawyer agrees not to disclose ideas of a

third party to reduce a client’s tax

obligations). Commentators asserted that

such confidentiality restrictions were

not an issue appropriate for regulation

under Circular 230. Commentators also

asserted that confidentiality restrictions

imposed by practitioners on clients

were an appropriate contractual

arrangement for the benefit of

practitioners. The Treasury Department

remains concerned, however, about

confidentiality restrictions and

specifically invites comments on

whether the final regulations should

address such restrictions, and, if so, in

what manner.

Return of Client’s Records

Section 10.28 of the proposed

regulations would specifically require a

practitioner to return a client’s records

when the client makes a request for

such records, whether or not a dispute

regarding fees exists. The practitioner

may retain a copy of those records.

Conflicting Interests

Section 10.29 of the regulations

prohibits a practitioner from

representing conflicting interests before

the Internal Revenue Service, except

with the express consent of all directly

interested parties after full disclosure.

Under the proposed regulations, a

practitioner would be required to obtain

the written consents of the clients before

representing clients with conflicting

interests. The practitioner would be

required to retain the written consents

for at least 36 months after the

conclusion of the representation of the

clients and to present copies of such

consents to the Internal Revenue

Service, if requested to do so.

In addition, the proposed regulations

would provide that a practitioner may

not represent a party in his or her

practice before the Internal Revenue

Service if that representation may be

materially limited by the practitioner’s

own interests, unless practitioner

reasonably believes the representation

will not be adversely affected and the

client consents after full disclosure,

including disclosure of the implications

of the potential conflict and the risks

involved.

Solicitation

Section 10.30 of the regulations

governs the manner in which

practitioners may contact potential

business clients. The proposed

regulations would update the

solicitation rules to reflect recent court

decisions and to respond to comments

received in connection with this

rulemaking. Under the proposed

regulations, a practitioner would be

permitted to contact potential business

clients using any medium that is not

prohibited by Federal or state statutes or

other rules applicable to the practitioner

regarding the uninvited solicitation of

prospective clients. The proposed

regulations also would expand the

prohibition of deceptive solicitation

practices to cover private, as well as

public, solicitations, expand the

prohibition against providing assistance

to or accepting assistance from an

individual who uses deceptive

solicitation practices, whether or not

such practices are in connection with

the relationship the individual has with

the practitioner, and include electronic

mail, facsimile, and hand-delivered

flyers in the definition of

communication.

Negotiation of Taxpayer Checks

Section 10.31 of the regulations

prohibits a practitioner who prepares

income tax returns from negotiating a

check with respect to income tax issued

to a taxpayer other than the practitioner.

The proposed regulations would clarify

that this prohibition is not limited to

checks issued for income taxes, but

applies to all checks issued to the

practitioner’s clients by the Government

with respect to matters before the

Internal Revenue Service. The proposed

regulations also would clarify that

practitioners are not prohibited from

negotiating checks issued to their own

partnerships, corporations, etc.

Tax Shelter Opinions

Two sections of the proposed

regulations would provide standards

governing tax shelter opinions. New

§ 10.35 would apply to all tax shelter

opinions that conclude that the Federal

tax treatment of a tax shelter item or

items is more likely than not (or at a

higher level of confidence) the proper

treatment. Section 10.33 would be

revised in scope to apply to all tax

shelter opinions not governed by § 10.35

that a practitioner knows or has reason

to believe will be used or referred to by

persons other than the practitioner to

promote, market or recommend a tax

shelter. For purposes of §§ 10.33 and

10.35 of the proposed regulations, the

definition of a tax shelter would

conform to the definition found in

section 6662(d)(2)(C)(iii) of the Internal

Revenue Code.

The Treasury Department and the

Internal Revenue Service recognize that

the proposed rules in §§ 10.33 and 10.35

of the proposed regulations may

regulate opinion standards with respect

to transactions that had not previously

been subject to the rules governing tax

shelter opinions. The proposed

regulations would exclude opinions

relating to municipal bonds and

qualified retirement plans. The Treasury

Department and the Internal Revenue

Service specifically request comment on

whether the regulations should exempt

other transactions from the

requirements for tax shelter opinions

and, if so, the types of other transactions

that should be exempted.

Tax Shelter Opinions Used by Third

Parties to Market Tax Shelters

Section 10.33 currently governs

advice by a practitioner concerning the

Federal tax aspects of a tax shelter either

appearing or referred to in offering

materials, or used or referred to in

connection with sales promotion efforts,

and directed to persons other than the

3280 Federal Register / Vol. 66, No. 9 / Friday, January 12, 2001 / Proposed Rules

client who engaged the practitioner to

give the advice. The proposed

regulations would revise the scope of

§ 10.33 to govern a tax shelter opinion

that does not conclude that the Federal

tax treatment of an item or items is more

likely than not the proper treatment and

that a practitioner knows or has reason

to believe will be used or referred to by

persons other than the practitioner to

promote, market or recommend the tax

shelter to one or more taxpayers. The

proposed regulations would clarify that

§ 10.33 governs tax shelter opinions

prepared for use by third parties that are

promoting the tax shelter, irrespective of

whether such promotional efforts are

conducted publicly or privately. The

proposed regulations also would modify

the definition of a material Federal tax

issue and define a tax shelter item as an

item of income, gain, loss, deduction or

credit if the item is directly or indirectly

attributable to a tax shelter.

Section 10.33 would require a

practitioner who provides a written

opinion with respect to a tax shelter

item or items to comply with a series of

requirements with respect to each such

item. A practitioner would be required

to make inquiry as to all relevant facts,

be satisfied that the opinion takes

account of all relevant facts, and that the

material facts are accurately and

completely described in the opinion.

Furthermore, the opinion could not be

based, directly or indirectly, on any

unreasonable factual assumptions. An

unreasonable factual assumption would

include a factual assumption that the

practitioner knows or has reason to

believe is incorrect, incomplete,

inconsistent or implausible. An

unreasonable factual assumption also

would include a factual assumption

regarding a fact or facts that the

practitioner could reasonably request to

be provided or to be represented.

The proposed regulations would

permit a practitioner, where it would be

reasonable based on all the facts and

circumstances, to rely upon factual

representations, statements, findings or

agreements. The proposed regulations

would further provide that a

practitioner need not conduct an audit

or independent verification of a factual

representation, but that reliance would

not be permitted on factual

representations that the practitioner

knows or has reason to believe are

unreasonable, incorrect, incomplete,

inconsistent or implausible (e.g., a

representation that there are business

reasons for a transaction without

describing those reasons, a

representation that a transaction is

potentially profitable apart from tax

benefits without providing adequate

factual support, or a valuation that is

inconsistent with the facts of the

transaction).

The proposed regulations would

provide that the opinion must clearly

identify the facts upon which the

opinion’s conclusions are based, contain

a reasoned analysis of the pertinent facts

and legal authorities and not assume the

favorable resolution of any Federal tax

issue material to the analysis or

otherwise rely on unreasonable legal

assumptions. The proposed regulations

also would require that the opinion not

contain legal analyses or conclusions

that are inconsistent with each other.

The practitioner would be required to

ascertain that all material Federal tax

issues with respect to the tax shelter

item or items have been considered and

that all of those material Federal tax

issues involving the reasonable

possibility of a challenge by the Internal

Revenue Service are fully and fairly

addressed. The opinion would be

required to state that the practitioner

has considered the possible application

to the facts of all potentially relevant

judicial doctrines, including the step

transaction, business purpose, economic

substance, substance over form, and

sham transaction doctrines, as well as

potentially relevant statutory and

regulatory anti-abuse rules, and the

opinion must analyze whether the tax

shelter item or items is (are) vulnerable

to challenge under all such potentially

relevant doctrines and anti-abuse rules.

The proposed regulations would

require that the opinion clearly provide

the practitioner’s conclusion as to the

likelihood that a typical investor of the

type to whom the tax shelter is or will

be marketed will prevail with respect to

the merits of each material Federal tax

issue that involves the reasonable

possibility of a challenge by the Internal

Revenue Service or clearly state that the

practitioner is unable to reach a

conclusion with respect to one or more

issues. Further, the opinion would be

required to fully describe the reasons for

the practitioner’s conclusions or fully

describe the reasons for the inability to

reach a conclusion.

The practitioner would be required to

reach an overall conclusion as to the

likelihood that the Federal tax treatment

of the tax shelter item or items is the

proper treatment or, where the

practitioner is unable to reach such a

conclusion, clearly state that the

practitioner is unable to reach such an

overall conclusion. Where an overall

conclusion cannot be reached, the

opinion would be required to fully

describe the reasons for the

practitioner’s inability to reach an

overall conclusion. Moreover, the fact

that the practitioner’s opinion does not

reach a conclusion that the Federal tax

treatment of a tax shelter item or items

is more likely than not the proper

treatment, or that the practitioner is

unable to reach an overall conclusion,

would be required to be clearly and

prominently disclosed on the first page

of the opinion. The opinion also would

be required to clearly and prominently

disclose that it was not written for the

purpose of establishing reasonable belief

or reasonable cause and good faith

under sections 6662 and 6664,

respectively, of the Internal Revenue

Code. The proposed regulations also

would clarify that in ascertaining that

all material Federal tax issues have been

considered, evaluating the merits of

those issues and evaluating whether the

Federal tax treatment of the tax shelter

item or items is the proper treatment,

the possibility that a return will not be

audited, that an issue will not be raised

on audit, or that an issue will be settled

may not be taken into account.

The proposed regulations would

require the practitioner to take

reasonable steps to assure that any

written materials or promotional efforts

that distribute, reflect or refer to the tax

shelter opinion correctly and fairly

represent the nature and extent of the

opinion.

The proposed regulations also would

address reliance on the opinions of

others. The proposed regulations would

require that the practitioner be

knowledgeable in all of the aspects of

Federal tax law relevant to the opinion

being rendered. A practitioner would

not be permitted to provide a tax shelter

opinion that does not reach a

conclusion on all the material Federal

tax issues that involve a reasonable

possibility of challenge by the Internal

Revenue Service or does not reach an

overall conclusion (or, alternatively,

fails to clearly state that such

conclusions cannot be reached), unless

at least one other competent practitioner

provides an opinion with respect to all

of the other material Federal tax issues

which involve a reasonable possibility

of challenge by the Internal Revenue

Service, and with respect to the tax

shelter item or items. The practitioner

also would be required, upon reviewing

such other opinion and any written

materials that distribute, reflect or refer

to such opinion, to have no reason to

believe that the other practitioner has

not complied with § 10.33 or that the

overall conclusion reached by such

practitioner is incorrect on its face.

Federal Register / Vol. 66, No. 9 / Friday, January 12, 2001 / Proposed Rules 3281

‘‘More Likely Than Not’’ Tax Shelter

Opinions

Under the proposed regulations, new

standards would be applicable to

practitioners who provide tax shelter

opinions that conclude that the Federal

tax treatment of a tax shelter item or

items is more likely than not (or at a

higher level of confidence) the proper

treatment. Such opinions potentially

provide a basis for establishing

reasonable belief and reasonable cause

and good faith under the provisions of

sections 6662 and 6664 of the Internal

Revenue Code, respectively. These

proposed rules would apply to all tax

shelter opinions that reach a more likely

or not, or higher, overall conclusion,

regardless of whether they were

rendered in connection with

promotional efforts conducted by a third

party or directly to a potential tax

shelter investor. The proposed

regulations also would define a material

Federal tax issue. A tax shelter item

would be defined in the same manner

as in § 10.33.

Section 10.35 would require a

practitioner who provides a written

opinion with respect to a tax shelter

item or items to comply with a series of

requirements with respect to each such

item. A practitioner would be required

to make inquiry as to all relevant facts,

be satisfied that the opinion takes

account of all relevant facts, and be

satisfied that the material facts are

accurately and completely described in

the opinion. Furthermore, the opinion

could not be based, directly or

indirectly, on any unreasonable factual

assumptions. An unreasonable factual

assumption would include a factual

assumption that the practitioner knows

or has reason to believe is incorrect,

incomplete, inconsistent or implausible.

An unreasonable factual assumption

also would include a factual assumption

regarding a fact or facts that the

practitioner could reasonably request to

be provided or to be represented.

Furthermore, an unreasonable factual

assumption would include a factual

assumption that the transaction has a

business reason, an assumption with

respect to the potential profitability of

the transaction apart from tax benefits,

or an assumption with respect to a

material valuation issue.

The proposed regulations would

permit a practitioner, where it would be

reasonable based on all the facts and

circumstances, to rely on factual

representations, statements, findings, or

agreements of the taxpayer or other

persons. The proposed regulations

would further provide that a

practitioner need not conduct an audit

or independent verification of a factual

representation, but that reliance would

not be permitted on factual

representations that the practitioner

knows or has reason to believe are

unreasonable, incorrect, incomplete,

inconsistent or implausible (e.g., a

representation that there are business

reasons for a transaction without

describing those reasons, a

representation that a transaction is

potentially profitable apart from tax

benefits without providing adequate

factual support, or a valuation that is

inconsistent with the facts of the

transaction).

The proposed regulations would

provide that the opinion must clearly

identify the facts upon which the

opinion’s conclusions are based, contain

a reasoned analysis of the pertinent facts

and legal authorities and not assume the

favorable resolution of any Federal tax

issue material to the analysis or

otherwise rely on unreasonable factual

assumptions. The proposed regulations

also would require that the opinion not

contain legal analysis or conclusions

that are inconsistent with each other.

The practitioner would be required to

ascertain that all material Federal tax

issues with respect to the tax shelter

item or items have been considered and

that all of those material Federal tax

issues involving the reasonable

possibility of a challenge by the Internal

Revenue Service are fully and fairly

addressed. The opinion would be

required to state that the practitioner

has considered the possible application

to the facts of all potentially relevant

judicial doctrines, including the step

transaction, business purpose, economic

substance, substance over form, and

sham transaction doctrines, as well as

potentially relevant statutory and

regulatory anti-abuse rules, and the

opinion must analyze whether the tax

shelter item or items is (are) vulnerable

to challenge under all such potentially

relevant doctrines and anti-abuse rules.

The proposed regulations would

require that the opinion clearly provide

the practitioner’s conclusion as to the

likelihood that the taxpayer will prevail

with respect to the merits of each

material Federal tax issue that involves

a reasonable possibility of challenge by

the Internal Revenue Service and must

unambiguously conclude that the

Federal tax treatment of the tax shelter

item or items more likely than not (or

at a higher level of confidence) is the

proper treatment. The proposed

regulations also would clarify that in

ascertaining that all material Federal tax

issues have been considered, evaluating

the merits of those issues and evaluating

whether the Federal tax treatment of the

tax shelter item or items is the proper

treatment, the possibility that a tax

return will not be audited, that an issue

will not be raised on audit, or that an

issue will be settled may not be taken

into account.

The proposed regulations would

require the practitioner to take

reasonable steps to assure that any

written materials or promotional efforts

that distribute, reflect or refer to the tax

shelter opinion correctly and fairly

represent the nature and extent of the

opinion. The proposed regulations also

would require that the practitioner be

knowledgeable in all of the relevant

aspects of Federal tax law at the time

the opinion is rendered. The

practitioner who is providing an overall

conclusion that the Federal tax

treatment of a tax shelter item or items

more likely than not (or at a higher level

of confidence) is the proper treatment

may rely on the opinion of another

practitioner with respect to certain

issues only if the practitioner is satisfied

that the other practitioner is sufficiently

knowledgeable regarding such issues

and the practitioner has no reason to

believe that such opinion should not be

relied upon. To the extent the

practitioner relies on such opinion, the

opinion rendered by the practitioner

must identify the other practitioner,

state the date on which the opinion was

rendered, and set forth the conclusions

reached in such opinion. Furthermore,

the practitioner must be satisfied that

the combined analysis, taken as a

whole, satisfies the requirements of this

§ 10.35.

The Treasury Department and the

Internal Revenue Service intend to

modify the advice standards in the

regulations under section 6662 of the

Internal Revenue Code (pertaining to

whether a taxpayer other than a

corporation reasonably believed at the

time a tax return was filed that the tax

treatment of a tax shelter item was more

likely than not the proper treatment of

that item) and under section 6664 of the

Internal Revenue Code (pertaining to

whether a taxpayer acted with

reasonable cause and in good faith with

respect to a tax shelter item) to provide

that opinions can satisfy those standards

only if such opinions satisfy the

standards of Circular 230.

Procedures to Ensure Compliance

Section 10.36 of the proposed

regulations provides that a practitioner

who is a member of, associated with, or

employed by a firm must take

reasonable steps, consistent with his or

her authority and responsibility for the

firm’s practice advising clients

regarding matters arising under the

3282 Federal Register / Vol. 66, No. 9 / Friday, January 12, 2001 / Proposed Rules

Federal tax laws, to make certain that

the firm has adequate procedures in

effect for purposes of ensuring

compliance with §§ 10.33, 10.34 and

10.35. The Director of Practice would be

authorized to take disciplinary action

against any practitioner for failing to

comply with this requirement if the

practitioner through willfulness,

recklessness, or gross incompetence

does not take such reasonable steps and

one or more persons who are members

of, associated with, or employed by the

firm have, while they were members of,

associated with, or employed by the

firm, engaged in a pattern or practice of

failing to comply with §§ 10.33, 10.34 or

10.35. The Director of Practice also

would be authorized to take disciplinary

action against any practitioner who

takes such steps but has actual

knowledge that one or more persons

who are members of, associated with, or

employed by the firm have, while they

were members of, associated with, or

employed by the firm, engaged in a

pattern or practice of failing to comply

with §§ 10.33, 10.34 or 10.35 and the

practitioner through willfulness,

recklessness, or gross incompetence

fails to take prompt action, consistent

with his or her authority and

responsibility for the firm’s practice

advising clients regarding matters under

the Federal tax law, to correct such

pattern or practice.

Sanctions

Section 10.50 of the regulations

authorizes the Secretary of the Treasury

to disbar or suspend any practitioner

from practice before the Internal

Revenue Service after notice and an

opportunity for a proceeding. Under the

proposed regulations, the Secretary also

would be permitted to censure the

practitioner after notice and an

opportunity for a proceeding. Censure is

a public reprimand. Additionally, the

authority to disqualify an appraiser

would be relocated to paragraph (b) of

§ 10.50 of the regulations.

Disreputable Conduct

Section 10.51 of the regulations

defines disreputable conduct for which

a practitioner may be disbarred or

suspended. The proposed regulations

would provide that a practitioner who

engages in disreputable conduct also

may be censured. The definition of

disreputable conduct also would be

modified to include conviction of any

felony involving conduct that renders

the practitioner unfit to practice before

the Internal Revenue Service.

Institution of Proceeding

Section 10.54 authorizes the Director

of Practice to institute a proceeding to

suspend or disbar a practitioner if the

Director believes the practitioner has

violated any provisions of the laws or

regulations governing practice before

the Internal Revenue Service. The

section would be renumbered as § 10.60

under the proposed regulations and

would specify that the Director of

Practice also may institute a proceeding

to censure the practitioner if the

Director believes the practitioner has

violated any provisions of the laws or

regulations governing practice before

the Internal Revenue Service. Under the

proposed regulations, the procedures set

forth in § 10.60 would apply to

proceedings to disqualify an appraiser.

Conferences

Section 10.55 authorizes the Director

of Practice to confer with a practitioner

regarding allegations of misconduct.

The provision permits a practitioner to

offer his or her consent to voluntary

suspension to prevent the institution or

conclusion of a disbarment proceeding.

The provision would be renumbered as

§ 10.61 and would be changed to permit

a practitioner to also offer his or her

consent to censure to prevent the

institution or conclusion of a

disbarment proceeding. The provision

also would apply to conferences with an

appraiser regarding allegations of

misconduct and would permit the

appraiser to offer his or her voluntary

consent to disqualification.

Service of Complaint and Other Papers

Sections 10.57 and 10.80 of the

regulations permit the Director of

Practice to serve a complaint or any

other paper upon a practitioner or

appraiser by certified mail. If the

certified mail is not claimed, the

Director of Practice may serve the

complaint by first class mail. The

proposed regulations would consolidate

these provisions under § 10.63 and

would specify that service by first class

mail is complete if the complaint is

mailed to the practitioner or appraiser at

his or her last known address as

determined under section 6212 of the

Internal Revenue Code.

Answer

Sections 10.58 and 10.81 of the

regulations require a practitioner or an

appraiser to file an Answer whenever

the Director of Practice files a complaint

against him or her under the

regulations. These provisions also

establish the time for filing an Answer

and prescribe certain requirements as to

the content of an Answer. The proposed

regulations would consolidate these

provisions under § 10.64, which section

would require that the Answer to the

complaint be signed by the respondent

or the respondent’s authorized

representative and include an

acknowledgment that knowing and

willful false statements may be

punishable under 18 U.S.C. 1001.

Reply to Answer

Sections 10.60 and 10.83 permit the

Director of Practice to file a reply to the

respondent’s answer at the Director’s

discretion or at the request of the

Administrative Law Judge. Under the

proposed regulations, these provisions

would be consolidated under § 10.66

and that section would require the

Director of Practice to file a reply to the

respondent’s answer if the

Administrative Law Judge orders that a

reply be filed.

Motions and Requests

Sections 10.62 and 10.85 of the

regulations permit the Director of

Practice and the respondent to file

motions and requests in hearings before

an Administrative Law Judge with the

Director or the Administrative Law

Judge. Under the proposed regulations,

these provisions would be consolidated

under § 10.68 and would clarify that the

Administrative Law Judge may direct

that motions or requests be filed at a

place specified by the Administrative

Law Judge.

Effect of Disbarment, Suspension, or

Censure

Section 10.73 of the regulations

prohibits a disbarred practitioner from

practicing before the Internal Revenue

Service unless and until authorized to

do so by the Director of Practice. The

regulations also prohibit a suspended

practitioner from practicing before the

Internal Revenue Service during the

period of suspension. Under the

proposed regulations, this section

would be renumbered as § 10.79 and

would also provide that the Director of

Practice may make a practitioner’s

future right to practice before the

Internal Revenue Service subject to his

or her meeting certain conditions

designed to promote high standards of

conduct.

Expedited Suspension Upon Criminal

Conviction or Loss of License for Cause

Paragraph (b)(2) of § 10.76 of the

regulations permits the Director of

Practice to institute a proceeding to

suspend any practitioner who has,

within 5 years of the date on which the

complaint instituting the proceeding is

served, been convicted of any crime

Federal Register / Vol. 66, No. 9 / Friday, January 12, 2001 / Proposed Rules 3283

under title 26 of the United States Code

or a felony under title 18 of the United

States Code involving dishonesty or

breach of trust. Under the proposed

regulations this provision would be

renumbered as § 10.82 and would

permit the Director of Practice to

institute a proceeding to suspend any

practitioner who has been convicted of

any crime under the Internal Revenue

Code, any crime involving dishonesty or

breach of trust (regardless of whether

such crime constituted a felony under

title 18 of the United States Code), or

any felony that involved conduct that

renders the practitioner unfit to practice

before the Internal Revenue Service

(regardless of whether such felony was

pursuant to title 18 of the United States

Code or involved dishonesty or breach

of trust).

Consolidation of Appraiser

Disqualification Rules

The current regulations contain, in

separate provisions, virtually identical

rules applicable to disciplinary

proceedings against practitioners and

appraisers. The proposed rules would

consolidate the rules regarding

sanctions of practitioners and appraisers

under subpart C and the rules regarding

the conduct of disciplinary proceedings

under subpart D.

Proposed Effective Date

These regulations are proposed to

apply on the date that final regulations

are published in the Federal Register.

Special Analyses

It has been determined that these

regulations are not a significant

regulatory action as defined in

Executive Order 12866. Therefore, a

regulatory assessment is not required. It

is hereby certified that these regulations

will not have a significant economic

impact on a substantial number of small

entities because the general

requirements, including the collection

of information requirements, of these

regulations are substantially the same as

the requirements of the regulations that

these regulations will replace. Persons

authorized to practice have long been

required to comply with certain

standards of conduct when practicing

before the Internal Revenue Service.

These regulations do not alter the basic

nature of the obligations and

responsibilities of these practitioners.

These regulations clarify those

obligations in response to public

comments and judicial decisions, and

make other modifications to reflect the

development of electronic media. In

addition, the added requirements for tax

shelter opinions imposed by these

regulations will have no impact on the

substantial number of small entities

who have been satisfying these

requirements when they provide such

opinions. Therefore, a regulatory

flexibility analysis under the Regulatory

Flexibility Act (5 U.S.C. chapter 6) is

not required. Pursuant to section 7805(f)

of the Internal Revenue Code, this

notice of proposed rulemaking will be

submitted to the Chief Counsel for

Advocacy of the Small Business

Administration for comment on its

impact on small businesses.

Comments and Public Hearing

Before the regulations are adopted as

final regulations, consideration will be

given to any written comments and

electronic comments that are submitted

timely to the Internal Revenue Service.

The Internal Revenue Service and

Treasury Department specifically

request comments on the clarity of the

proposed regulations and how they can

be made easier to understand. All

comments will be available for public

inspection and copying.

The public hearing is scheduled for

May 2, 2001, from 8 am. to 11 am., and

will be held in the auditorium, Internal

Revenue Building, 1111 Constitution

Avenue, NW., Washington, DC. Due to

building security procedures, visitors

must enter at the 10th Street entrance,

located between Constitution and

Pennsylvania Avenues, NW. All visitors

must present photo identification to

enter the building. Visitors will not be

admitted beyond the immediate

entrance area more than 15 minutes

before the hearing starts. For

information about having your name

placed on the building access list to

attend the hearing, see the FOR FURTHER

INFORMATION CONTACT section of this

preamble.

The rules of 26 CFR 601.601(a)(3)

apply to the hearing. Persons who wish

to present oral comments at the hearing

must submit written or electronic

comments and an outline of the topics

to be discussed and the time to be

devoted to each topic by April 12, 2001.

A period of 10 minutes will be allocated

to each person for making comments.

An agenda showing the scheduling of

the speakers will be prepared after the

deadline for receiving outlines has

passed. Copies of the agenda will be

available free of charge at the hearing.

Drafting information

The principal authors of these

regulations are Richard S. Goldstein and

Brinton Warren, Office of Associate

Chief Counsel (Procedure &

Administration), Administrative

Provisions and Judicial Practice

Division, but other personnel from the

Internal Revenue Service and Treasury

Department participated in their

development.

List of Subjects in 31 CFR Part 10

Accountants, Administrative practice

and procedure, Lawyers.

Proposed Amendments to the

Regulations

Accordingly, 31 CFR part 10 is

proposed to be revised to read as

follows:

PART 10—PRACTICE BEFORE THE

INTERNAL REVENUE SERVICE

Sec.

10.0 Scope of part.

Subpart A—Rules Governing Authority to

Practice

10.1 Director of Practice.

10.2 Definitions.

10.3 Who may practice.

10.4 Eligibility for enrollment.

10.5 Application for enrollment.

10.6 Enrollment.

10.7 Representing oneself; participating in

rulemaking; limited practice; special

appearances; and return preparation.

10.8 Customhouse brokers.

Subpart B—Duties and Restrictions

Relating to Practice Before the Internal

Revenue Service

10.20 Information to be furnished.

10.21 Knowledge of client’s omission.

10.22 Diligence as to accuracy.

10.23 Prompt disposition of pending

matters.

10.24 Assistance from or to disbarred or

suspended persons and former Internal

Revenue Service employees.

10.25 Practice by former Government

employees, their partners and their

associates.

10.26 Notaries.

10.27 Fees.

10.28 Return of client’s records.

10.29 Conflicting interests.

10.30 Solicitation.

10.31 Negotiation of taxpayer checks.

10.32 Practice of law.

10.33 Tax shelter opinions used by third

parties to market tax shelters.

10.34 Standards for advising with respect to

tax return positions and for preparing or

signing returns.

10.35 More likely than not tax shelter

opinions.

10.36 Procedures to ensure compliance.

Subpart C—Sanctions for Violation of the

Regulations

10.50 Sanctions.

10.51 Incompetence and disreputable

conduct.

10.52 Violation of regulations.

10.53 Receipt of information concerning

practitioner.

Subpart D—Rules Applicable to Disciplinary

Proceedings

10.60 Institution of proceeding.

3284 Federal Register / Vol. 66, No. 9 / Friday, January 12, 2001 / Proposed Rules

10.61 Conferences.

10.62 Contents of complaint.

10.63 Service of complaint and other

papers.

10.64 Answer.

10.65 Supplemental charges.

10.66 Reply to answer.

10.67 Proof; variance; amendment of

pleadings.

10.68 Motions and requests.

10.69 Representation.

10.70 Administrative Law Judge.

10.71 Hearings.

10.72 Evidence.

10.73 Depositions.

10.74 Transcript.

10.75 Proposed findings and conclusions.

10.76 Decision of the Administrative Law

Judge.

10.77 Appeal to the Secretary.

10.78 Decision of the Secretary.

10.79 Effect of disbarment, suspension, or

censure.

10.80 Notice of disbarment, suspension,

censure, or disqualification.

10.81 Petition for reinstatement.

10.82 Expedited suspension upon criminal

conviction or loss of license for cause.

Subpart E—General Provisions

10.90 Records.

10.91 Saving clause.

10.92 Special orders.

10.93 Effective date.

Authority: Sec. 3, 23 Stat. 258, secs. 2–12,

60 Stat. 237 et seq.; 5 U.S.C. 301, 500, 551–

559; 31 U.S.C. 330; Reorg. Plan No. 26 of

1950, 15 FR 4935, 64 Stat. 1280, 3 CFR 1949–

1953 Comp., P. 1017.

§ 10.0 Scope of part.

This part contains rules governing the

recognition of attorneys, certified public

accountants, enrolled agents, and other

persons representing taxpayers before

the Internal Revenue Service. Subpart A

of this part sets forth rules relating to

authority to practice before the Internal

Revenue Service; subpart B of this part

prescribes the duties and restrictions

relating to such practice; subpart C of

this part prescribes the sanctions for

violating the regulations; subpart D of

this part contains the rules applicable to

disciplinary proceedings; and subpart E

of this part contains general provisions

including provisions relating to the

availability of official records.

Subpart A—Rules Governing Authority

to Practice

§ 10.1 Director of practice.

(a) Establishment of office. The office

of the Director of Practice is established

in the Office of the Secretary of the

Treasury. The Director of Practice is

appointed by the Secretary of the

Treasury, or his or her designate.

(b) Duties. The Director of Practice

acts on applications for enrollment to

practice before the Internal Revenue

Service; makes inquires with respect to

matters under his or her jurisdiction;

institutes and provides for the conduct

of disciplinary proceedings relating to

attorneys, certified public accountants,

enrolled agents, enrolled actuaries and

appraisers; and performs other duties as

are necessary or appropriate to carry out

his or her functions under this part or

as are prescribed by the Secretary of the

Treasury, or his or her designate.

(c) Acting Director of Practice. The

Secretary of the Treasury, or his or her

designate, will designate an officer or

employee of the Treasury Department to

act as Director of Practice in the absence

of the Director or a vacancy in that

office.

§ 10.2 Definitions.

As used in this part, except where the

context clearly indicates otherwise:

(a) Attorney means any person who is

a member in good standing of the bar of

the highest court of any State,

possession, territory, Commonwealth, or

the District of Columbia.

(b) Certified public accountant means

any person who is duly qualified to

practice as a certified public accountant

in any State, possession, territory,

Commonwealth, or the District of

Columbia.

(c) Commissioner refers to the

Commissioner of Internal Revenue.

(d) Director refers to the Director of

Practice.

(e) Practice before the Internal

Revenue Service comprehends all

matters connected with a presentation

to the Internal Revenue Service or any

of its officers or employees relating to a

taxpayer’s rights, privileges, or

liabilities under laws or regulations

administered by the Internal Revenue

Service. Such presentations include, but

are not limited to, preparing and filing

documents, corresponding and

communicating with the Internal

Revenue Service, and representing a

client at conferences, hearings, and

meetings.

(f) Practitioner means any individual

described in paragraphs (a), (b), (c), or

(d) of § 10.3 of this part.

(g) A tax return includes an amended

tax return and a claim for refund.

(h) Service means the Internal

Revenue Service.

§ 10.3 Who may practice.

(a) Attorneys. Any attorney who is not

currently under suspension or

disbarment from practice before the

Internal Revenue Service may practice

before the Service by filing with the

Service a written declaration that he or

she is currently qualified as an attorney

and is authorized to represent the

party(ies) on whose behalf he or she

acts.

(b) Certified public accountants. Any

certified public accountant who is not

currently under suspension or

disbarment from practice before the

Internal Revenue Service may practice

before the Service by filing with the

Service a written declaration that he or

she is currently qualified as a certified

public accountant and is authorized to

represent the party(ies) on whose behalf

he or she acts.

(c) Enrolled agents. Any individual

enrolled as an agent pursuant to this

part who is not currently under

suspension or disbarment from practice

before the Internal Revenue Service may

practice before the Service.

(d) Enrolled actuaries. (1) Any

individual who is enrolled as an actuary

by the Joint Board for the Enrollment of

Actuaries pursuant to 29 U.S.C. 1242

who is not currently under suspension

or disbarment from practice before the

Internal Revenue Service may practice

before the Service by filing with the

Service a written declaration stating that

he or she is currently qualified as an

enrolled actuary and is authorized to

represent the party(ies) on whose behalf

he or she acts.

(2) Practice as an enrolled actuary is

limited to representation with respect to

issues involving the following statutory

provisions in title 26 of the United

States Code: sections 401 (relating to

qualification of employee plans), 403(a)

(relating to whether an annuity plan

meets the requirements of section

404(a)(2)), 404 (relating to deductibility

of employer contributions), 405 (relating

to qualification of bond purchase plans),

412 (relating to funding requirements

for certain employee plans), 413

(relating to application of qualification

requirements to collectively bargained

plans and to plans maintained by more

than one employer), 414 (relating to

definitions and special rules with

respect to the employee plan area), 419

(relating to treatment of funded welfare

benefits), 419A (relating to qualified

asset accounts), 420 (relating to transfers

of excess pension assets to retiree health

accounts), 4971 (relating to excise taxes

payable as a result of an accumulated

funding deficiency under section 412),

4972 (relating to tax on nondeductible

contributions to qualified employer

plans), 4976 (relating to taxes with

respect to funded welfare benefit plans),

4980 (relating to tax on reversion of

qualified plan assets to employer), 6057

(relating to annual registration of plans),

6058 (relating to information required in

connection with certain plans of

deferred compensation), 6059 (relating

to periodic report of actuary), 6652(e)

(relating to the failure to file annual

registration and other notifications by

Federal Register / Vol. 66, No. 9 / Friday, January 12, 2001 / Proposed Rules 3285

pension plan), 6652(f) (relating to the

failure to file information required in

connection with certain plans of

deferred compensation), 6692 (relating

to the failure to file actuarial report),

and 7805(b) (relating to the extent to

which a Internal Revenue Service ruling

or determination letter coming under

the statutory provisions listed here will

be applied without retroactive effect);

and 29 U.S.C. 1083 (relating to the

waiver of funding for nonqualified

plans).

(3) An individual who practices

before the Internal Revenue Service

pursuant to paragraph (d)(1) of this

section is subject to the provisions of

this part in the same manner as

attorneys, certified public accountants

and enrolled agents.

(e) Others. Any individual qualifying

under paragraph (c) of § 10.5 or § 10.7 is

eligible to practice before the Internal

Revenue Service to the extent provided

in those sections.

(f) Government officers and

employees, and others. An individual,

who is an officer or employee of the

executive, legislative, or judicial branch

of the United States Government; an

officer or employee of the District of

Columbia; a Member of Congress; or a

Resident Commissioner may not

practice before the Internal Revenue

Service if such practice violates 18

U.S.C. 203 or 205.

(g) State officers and employees. No

officer or employee of any State, or

subdivision of any State, whose duties

require him or her to pass upon,

investigate, or deal with tax matters for

such State or subdivision, may practice

before the Internal Revenue Service, if

such employment may disclose facts or

information applicable to Federal tax

matters.

§ 10.4 Eligibility for enrollment.

(a) Enrollment upon examination. The

Director of Practice may grant

enrollment to an applicant who

demonstrates special competence in tax

matters by written examination

administered by, or administered under

the oversight of, the Director and who

has not engaged in any conduct that

would justify the censure, suspension,

or disbarment of any practitioner under

the provisions of this part.

(b) Enrollment of former Internal

Revenue Service employees. The

Director of Practice may grant

enrollment to an applicant who, by

virtue of his or her past service and

technical experience in the Internal

Revenue Service, has qualified for such

enrollment and who has not engaged in

any conduct that would justify the

censure, suspension, or disbarment of

any practitioner under the provisions of

this part, under the following

circumstances—

(1) The former employee applies for

enrollment to the Director of Practice on

a form supplied by the Director and

supplies the information requested on

the form and such other information

regarding the experience and training of

the applicant as may be relevant.

(2) An appropriate office of the

Internal Revenue Service, at the request

of the Director of Practice, will provide

the Director with a detailed report of the

nature and rating of the applicant’s

work while employed by the Service

and a recommendation whether such

employment qualifies the applicant

technically or otherwise for the desired

authorization.

(3) Enrollment based on an

applicant’s former employment with the

Internal Revenue Service may be of

unlimited scope or it may be limited to

permit the presentation of matters only

of the particular class or only before the

particular unit or division of the Service

for which the applicant’s former

employment has qualified the applicant.

(4) Application for enrollment based

on an applicant’s former employment

with the Internal Revenue Service must

be made within 3 years from the date of

separation from such employment.

(5) An applicant for enrollment who

is requesting such enrollment based on

his or her former employment with the

Internal Revenue Service must have had

a minimum of 5 years continuous

employment with the Service during

which he or she must have been

regularly engaged in applying and

interpreting the provisions of the

Internal Revenue Code and the

regulations thereunder relating to

income, estate, gift, employment, or

excise taxes.

(6) For the purposes of paragraph

(b)(5) of this section, an aggregate of 10

or more years of employment in

positions involving the application and

interpretation of the provisions of the

Internal Revenue Code, at least 3 of

which occurred within the 5 years

preceding the date of application, is the

equivalent of 5 years continuous

employment.

(c) Natural persons. Enrollment to

practice may be granted only to natural

persons.

§ 10.5 Application for enrollment.

(a) Form; address. An applicant for

enrollment must file an application on

Form 23, ‘‘Application for Enrollment to

Practice Before the Internal Revenue

Service’’, properly executed under oath

or affirmation, with the Director of

Practice. The address of the applicant

entered on Form 23 will be the address

under which a successful applicant is

enrolled and is the address to which the

Director will send correspondence

concerning enrollment. An enrolled

agent must send notification of any

change to his or her enrollment address

to the Director of Practice, Internal

Revenue Service, 1111 Constitution

Avenue, NW., Washington, DC 20224,

or at such other address specified by the

Director. This notification must include

the enrolled agent’s name, old address,

new address, social security number,

signature, and the date.

(b) Fee. The application for

enrollment must be accompanied by a

check or money order in the amount set

forth on Form 23, payable to the Internal

Revenue Service, which amount

constitutes a fee charged to each

applicant for enrollment. This fee will

be retained by the United States

whether or not the applicant is granted

enrollment.

(c) Additional information;

examination. The Director of Practice,

as a condition to consideration of an

application for enrollment, may require

the applicant to file additional

information and to submit to any

written or oral examination under oath

or otherwise. The Director will, on

written request filed by an applicant,

afford such applicant the opportunity to

be heard with respect to his or her

application for enrollment.

(d) Temporary recognition. On receipt

of a properly executed application, the

Director of Practice may grant the

applicant temporary recognition to

practice pending a determination as to

whether enrollment to practice should

be granted. Temporary recognition will

be granted only in unusual

circumstances and it will not be

granted, in any circumstance, if the

application is not regular on its face, if

the information stated in the

application, if true, is not sufficient to

warrant enrollment to practice, or if

there is any information before the

Director indicating that the statements

in the application are untrue or that the

applicant would not otherwise qualify

for enrollment. Issuance of temporary

recognition does not constitute

enrollment to practice or a finding of

eligibility for enrollment, and the

temporary recognition may be

withdrawn at any time by the Director.

(e) Appeal from denial of application.

The Director of Practice must inform the

applicant as to the reason(s) for any

denial of an application for enrollment.

The applicant may, within 30 days after

receipt of the notice of denial of

enrollment, file a written appeal of the

denial of enrollment with the Secretary

3286 Federal Register / Vol. 66, No. 9 / Friday, January 12, 2001 / Proposed Rules

of the Treasury. A decision on the

appeal will be rendered by the Secretary

of the Treasury, or his or her designate,

as soon as practicable.

§ 10.6 Enrollment.

(a) Roster. The Director of Practice

will maintain rosters of all

individuals—

(1) Who have been granted active

enrollment to practice before the

Internal Revenue Service;

(2) Whose enrollment has been placed

in inactive status for failure to meet the

requirements for renewal of enrollment;

(3) Whose enrollment has been placed

in inactive retirement status;

(4) Who have been censured,

suspended, or disbarred from practice

before the Internal Revenue Service;

(5) Whose offer of consent to resign

from enrollment to practice before the

Internal Revenue Service has been

accepted by the Director of Practice

under § 10.61 of this part; and

(6) Whose application for enrollment

has been denied.

(b) Enrollment card. The Director of

Practice will issue an enrollment card to

each individual whose application for

enrollment to practice before the

Internal Revenue Service is approved

after the effective date of this regulation.

Each enrollment card will be valid for

the period stated on the enrollment

card. Enrollment cards issued to

individuals before February 1, 1999, are

invalid. An individual is not eligible to

practice before the Service if his or her

enrollment card is not valid.

(c) Term of enrollment. Each

individual enrolled to practice before

the Internal Revenue Service will be

accorded active enrollment status

subject to his or her renewal of

enrollment as provided in this part.

(d) Renewal of enrollment. To

maintain active enrollment to practice

before the Internal Revenue Service,

each individual enrolled is required to

have his or her enrollment renewed.

Failure by an individual to receive

notification from the Director of Practice

of the renewal requirement will not be

justification for the failure to satisfy this

requirement.

(1) All individuals enrolled to

practice before the Internal Revenue

Service must apply for renewal of

enrollment between November 1, 2001,

and January 31, 2002. Those who

receive initial enrollment between

November 1, 2001, and January 31,

2002, must apply for renewal of

enrollment by March 1, 2002. The

renewal will be effective April 1, 2002.

(2) Thereafter, applications for

renewal will be required between

November 1, 2004, and January 31,

2005, and between November 1 and

January 31 of every subsequent third

year. Those who receive initial

enrollment during the renewal

application period must apply for

renewal of enrollment by March 1 of the

renewal year. Renewed enrollment will

be effective April 1, 2005, and April 1

of every subsequent third year.

(3) The Director of Practice will notify

the individual of his or her renewal of

enrollment and will issue the individual

a card evidencing renewal.

(4) A reasonable nonrefundable fee

may be charged for each application for

renewal of enrollment filed with the

Director of Practice.

(5) Forms required for renewal may be

obtained from the Director of Practice,

Internal Revenue Service, Washington,

DC 20224.

(e) Condition for renewal: Continuing

professional education. In order to

qualify for renewal of enrollment, an

individual enrolled to practice before

the Internal Revenue Service must

certify, on the application for renewal

form prescribed by the Director of

Practice, that he or she has satisfied the

following continuing professional

education requirements.

(1) For renewed enrollment effective

April 1, 2002. (i) A minimum of 24

hours of continuing education credit

must be completed between January 1,

2001, and January 31, 2002.

(ii) An individual who receives initial

enrollment between January 1, 2001,

and January 31, 2002, is exempt from

the continuing education requirement

for the renewal of enrollment effective

April 1, 2002, but is required to file a

timely application for renewal of

enrollment.

(2) For renewed enrollment effective

April 1, 2005, and every third year

thereafter. (i) A minimum of 72 hours of

continuing education credit must be

completed between February 1, 2002,

and January 31, 2005, and during each

subsequent three year period. Each such

three year period is known as an

enrollment cycle.

(ii) A minimum of 16 hours of

continuing education credit must be

completed in each year of an enrollment

cycle.

(iii) An individual who receives

initial enrollment during an enrollment

cycle must complete two (2) hours of

qualifying continuing education credit

for each month enrolled during the

enrollment cycle. Enrollment for any

part of a month is considered

enrollment for the entire month.

(f) Qualifying continuing education—

(1) General. To qualify for continuing

education credit, a course of learning

must—

(i) Be a qualifying program designed

to enhance professional knowledge in

Federal taxation or Federal tax related

matters, i.e., programs comprised of

current subject matter in Federal

taxation or Federal tax related matters,

including accounting, tax preparation

software and taxation; and

(ii) Be conducted by a qualifying

sponsor.

(2) Qualifying programs—(i) Formal

programs. A formal program qualifies as

continuing education programs if it—

(A) Requires attendance.

Additionally, the program sponsor must

provide each attendee with a certificate

of attendance; and

(B) Requires that the program be

conducted by a qualified instructor,

discussion leader, or speaker, i.e., a

person whose background, training,

education and experience is appropriate

for instructing or leading a discussion

on the subject matter of the particular

program; and

(C) Provides or requires a written

outline, textbook, or suitable electronic

educational materials.

(ii) Correspondence or individual

study programs (including taped

programs). Qualifying continuing

education programs include

correspondence or individual study

programs that are conducted by

qualifying sponsors and completed on

an individual basis by the enrolled

individual. The allowable credit hours

for such programs will be measured on

a basis comparable to the measurement

of a seminar or course for credit in an

accredited educational institution. Such

programs qualify as continuing

education programs if they—

(A) Require registration of the

participants by the sponsor;

(B) Provide a means for measuring

completion by the participants (e.g., a

written examination), including the

issuance of a certificate of completion

by the sponsor; and

(C) Provide a written outline,

textbook, or suitable electronic

educational materials.

(iii) Serving as an instructor,

discussion leader or speaker. (A) One

hour of continuing education credit will

be awarded for each contact hour

completed as an instructor, discussion

leader, or speaker at an educational

program that meets the continuing

education requirements of paragraph (f)

of this section.

(B) Two hours of continuing

education credit will be awarded for

actual subject preparation time for each

contact hour completed as an instructor,

discussion leader, or speaker at such

programs. It is the responsibility of the

individual claiming such credit to

Federal Register / Vol. 66, No. 9 / Friday, January 12, 2001 / Proposed Rules 3287

maintain records to verify preparation

time.

(C) The maximum credit for

instruction and preparation may not

exceed 50 percent of the continuing

education requirement for an

enrollment cycle.

(D) An instructor, discussion leader,

or speaker who makes more than one

presentation on the same subject matter

during an enrollment cycle, will receive

continuing education credit for only one

such presentation for the enrollment

cycle.

(iv) Credit for published articles,

books, etc. (A) Continuing education

credit will be awarded for publications

on Federal taxation or Federal tax

related matters, including accounting,

financial management, tax preparation

software, and taxation, provided the

content of such publications is current

and designed for the enhancement of

the professional knowledge of an

individual enrolled to practice before

the Internal Revenue Service.

(B) The credit allowed will be on the

basis of one hour credit for each hour

of preparation time for the material. It

is the responsibility of the person

claiming the credit to maintain records

to verify preparation time.

(C) The maximum credit for

publications may not exceed 25 percent

of the continuing education requirement

of any enrollment cycle.

(3) Periodic examination. (i)

Individuals may establish eligibility for

renewal of enrollment for any

enrollment cycle by—

(A) Achieving a passing score on each

part of the Special Enrollment

Examination administered under this

part during the three year period prior

to renewal; and

(B) Completing a minimum of 16

hours of qualifying continuing

education during the last year of an

enrollment cycle.

(ii) Courses designed to help an

applicant prepare for the examination

specified in paragraph (a) of § 10.4 are

considered basic in nature and are not

qualifying continuing education.

(g) Sponsors. (1) Sponsors are those

responsible for presenting programs.

(2) To qualify as a sponsor, a program

presenter must—

(i) Be an accredited educational

institution;

(ii) Be recognized for continuing

education purposes by the licensing

body of any State, possession, territory,

Commonwealth, or the District of

Columbia responsible for the issuance of

a license in the field of accounting or

law;

(iii) Be recognized by the Director of

Practice as a professional organization

or society whose programs include

offering continuing professional

education opportunities in subject

matters within the scope of paragraph

(f)(1)(i) of this section; or

(iv) File a sponsor agreement with the

Director of Practice and obtain approval

of the program as a qualified continuing

education program.

(3) A qualifying sponsor must ensure

the program complies with the

following requirements—

(i) Programs must be developed by

individual(s) qualified in the subject

matter;

(ii) Program subject matter must be

current;

(iii) Instructors, discussion leaders,

and speakers must be qualified with

respect to program content;

(iv) Programs must include some

means for evaluation of technical

content and presentation;

(v) Certificates of completion must be

provided those who have successfully

completed the program; and

(vi) Records must be maintained by

the sponsor to verify the participants

who attended and completed the

program for a period of three years

following completion of the program. In

the case of continuous conferences,

conventions, and the like, records must

be maintained to verify completion of

the program and attendance by each

participant at each segment of the

program.

(4) Professional organizations or

societies wishing to be considered as

qualified sponsors must request this

status from the Director of Practice and

furnish information in support of the

request together with any further

information deemed necessary by the

Director.

(5) A professional organization or

society recognized as a qualified

sponsor by the Director of Practice will

retain its status for one enrollment

cycle. The Director will publish the

names of such sponsors on a periodic

basis.

(h) Measurement of continuing

education coursework. (1) All

continuing education programs will be

measured in terms of contact hours. The

shortest recognized program will be one

contact hour.

(2) A contact hour is 50 minutes of

continuous participation in a program.

Credit is granted only for a full contact

hour, i.e., 50 minutes or multiples

thereof. For example, a program lasting

more than 50 minutes but less than 100

minutes will count as one contact hour.

(3) Individual segments at continuous

conferences, conventions and the like

will be considered one total program.

For example, two 90-minute segments

(180 minutes) at a continuous

conference will count as three contact

hours.

(4) For university or college courses,

each semester hour credit will equal 15

contact hours and a quarter hour credit

will equal 10 contact hours.

(i) Recordkeeping requirements. (1)

Each individual applying for renewal

must retain for a period of three years

following the date of renewal of

enrollment the information required

with regard to qualifying continuing

professional education credit hours.

Such information includes—

(i) The name of the sponsoring

organization;

(ii) The location of the program;

(iii) The title of the program and

description of its content;

(iv) Written outlines, course syllibi,

textbook, and/or electronic materials

provided or required for the course;

(v) The dates attended;

(vi) The credit hours claimed;

(vii) The name(s) of the instructor(s),

discussion leader(s), or speaker(s), if

appropriate; and

(viii) The certificate of completion

and/or signed statement of the hours of

attendance obtained from the sponsor.

(2) To receive continuing education

credit for service completed as an

instructor, discussion leader, or speaker,

the following information must be

maintained for a period of three years

following the date of renewal of

enrollment—

(i) The name of the sponsoring

organization;

(ii) The location of the program;

(iii) The title of the program and

description of its content;

(iv) The dates of the program; and

(v) The credit hours claimed.

(3) To receive continuing education

credit for publications, the following

information must be maintained for a

period of three years following the date

of renewal of enrollment—

(i) The publisher;

(ii) The title of the publication;

(iii) A copy of the publication;

(iv) The date of publication; and

(v) Records that substantiate the hours

worked on the publication.

(j) Waivers. (1) Waiver from the

continuing education requirements for a

given period may be granted by the

Director of Practice for the following

reasons—

(i) Health, which prevented

compliance with the continuing

education requirements;

(ii) Extended active military duty;

(iii) Absence from the United States

for an extended period of time due to

employment or other reasons, provided

the individual does not practice before

3288 Federal Register / Vol. 66, No. 9 / Friday, January 12, 2001 / Proposed Rules

the Internal Revenue Service during

such absence; and

(iv) Other compelling reasons, which

will be considered on a case-by-case

basis.

(2) A request for waiver must be

accompanied by appropriate

documentation. The individual is

required to furnish any additional

documentation or explanation deemed

necessary by the Director of Practice.

Examples of appropriate documentation

could be a medical certificate or military

orders.

(3) A request for waiver must be filed

no later than the last day of the renewal

application period.

(4) If a request for waiver is not

approved, the individual will be placed

in inactive status, so notified by the

Director of Practice, and placed on a

roster of inactive enrolled individuals.

(5) If a request for waiver is approved,

the individual will be notified and

issued a card evidencing renewal.

(6) Those who are granted waivers are

required to file timely applications for

renewal of enrollment.

(k) Failure to comply. (1) Compliance

by an individual with the requirements

of this part is determined by the

Director of Practice. An individual who

fails to meet the requirements of

eligibility for renewal of enrollment will

be notified by the Director at his or her

enrollment address by first class mail.

The notice will state the basis for the

determination of noncompliance and

will provide the individual an

opportunity to furnish information in

writing relating to the matter within 60

days of the date of the notice. Such

information will be considered by the

Director in making a final determination

as to eligibility for renewal of

enrollment.

(2) The Director of Practice may

require any individual, by notice sent by

first class mail to his or her enrollment

address, to provide copies of any

records required to be maintained under

this part. The Director may disallow any

continuing professional education hours

claimed if the individual fails to comply

with this requirement.

(3) An individual who has not filed a

timely application for renewal of

enrollment, who has not made a timely

response to the notice of noncompliance

with the renewal requirements, or who

has not satisfied the requirements of

eligibility for renewal will be placed on

a roster of inactive enrolled individuals.

During this time, the individual will be

ineligible to practice before the Internal

Revenue Service.

(4) Individuals placed in inactive

enrollment status and individuals

ineligible to practice before the Internal

Revenue Service may not, directly or

indirectly, indicate that they are

enrolled to practice before the Service,

or use the term ‘‘enrolled agent,’’ the

designation ‘‘E. A.,’’ or other form of

reference to eligibility to practice before

the Service.

(5) An individual placed in an

inactive status may be reinstated to an

active enrollment status by filing an

application for renewal of enrollment

and providing evidence of the

completion of all required continuing

professional education hours for the

enrollment cycle. Continuing education

credit under this subsection may not be

used to satisfy the requirements of the

enrollment cycle in which the

individual has been placed back on the

active roster.

(6) An individual placed in an

inactive status must file an application

for renewal of enrollment and satisfy the

requirements for renewal as set forth in

this section within three years of being

placed in an inactive status. The name

of such individual otherwise will be

removed from the inactive enrollment

roster and his or her enrollment will

terminate. Eligibility for enrollment

must then be reestablished by the

individual as provided in this section.

(7) Inactive enrollment status is not

available to an individual who is the

subject of a disciplinary matter in the

Office of Director of Practice.

(l) Inactive retirement status. An

individual who no longer practices

before the Internal Revenue Service may

request being placed in an inactive

status at any time and such individual

will be placed in an inactive retirement

status. The individual will be ineligible

to practice before the Service. Such

individual must file a timely application

for renewal of enrollment at each

applicable renewal or enrollment period

as provided in this section. An

individual who is placed in an inactive

retirement status may be reinstated to an

active enrollment status by filing an

application for renewal of enrollment

and providing evidence of the

completion of the required continuing

professional education hours for the

enrollment cycle. Inactive retirement

status is not available to an individual

who is subject of a disciplinary matter

in the Office of Director of Practice.

(m) Renewal while under suspension

or disbarment. An individual who is

ineligible to practice before the Internal

Revenue Service by virtue of

disciplinary action is required to be in

conformance with the requirements for

renewal of enrollment before his or her

eligibility is restored.

(n) Verification. The Director of

Practice may review the continuing

education records of an enrolled

individual and/or qualified sponsor in a

manner deemed appropriate to

determine compliance with the

requirements and standards for renewal

of enrollment as provided in paragraph

(f) of this section.

(o) Enrolled Actuaries. The

enrollment and the renewal of

enrollment of actuaries authorized to

practice under paragraph (d) of § 10.3

are governed by the regulations of the

Joint Board for the Enrollment of

Actuaries at 20 CFR 901.1 et seq.

§ 10.7 Representing oneself; participating

in rulemaking; limited practice; special

appearances; and return preparation.

(a) Representing oneself. Individuals

may appear on their own behalf before

the Internal Revenue Service provided

they present satisfactory identification.

(b) Participating in rulemaking.

Individuals may participate in

rulemaking as provided by the

Administrative Procedure Act. See 5

U.S.C. 553.

(c) Limited practice—(1) In general.

Subject to the limitations in paragraph

(c)(2) of this section, an individual who

is not a practitioner may represent a

taxpayer before the Internal Revenue

Service in the circumstances described

in this paragraph (c)(1), even if the

taxpayer is not present, provided the

individual presents satisfactory

identification and proof of his or her

authority to represent the taxpayer. The

circumstances described in this

paragraph (c)(1) are as follows:

(i) An individual may represent a

member of his or her immediate family.

(ii) A regular full-time employee of an

individual employer may represent the

employer.

(iii) A general partner or a regular fulltime employee of a partnership may

represent the partnership.

(iv) A bona fide officer or a regular

full-time employee of a corporation

(including a parent, subsidiary, or other

affiliated corporation), association, or

organized group may represent the

corporation, association, or organized

group.

(v) A regular full-time employee of a

trust, receivership, guardianship, or

estate may represent the trust,

receivership, guardianship, or estate.

(vi) An officer or a regular employee

of a governmental unit, agency, or

authority may represent the

governmental unit, agency, or authority

in the course of his or her official duties.

(vii) An individual may represent any

individual or entity, who is outside the

United States, before personnel of the

Internal Revenue Service when such

representation takes place outside the

United States.

Federal Register / Vol. 66, No. 9 / Friday, January 12, 2001 / Proposed Rules 3289

(viii) An individual who prepares and

signs a taxpayer’s tax return as the

preparer, or who prepares a tax return

but is not required (by the instructions

to the tax return or regulations) to sign

the tax return, may represent the

taxpayer before revenue agents,

customer service representatives or

similar officers and employees of the

Internal Revenue Service during an

examination of the taxable year or

period covered by that tax return, but

this right does not permit such

individual to represent the taxpayer,

regardless of the circumstances

requiring representation, before appeals

officers, revenue officers, Counsel or

similar officers or employees of the

Service or the Department of Treasury.

(2) Limitations. (i) An individual who

is under suspension or disbarment from

practice before the Internal Revenue

Service may not engage in limited

practice before the Service under

paragraph (c)(1) of this section.

(ii) The Director, after notice and

opportunity for a conference, may deny

eligibility to engage in limited practice

before the Internal Revenue Service

under paragraph (c)(1) of this section to

any individual who has engaged in

conduct that would justify censuring,

suspending, or disbarring a practitioner

from practice before the Service.

(iii) An individual who represents a

taxpayer under the authority of

paragraph (c)(1) of this section is

subject, to the extent of his or her

authority, to such rules of general

applicability regarding standards of

conduct and other matters as the

Director of Practice prescribes.

(d) Special appearances. The Director

of Practice may, subject to such

conditions as he or she deems

appropriate, authorize an individual

who is not otherwise eligible to practice

before the Service to represent another

person in a particular matter.

(e) Preparing tax returns and

furnishing information. Any individual

may prepare a tax return, appear as a

witness for the taxpayer before the

Internal Revenue Service, or furnish

information at the request of the Service

or any of its officers or employees.

(f) Fiduciaries. For purposes of this

part, a fiduciary (i.e., a trustee, receiver,

guardian, personal representative,

administrator, or executor) is considered

to be the taxpayer and not a

representative of the taxpayer.

§ 10.8 Customhouse brokers.

Nothing contained in the regulations

in this part will affect or limit the right

of a customhouse broker, licensed as

such by the Commissioner of Customs

in accordance with the regulations

prescribed therefor, in any customs

district in which he or she is so

licensed, at the local office of the

Internal Revenue Service or before the

National Office of the Service, to act as

a representative in respect to any

matters relating specifically to the

importation or exportation of

merchandise under the customs or

internal revenue laws, for any person for

whom he or she has acted as a

customhouse broker.

Subpart B—Duties and Restrictions

Relating to Practice Before the Internal

Revenue Service

§ 10.20 Information to be furnished.

(a) To the Internal Revenue Service. A

practitioner must, on a proper and

lawful request by a duly authorized

officer or employee of the Internal

Revenue Service, promptly submit

records or information in any matter

before the Internal Revenue Service

unless the practitioner believes in good

faith and on reasonable grounds that the

records or information are privileged.

Where the requested records or

information are not in the possession or

control of the practitioner or the

practitioner’s client, the practitioner

must promptly notify the requesting

officer or employee, and must provide

any information that either the

practitioner or the practitioner’s client

has regarding the identity of any person

who may have possession or control of

the requested records or information. A

practitioner may not interfere, or

attempt to interfere, with any proper

and lawful effort by the Service or its

officers or employees to obtain any

record or information unless the

practitioner believes in good faith and

on reasonable grounds that the record or

information is privileged.

(b) To the Director of Practice. When

a proper and lawful request is made by

the Director of Practice, a practitioner

must provide the Director with any

information the practitioner has

concerning a violation or possible

violation of the regulations in this part

by any person, and to testify regarding

this information in any proceeding

instituted under this part, unless the

practitioner believes in good faith and

on reasonable grounds that the

information is privileged.

§ 10.21 Knowledge of client’s omission.

A practitioner who, having been

retained by a client with respect to a

matter administered by the Internal

Revenue Service, knows that the client

has not complied with the revenue laws

of the United States or has made an

error in or omission from any return,

document, affidavit, or other paper

which the client submitted or executed

under the revenue laws of the United

States, must advise the client promptly

of the fact of such noncompliance, error,

or omission, the manner in which

corrective action may be taken, and the

possible consequences of not taking

corrective action.

§ 10.22 Diligence as to accuracy.

(a) In general. A practitioner must

exercise due diligence—

(1) In preparing or assisting in the

preparation of, approving, and filing tax

returns, documents, affidavits, and other

papers relating to Internal Revenue

Service matters;

(2) In determining the correctness of

oral or written representations made by

the practitioner to the Department of the

Treasury; and

(3) In determining the correctness of

oral or written representations made by

the practitioner to clients with reference

to any matter administered by the

Internal Revenue Service.

(b) Reliance on others. Except as

provided in §§ 10.33, 10.34, and 10.35,

a practitioner will be presumed to have

exercised due diligence for purposes of

this section if the practitioner relies on

the work product of another person and

the practitioner used reasonable care in

engaging, supervising, training, and

evaluating the person, taking proper

account of the nature of the relationship

between the practitioner and the person.

§ 10.23 Prompt disposition of pending

matters.

A practitioner may not unreasonably

delay the prompt disposition of any

matter before the Internal Revenue

Service.

§ 10.24 Assistance from or to disbarred or

suspended persons and former Internal

Revenue Service employees.

A practitioner may not, knowingly

and directly or indirectly:

(a) Accept assistance from or assist

any person who is under disbarment or

suspension from practice before the

Internal Revenue Service if the

assistance relates to a matter or matters

constituting practice before the Service.

(b) Accept assistance from any former

government employee where the

provisions of § 10.25 of this part or any

Federal law would be violated.

§ 10.25 Practice by former Government

employees, their partners and their

associates.

(a) Definitions. For purposes of this

section—

(1) Assist means to act in such a way

as to advise, furnish information to, or

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otherwise aid another person, directly

or indirectly.

(2) Government employee is an officer

or employee of the United States or any

agency of the United States, including a

special government employee as defined

in 18 U.S.C. 202(a), or of the District of

Columbia, or of any State, or a member

of Congress or of any State legislature.

(3) Member of a firm is a sole

practitioner or an employee or associate

thereof, or a partner, stockholder,

associate, affiliate or employee of a

partnership, joint venture, corporation,

professional association or other

affiliation of two or more practitioners

who represent nongovernmental parties.

(4) Practitioner includes any

individual described in paragraph (f) of

§ 10.2.

(5) Official responsibility means the

direct administrative or operating

authority, whether intermediate or final,

and either exercisable alone or with

others, and either personally or through

subordinates, to approve, disapprove, or

otherwise direct Government action,

with or without knowledge of the

action.

(6) Participate or participation means

substantial involvement as a

Government employee by making

decisions, or preparing or reviewing

documents with or without the right to

exercise a judgment of approval or

disapproval, or participating in

conferences or investigations, or

rendering advice of a substantial nature.

(7) Rule includes Treasury

Regulations, whether issued or under

preparation for issuance as Notices of

Proposed Rule Making or as Treasury

Decisions; revenue rulings; and revenue

procedures published in the Internal

Revenue Bulletin. Rule does not include

a transaction as defined in paragraph

(a)(8) of this section.

(8) Transaction means any decision,

determination, finding, letter ruling,

technical advice, Chief Counsel advice,

or contract or the approval or

disapproval thereof, relating to a

particular factual situation or situations

involving a specific party or parties

whose rights, privileges, or liabilities

under laws or regulations administered

by the Internal Revenue Service, or

other legal rights, are determined or

immediately affected therein and to

which the United States is a party or in

which it has a direct and substantial

interest, whether or not the same taxable

periods are involved. Transaction does

not include rule as defined in paragraph

(a)(7) of this section.

(b) General rules. (1) No former

Government employee may, subsequent

to his or her Government employment,

represent anyone in any matter

administered by the Internal Revenue

Service if the representation would

violate 18 U.S.C. 207 or any other laws

of the United States.

(2) No former Government employee

who participated in a transaction may,

subsequent to his or her Government

employment, represent or knowingly

assist, in that transaction, any person

who is or was a specific party to that

transaction.

(3) A former Government employee

who within a period of one year prior

to the termination of Government

employment had official responsibility

for a transaction may not, within two

years after his or her Government

employment is ended, represent or

knowingly assist in that transaction any

person who is or was a specific party to

that transaction.

(4) No former Government employee

may, within one year after his or her

Government employment is ended,

appear before any employee of the

Treasury Department in connection

with the publication, withdrawal,

amendment, modification, or

interpretation of a rule in the

development of which the former

Government employee participated or

for which, within a period of one year

prior to the termination of his or her

Government employment, he or she had

official responsibility. This paragraph

(b)(4) does not, however, preclude such

former employee from appearing on his

or her own behalf or from representing

a taxpayer before the Internal Revenue

Service in connection with a transaction

involving the application or

interpretation of such a rule with

respect to that transaction, provided that

such former employee does not utilize

or disclose any confidential information

acquired by the former employee in the

development of the rule.

(c) Firm representation. (1) No

member of a firm of which a former

Government employee is a member may

represent or knowingly assist a person

who was or is a specific party in any

transaction with respect to which the

restrictions of paragraph (b)(2) or (3) of

this section apply to the former

Government employee, in that

transaction, unless the firm isolates the

former Government employee in such a

way to ensure that the former

Government employee cannot assist in

the representation.

(2) When isolation of a former

Government employee is required under

paragraph (c)(1) of this section, a

statement affirming the fact of such

isolation must be executed under oath

by the former Government employee

and by another member of the firm

acting on behalf of the firm. The

statement must clearly identify the firm,

the former Government employee, and

the transaction(s) requiring isolation

and it must be filed with the Director of

Practice and in such other place and in

the manner prescribed by rule or

regulation.

(d) Pending representation. Practice

by former Government employees, their

partners and associates with respect to

representation in specific matters where

actual representation commenced before

adoption of this regulation is governed

by the regulations set forth at 31 CFR

part 10 immediately preceding the

adoption of these regulations. The

burden of showing that representation

commenced before adoption of the

revised regulations lies with the former

Government employees, and their

partners and associates.

§ 10.26 Notaries.

A practitioner may not take

acknowledgments, administer oaths,

certify papers, or perform any official

act as a notary public with respect to

any matter administered by the Internal

Revenue Service and for which he or

she is employed as counsel, attorney, or

agent, or in which he or she may be in

any way interested. (26 Op. Atty. Gen.

236).

§ 10.27 Fees.

(a) Generally. A practitioner may not

charge an unconscionable fee for

representing a client in a matter before

the Internal Revenue Service.

(b) Contingent fees. A practitioner

may not charge a contingent fee for

preparing an original tax return or for

any advice rendered in connection with

a position taken or to be taken on an

original tax return. A practitioner may

charge a contingent fee for preparing, or

for any advice rendered in connection

with a position taken or to be taken on,

an amended tax return or a claim for

refund (other than a claim for refund

made on an original tax return) if the

practitioner reasonably anticipates at

the time the fee arrangement is entered

into that the amended tax return or

refund claim will receive substantive

review by the Internal Revenue Service.

For purposes of this section, a

contingent fee is any fee that is based,

in whole or in part, on whether or not

a position taken on a tax return or in a

refund claim is sustained by the Service

or in litigation. A contingent fee

includes an indemnity agreement, a

guarantee, rescission rights, insurance,

or any other arrangement under which

the taxpayer or other person would be

entitled to be compensated or

reimbursed by the practitioner in the

event a position taken on a tax return or

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in a refund claim is not sustained, or

any other arrangement that has a similar

effect.

§ 10.28 Return of client’s records.

On the request of a client, a

practitioner must promptly return any

and all records of the client. The

existence of a dispute over fees does not

relieve the practitioner of his or her

responsibility under this section. The

practitioner may retain copies of the

records returned to a client.

§ 10.29 Conflicting interests.

(a) A practitioner may not represent

potential conflicting interests in his or

her practice before the Internal Revenue

Service, unless—

(1) The practitioner reasonably

believes that the representation of any

party before the Service will not be

adversely affected; and

(2) All parties represented by the

practitioner who have an interest in the

matter before the Service expressly

consent in writing to the representation

after the practitioner has fully disclosed

the potential conflict.

(b) Copies of the written consents

must be retained by the practitioner for

at least 36 months from the date of the

conclusion of the representation of the

affected clients and the written consents

must be provided to any officer or

employee of the Internal Revenue

Service on request.

(c) A practitioner may not represent a

party in his or her practice before the

Internal Revenue Service if the

representation of the party may be

materially limited by the practitioner’s

own interests, unless the practitioner

reasonably believes the representation

will not be adversely affected and the

client consents after the practitioner has

fully disclosed the potential conflict,

including disclosure of the implications

of the potential conflict and the risks

involved.

§ 10.30 Solicitation.

(a) Advertising and solicitation

restrictions. (1) A practitioner may not,

with respect to any Internal Revenue

Service matter, in any way use or

participate in the use of any form of

public communication or private

solicitation containing a false,

fraudulent, or coercive statement or

claim; or a misleading or deceptive

statement or claim. Enrolled agents, in

describing their professional

designation, may not utilize the term of

art ‘‘certified’’ or ‘‘licensed’’ or indicate

an employer/employee relationship

with the Service. Examples of

acceptable descriptions are ‘‘enrolled to

represent taxpayers before the Internal

Revenue Service,’’ ‘‘enrolled to practice

before the Internal Revenue Service,’’

and ‘‘admitted to practice before the

Internal Revenue Service.’’ Enrolled

agents and enrolled actuaries may

abbreviate such designation as either EA

or E.A. Examples of unacceptable

descriptions are ‘‘Internal Revenue

Service (or IRS) Enrolled Agent,’’

‘‘Enrolled Agent of the Internal Revenue

Service (or IRS),’’ ‘‘Certified Enrolled

Agent,’’ or ‘‘Licensed to practice before

the Internal Revenue Service (or IRS).’’

(2) A practitioner may not make,

directly or indirectly, an uninvited

written or oral solicitation of

employment in matters related to the

Internal Revenue Service if the

solicitation violates Federal or State law

or other applicable rule, e.g., attorneys

are precluded from making a solicitation

that is prohibited by the rules of the

State bar to which they are members.

Any lawful solicitation made by or on

behalf of a practitioner eligible to

practice before the Service must,

nevertheless, clearly identify the

solicitation as such and, if applicable,

identify the source of the information

used in choosing the recipient.

(b) Fee information. (1)(i) A

practitioner may publish the availability

of a written schedule of fees and

disseminate the following fee

information—

(A) Fixed fees for specific routine

services.

(B) Hourly rates.

(C) Range of fees for particular

services.

(D) Fee charged for an initial

consultation.

(ii) Any statement of fee information

concerning matters in which costs may

be incurred must include a statement

disclosing whether clients will be

responsible for such costs.

(2) A practitioner may charge no more

than the rate(s) published under

paragraph (b)(1) of this section for a

reasonable period of time after the last

date on which the schedule of fees was

published (which, in no event, may be

shorter than 30 days).

(c) Communication of fee information.

Fee information may be communicated

in professional lists, telephone

directories, print media, mailings,

electronic mail, facsimile, hand

delivered flyers, radio, television, and

any other method. The method chosen,

however, must not cause the

communication to become untruthful,

deceptive, or otherwise in violation of

these regulations. A practitioner may

not persist in attempting to contact a

prospective client if the prospective

client has made it known to the

practitioner that he or she does not

desire to be solicited. In the case of

radio and television broadcasting, the

broadcast must be recorded and the

practitioner must retain a recording of

the actual transmission. In the case of

direct mail and e-commerce

communications, the practitioner must

retain a copy of the actual

communication, along with a list or

other description of persons to whom

the communication was mailed or

otherwise distributed. The copy must be

retained by the practitioner for a period

of at least 36 months from the date of

the last transmission or use.

(d) Improper associations. A

practitioner may not, in matters related

to the Internal Revenue Service, assist,

or accept assistance from, any person or

entity who, to the knowledge of the

practitioner, obtains clients or otherwise

practices in a manner forbidden under

this section.

§ 10.31 Negotiation of taxpayer checks.

A practitioner who prepares tax

returns may not endorse or otherwise

negotiate any check issued to a client by

the government in respect of a Federal

tax liability.

§ 10.32 Practice of law.

Nothing in the regulations in this part

may be construed as authorizing

persons not members of the bar to

practice law.

§ 10.33 Tax shelter opinions used by third

parties to market tax shelters.

(a) In general. A practitioner who

provides a tax shelter opinion that does

not conclude that the Federal tax

treatment of a tax shelter item or items

is more likely than not the proper

treatment must comply with each of the

following requirements with respect to

each such item.

(1) Factual matters. (i) The

practitioner must make inquiry as to all

relevant facts, be satisfied that the

opinion takes account of all relevant

facts, and be satisfied that the material

facts (including factual assumptions and

representations) are accurately and

completely described in the opinion and

in any related offering materials or sales

promotion materials.

(ii) The opinion must not be based,

directly or indirectly, on any

unreasonable factual assumptions

(including assumptions as to future

events). Unreasonable factual

assumptions include—

(A) A factual assumption that the

practitioner knows or has reason to

believe is incorrect, incomplete,

inconsistent with an important fact or

another factual assumption, or

implausible in any material respect; or

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(B) A factual assumption regarding a

fact or facts that the practitioner could

reasonably request to be provided or to

be represented.

(iii) A practitioner may, where it

would be reasonable based on all the

facts and circumstances, rely upon

factual representations, statements,

findings, or agreements (factual

representations) (including

representations describing the specific

business reasons for the transaction, the

potential profitability of the transaction

apart from tax benefits, or a valuation

prepared by an independent party).

Factors relevant to whether such factual

representations are reasonable include,

but are not limited to, whether the

person making the factual

representations is knowledgeable as to

the facts being represented and is the

appropriate person to make such factual

representations. A practitioner does not

need to conduct an audit or

independent verification of a factual

representation, but the practitioner may

not rely on factual representations if the

practitioner knows or has reason to

believe, based on his or her background

and knowledge, that the relevant

information is, or otherwise appears to

be, unreasonable, incorrect, incomplete,

inconsistent with an important fact or

another factual representation, or

implausible in any material respect. For

example, a representation is incomplete

if it states that there are business

reasons for the transaction without

describing those reasons, or if it states

that a transaction is potentially

profitable apart from tax benefits

without providing adequate factual

support. In addition, a valuation is

inconsistent with an important fact or

factual assumption or is implausible if

it appears to be based on facts that are

inconsistent with the facts of the

transaction.

(iv) If the fair market value of property

or the expected financial performance of

an investment is relevant to the tax

shelter item, a practitioner may not

accept an appraisal or financial

projection as support for the matters

claimed therein unless—

(A) The appraisal or financial

projection makes sense on its face;

(B) The practitioner reasonably

believes that the person making the

appraisal or financial projection is

reputable and competent to perform the

appraisal or projection; and

(C) The appraisal is based on the

definition of fair market value

prescribed under the relevant Federal

tax provisions.

(v) If the fair market value of

purchased property is to be established

by reference to its stated purchase price,

the practitioner must examine the terms

and conditions on which the property

was (or is to be) purchased to determine

whether the stated purchase price

reasonably may be considered to be its

fair market value.

(2) Relate law to facts. (i) The opinion

must relate the applicable law to the

relevant facts.

(ii) The opinion must clearly identify

the facts upon which the opinion’s

conclusions are based.

(iii) The opinion must contain a

reasoned analysis of the pertinent facts

and legal authorities and must not

assume the favorable resolution of any

Federal tax issue material to the analysis

or otherwise rely on any unreasonable

legal assumptions.

(iv) The opinion must not contain

legal analyses or conclusions with

respect to Federal tax issues that are

inconsistent with each other.

(3) Analysis of material Federal tax

issues. The practitioner must ascertain

that all material Federal tax issues have

been considered, and that all of those

issues that involve the reasonable

possibility of a challenge by the Internal

Revenue Service have been fully and

fairly addressed. The opinion must state

that the practitioner has considered the

possible application to the facts of all

potentially relevant judicial doctrines,

including the step transaction, business

purpose, economic substance, substance

over form, and sham transaction

doctrines, as well as potentially relevant

statutory and regulatory anti-abuse

rules, and the opinion must analyze

whether the tax shelter item is

vulnerable to challenge under all

potentially relevant doctrines and antiabuse rules. In analyzing such judicial

doctrines and statutory and regulatory

anti-abuse rules, the opinion must take

into account the typical investor’s nontax and tax purposes (and the relative

weight of such purposes) for entering

into a transaction and for structuring a

transaction in a particular manner.

(4) Evaluation of material Federal tax

issues. The practitioner must, where

possible, clearly provide his or her

conclusion as to the likelihood that a

typical investor of the type to whom the

tax shelter is or will be marketed will

prevail on the merits with respect to

each material Federal tax issue that

involves the reasonable possibility of a

challenge by the Internal Revenue

Service. If the practitioner is unable to

reach such a conclusion with respect to

one or more Federal tax issues, he or she

must clearly state that he or she is

unable to reach such a conclusion with

respect to those issues. The

practitioner’s opinion must fully

describe the reasons for the

practitioner’s conclusions or fully

describe the reasons for his or her

inability to reach a conclusion as to one

or more issues.

(5) Overall conclusion. (i) The

practitioner must, where possible,

clearly provide an overall conclusion as

to the likelihood that the Federal tax

treatment of the tax shelter item or items

is the proper treatment. If the

practitioner is unable to reach such an

overall conclusion, he or she must

clearly state that he or she is unable to

reach such an overall conclusion and

the opinion must fully describe the

reasons for the practitioner’s inability to

reach a conclusion.

(ii) The fact that the practitioner’s

opinion does not reach an overall

conclusion that the Federal tax

treatment of the tax shelter item or items

is more likely than not the proper

treatment, or the fact that the

practitioner is unable to reach an overall

conclusion, must be clearly and

prominently disclosed on the first page

of the opinion.

(iii) The opinion must clearly and

prominently disclose on the first page of

the opinion that the opinion was not

written for the purpose of establishing—

(A) Under section 6662(d)(2)(C)(i)(II)

of the Internal Revenue Code and 26

CFR 1.6662–4(g)(4), that a taxpayer

other than a corporation reasonably

believed at the time a tax return was

filed that the tax treatment of a tax

shelter item was more likely than not

the proper treatment of that item; or

(B) Under section 6664(c)(1) of the

Internal Revenue Code and 26 CFR

1.6664–4(e), that a corporate taxpayer

acted with reasonable cause and in good

faith with respect to a tax shelter item.

(iv) In ascertaining that all material

Federal tax issues have been considered,

evaluating the merits of those issues and

evaluating whether the Federal tax

treatment of the tax shelter item or items

is the proper treatment, the possibility

that a tax return will not be audited, that

an issue will not be raised on audit, or

that an issue will be settled may not be

taken into account.

(6) Description of opinion. The

practitioner must take reasonable steps

to assure that any written materials or

promotional efforts that distribute,

reflect or refer to the tax shelter opinion,

correctly and fairly represent the nature

and extent of the opinion.

(b) Competence to provide opinion;

reliance on opinions of others. (1) The

practitioner must be knowledgeable in

all of the aspects of Federal tax law

relevant to the opinion being rendered.

(i) A practitioner may not provide a

tax shelter opinion that does not clearly

provide his or her conclusion as to the

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likelihood that a typical investor of the

type to whom the tax shelter is or will

be marketed will prevail on the merits

with respect to each material Federal tax

issue that involves the reasonable

possibility of a challenge by the Internal

Revenue Service (or, alternatively, if the

practitioner is unable to reach a

conclusion with respect to one or more

material Federal tax issues, an opinion

that does not clearly state that he or she

is unable to reach a conclusion with

respect to those issues), or does not

provide an overall conclusion as to the

likelihood that the Federal tax treatment

of the tax shelter item or items is the

proper treatment (or, alternatively, if the

practitioner is unable to reach an overall

conclusion, an opinion that does not

clearly state that he or she is unable to

reach such an overall conclusion),

unless—

(A) At least one other competent

practitioner provides an opinion on the

likely outcome with respect to all of the

other material Federal tax issues which

involve a reasonable possibility of

challenge by the Internal Revenue

Service, and with respect to the tax

shelter item or items; and

(B) The practitioner, on reviewing

such other opinions and any written

materials that distribute, reflect or refer

to such other opinions, has no reason to

believe that the other practitioner did

not comply with the standards of

paragraph (a) of this section.

(ii) Notwithstanding the foregoing, a

practitioner who has not been retained

to provide an overall evaluation may

issue an opinion on less than all the

material tax issues only if he or she has

no reason to believe, based on his or her

knowledge and experience, that an

overall conclusion given by the

practitioner who reaches an overall

conclusion is incorrect on its face. Such

practitioner also must ensure that the

limited opinion satisfies the

requirements of this section that are

otherwise applicable.

(2) Financial forecasts and

projections. A practitioner who makes

financial forecasts or projections

relating to or based on the tax

consequences of the tax shelter item that

are included in written materials

disseminated to any or all of the same

persons as the opinion may rely on the

opinion of another practitioner as to any

or all material Federal tax issues,

provided that the practitioner who

desires to rely on the other opinion has

no reason to believe the practitioner

rendering such other opinion has not

complied with the standards of

paragraph (a) of this § 10.33, and the

requirements of paragraphs (b)(1)(i)(A)

and (B) and the first sentence of

paragraph (b)(1)(ii) of this section are

satisfied. The practitioner’s report must

disclose any material Federal tax issue

not covered by, or incorrectly opined

on, by the other opinion, and shall set

forth his or her opinion with respect to

each such issue in a manner that

satisfies the requirements of paragraph

(a) of this section.

(c) Definitions. For purposes of this

section—

(1) Practitioner includes any

individual described in paragraph (f) of

§ 10.2.

(2) The definition of tax shelter is set

forth in section 6662(d)(2)(C)(iii) of the

Internal Revenue Code.

(3) A tax shelter item is an item of

income, gain, loss, deduction or credit

if the item is directly or indirectly

attributable to a tax shelter as defined in

section 6662(d)(2)(C)(iii) of the Internal

Revenue Code.

(4) A tax shelter opinion, as the term

is used in this section, is written advice

by a practitioner concerning the Federal

tax aspects of a tax shelter item or items

that a practitioner knows or has reason

to believe will be used or referred to by

a person other than the practitioner (or

person who is a member of, associated

with, or employed by the practitioner’s

firm or company) in promoting,

marketing or recommending the tax

shelter to one or more taxpayers,

irrespective of whether such

promotional, marketing, or similar

activities are conducted privately or

publicly. The term tax shelter opinion

includes the Federal tax aspects or tax

risks portion of offering materials

prepared for the person who is

promoting, marketing or recommending

the tax shelter by or at the direction of

a practitioner, whether or not a separate

opinion letter is issued or whether or

not the practitioner’s name is referred to

in offering materials or in connection

with sales promotion efforts. Similarly,

a financial forecast or projection

prepared by a practitioner is a tax

shelter opinion if it is predicated on

assumptions regarding Federal tax

aspects of the investment and that meets

the other requirements of the first

sentence of this paragraph. The term tax

shelter opinion does not include advice

provided in connection with the review

of portions of offering or sales

promotion materials, provided neither

the name of the practitioner or the

practitioner’s firm, nor the fact that a

practitioner has rendered advice

concerning the Federal tax aspects, is

referred to in the offering materials or

related sales promotion efforts.

(5) A material Federal tax issue, as the

term is used in this section, is any

Federal tax issue the resolution of

which could have a significant impact

(whether beneficial or adverse) on a

taxpayer under any reasonably

foreseeable circumstance. A material

Federal tax issue includes the potential

applicability of penalties, additions to

tax, or interest charges that reasonably

could be asserted by the Internal

Revenue Service with respect to the tax

shelter item.

(6) The following examples illustrate

this section—

Example 1. A practitioner is requested by

a third party to prepare a memorandum

evaluating whether the purported Federal tax

treatment of a tax shelter item arising from

a series of transactions will be sustained if

challenged by the Internal Revenue Service.

The practitioner concludes that there is a

realistic possibility that the purported

treatment of the tax shelter item is the proper

treatment and has reason to believe that the

third party will use or refer to the

memorandum he prepares in promoting,

marketing or recommending the transaction

to one or more taxpayers. The memorandum

is a tax shelter opinion for purposes of this

section.

Example 2. A practitioner writes a

memorandum that evaluates whether a

hypothetical taxpayer which enters into a

series of transactions can offset a preexisting

capital gain against certain losses arising

from the series of transactions. The

practitioner concludes that, while a

significant purpose for entering into the

series of transactions is the avoidance or

evasion of Federal income tax within the

meaning of section 6662(d)(2)(C)(iii) of the

Internal Revenue Code, there is a realistic

possibility that the tax loss arising from this

series of transactions is the proper treatment.

The practitioner plans to provide this

memorandum directly to clients who have

capital gains. The memorandum is not a tax

shelter opinion for purposes of this section

because the promoting, marketing or

recommending of the tax shelter is not being

done by a person other than the practitioner.

§ 10.34 Standards for advising with

respect to tax return positions and for

preparing or signing returns.

(a) Realistic possibility standard. A

practitioner may not sign a tax return as

a preparer if the practitioner determines

that the tax return contains a position

that does not have a realistic possibility

of being sustained on its merits (the

realistic possibility standard) unless the

position is not frivolous and is

adequately disclosed to the Internal

Revenue Service. A practitioner may not

advise a client to take a position on a

tax return, or prepare the portion of a

tax return on which a position is taken,

unless—

(1) The practitioner determines that

the position satisfies the realistic

possibility standard; or

(2) The position is not frivolous and

the practitioner advises the client of any

3294 Federal Register / Vol. 66, No. 9 / Friday, January 12, 2001 / Proposed Rules

opportunity to avoid the accuracyrelated penalty in section 6662 of the

Internal Revenue Code by adequately

disclosing the position and of the

requirements for adequate disclosure.

(b) Advising clients on potential

penalties. A practitioner advising a

client to take a position on a tax return,

or preparing or signing a tax return as

a preparer, must inform the client of the

penalties reasonably likely to apply to

the client with respect to the position

advised, prepared, or reported. The

practitioner also must inform the client

of any opportunity to avoid any such

penalty by disclosure, if relevant, and of

the requirements for adequate

disclosure. This paragraph (b) applies

even if the practitioner is not subject to

a penalty with respect to the position.

(c) Relying on information furnished

by clients. A practitioner advising a

client to take a position on a tax return,

or preparing or signing a tax return as

a preparer, generally may rely in good

faith without verification upon

information furnished by the client. The

practitioner may not, however, ignore

the implications of information

furnished to, or actually known by, the

practitioner, and must make reasonable

inquiries if the information as furnished

appears to be incorrect, inconsistent

with an important fact or another factual

assumption, or incomplete.

(d) Definitions. For purposes of this

section—

(1) Realistic possibility. A position is

considered to have a realistic possibility

of being sustained on its merits if a

reasonable and well informed analysis

by a person knowledgeable in the tax

law would lead such a person to

conclude that the position has

approximately a one in three, or greater,

likelihood of being sustained on its

merits. The authorities described in 26

CFR 1.6662–4(d)(3)(iii), or any successor

provision, of the substantial

understatement penalty regulations may

be taken into account for purposes of

this analysis. The possibility that a tax

return will not be audited, that an issue

will not be raised on audit, or that an

issue will be settled may not be taken

into account.

(2) Frivolous. A position is frivolous

if it is patently improper.

§ 10.35 More likely than not tax shelter

opinions.

(a) In general. A practitioner who

provides a tax shelter opinion that

concludes that the Federal tax treatment

of a tax shelter item or items is more

likely than not (or at a higher level of

confidence) the proper treatment must

comply with each of the following

requirements with respect to each such

item.

(1) Factual matters. (i) The

practitioner must make inquiry as to all

relevant facts, be satisfied that the

opinion takes account of all relevant

facts, and be satisfied that the material

facts (including factual assumptions and

representations) are accurately and

completely described in the opinion,

and, where appropriate, in any related

offering materials or sales promotion

materials.

(ii) The opinion must not be based,

directly or indirectly, on any

unreasonable factual assumptions

(including assumptions as to future

events). Unreasonable factual

assumptions include—

(A) A factual assumption that the

practitioner knows or has reason to

believe is incorrect, incomplete,

inconsistent with an important fact or

another factual assumption, or

implausible in any material respect; or

(B) A factual assumption regarding a

fact or facts that the practitioner could

reasonably request to be provided or to

be represented.

(C) A factual assumption that the

transaction has a business reason, an

assumption that the transaction is

potentially profitable apart from tax

benefits, or an assumption with respect

to a material valuation issue.

(iii) A practitioner may, where it

would be reasonable based on all the

facts and circumstances, rely on factual

representations, statements, findings, or

agreements of the taxpayer or other

persons ((factual representations)

(including representations describing

the specific business reasons for the

transaction, the potential profitability of

the transaction apart from tax benefits,

or a valuation prepared by an

independent party). Factors relevant to

whether such factual representations are

reasonable include, but are not limited

to, whether the person making the

factual representations is knowledgeable

as to the facts being represented and is

the appropriate person to make such

factual representations. A practitioner

does not need to conduct an audit or

independent verification of a factual

representation, but the practitioner may

not rely on factual representations if the

practitioner knows or has reason to

believe, based on his or her background

and knowledge, that the relevant

information is, or otherwise appears to

be, unreasonable, incorrect, incomplete,

inconsistent with an important fact or

another factual representation, or

implausible in any material respect. For

example, a representation is incomplete

if it states that there are business

reasons for the transaction without

describing those reasons, or if it states

that a transaction is potentially

profitable apart from tax benefits

without providing adequate factual

support. In addition, a valuation is

inconsistent with an important fact or

factual assumption or is implausible if

it appears to be based on facts that are

inconsistent with the facts of the

transaction.

(iv) If the fair market value of property

or the expected financial performance of

an investment is relevant to the tax

shelter item, a practitioner may not

accept an appraisal or financial

projection as support for the matters

claimed therein unless—

(A) The appraisal or financial

projection makes sense on its face;

(B) The practitioner reasonably

believes that the person making the

appraisal or financial projection is

reputable and competent to perform the

appraisal or projection; and

(C) The appraisal is based on the

definition of fair market value

prescribed under the relevant Federal

tax provisions.

(v) If the fair market value of

purchased property is to be established

by reference to its stated purchase price,

the practitioner must examine the terms

and conditions on which the property

was (or is to be) purchased to determine

whether the stated purchase price

reasonably may be considered to be its

fair market value.

(2) Relate law to facts. (i) The opinion

must relate the applicable law to the

relevant facts.

(ii) The opinion must clearly identify

the facts upon which the opinion’s

conclusions are based.

(iii) The opinion must contain a

reasoned analysis of the pertinent facts

and legal authorities and must not

assume the favorable resolution of any

Federal tax issue material to the analysis

or otherwise rely on any unreasonable

legal assumptions.

(iv) The opinion must not contain

legal analyses or conclusions with

respect to Federal tax issues that are

inconsistent with each other.

(3) Analysis of material Federal tax

issues. The practitioner must ascertain

that all material Federal tax issues have

been considered, and that all of those

issues which involve the reasonable

possibility of a challenge by the Internal

Revenue Service have been fully and

fairly addressed. The opinion must state

that the practitioner has considered the

possible application to the facts of all

potentially relevant judicial doctrines,

including the step transaction, business

purpose, economic substance, substance

over form, and sham transaction

doctrines, as well as potentially relevant

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statutory and regulatory anti-abuse

rules, and the opinion must analyze

whether the tax shelter item is

vulnerable to challenge under all

potentially relevant doctrines and antiabuse rules. In analyzing such judicial

doctrines and statutory and regulatory

anti-abuse rules, the opinion must take

into account the taxpayer’s non-tax and

tax purposes (and the relative weight of

such purposes) for entering into a

transaction and for structuring a

transaction in a particular manner.

(4) Evaluation of material Federal tax

issues and overall conclusion. (i) The

practitioner must clearly provide his or

her conclusion as to the likelihood that

an investor (or, where the practitioner is

relying on a representation as to the

characteristics of potential investors, a

typical investor of the type to whom the

tax shelter is or will be marketed) will

prevail on the merits with respect to

each material Federal tax issue that

involves the reasonable possibility of a

challenge by the Internal Revenue

Service. This requirement is not

satisfied by including a statement in the

opinion that the practitioner was unable

to opine with respect to certain material

Federal tax issues, including but not

limited to whether the transaction has a

business purpose or economic

substance.

(ii) The opinion must unambiguously

conclude that the Federal tax treatment

of the tax shelter item or items is more

likely than not (or at a higher level of

confidence) the proper tax treatment. A

favorable overall conclusion may not be

based solely on the conclusion that the

taxpayer more likely than not will

prevail on the merits of each material

Federal tax issue.

(iii) In ascertaining that all material

Federal tax issues have been considered,

evaluating the merits of those issues and

evaluating whether the Federal tax

treatment of the tax shelter item or items

is the proper tax treatment, the

possibility that a tax return will not be

audited, that an issue will not be raised

on audit, or that an issue will be settled

may not be taken into account.

(5) Description of opinion. The

practitioner must take reasonable steps

to assure that any written materials or

promotional efforts that distribute,

reflect or refer to the tax shelter opinion,

correctly and fairly represent the nature

and extent of the opinion.

(b) Competence to provide opinion;

reliance on opinions of others. (1) The

practitioner must be knowledgeable in

all of the aspects of Federal tax law

relevant to the opinion being rendered.

If the practitioner is not sufficiently

knowledgeable to render an informed

opinion with respect to particular

material Federal tax issues, then the

practitioner may rely on the opinion of

another practitioner with respect to

such issues, provided the practitioner is

satisfied that the other practitioner is

sufficiently knowledgeable regarding

such issues and the practitioner does

not know and has no reason to believe

that such opinion should not be relied

on.

(2) To the extent the practitioner

relies on an opinion of another

practitioner, the opinion rendered by

the practitioner must identify the other

practitioner, state the date on which the

opinion was rendered, and set forth the

conclusions reached in such opinion.

(3) The practitioner also must be

satisfied that the combined analysis,

taken as a whole, satisfies the

requirements of this § 10.35.

(4) Financial forecasts and

projections. A practitioner who makes

financial forecasts or projections

relating to or based on the tax

consequences of the tax shelter item that

are included in written materials

disseminated to any or all of the same

persons as the opinion may rely on the

opinion of another practitioner as to any

or all material Federal tax issues,

provided that the practitioner who

desires to rely on the other opinion has

no reason to believe the practitioner

rendering such other opinion has not

complied with the standards of

paragraph (a) of this § 10.35, is satisfied

that the other practitioner is sufficiently

knowledgeable and does not know and

has no reason to believe that the opinion

of the other practitioner should not be

relied on. The practitioner’s report must

disclose any material Federal tax issue

not covered by, or incorrectly opined

on, by the other opinion, and shall set

forth his or her opinion with respect to

each such issue in a manner that

satisfies the requirements of paragraph

(a) of this section.

(c) Definitions. For purposes of this

section—

(1) Practitioner includes any

individual described in paragraph (f) of

§ 10.2.

(2) The definition of tax shelter is set

forth in section 6662(d)(2)(C)(iii) of the

Internal Revenue Code. Excluded from

the term are municipal bonds and

qualified retirement plans.

(3) A tax shelter item is an item of

income, gain, loss, deduction or credit

if the item is directly or indirectly

attributable to a tax shelter as defined in

section 6662(d)(2)(C)(iii) of the Internal

Revenue Code.

(4) A tax shelter opinion, as the term

is used in this section, is written advice

by a practitioner concerning the Federal

tax aspects of a tax shelter item or items.

The term tax shelter opinion includes

the Federal tax aspects or tax risks

portion of offering materials prepared by

or at the direction of a practitioner,

whether or not a separate opinion letter

is issued and whether or not the

practitioner’s name is referred to in

offering materials or in connection with

sales promotion efforts. Similarly, a

financial forecast or projection prepared

by a practitioner is a tax shelter opinion

if it is predicated on assumptions

regarding Federal tax aspects of the

investment and that meets the other

requirements of the first sentence of this

paragraph. The term tax shelter opinion

does not include advice provided in

connection with the review of portions

of offering materials or sales promotion

materials, provided neither the name of

the practitioner or the practitioner’s firm

nor the fact that a practitioner has

rendered advice concerning the Federal

tax aspects, is referred to in the offering

materials or related sales promotion

materials.

(5) A material Federal tax issue, as the

term is used in this section, is any

Federal tax issue the resolution of

which could have a significant impact

(whether beneficial or adverse) on a

taxpayer under any reasonably

foreseeable circumstance.

(d) Effect of opinion that meets these

standards. An opinion of a practitioner

that meets these requirements will

satisfy the practitioner’s responsibilities

under this section, but the

persuasiveness of the opinion with

regard to the tax issues in question and

the taxpayer’s good faith reliance on the

opinion will be separately determined

under applicable provisions of the law

and regulations.

(e) For purposes of advising the

Director of Practice whether an

individual may have violated § 10.33 or

§ 10.35, the Director is authorized to

establish an Advisory Committee

composed of at least five individuals

authorized to practice before the

Internal Revenue Service. Under

procedures established by the Director,

such Advisory Committee will, at the

request of the Director, review and make

recommendations with regard to the

alleged violations of § 10.33 or § 10.35.

§ 10.36 Procedures to ensure compliance.

A practitioner who is a member of,

associated with, or employed by a firm

must take reasonable steps, consistent

with his or her authority and

responsibility for the firm’s practice

advising clients regarding matters

arising under the Federal tax laws, to

make certain that the firm has adequate

procedures in effect for purposes of

ensuring compliance with §§ 10.33,

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10.34, and 10.35. The Director of

Practice may take disciplinary action

against any practitioner for failing to

comply with the requirements of the

preceding sentence if, and only if— (a) The practitioner through

willfulness, recklessness, or gross

incompetence does not take such

reasonable steps and the practitioner

and one or more persons who are

members of, associated with, or

employed by the firm have, in

connection with their practice with the

firm, engaged in a pattern or practice of

failing to comply with § 10.33, § 10.34

or § 10.35; or

(b) The practitioner takes such

reasonable steps but has actual

knowledge that one or more persons

who are members of, associated with, or

employed by the firm have, in

connection with their practice with the

firm, engaged in a pattern or practice of

failing to comply with § 10.33, § 10.34

or § 10.35 and the practitioner, through

willfulness, recklessness, or gross

incompetence, fails to take prompt

action, consistent with his or her

authority and responsibility for the

firm’s practice advising clients

regarding matters under the Federal tax

laws, to correct such pattern or practice.

Subpart C—Sanctions for Violation of

the Regulations

§ 10.50 Sanctions.

(a) Authority to censure, suspend, or

disbar. The Secretary of the Treasury, or

his or her designate, after notice and an

opportunity for a proceeding, may

censure, suspend or disbar any

practitioner from practice before the

Internal Revenue Service if the

practitioner is shown to be incompetent

or disreputable, fails to comply with any

regulation in this part, or with intent to

defraud, willfully and knowingly

misleads or threatens a client or

prospective client. Censure is a public

reprimand. (b) Authority to disqualify. The

Secretary of the Treasury, or his or her

designate, after due notice and

opportunity for hearing, may disqualify

any appraiser with respect to whom a

penalty has been assessed under section

6701(a) of the Internal Revenue Code.

(1) If any appraiser is disqualified

pursuant to this subpart C, such

appraiser is barred from presenting

evidence or testimony in any

administrative proceeding before the

Department of Treasury or the Internal

Revenue Service, regardless of whether

such evidence or testimony would

pertain to an appraisal made prior to or

after such date.

(2) Any appraisal made by a

disqualified appraiser after the effective

date of disqualification will not have

any probative effect in any

administrative proceeding before the

Department of the Treasury or the

Internal Revenue Service. However, an

appraisal otherwise barred from

admission into evidence pursuant to

this section may be admitted into

evidence solely for the purpose of

determining the taxpayer’s reliance in

good faith on such appraisal.

§ 10.51 Incompetence and disreputable

conduct.

Incompetence and disreputable

conduct for which a practitioner may be

censured, suspended or disbarred from

practice before the Internal Revenue

Service includes, but is not limited to—

(a) Conviction of any criminal offense

under the revenue laws of the United

States;

(b) Conviction of any criminal offense

involving dishonesty, or breach of trust; (c) Conviction of any felony under

Federal or State law for which the

conduct involved renders the

practitioner unfit to practice before the

Internal Revenue Service;

(d) Giving false or misleading

information, or participating in any way

in the giving of false or misleading

information to the Department of the

Treasury or any officer or employee

thereof, or to any tribunal authorized to

pass upon Federal tax matters, in

connection with any matter pending or

likely to be pending before them,

knowing such information to be false or

misleading. Facts or other matters

contained in testimony, Federal tax

returns, financial statements,

applications for enrollment, affidavits,

declarations, or any other document or

statement, written or oral, are included

in the term information. (e) Solicitation of employment as

prohibited under § 10.30, the use of

false or misleading representations with

intent to deceive a client or prospective

client in order to procure employment,

or intimating that the practitioner is able

improperly to obtain special

consideration or action from the Internal

Revenue Service or officer or employee

thereof.

(f) Willfully failing to make a Federal

tax return in violation of the revenue

laws of the United States, willfully

evading, attempting to evade, or

participating in any way in evading or

attempting to evade any assessment or

payment of any Federal tax, or

knowingly counseling or suggesting to a

client or prospective client an illegal

plan to evade Federal taxes or payment

thereof.

(g) Misappropriation of, or failure

properly and promptly to remit funds

received from a client for the purpose of

payment of taxes or other obligations

due the United States.

(h) Directly or indirectly attempting to

influence, or offering or agreeing to

attempt to influence, the official action

of any officer or employee of the

Internal Revenue Service by the use of

threats, false accusations, duress or

coercion, by the offer of any special

inducement or promise of advantage or

by the bestowing of any gift, favor or

thing of value.

(i) Disbarment or suspension from

practice as an attorney, certified public

accountant, public accountant, or

actuary by any duly constituted

authority of any State, possession,

territory, Commonwealth, the District of

Columbia, any Federal court of record or

any Federal agency, body or board.

(j) Knowingly aiding and abetting

another person to practice before the

Internal Revenue Service during a

period of suspension, disbarment, or

ineligibility of such other person.

(k) Contemptuous conduct in

connection with practice before the

Internal Revenue Service, including the

use of abusive language, making false

accusations and statements, knowing

them to be false, or circulating or

publishing malicious or libelous matter.

(l) Giving a false opinion, knowingly,

recklessly, or through gross

incompetence, including an opinion

which is intentionally or recklessly

misleading, or engaging in a pattern of

providing incompetent opinions on

questions arising under the Federal tax

laws. False opinions described in this

paragraph (l) include those which

reflect or result from a knowing

misstatement of fact or law, from an

assertion of a position known to be

unwarranted under existing law, from

counseling or assisting in conduct

known to be illegal or fraudulent, from

concealing matters required by law to be

revealed, or from consciously

disregarding information indicating that

material facts expressed in the tax

opinion or offering material are false or

misleading. For purposes of this

paragraph, reckless conduct is a highly

unreasonable omission or

misrepresentation involving an extreme

departure from the standards of

ordinary care that a practitioner should

observe under the circumstances. A

pattern of conduct is a factor that will

be taken into account in determining

whether a practitioner acted knowingly,

recklessly, or through gross

incompetence. Gross incompetence

includes conduct that reflects gross

indifference, preparation which is

grossly inadequate under the

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circumstances, and a consistent failure

to perform obligations to the client.

§ 10.52 Violation of regulations.

A practitioner may be censured,

suspended or disbarred from practice

before the Internal Revenue Service for

any of the following—

(a) Willfully violating any of the

regulations contained in this part.

(b) Recklessly or through gross

incompetence (within the meaning of

§ 10.51(l)) violating § 10.33, § 10.34, or

§ 10.35.

§ 10.53 Receipt of information concerning

practitioner.

(a) Officer or employee of the Internal

Revenue Service. If an officer or

employee of the Internal Revenue

Service has reason to believe that a

practitioner has violated any provision

of this part, the officer or employee will

promptly make a written report to the

Director of Practice of the alleged

violation.

(b) Other persons. Any person other

than an officer or employee of the

Internal Revenue Service having

information of a violation of any

provision of this part may make an oral

or written report of the alleged violation

to the Director of Practice or any officer

or employee of the Service. If the report

is made to an officer or employee of the

Service, the officer or employee will

make a written report of the alleged

violation to the Director.

Subpart D—Rules Applicable to

Disciplinary Proceedings

§ 10.60 Institution of proceeding.

(a) Whenever the Director of Practice

determines that a practitioner violated

any provision of the laws or regulations

governing practice before the Internal

Revenue Service, the Director may

reprimand the practitioner or, in

accordance with § 10.62, institute a

proceeding for censure, suspension, or

disbarment of the practitioner.

(b) Whenever the Director of Practice

is advised or becomes aware that a

penalty has been assessed against an

appraiser under section 6701(a) of the

Internal Revenue Code, the Director may

reprimand the appraiser or, in

accordance with § 10.62, institute a

proceeding for disqualification of the

appraiser.

(c) A proceeding for censure,

suspension, or disbarment of a

practitioner or disqualification of an

appraiser is instituted by the filing of a

complaint, the contents of which are

more fully described in § 10.62. Except

as provided in § 10.82, a proceeding will

not be instituted under this section

unless the proposed respondent

previously has been advised in writing

of the facts or conduct warranting such

action and has been accorded an

opportunity to provide an explanation

or description of mitigating

circumstances.

§ 10.61 Conferences.

(a) In general. The Director of Practice

may confer with a practitioner or an

appraiser concerning allegations of

misconduct irrespective of whether a

proceeding for censure, suspension,

disbarment, or disqualification has been

instituted against the practitioner or

appraiser. If the conference results in a

stipulation in connection with a

proceeding in which the practitioner or

appraiser is the respondent, the

stipulation may be entered in the record

by either party to the proceeding.

(b) Resignation or voluntary

suspension or censure. To avoid the

institution or conclusion of a

proceeding under paragraph (a) of

§ 10.60, a practitioner may offer his or

her consent to the issuance of a censure,

suspension or disbarment, or may

resign, as the case may be, from practice

before the Internal Revenue Service. It is

within the discretion of the Director of

Practice to accept the offered censure,

suspension, disbarment, or resignation,

in accordance with the consent offered.

(c) Voluntary disqualification. To

avoid the institution or conclusion of a

proceeding under paragraph (b) of

§ 10.60, an appraiser may offer his or

her consent to disqualification. It is

within the discretion of the Director of

Practice to accept the offered

disqualification in accordance with the

consent offered.

§ 10.62 Contents of complaint.

(a) Charges. A complaint must name

the respondent, give a plain and concise

description of the allegations that

constitute the basis for the proceeding,

and be signed by the Director of

Practice. A complaint is sufficient if it

fairly informs the respondent of the

charges brought so that he or she is able

to prepare a defense. In the case of a

complaint filed against an appraiser, the

complaint is sufficient if it refers to a

penalty imposed previously on the

respondent under section 6701(a) of the

Internal Revenue Code.

(b) Demand for answer. The Director

of Practice must notify the respondent

of the place and time for answering the

complaint, the time for which may not

be less than 15 days from the date of

service of the complaint, and notice

must be given that a decision by default

may be rendered against the respondent

in the event an answer is not filed as

required.

§ 10.63 Service of complaint and other

papers.

(a) Complaint. The complaint or a

copy of the complaint must be served on

the respondent by certified mail or first

class mail, as provided below; by

delivering it to the respondent or the

respondent’s authorized representative

in person; by leaving it at the office or

place of business of the respondent or

the respondent’s authorized

representative; or in any other manner

that has been agreed to by the

respondent. Where service is by

certified mail, the returned post office

receipt duly signed by or on behalf of

the respondent will be proof of service.

If the certified mail is not claimed or

accepted by the respondent and is

returned undelivered, complete service

may be made on the respondent by

mailing the complaint to the respondent

by first class mail, provided the

complaint is addressed to the

respondent at the respondent’s last

known address as determined under

section 6212 of the Internal Revenue

Code and the regulations thereunder. If

service is made on the respondent or the

respondent’s authorized representative

in person, by leaving the complaint at

the office or place of business of the

respondent or the respondent’s

authorized representative, or by other

means agreed to by the respondent, the

sworn or affirmed written statement of

service by the person making service,

setting forth the manner of service,

including the place, recipient, date and

time of service, will be proof of service.

(b) Service of papers other than

complaint. Any paper other than the

complaint may be served on the

respondent as provided in paragraph (a)

of this section or by mailing the paper

by first class mail to the respondent at

his or her last known address as

determined under section 6212 of the

Internal Revenue Code and the

regulations thereunder, or by mailing

the paper by first class mail to the

respondent’s authorized representative.

This mailing constitutes complete

service.

(c) Filing of papers. Whenever the

filing of a paper is required or permitted

in connection with a proceeding under

this part, and the place of filing is not

specified by these regulations, rule, or

order of the Administrative Law Judge,

the paper must be filed with the

Director of Practice, Internal Revenue

Service, 1111 Constitution Avenue,

NW., Washington, DC 20224. All papers

must be filed in duplicate.

§ 10.64 Answer.

(a) Filing. The respondent’s answer

must be filed in writing within the time

3298 Federal Register / Vol. 66, No. 9 / Friday, January 12, 2001 / Proposed Rules

specified in the complaint unless, on

application of the respondent, the time

is extended by the Director of Practice

or the Administrative Law Judge. The

answer is to be filed in duplicate with

the Director.

(b) Contents. The answer must

contain a statement of facts that

constitute the respondent’s grounds of

defense. The respondent must

specifically admit or deny each

allegation set forth in the complaint,

except that the respondent may state

that the respondent is without sufficient

information to admit or deny a specific

allegation. The respondent,

nevertheless, may not deny a material

allegation in the complaint which the

respondent knows to be true, or state

that the respondent is without sufficient

information to form a belief, when the

respondent possesses the required

information. The respondent also must

state affirmatively any special matters of

defense on which he or she relies.

(c) Failure to deny or answer

allegations in the complaint. Every

allegation in the complaint that is not

denied in the answer is deemed

admitted and may be considered

proved; no further evidence in respect

of such allegation need be adduced at a

hearing. Failure to file an answer within

the time prescribed (or within the time

for answer as extended by the Director

of Practice or the Administrative Law

Judge), constitutes an admission of the

allegations of the complaint and a

waiver of hearing, and the

Administrative Law Judge may make the

decision by default without a hearing or

further procedure.

(d) Signature. The answer must be

signed by the respondent or the

respondent’s authorized representative

and must include a statement directly

above the signature acknowledging that

the statements made in the answer are

true and correct and that knowing and

willful false statements may be

punishable under 18 U.S.C. 1001.

§ 10.65 Supplemental charges.

If it appears that the respondent, in

his or her answer, falsely and in bad

faith, denies a material allegation of fact

in the complaint or states that the

respondent has insufficient knowledge

to form a belief, when the respondent in

fact possesses such information, or if it

appears that the respondent has

knowingly introduced false testimony

during proceedings for his or her

censure, suspension, disbarment, or

disqualification, the Director of Practice

may file supplemental charges against

the respondent. The supplemental

charges may be tried with other charges

in the case, provided the respondent is

given due notice of the charges and is

afforded an opportunity to prepare a

defense to such charges.

§ 10.66 Reply to answer.

The Director of Practice may file a

reply to the respondent’s answer, but

unless otherwise ordered by the

Administrative Law Judge, no reply to

the respondent’s answer is required. If

a reply is not filed, new matter in the

answer is deemed denied.

§ 10.67 Proof; variance; amendment of

pleadings.

In the case of a variance between the

allegations in pleadings and the

evidence adduced in support of the

pleadings, the Administrative Law

Judge may order or authorize

amendment of the pleadings to conform

to the evidence. The party who would

otherwise be prejudiced by the

amendment must be given a reasonable

opportunity to address the allegations of

the pleadings as amended and the

Administrative Law Judge must make

findings on any issue presented by the

pleadings as amended.

§ 10.68 Motions and requests.

Unless the Administrative Law Judge

directs otherwise, motions and requests

may be filed with the Director of

Practice or with the Administrative Law

Judge.

§ 10.69 Representation.

A respondent or proposed respondent

may appear in person or he or she may

be represented by a practitioner. The

Director of Practice may be represented

by an attorney or other employee of the

Internal Revenue Service.

§ 10.70 Administrative Law Judge.

(a) Appointment. Proceedings on

complaints for the censure, suspension

or disbarment of a practitioner or the

disqualification of an appraiser will be

conducted by an Administrative Law

Judge appointed as provided by 5 U.S.C.

3105.

(b) Powers of the Administrative Law

Judge. The Administrative Law Judge,

among other powers, has the authority,

in connection with any proceeding

under § 10.60 assigned or referred to

him or her, to do the following—

(1) Administer oaths and affirmations;

(2) Make rulings on motions and

requests, which rulings may not be

appealed prior to the close of a hearing

except in extraordinary circumstances

and at the discretion of the

Administrative Law Judge;

(3) Determine the time and place of

hearing and regulate its course and

conduct;

(4) Adopt rules of procedure and

modify the same from time to time as

needed for the orderly disposition of

proceedings;

(5) Rule on offers of proof, receive

relevant evidence, and examine

witnesses;

(6) Take or authorize the taking of

depositions;

(7) Receive and consider oral or

written argument on facts or law;

(8) Hold or provide for the holding of

conferences for the settlement or

simplification of the issues with the

consent of the parties;

(9) Perform such acts and take such

measures as are necessary or

appropriate to the efficient conduct of

any proceeding; and

(10) Make decisions.

§ 10.71 Hearings.

(a) In general. An Administrative Law

Judge will preside at the hearing on a

complaint filed under paragraph (c) of

§ 10.60 for the censure, suspension, or

disbarment of a practitioner or

disqualification of an appraiser.

Hearings will be stenographically

recorded and transcribed and the

testimony of witnesses will be taken

under oath or affirmation. Hearings will

be conducted pursuant to 5 U.S.C. 556.

A hearing in a proceeding requested

under paragraph (g) of § 10.82 will be

conducted de novo.

(b) Failure to appear. If either party to

the proceeding fails to appear at the

hearing, after notice of the proceeding

has been sent to him or her, the party

will be deemed to have waived the right

to a hearing and the Administrative Law

Judge may make his or her decision

against the absent party by default.

§ 10.72 Evidence.

(a) In general. The rules of evidence

prevailing in courts of law and equity

are not controlling in hearings on

complaints filed under paragraph (c) of

§ 10.60. However, the Administrative

Law Judge may exclude evidence that is

irrelevant, immaterial, or unduly

repetitious.

(b) Depositions. The deposition of any

witness taken pursuant to § 10.73 may

be admitted into evidence in any

proceeding instituted under § 10.60.

(c) Proof of documents. Official

documents, records, and papers of the

Internal Revenue Service and the Office

of Director of Practice are admissible in

evidence without the production of an

officer or employee to authenticate

them. Any such documents, records,

and papers may be evidenced by a copy

attested or identified by an officer or

employee of the Service or the Treasury

Department, as the case may be.

Federal Register / Vol. 66, No. 9 / Friday, January 12, 2001 / Proposed Rules 3299

(d) Exhibits. If any document, record,

or other paper is introduced in evidence

as an exhibit, the Administrative Law

Judge may authorize the withdrawal of

the exhibit subject to any conditions

that he or she deems proper.

(e) Objections. Objections to evidence

are to be made in short form, stating the

grounds for the objection. Except as

ordered by the Administrative Law

Judge, argument on objections will not

be recorded or transcribed. Rulings on

objections are to be a part of the record,

but no exception to a ruling is necessary

to preserve the rights of the parties.

§ 10.73 Depositions.

(a) Depositions for use at a hearing

may be taken, with the written approval

of the Administrative Law Judge, by

either the Director of Practice or the

respondent or their duly authorized

representatives. Depositions may be

taken before any officer duly authorized

to administer an oath for general

purposes or before an officer or

employee of the Internal Revenue

Service who is authorized to administer

an oath in internal revenue matters.

(b) The party taking the deposition

must provide the deponent and the

other party with 10 days written notice

of the deposition, unless the deponent

and the parties agree otherwise. The

notice must specify the name of the

deponent, the time and place where the

deposition is to be taken, and whether

the deposition will be taken by oral or

written interrogatories. When a

deposition is taken by written

interrogatories, any cross-examination

also will be by written interrogatories.

Copies of the written interrogatories

must be served on the other party with

the notice of deposition, and copies of

any written cross-interrogation must be

mailed or delivered to the opposing

party at least 5 days before the date that

the deposition will be taken, unless the

parties mutually agree otherwise. A

party on whose behalf a deposition is

taken must file the responses to the

written interrogatories or a transcript of

the oral deposition with the

Administrative Law Judge and serve

copies on the opposing party and the

deponent. Expenses in the reporting of

depositions will be borne by the party

that requested the deposition.

§ 10.74 Transcript.

In cases where the hearing is

stenographically reported by a

Government contract reporter, copies of

the transcript may be obtained from the

reporter at rates not to exceed the

maximum rates fixed by contract

between the Government and the

reporter. Where the hearing is

stenographically reported by a regular

employee of the Internal Revenue

Service, a copy will be supplied to the

respondent either without charge or

upon the payment of a reasonable fee.

Copies of exhibits introduced at the

hearing or at the taking or depositions

will be supplied to the parties upon the

payment of a reasonable fee (Sec. 501,

Public Law 82–137) (65 Stat. 290) (31

U.S.C. 483a).

§ 10.75 Proposed findings and

conclusions.

Except in cases where the respondent

has failed to answer the complaint or

where a party has failed to appear at the

hearing, the parties must be afforded a

reasonable opportunity to submit

proposed findings and conclusions and

their supporting reasons to the

Administrative Law Judge.

§ 10.76 Decision of the Administrative Law

Judge.

As soon as practicable after the

conclusion of a hearing and the receipt

of any proposed findings and

conclusions timely submitted by the

parties, the Administrative Law Judge

will make the decision in the case. The

decision must include a statement of

findings and conclusions, as well as the

reasons or basis for making such

findings and conclusions, and an order

of censure, suspension, disbarment,

disqualification, or dismissal of the

complaint. The Administrative Law

Judge will file the decision with the

Director of Practice, who will transmit

a copy of the decision to the respondent

or the respondent’s authorized

representative. In the absence of an

appeal to the Secretary of the Treasury,

or review of the decision on motion of

the Secretary, the decision of the

Administrative Law Judge will without

further proceedings become the decision

of the Secretary of the Treasury 30 days

after the date of the Administrative Law

Judge’s decision.

§ 10.77 Appeal to the Secretary.

Within 30 days from the date of the

Administrative Law Judge’s decision,

either party may appeal to the Secretary

of the Treasury, or his or her designate.

The respondent must file his or her

appeal with the Director of Practice in

duplicate and notice of appeal must

include exceptions to the decision of the

Administrative Law Judge and

supporting reasons for such exceptions.

If the Director files an appeal, he or she

must transmit a copy to the respondent.

Within 30 days after receipt of an appeal

or copy thereof, the other party may file

a reply brief in duplicate with the

Director. If the reply brief is filed by the

Director, he or she must transmit a copy

of it to the respondent. The Director

must transmit the entire record to the

Secretary of the Treasury, or his or her

designate, after the appeal and any reply

brief has been filed.

§ 10.78 Decision of the Secretary.

On appeal from or review of the

decision of the Administrative Law

Judge, the Secretary of the Treasury, or

his or her designate, will make the

agency decision. A copy of the agency’s

decision will be transmitted to the

respondent by the Director of Practice.

§ 10.79 Effect of disbarment, suspension,

or censure.

(a) Disbarment. Where the final order

in a case is against the respondent and

is for disbarment, the respondent will

not be permitted to practice before the

Internal Revenue Service unless and

until authorized to do so by the Director

of Practice pursuant to § 10.81.

(b) Suspension. Where the final order

in a case is against the respondent and

is for suspension, the respondent will

not be permitted to practice before the

Internal Revenue Service during the

period of suspension.

(c) Censure. Where the final order in

the case is against the respondent and

is for censure, the respondent may be

permitted to practice before the Internal

Revenue Service, but the respondent’s

future representations may be subject to

conditions prescribed by the Director of

Practice designed to promote high

standards of conduct. For example,

where a practitioner is censured because

he or she failed to advise his or her

clients about a potential conflict of

interest and obtain the clients’ written

consents, the Director of Practice may

require the practitioner to provide the

Director or another Internal Revenue

Service official with a copy of all future

consents obtained by the practitioner,

whether or not such consents are

specifically requested.

§ 10.80 Notice of disbarment, suspension,

censure, or disqualification.

On the issuance of a final order

censuring, suspending, or disbarring a

practitioner or a final order

disqualifying an appraiser, the Director

of Practice may give notice of the

censure, suspension, disbarment, or

disqualification to appropriate officers

and employees of the Internal Revenue

Service and to interested departments

and agencies of the Federal government.

The Director may determine the manner

of giving notice to the proper authorities

of the State by which the censured,

suspended, or disbarred person was

licensed to practice.

3300 Federal Register / Vol. 66, No. 9 / Friday, January 12, 2001 / Proposed Rules

§ 10.81 Petition for reinstatement.

The Director of Practice may entertain

a petition for reinstatement from any

person disbarred from practice before

the Internal Revenue Service or any

disqualified appraiser after the

expiration of 5 years following such

disbarment or disqualification.

Reinstatement may not be granted

unless the Director is satisfied that the

petitioner, thereafter, is not likely to

conduct himself contrary to the

regulations in this part, and that

granting such reinstatement would not

be contrary to the public interest.

§ 10.82 Expedited suspension upon

criminal conviction or loss of license for

cause.

(a) When applicable. Whenever the

Director of Practice determines that a

practitioner is described in paragraph

(b) of this section, the Director may

institute a proceeding under this section

to suspend the practitioner from

practice before the Internal Revenue

Service.

(b) To whom applicable. This section

applies to any practitioner who, within

5 years of the date a complaint

instituting a proceeding under this

section is served—

(1) Has had his or her license to

practice as an attorney, certified public

accountant, or actuary suspended or

revoked for cause (not including a

failure to pay a professional licensing

fee) by any authority or court, agency,

body, or board described in § 10.51(i); or

(2) Has been convicted of any crime

under title 26 of the United States Code,

any crime involving dishonesty or

breach of trust, or any felony for which

the conduct involved renders the

practitioner unfit to practice before the

Internal Revenue Service.

(c) Instituting a proceeding. A

proceeding under this section will be

instituted by a complaint that names the

respondent, is signed by the Director of

Practice, is filed in the Director’s office,

and is served according to the rules set

forth in paragraph (a) of § 10.63. The

complaint must give a plain and concise

description of the allegations that

constitute the basis for the proceeding.

The complaint must notify the

respondent—

(1) Of the place and due date for filing

an answer;

(2) That a decision by default may be

rendered if the respondent fails to file

an answer as required;

(3) That the respondent may request

a conference with the Director of

Practice to address the merits of the

complaint and that any such request

must be made in the answer; and

(4) That the respondent may be

suspended either immediately following

the expiration of the period by which an

answer must be filed or, if a conference

is requested, immediately following the

conference.

(d) Answer. The answer to a

complaint described in this section

must be filed no later than 30 calendar

days following the date the complaint is

served, unless the Director of Practice

extends the time for filing. The answer

must be filed in accordance with the

rules set forth in § 10.64, except as

otherwise provided in this section. A

respondent is entitled to a conference

with the Director only if the conference

is requested in a timely filed answer. If

a request for a conference is not made

in the answer or the answer is not

timely filed, the respondent will be

deemed to have waived his or her right

to a conference and the Director may

suspend such respondent at any time

following the date on which the answer

was due.

(e) Conference. The Director of

Practice or his or her designee will

preside at a conference described in this

section. The conference will be held at

a place and time selected by the

Director, but no sooner than 14 calendar

days after the date by which the answer

must be filed with the Director, unless

the respondent agrees to an earlier date.

An authorized representative may

represent the respondent at the

conference. Following the conference,

upon a finding that the respondent is

described in paragraph (b) of this

section, or upon the respondent’s failure

to appear at the conference either

personally or through an authorized

representative, the Director may

immediately suspend the respondent

from practice before the Internal

Revenue Service.

(f) Duration of suspension. A

suspension under this section will

commence on the date that written

notice of the suspension is issued. A

practitioner’s suspension will remain

effective until the earlier of the

following—

(1) The Director of Practice lifts the

suspension after determining that the

practitioner is no longer described in

paragraph (b) of this section or for any

other reason; or

(2) The suspension is lifted by an

Administrative Law Judge or the

Secretary of the Treasury in a

proceeding referred to in paragraph (g)

of this section and instituted under

§ 10.60.

(g) Proceeding instituted under

§ 10.60. If the Director of Practice

suspends a practitioner under this

section, the practitioner may ask the

Director to issue a complaint under

§ 10.60. The request must be made in

writing within 2 years from the date on

which the practitioner’s suspension

commences. The Director must issue a

complaint requested under this

paragraph within 30 calendar days of

receiving the request.

Subpart E—General Provisions

§ 10.90 Records.

(a) Availability. The Director of

Practice will make available for public

inspection at the Office of Director of

Practice the roster of all persons

enrolled to practice, the roster of all

persons censured, suspended, or

disbarred from practice before the

Internal Revenue Service, and the roster

of all disqualified appraisers. Other

records of the Director may be disclosed

upon specific request, in accordance

with the applicable disclosure rules of

the Internal Revenue Service and the

Treasury Department.

(b) Disciplinary procedures. A request

by a practitioner or appraiser that a

hearing in a disciplinary proceeding

concerning him or her be public, and

that the record of such disciplinary

proceeding be made available for

inspection by interested persons may be

granted by the Director of Practice

where the parties stipulate in advance to

protect from disclosure confidential tax

information in accordance with all

applicable statutes and regulations.

§ 10.91 Saving clause.

Any proceeding instituted under this

part, but not closed prior to the effective

date of these revised regulations, will

not be affected by the revisions. Any

proceeding under this part based on

conduct engaged in prior to the effective

date of these regulations may be

instituted subsequent to the effective

date of these revisions. Conduct engaged

in prior to the effective date of these

regulations is subject to the regulations

in effect at the time the conduct

occurred.

§ 10.92 Special orders.

The Secretary of the Treasury reserves

the power to issue such special orders

as he or she deems proper in any cases

within the purview of this part.

Federal Register / Vol. 66, No. 9 / Friday, January 12, 2001 / Proposed Rules 3301

§ 10.93 Effective date.

Subject to § 10.91, Part 10 is

applicable on the date final regulations

are published in the Federal Register.

Robert E. Wenzel,

Deputy Commissioner of Internal Revenue.

Approved: January 3, 2001.

Jonathan Talisman,

Assistant Secretary (Tax Policy).

[FR Doc. 01–499 Filed 1–11–01; 8:45 am]

BILLING CODE 4830–01–P