[Federal Register Volume 68, Number 249 (Tuesday, December 30, 2003)]
[Proposed Rules]
[Pages 75186-75191]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-31898]


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DEPARTMENT OF THE TREASURY

Office of the Secretary

31 CFR Part 10

[REG-122379-02]
RIN 1545-BA70


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 affect individuals who are eligible to practice 
before the IRS. The proposed modifications set forth best practices for 
tax advisors providing advice to taxpayers relating to Federal tax 
issues or submissions to the IRS and modify the standards for certain 
tax shelter opinions. This document also provides notice of a public 
hearing regarding the proposed regulations.

DATES: Comments: Written or electronically generated comments must be 
received by February 13, 2004.
    Public Hearing: Outlines of topics to be discussed at the public 
hearing scheduled for February 18, 2004, in the Auditorium of the 
Internal Revenue Building at 1111 Constitution Avenue, NW., Washington, 
DC 20224, must be received by February 11, 2004.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-122379-02), room 
5203, Internal Revenue Service, POB 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG-
122379-02), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue, NW., Washington, DC. Alternatively, taxpayers may submit 
comments electronically via the IRS Internet site at: www.irs.gov/regs.

FOR FURTHER INFORMATION CONTACT: Concerning issues for comment, Heather 
L. Dostaler or Bridget E. Tombul at (202) 622-4940; concerning 
submissions of comments, Guy Traynor of the Publications and 
Regulations Branch 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, SE:W:CAR:MP:T:T:SP, 
Washington, DC 20224. Comments on the collection of information should 
be received by March 1, 2004. Comments are specifically requested 
concerning:
    Whether the proposed collection of information is necessary for the 
proper performance of the Office of Professional Responsibility, 
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 collections of information (disclosure requirements) in these 
proposed regulations are in Sec.  10.35(d). Section 10.35(d) requires a 
practitioner providing a tax shelter opinion to make certain 
disclosures in the beginning of marketed tax shelter opinions, limited 
scope opinions and opinions that fail to conclude at a confidence level 
of at least more likely than not. In addition, certain relationships 
between the practitioner and a person promoting or marketing a tax 
shelter must be disclosed. A practitioner may be required to make one 
or more disclosure at the beginning of an opinion. The collection of 
this material helps to ensure that taxpayers who receive a tax shelter 
opinion are informed of any facts or circumstances that might limit the 
taxpayer's use of the opinion. The collection of information is 
mandatory.
    Estimated total annual disclosure burden is 13,333 hours.
    Estimated annual burden per disclosing practitioner varies from 5 
to 10 minutes, depending on individual circumstances, with an estimated 
average of 8 minutes.
    Estimated number of disclosing practitioners is 100,000.
    Estimated annual frequency of responses is on occasion.
    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 has published the 
regulations in Circular 230 (31 CFR part 10). On February 23, 1984, the 
regulations were amended to provide standards for tax shelter opinions 
(49 FR 6719). On May 5, 2000, an advance notice of proposed rulemaking 
was published (65 FR 30375) which requested comments regarding 
amendments to the standards of practice governing tax shelters and 
other general matters. On January 12, 2001, a notice of proposed 
rulemaking (66 FR 3276) was published that proposed amendments to the 
regulations relating to practice before the Internal Revenue Service in 
general and addressing tax shelter opinions in particular. On July 26, 
2002, final regulations (67 FR 48760) were issued incorporating only 
the non-tax shelter related matters. The IRS and the Treasury 
Department announced that regulations governing standards for tax 
shelter opinions would be proposed again at a later date.
    This document proposes new proposed amendments to the standards 
governing tax shelter opinions and withdraws proposed amendments to 
Sec. Sec.  10.33, 10.35 and 10.36 of the regulations governing practice 
before the IRS that were published in 2001. See 66 FR 3276 (Jan. 12, 
2001).

Explanation of Provisions

    Tax advisors play an increasingly important role in the Federal tax 
system, which is founded on principles of voluntary compliance. The tax 
system is

[[Page 75187]]

best served when the public has confidence in the honesty and integrity 
of the professionals providing tax advice. To restore, promote, and 
maintain the public's confidence in those individuals and firms, these 
proposed regulations set forth best practices applicable to all tax 
advisors. These regulations also amend the mandatory requirements for 
practitioners who provide certain tax shelter opinions. These 
regulations are limited to practice before the IRS and do not alter or 
supplant other ethical standards applicable to practitioners.
    The standards set forth in these proposed regulations differ from 
the January 12, 2001 proposed regulations in several ways. First, Sec.  
10.33 prescribes best practices for all tax advisors. Second, Sec.  
10.35 combines and modifies the standards applicable to marketed and 
more likely than not tax shelter opinions in former Sec.  10.33 (tax 
shelter opinions used to market tax shelters) and former Sec.  10.35 
(more likely than not tax shelter opinions) of the January 12, 2001 
proposed regulations. Third, these regulations revise proposed Sec.  
10.36, which provides procedures for ensuring compliance with 
Sec. Sec.  10.33 and 10.35. Finally, provisions relating to advisory 
committees to the Office of Professional Responsibility are provided in 
new Sec.  10.37. The Treasury Department and the IRS will publish 
conforming amendments to Sec. Sec.  10.22 and 10.52 in a separate 
notice of proposed rulemaking.

Best Practices

    To ensure the integrity of the tax system, tax professionals should 
adhere to best practices when providing advice or assisting their 
clients in the preparation of a submission to the IRS. Section 10.33 
describes the best practices to be observed by all tax advisors in 
providing clients with the highest quality representation. These best 
practices include: (1) Communicating clearly with the client regarding 
the terms of the engagement and the form and scope of the advice or 
assistance to be rendered; (2) establishing the relevant facts, 
including evaluating the reasonableness of any assumptions or 
representations; (3) relating applicable law, including potentially 
applicable judicial doctrines, to the relevant facts; (4) arriving at a 
conclusion supported by the law and the facts; (5) advising the client 
regarding the import of the conclusions reached; and (6) acting fairly 
and with integrity in practice before the IRS.

Standards for Certain Tax Shelter Opinions

    Section 10.35 prescribes requirements for practitioners providing 
more likely than not and marketed tax shelter opinions. A more likely 
than not tax shelter opinion is a tax shelter opinion that reaches a 
conclusion of at least more likely than not with respect to one or more 
material Federal tax issue(s). A marketed tax shelter opinion is a tax 
shelter opinion, including a more likely than not tax shelter opinion, 
that a practitioner knows, or has reason to know, will be used or 
referred to by a person other than the practitioner (or a person who is 
a member of, associated with, or employed by the practitioner's firm) 
in promoting, marketing or recommending a tax shelter to one or more 
taxpayers.

Definition of Tax Shelter Opinion

    These proposed regulations retain the definition of tax shelter 
proposed in January 2001 by applying the definition found in section 
6662 to all taxes under the Internal Revenue Code. A number of 
commentators expressed concern that this definition is overly broad, 
encompasses routine tax matters, and is difficult to administer by 
practitioners and the IRS. After careful consideration of these issues, 
the Treasury Department and the IRS have determined that the definition 
in the proposed regulations best defines the scope of these 
regulations. Section 10.35 has been modified, however, to address 
commentators' concerns by excluding from the definition of a tax 
shelter opinion preliminary advice provided pursuant to an engagement 
in which the practitioner is expected subsequently to provide an 
opinion that satisfies the requirements of this section. In addition, 
under Sec.  10.35(a)(3)(ii), a practitioner may provide an opinion that 
is limited to some, but not all, material Federal tax issues that may 
be relevant to the treatment of a tax shelter item if the taxpayer and 
the practitioner agree to limit the scope of the opinion. Such a 
limited scope opinion cannot be a marketed tax shelter opinion, and all 
limited scope opinions must contain the appropriate disclosures 
described below.

Requirements for Tax Shelter Opinions

    The requirements for all more likely than not and marketed tax 
shelter opinions include: (1) Identifying and considering all relevant 
facts and not relying on any unreasonable factual assumptions or 
representations; (2) relating the applicable law (including potentially 
applicable judicial doctrines) to the relevant facts and not relying on 
any unreasonable legal assumptions, representations or conclusions; (3) 
considering all material Federal tax issues and reaching a conclusion, 
supported by the facts and the law, with respect to each material 
Federal tax issue; and (4) providing an overall conclusion as to the 
Federal tax treatment of the tax shelter item or items and the reasons 
for that conclusion.
    In addition to the exception to the requirements for limited scope 
opinions discussed above, in the case of a marketed tax shelter 
opinion, a practitioner is not expected to identify and ascertain facts 
peculiar to a taxpayer to whom the transaction is marketed, but the 
opinion must include the appropriate disclosure described below. 
Moreover, if a practitioner is unable to reach a conclusion with 
respect to one or more material Federal tax issue(s) or to reach an 
overall conclusion in a tax shelter opinion, the opinion must state 
that the practitioner is unable to reach a conclusion with respect to 
those issues or to reach an overall conclusion and describe the reasons 
that the practitioner is unable to reach such a conclusion. If the 
practitioner fails to reach a conclusion at a confidence level of at 
least more likely than not with respect to one or more material Federal 
tax issue(s), the opinion must include the appropriate disclosures 
described below.

Required Disclosures

    Section 10.35(d) provides disclosures that are required to be made 
in the beginning of marketed tax shelter opinions, limited scope 
opinions, and opinions that fail to reach a conclusion at a confidence 
level of at least more likely than not. In addition, certain 
relationships between the practitioner and a person promoting or 
marketing a tax shelter must be disclosed. A practitioner may be 
required to make more than one of the disclosures described below.
1. Relationship Between Practitioner and Promoter
    Under Sec.  10.35(d)(1), a practitioner must disclose if the 
practitioner has a compensation arrangement with any person (other than 
the client for whom the opinion is prepared) with respect to the 
promoting, marketing or recommending of a tax shelter discussed in the 
opinion. A practitioner also must disclose if there is any referral 
agreement between the practitioner and any person (other than the 
client for whom the opinion is prepared) engaged in the promoting, 
marketing or

[[Page 75188]]

recommending of the tax shelter discussed in the opinion.
2. Marketed Tax Shelter Opinion
    Under Sec.  10.35(d)(2), a practitioner must disclose that a 
marketed opinion may not be sufficient for a taxpayer to use for the 
purpose of avoiding penalties under section 6662(d) of the Code. The 
practitioner also must state that taxpayers should seek advice from 
their own tax advisors.
3. Limited Scope Opinion
    Under Sec.  10.35(d)(3), a practitioner must disclose in a limited 
scope opinion that additional issue(s) may exist that could affect the 
Federal tax treatment of the tax shelter addressed in the opinion, that 
the opinion does not consider or reach a conclusion with respect to 
those additional issues and that the opinion was not written, and 
cannot be used by the recipient, for the purpose of avoiding penalties 
under section 6662(d) of the Code with respect to those issues outside 
the scope of the opinion.
4. Opinions That Fail To Reach a Conclusion at a Confidence Level of at 
Least More Likely Than Not
    Under Sec.  10.35(d)(4), a practitioner must disclose that the 
opinion fails to reach a conclusion at a confidence level of at least 
more likely than not with respect to one or more material Federal tax 
issue(s) addressed by the opinion and that the opinion was not written, 
and cannot be used by the recipient, for the purpose of avoiding 
penalties under section 6662(d) of the Code with respect to such 
issue(s).

Procedures To Ensure Compliance

    Section 10.36 provides that tax advisors with responsibility for 
overseeing a firm's practice before the IRS should take reasonable 
steps to ensure that the firm's procedures for all members, associates, 
and employees are consistent with the best practices described in Sec.  
10.33. In the case of tax shelter opinions, a practitioner with this 
oversight responsibility must take reasonable steps to ensure that the 
firm has adequate procedures in effect for purposes of complying with 
Sec.  10.35.

Advisory Committees on the Integrity of Tax Professionals

    Section 10.37 authorizes the Director of the Office of Professional 
Responsibility to establish one or more advisory committees composed of 
at least five individuals authorized to practice before the IRS. Under 
procedures prescribed by the Director and at the request of the 
Director, an advisory committee may review and make recommendations 
regarding professional standards or best practices for tax advisors or 
may advise the Director whether a practitioner may have violated 
Sec. Sec.  10.35 or 10.36.

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 this notice of proposed rulemaking is 
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. Persons authorized to 
practice before the IRS have long been required to comply with certain 
standards of conduct. The added disclosure requirements for tax shelter 
opinions imposed by these regulations will not have a significant 
economic impact on a substantial number of small entities because, as 
previously noted, the estimated burden of disclosures is minimal. This 
is because practitioners have the information needed to determine 
whether some of the disclosures are required before the opinion is 
prepared and for the other disclosures the regulations provide 
practitioners with the language to be included in the opinion. 
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 IRS. The IRS 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 February 18, 2004, at 10 a.m., 
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 Constitution Avenue entrance. 
All visitors must present photo identification to enter the building. 
Visitors will not be admitted beyond the immediate entrance area more 
than 30 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 by February 13, 2004, and submit an outline of the 
topics to be discussed and the time to be devoted to each topic by 
February 11, 2004. 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 the regulations are Heather L. Dostaler, 
Bridget E. Tombul, and Brinton T. Warren of the Office of the Associate 
Chief Counsel (Procedure and Administration), Administrative Provisions 
and Judicial Practice Division, but other personnel from the IRS and 
Treasury Department participated in their development.

List of Subjects in 31 CFR Part 10

    Accountants, Administrative practice and procedure, Appraisers, 
Enrolled actuaries, Lawyers, Reporting and recordkeeping requirements, 
Taxes.

Proposed Amendments to the Regulations

    Accordingly, 31 CFR part 10 is proposed to be amended as follows:
    1. The authority citation for subtitle A, part 10 continues to read 
as follows:

    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.

    2. Section 10.33 is revised to read as follows:


Sec.  10.33  Best practices for tax advisors.

    (a) Best practices. Tax advisors should provide clients with the 
highest quality representation concerning Federal tax issues by 
adhering to best practices in providing advice and in preparing or 
assisting in the preparation of a submission to the Internal Revenue 
Service. Best practices include the following:
    (1) Communicating clearly with the client regarding the terms of 
the

[[Page 75189]]

engagement. For example, the advisor should determine the client's 
expected purpose for and use of the advice and should have a clear 
understanding with the client regarding the form and scope of the 
advice or assistance to be rendered.
    (2) Establishing the facts, determining which facts are relevant, 
and evaluating the reasonableness of any assumptions or 
representations.
    (3) Relating the applicable law (including potentially applicable 
judicial doctrines) to the relevant facts.
    (4) Arriving at a conclusion supported by the law and the facts.
    (5) Advising the client regarding the import of the conclusions 
reached, including, for example, whether a taxpayer may avoid penalties 
for a substantial understatement of income tax under section 6662(d) of 
the Internal Revenue Code if a taxpayer acts in reliance on the advice.
    (6) Acting fairly and with integrity in practice before the 
Internal Revenue Service.
    (b) Effective date. This section is effective on the date that 
final regulations are published in the Federal Register.
    3. Section 10.35 is added to subpart B to read as follows:


Sec.  10.35  Requirements for certain tax shelter opinions.

    (a) In general. A practitioner providing a more likely than not tax 
shelter opinion or a marketed tax shelter opinion must comply with each 
of the following requirements.
    (1) Factual matters. (i) The practitioner must use reasonable 
efforts to identify and ascertain the facts, which may relate to future 
events if a transaction is prospective or proposed, and determine which 
facts are relevant. The opinion must identify and consider all relevant 
facts.
    (ii) The practitioner must not base the opinion on any unreasonable 
factual assumptions (including assumptions as to future events), such 
as a factual assumption that the practitioner knows or should know is 
incorrect or incomplete. For example, it is unreasonable to assume that 
a transaction has a business purpose or that a transaction is 
potentially profitable apart from tax benefits, or to make an 
assumption with respect to a material valuation issue. In the case of 
any marketed tax shelter opinion, the practitioner is not expected to 
identify or ascertain facts peculiar to a taxpayer to whom the 
transaction may be marketed, but the opinion must include the 
appropriate disclosure(s) required under paragraph (d) of this section.
    (iii) The practitioner must not base the opinion on any 
unreasonable factual representations, statements or findings of the 
taxpayer or any other person, such as a factual representation that the 
practitioner knows or should know is incorrect or incomplete. For 
example, a practitioner may not rely on a taxpayer's factual 
representation that a transaction has a business purpose if the 
representation fails to include a specific description of the business 
purpose or the practitioner knows or should know that the 
representation is incorrect or incomplete.
    (2) Relate law to facts. (i) The practitioner must relate the 
applicable law (including potentially applicable judicial doctrines) to 
the relevant facts.
    (ii) The practitioner must not assume the favorable resolution of 
any material Federal tax issue except as provided in paragraphs 
(a)(3)(ii) and (b) of this section, or otherwise base an opinion on any 
unreasonable legal assumptions, representations, or conclusions.
    (iii) The practitioner's opinion must not contain internally 
inconsistent legal analyses or conclusions.
    (3) Evaluation of material Federal tax issues. (i) The practitioner 
must consider all material Federal tax issues except as provided in 
paragraphs (a)(3)(ii) and (b) of this section.
    (ii) The practitioner may provide an opinion that considers less 
than all of the material Federal tax issues if--
    (A) The taxpayer and the practitioner agree to limit the scope of 
the opinion to one or more Federal tax issue(s);
    (B) The opinion is not a marketed tax shelter opinion; and
    (C) The opinion includes the appropriate disclosure(s) required 
under paragraph (d) of this section.
    (iii) The practitioner must provide his or her conclusion as to the 
likelihood that the taxpayer will prevail on the merits with respect to 
each material Federal tax issue. If the practitioner is unable to reach 
a conclusion with respect to one or more material Federal tax issue(s), 
the opinion must state that the practitioner is unable to reach a 
conclusion with respect to those issues. The practitioner must describe 
the reasons for the conclusions, including the facts and analysis 
supporting the conclusions, or describe the reasons that the 
practitioner is unable to reach a conclusion as to one or more material 
Federal tax issue(s). If the practitioner fails to reach a conclusion 
at a confidence level of at least more likely than not with respect to 
one or more material Federal tax issue(s), the opinion must include the 
appropriate disclosure(s) required under paragraph (d) of this section.
    (iv) The practitioner must not take into account 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.
    (4) Overall conclusion. The practitioner must provide an overall 
conclusion as to the likelihood that the Federal tax treatment of the 
tax shelter item or items is the proper treatment and the reasons for 
that conclusion. If the practitioner is unable to reach an overall 
conclusion, the opinion must state that the practitioner is unable to 
reach an overall conclusion and describe the reasons for the 
practitioner's inability to reach a conclusion.
    (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, the 
practitioner may rely on the opinion of another practitioner with 
respect to these issues unless the practitioner knows or should know 
that such opinion should not be relied on. If a practitioner relies on 
the opinion of another practitioner, the relying practitioner must 
identify the other opinion and set forth the conclusions reached in the 
other opinion.
    (2) The practitioner must be satisfied that the combined analysis 
of the opinions, taken as a whole, satisfies the requirements of this 
section.
    (c) Definitions. For purposes of this section--
    (1) A practitioner includes any individual described in Sec.  
10.2(e).
    (2) The term tax shelter includes any partnership or other entity, 
any investment plan or arrangement, or any other plan or arrangement, a 
significant purpose of which is the avoidance or evasion of any tax 
imposed by the Internal Revenue Code. A tax shelter may give rise to 
one or more tax shelter items.
    (3) A tax shelter item is, with respect to a tax shelter, an item 
of income, gain, loss, deduction, or credit, the existence or absence 
of a taxable transfer of property, or the value of property.
    (4) Tax shelter opinion--(i) In general. A tax shelter opinion is 
written advice by a practitioner concerning the Federal tax aspects of 
any Federal tax issue relating to a tax shelter item or items.
    (ii) Excluded advice. A tax shelter opinion does not include 
written advice provided to a client during the course of an engagement 
pursuant to which the practitioner is expected subsequently to

[[Page 75190]]

provide written advice to the client that satisfies the requirements of 
this section, or written advice concerning the qualification of a 
qualified plan.
    (iii) Included advice. A tax shelter opinion includes the Federal 
tax aspects or tax risks portion of offering materials prepared by or 
at the direction of a practitioner. Similarly, a financial forecast or 
projection prepared by or at the direction of a practitioner is a tax 
shelter opinion if it is predicated on assumptions regarding Federal 
tax aspects of the investment.
    (5) A more likely than not tax shelter opinion is a tax shelter 
opinion that reaches a conclusion at a confidence level of at least 
more likely than not (that is, greater than 50 percent) that one or 
more material Federal tax issues would be resolved in the taxpayer's 
favor.
    (6) A marketed tax shelter opinion is a tax shelter opinion, 
including a more likely than not tax shelter opinion, that a 
practitioner knows or has reason to know will be used or referred to by 
a person other than the practitioner (or a person who is a member of, 
associated with, or employed by the practitioner's firm) in promoting, 
marketing or recommending the tax shelter to one or more taxpayers.
    (7) A material Federal tax issue is any Federal tax issue for which 
the Internal Revenue Service has a reasonable basis for a successful 
challenge and the resolution of which could have a significant impact, 
whether beneficial or adverse and under any reasonably foreseeable 
circumstance, on the Federal tax treatment of a taxpayer's tax shelter 
item or items.
    (d) Required disclosures. An opinion must contain all of the 
following disclosures that apply--(1) Relationship between promoter and 
practitioner. A practitioner must disclose in the beginning of the 
opinion the existence of--
    (i) Any compensation arrangement, such as a referral fee or a fee-
sharing arrangement, between the practitioner (or the practitioner's 
firm) and any person (other than the client for whom the opinion is 
prepared) with respect to the promoting, marketing or recommending of a 
tax shelter discussed in the opinion; or
    (ii) Any referral agreement between the practitioner (or the 
practitioner's firm) and a person (other than the client for whom the 
opinion is prepared) engaged in the promoting, marketing or 
recommending of the tax shelter discussed in the opinion.
    (2) Marketed tax shelter opinions. A practitioner must disclose in 
the beginning of a marketed tax shelter opinion that with respect to 
any material Federal tax issue for which the opinion reaches a 
conclusion at a confidence level of at least more likely than not--
    (i) The opinion may not be sufficient for a taxpayer to use for the 
purpose of avoiding penalties relating to a substantial understatement 
of income tax under section 6662(d) of the Internal Revenue Code; and
    (ii) Taxpayers should seek advice based on their individual 
circumstances with respect to those material Federal tax issues from 
their own tax advisor(s).
    (3) Limited scope opinions. If a practitioner provides an opinion 
that is limited to one or more Federal tax issue(s) agreed to by the 
taxpayer and the practitioner, the practitioner must disclose in the 
beginning of the opinion that--
    (i) The opinion is limited to the one or more Federal tax issue(s) 
agreed to by the taxpayer and the practitioner and addressed in the 
opinion;
    (ii) Additional issue(s) may exist that could affect the Federal 
tax treatment of the tax shelter addressed in the opinion and the 
opinion does not consider or provide a conclusion with respect to any 
additional issue(s); and
    (iii) With respect to any material Federal tax issue(s) outside the 
limited scope of the opinion, the opinion was not written, and cannot 
be used by the recipient, for the purpose of avoiding penalties 
relating to a substantial understatement of income tax under section 
6662(d) of the Internal Revenue Code.
    (4) Opinions that fail to reach a more likely than not conclusion. 
If a practitioner does not reach a conclusion at a confidence level of 
at least more likely than not with respect to a material Federal tax 
issue addressed by the opinion, the practitioner must disclose in the 
beginning of the opinion that--
    (i) The opinion does not reach a conclusion at a confidence level 
of at least more likely than not that with respect to one or more 
material Federal tax issues addressed by the opinion; and
    (ii) With respect to those material Federal tax issues, the opinion 
was not written, and cannot be used by the recipient, for the purpose 
of avoiding penalties relating to a substantial understatement of 
income tax under section 6662(d) of the Internal Revenue Code.
    (e) Effect of opinion that meets these standards. An opinion that 
meets these requirements satisfies 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.
    (f) Effective date. This section applies to tax shelter opinions 
rendered after the date that final regulations are published in the 
Federal Register.
    4. Section 10.36 is added to subpart B read as follows:


Sec.  10.36  Procedures to ensure compliance.

    (a) Best practices for tax advisors. Tax advisors with 
responsibility for overseeing a firm's practice of providing advice 
concerning Federal tax issues or of preparing or assisting in the 
preparation of submissions to the Internal Revenue Service should take 
reasonable steps to ensure that the firm's procedures for all members, 
associates, and employees are consistent with the best practices 
described in Sec.  10.33.
    (b) Requirements for certain tax shelter opinions. Any practitioner 
who has (or practitioners who have or share) principal authority and 
responsibility for overseeing a firm's practice of providing advice 
concerning Federal tax issues must take reasonable steps to ensure that 
the firm has adequate procedures in effect for all members, associates, 
and employees for purposes of complying with Sec.  10.35. A 
practitioner will be subject to discipline for failing to comply with 
the requirements of this paragraph if--
    (1) The practitioner through willfulness, recklessness, or gross 
incompetence does not take reasonable steps to ensure that the firm has 
adequate procedures to comply with Sec.  10.35, and one or more 
individuals who are members of, associated with, or employed by, the 
firm are, or have, engaged in a pattern or practice, in connection with 
their practice with the firm, of failing to comply with Sec.  10.35; or
    (2) The practitioner knows or has reason to know that one or more 
individuals who are members of, associated with, or employed by, the 
firm are, or have, engaged in a practice, in connection with their 
practice with the firm, that does not comply with Sec.  10.35 and the 
practitioner, through willfulness, recklessness, or gross incompetence 
fails to take prompt action to correct the noncompliance.
    (c) Effective date. Paragraph (a) of this section is effective on 
the date that final regulations are published in the Federal Register. 
Paragraph (b) of this section applies to tax shelter opinions rendered 
after the date that final regulations are published in the Federal 
Register.
    5. Section 10.37 is added to read as follows:

[[Page 75191]]

Sec.  10.37  Establishment of Advisory Committees.

    (a) Advisory committees. To promote and maintain the public's 
confidence in tax advisors, the Director of the Office of Professional 
Responsibility is authorized to establish one or more advisory 
committees composed of at least five individuals authorized to practice 
before the Internal Revenue Service. Under procedures prescribed by the 
Director, an advisory committee may review and make recommendations 
regarding professional standards or best practices for tax advisors, or 
more particularly, whether a practitioner may have violated Sec. Sec.  
10.35 or 10.36.
    (b) Effective date. This section is effective on the date that 
final regulations are published in the Federal Register.
    6. Section 10.93 is revised to read as follows:


Sec.  10.93  Effective date.

    Except as otherwise provided in each section and subject to Sec.  
10.91, Part 10 is applicable on July 26, 2002.

Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
    Approved: December 19, 2003.
George B. Wolfe,
Deputy General Counsel, Office of the Secretary.
[FR Doc. 03-31898 Filed 12-29-03; 8:45 am]
BILLING CODE 4830-01-P