Xbox Live Code of Conduct
The Xbox Live Code of Conduct is a set of rules that Microsoft enforces to maintain a friendly gaming environment. In a nutshell, the code of conduct amounts to being polite to others and not causing problems. More specifically, you can't create a gamertag that uses profane words, sexually suggestive content, illegal drugs/activities or hate speech, such as ethnic, racial or religious slurs. Also, avoid using a gamertag that refers to sensitive topics, like the 9/11 attacks, or unfavorably known people or organizations like Adolf Hitler or the Nazis. If you violate any part of these rules, you may find your gamertag flagged or reported, both of which will likely result in a forced gamertag change.
Flagged Gamertag
Microsoft uses its own employees to monitor games, chat, forums and other areas where conduct violations might occur. If these moderators find any offensive content, they'll flag it and notify the account owner, who'll need to take the appropriate steps to correct the offense. Even a company as big as Microsoft can't have eyes on everything, but its in-house moderators are a good way to detect problems early and possibly keep the offensive material from sensitive eyes.
Reported Gamertag
Your Xbox Live gamertag, along with your profile, are all public. Anyone can see this information, and if he's offended by any of the content, he can report that offense to Microsoft. The code of conduct rules for gamertags and profile content is made purposefully vague because it's hard to tell what may offend others. Something completely acceptable to you may be offensive to someone else. Microsoft tends to err on the side of caution on these matters, so it's likely that if you've been reported, you'll be contacted by Microsoft and told to change or remove the offensive content. The downside to this system is that it can be exploited by sore losers and "griefers," who are simply out to mess with people for their own entertainment. If your gamertag has been reported and you feel it was unwarranted, you can appeal the decision at support.xbox.com. In addition, if you feel that someone is reporting you repeatedly because of a personal grudge, report that person because harassing others is also a violation of the code.
Change Your Gamertag
To change your gamertag, on your Xbox 360 sign in to your Xbox Live account. Navigate to "My Xbox" and select your profile. On your profile page, select "Change Gamertag." Once you've entered the gamertag you would like to use, select "Yes, use this gamertag." Changing your gamertag, even if you're forced to do so by Microsoft, costs 800 Microsoft Points -- $10.