[Title 31 CFR 10.33]
[Code of Federal Regulations (annual edition) - July 1, 2002 Edition]
[Title 31 - MONEY AND FINANCE: TREASURY]
[Part 10 - PRACTICE BEFORE THE INTERNAL REVENUE SERVICE]
[Subpart B - Duties and Restrictions Relating to Practice Before the]
[Sec. 10.33 - Tax shelter opinions.]
[From the U.S. Government Printing Office]


31MONEY AND FINANCE: TREASURY12002-07-012002-07-01false10.33Sec. 10.33MONEY AND FINANCE: TREASURYPRACTICE BEFORE THE INTERNAL REVENUE SERVICEDuties and Restrictions Relating to Practice Before the
Sec. 10.33  Tax shelter opinions.

    (a) Tax shelter opinions and offering materials. A practitioner who 
provides a tax shelter opinion analyzing the Federal tax effects of a 
tax shelter investment shall comply with each of the following 
requirements:
    (1) Factual matters. (i) The practitioner must make inquiry as to 
all relevant facts, be satisfied that the material facts are accurately 
and completely described in the offering materials, and assure that any 
representations as to future activities are clearly identified, 
reasonable and complete.
    (ii) A practitioner may not accept as true asserted facts pertaining 
to the tax shelter which he/she should not, based on his/her background 
and knowledge, reasonably believe to be true. However, a practitioner 
need not conduct an audit or independent verification of the asserted 
facts, or assume that a client's statement of the facts cannot be relied 
upon, unless he/she has reason to believe that any relevant facts 
asserted to him/her are untrue.
    (iii) If the fair market value of property or the expected financial 
performance of an investment is relevant to the tax shelter, 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 competent to do so and is not of 
dubious reputation; and
    (C) The appraisal is based on the definition of fair market value 
prescribed under the relevant Federal tax provisions.
    (iv) 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 upon 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. The practitioner must relate the law to the 
actual facts and, when addressing issues based on future activities, 
clearly identify what facts are assumed.
    (3) Identification of material 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 in the offering materials.
    (4) Opinion on each material issue. Where possible, the practitioner 
must provide an opinion whether it is more likely than not that an 
investor will prevail on the merits of each material tax issue presented 
by the offering which involves a reasonable possibility of a challenge 
by the Internal Revenue Service. Where such an opinion cannot be given 
with respect to any material tax issue, the opinion should fully 
describe the reasons for the practitioner's inability to opine as to the 
likely outcome.
    (5) Overall evaluation. (i) Where possible, the practitioner must 
provide an overall evaluation whether the material tax benefits in the 
aggregate more likely than not will be realized. Where such an overall 
evaluation cannot be given, the opinion should fully describe the 
reasons for the practitioner's inability to make an overall evaluation. 
Opinions concluding that an overall evaluation cannot be provided will 
be given special scrutiny to determine if the stated reasons are 
adequate.
    (ii) A favorable overall evaluation may not be rendered unless it is 
based on a conclusion that substantially more than half of the material 
tax benefits, in terms of their financial impact

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on a typical investor, more likely than not will be realized if 
challenged by the Internal Revenue Service.
    (iii) If it is not possible to give an overall evaluation, or if the 
overall evaluation is that the material tax benefits in the aggregate 
will not be realized, the fact that the practitioner's opinion does not 
constitute a favorable overall evaluation, or that it is an unfavorable 
overall evaluation, must be clearly and prominently disclosed in the 
offering materials.
    (iv) The following examples illustrate the principles of this 
paragraph:

    Example (1). A limited partnership acquires real property in a sale-
leaseback transaction. The principal tax benefits offered to investing 
partners consist of depreciation and interest deductions. Lesser tax 
benefits are offered to investors by reason of several deductions under 
Internal Revenue Code section 162 (ordinary and necessary business 
expenses). If a practitioner concludes that it is more likely than not 
that the partnership will not be treated as the owner of the property 
for tax purposes (which is required to allow the interest and 
depreciation deductions), then he/she may not opine to the effect that 
it is more likely than not that the material tax benefits in the 
aggregate will be realized, regardless of whether favorable opinions may 
be given with respect to the deductions claimed under Code section 162.
    Example (2). A corporation electing under subchapter S of the 
Internal Revenue Code is formed to engage in research and development 
activities. The offering materials forecast that deductions for research 
and experimental expenditures equal to 75% of the total investment in 
the corporation will be available during the first two years of the 
corporation's operations, other expenses will account for another 15% of 
the total investment, and that little or no gross income will be 
received by the corporation during this period. The practitioner 
concludes that it is more likely than not that deductions for research 
and experimental expenditures will be allowable. The practitioner may 
render an opinion to the effect that based on this conclusion, it is 
more likely than not that the material tax benefits in the aggregate 
will be realized, regardless of whether he/she can opine that it is more 
likely than not that any of the other tax benefits will be achieved.
    Example (3). An investment program is established to acquire 
offsetting positions in commodities contracts. The objective of the 
program is to close the loss positions in year one and to close the 
profit positions in year two. The principal tax benefit offered by the 
program is a loss in the first year, coupled with the deferral of 
offsetting gain until the following year. The practitioner concludes 
that the losses will not be deductible in year one. Accordingly, he/she 
may not render an opinion to the effect that it is more likely than not 
that the material tax benefits in the aggregate will be realized, 
regardless of the fact that he/she is of the opinion that losses not 
allowable in year one will be allowable in year two, because the 
principal tax benefit offered is a one-year deferral of income.
    Example (4). A limited partnership is formed to acquire, own and 
operate residential rental real estate. The offering material forecasts 
gross income of $2,000,000 and total deductions of $10,000,000, 
resulting in net losses of $8,000,000 over the first six taxable years. 
Of the total deductions, depreciation and interest are projected to be 
$7,000,000, and other deductions $3,000,000. The practitioner concludes 
that it is more likely than not that all of the depreciation and 
interest deductions will be allowable, and that it is more likely than 
not that the other deductions will not be allowed. The practitioner may 
render an opinion to the efect that it is more likely than not that the 
material tax benefits in the aggregate will be realized.

    (6) Description of opinion. The practitioner must assure that the 
offering materials correctly and fairly represent the nature and extent 
of the tax shelter opinion.
    (b) Reliance on other opinions--(1) In general. A practitioner may 
provide an opinion on less than all of the material tax issues only if:
    (i) At least one other competent practitioner provides an opinion on 
the likely outcome with respect to all of the other material tax issues 
which involve a reasonable possibility of challenge by the Internal 
Revenue Service, and an overall evalution whether the material tax 
benefits in the aggregate more likely than not will be realized, which 
is disseminated in the same manner as the practitioner's opinion; and
    (ii) The practitioner, upon reviewing such other opinions and any 
offering materials, has no reason to believe that the standards of 
paragraph (a) of this section have not been complied with.

Notwithstanding the foregoing, a practitioner who has not been retained 
to provide an overall evaluation whether the material tax benefits in 
the aggregate more likely than not will be realized may issue an opinion 
on less than

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all the material tax issues only if he/she has no reason to believe, 
based on his/her knowledge and experience, that the overall evaluation 
given by the practitioner who furnishes the overall evaluation is 
incorrect on its face.
    (2) Forecasts and projections. A practitioner who is associated with 
forecasts or projections relating to or based upon the tax consequences 
of the tax shelter offering that are included in the offering materials, 
or are disseminated to potential investors other than the practitioner's 
clients, may rely on the opinion of another practitioner as to any or 
all material tax issues, provided that the practitioner who desires to 
rely on the other opinion has no reason to believe that the standards of 
paragraph (a) of this section have not been complied with by the 
practitioner rendering such other opinion, and the requirements of 
paragraph (b)(1) of this section are satisfied. The practitioner's 
report shall disclose any material tax issue not covered by, or 
incorrectly opined upon, by the other opinion, and shall set forth his/
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 Sec. 10.3(e).
    (2) A tax shelter, as the term is used in this section, is an 
investment which has as a significant and intended feature for Federal 
income or excise tax purposes either of the following attributes:
    (i) Deductions in excess of income from the investment being 
available in any year to reduce income from other sources in that year, 
or
    (ii) Credits in excess of the tax attributable to the income from 
the investment being available in any year to offset taxes on income 
from other sources in that year. Excluded from the term are municipal 
bonds; annuities; family trusts (but not including schemes or 
arrangements that are marketed to the public other than in a direct 
practitioner-client relationship); qualified retirement plans; 
individual retirement accounts; stock option plans; securities issued in 
a corporate reorganization; mineral development ventures, if the only 
tax benefit would be percentage depletion; and real estate where it is 
anticipated that in no year is it likely that deductions will exceed 
gross income from the investment in that year, or that tax credits will 
exceed the tax attributable to gross income from the investment in that 
year. Whether an investment is intended to have tax shelter features 
depends on the objective facts and circumstances of each case. 
Significant weight will be given to the features described in the 
offering materials to determine whether the investment is a tax shelter.
    (3) A tax shelter opinion, as the term is used in this section, is 
advice by a practitioner concerning the Federal tax aspects of a tax 
shelter either appearing or referred to in the offering materials, or 
used or referred to in connection with sales promotion efforts, and 
directed to persons other than the client who engaged the practitioner 
to give the advice. The term includes the tax aspects or tax risks 
portion of the offering materials prepared 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 the offering 
materials or in connection with the sales promotion efforts. In 
addition, a financial forcast 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 it meets the other 
requirements of the first sentence of this paragraph. The term does not, 
however, include rendering advice solely to the offeror or reviewing 
parts of the offering materials, so long as neither the name of the 
practitioner, nor the fact that a practitioner has rendered advice 
concerning the tax aspects, is referred to in the offering materials or 
in connection with the sales promotion efforts.
    (4) A material tax issue as the term is used in this section is
    (i) Any Federal income or excise tax issue relating to a tax shelter 
that would make a significant contribution toward sheltering from 
Federal taxes income from other sources by providing deductions in 
excess of the income from the tax shelter investment

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in any year, or tax credits available to offset tax liabilities in 
excess of the tax attributable to the tax shelter investment in any 
year;
    (ii) Any other Federal income or excise tax issue relating to a tax 
shelter that could have a significant impact (either benefical or 
adverse) on a tax shelter investor under any reasonably foreseeable 
circumstances (e.g., depreciation or investment tax credit recapture, 
availability of long-term capital gain treatment, or realization of 
taxable income in excess of cash flow, upon sale or other disposition of 
the tax shelter investment); and
    (iii) The potential applicability of penalties, additions to tax, or 
interest charges that reasonably could be asserted against a tax shelter 
investor by the Internal Revenue Service with respect to the tax 
shelter. The determination of what is material is to be made in good 
faith by the practitioner, based on information available at the time 
the offering materials are circulated.
    (d) For purposes of advising the Director of Practice whether an 
individual may have violated Sec. 10.33, the Director of Practice 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 of Practice, such Advisory 
Committee shall, at the request of the Director of Practice, review and 
make recommendations with regard to alleged violations of Sec. 10.33.

(Sec. 3, 23 Stat. 258, secs. 2-12, 60 Stat. 237 et seq.; 5 U.S.C. 301; 
31 U.S.C. 330; 31 U.S.C. 321 (Reorg. Plan No. 26 of 1950, 15 FR 4935, 64 
Stat. 1280, 3 CFR, 1949-53 Comp., p. 1017))

[49 FR 6722, Feb. 23, 1984; 49 FR 7116, Feb. 27, 1984; 59 FR 31527, 
31528, June 20, 1994]