[Federal Register Volume 66, Number 9 (Friday, January 12, 2001)]
[Proposed Rules]
[Pages 3276-3301]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-499]



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Part VII





Department of the Treasury





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Office of the Secretary



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31 CFR Part 10



Regulations Governing Practice Before the Internal Revenue Service; 
Proposed Rule

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

[[Page 3276]]


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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.

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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 
Secs. 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

[[Page 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 Sec. 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 Sec. 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 
Sec. 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

[[Page 3278]]

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 Sec. 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 Sec. 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 Sec. 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 Sec. 10.26 of the current regulations 
(Sec. 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 Sec. 10.25 under the 
proposed regulations and would be amended to reflect changes to the 
Federal statutes governing post-employment restrictions applicable to 
former Government employees.

Fees and Confidentiality

    Paragraph (b) of Sec. 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

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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 
Sec. 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 Sec. 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 Sec. 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 Secs. 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 Secs. 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

[[Page 3280]]

client who engaged the practitioner to give the advice. The proposed 
regulations would revise the scope of Sec. 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 Sec. 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 
Sec. 10.33 or that the overall conclusion reached by such practitioner 
is incorrect on its face.

[[Page 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 
Sec. 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 
Sec. 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

[[Page 3282]]

Federal tax laws, to make certain that the firm has adequate procedures 
in effect for purposes of ensuring compliance with Secs. 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 
Secs. 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 Secs. 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 Sec. 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 Sec. 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 Sec. 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 Sec. 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 
Sec. 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 Sec. 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 Sec. 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 Sec. 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 Sec. 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 Sec. 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

[[Page 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 
Sec. 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.

[[Page 3284]]

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.


Sec. 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


Sec. 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.


Sec. 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 Sec. 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.


Sec. 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

[[Page 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 
Sec. 10.5 or Sec. 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.


Sec. 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.


Sec. 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

[[Page 3286]]

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.


Sec. 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 Sec. 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

[[Page 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 Sec. 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

[[Page 3288]]

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 
Sec. 10.3 are governed by the regulations of the Joint Board for the 
Enrollment of Actuaries at 20 CFR 901.1 et seq.


Sec. 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 full-time 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.

[[Page 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.


Sec. 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


Sec. 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.


Sec. 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.


Sec. 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 Secs. 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.


Sec. 10.23  Prompt disposition of pending matters.

    A practitioner may not unreasonably delay the prompt disposition of 
any matter before the Internal Revenue Service.


Sec. 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 Sec. 10.25 of this part or any Federal law would be 
violated.


Sec. 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

[[Page 3290]]

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 Sec. 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.


Sec. 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).


Sec. 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.


Sec. 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.


Sec. 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.


Sec. 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.


Sec. 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.


Sec. 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.


Sec. 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

[[Page 3292]]

    (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 anti-abuse rules. In analyzing such judicial doctrines 
and statutory and regulatory anti-abuse rules, the opinion must take 
into account the typical investor'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. 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

[[Page 3293]]

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 Sec. 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 Sec. 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.


Sec. 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

[[Page 3294]]

opportunity to avoid the accuracy-related 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.


Sec. 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

[[Page 3295]]

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 anti-abuse 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 
Sec. 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 Sec. 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 Sec. 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 Sec. 10.33 or Sec. 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 Sec. 10.33 or Sec. 10.35.


Sec. 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 Secs. 10.33,

[[Page 3296]]

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 
Sec. 10.33, Sec. 10.34 or Sec. 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 
Sec. 10.33, Sec. 10.34 or Sec. 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


Sec. 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.


Sec. 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 Sec. 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

[[Page 3297]]

circumstances, and a consistent failure to perform obligations to the 
client.


Sec. 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 
Sec. 10.51(l)) violating Sec. 10.33, Sec. 10.34, or Sec. 10.35.


Sec. 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


Sec. 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 Sec. 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 Sec. 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 Sec. 10.62. Except as provided in Sec. 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.


Sec. 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 
Sec. 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 Sec. 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.


Sec. 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.


Sec. 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.


Sec. 10.64  Answer.

    (a) Filing. The respondent's answer must be filed in writing within 
the time

[[Page 3298]]

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.


Sec. 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.


Sec. 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.


Sec. 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.


Sec. 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.


Sec. 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.


Sec. 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 Sec. 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.


Sec. 10.71  Hearings.

    (a) In general. An Administrative Law Judge will preside at the 
hearing on a complaint filed under paragraph (c) of Sec. 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 
Sec. 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.


Sec. 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 Sec. 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 
Sec. 10.73 may be admitted into evidence in any proceeding instituted 
under Sec. 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.

[[Page 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.


Sec. 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.


Sec. 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).


Sec. 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.


Sec. 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.


Sec. 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.


Sec. 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.


Sec. 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 Sec. 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.


Sec. 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.

[[Page 3300]]

Sec. 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.


Sec. 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 Sec. 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 Sec. 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 Sec. 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 Sec. 10.60.
    (g) Proceeding instituted under Sec. 10.60. If the Director of 
Practice suspends a practitioner under this section, the practitioner 
may ask the Director to issue a complaint under Sec. 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


Sec. 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.


Sec. 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.


Sec. 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.

[[Page 3301]]

Sec. 10.93  Effective date.

    Subject to Sec. 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