Sources of Federal Tax Law

Gregory J. Cook, EA, CPA+ Accredited Tax Advisor Past President Alabama Society of Enrolled Agents Past President Alabama Association of Accountants

THE INTERNAL REVENUE CODE
The statutory basis of federal tax law is the Internal Revenue Code (title 26 of the United States Code). The Code is federal legislation, passed by the Congress and signed into law by the President. The first version of the Internal Revenue Code was passed in 1913, and major revisions were passed in 1939, 1954, and 1986. In addition, minor revisions are made to the Code every year.

Revisions to the Code are made by public laws, which are cited by name and public law number: The Taxpayer Relief Act of 1997, Pub. L. 105-34.

FEDERAL CASE LAW
Tax litigation can be heard in the Tax Court or in the Federal District Courts.

There are two types of Tax Court decisions: reported and memorandum. Reported decisions usually involve a dispute about the interpretation of the Internal Revenue Code. Tax Court Memoranda usually involve a dispute about facts but not interpretation of the law and cannot be officially cited as precedent by other taxpayers.



REPORTED TAX COURT CASES are officially published in the Tax Court Reporter and receive a citation showing the volume and page number (e.g., 109 T.C. 23).

TAX COURT MEMORANDUM decisions are not officially reported, but they are published in a number of sources. They often are cited by their year and number (e.g., T.C. Memo. 1997-12), which are assigned by the Tax Court.

The other federal courts that can hear tax cases are the District Courts and the Federal Court of Claims. Their decisions are reported in various unofficial reporters.

Appeals from the District Courts and the Tax Court go up to the Courts of Appeals. These are arranged into twelve circuits. Decisions of the Courts of Appeals are reported in various unofficial reporters.

The United States Supreme Court has discretion to hear appeals from the Courts of Appeals.

REGULATIONS
The Internal Revenue Service, a branch of the Treasury Department, is charged with enforcing federal tax law. As part of that function, it promulgates its own interpretations of federal tax law. These interpretations carry varying weights of authority.

Regulations are prepared by the Chief Counsel of the IRS and approved by the Treasury Department. The IRS must comply with notice and hearing procedures once the Treasury Department has approved a regulation in order for that regulation to take effect, but once a regulation is in effect, it has the force of law and is treated as such by courts and the IRS.

There are three types of regulations: PROPOSED, TEMPORARY, and FINAL.

PROPOSED REGULATIONS are issued by the IRS in order to comply with the notice and hearing requirements. The IRS invites public comment on proposed regulations. Proposed regulations that make it through the notice and hearing phase and are approved become final. Proposed regulations are not law until they become final, but are a good guide for tax practitioners because they show what the IRS is planning.

TEMPORARY REGULATIONS are put in effect when the IRS feels it does not have time to comply with the notice and hearing requirements. They do have the force of law while they are in effect, and they are usually promulgated simultaneously with identical proposed regulations.

FINAL REGULATIONS are what proposed regulations become once they have completed the notice and hearing process. They have the force of law.

Final and temporary regulations are issued in Treasury Decisions, which contain the text of the regulation plus a preamble. The preamble generally explains the reasons why the regulation is being promulgated. It may also explain differences between the final regulations and proposed regulations (if any) and address comments the IRS may have received on the proposed regulations. Preambles are cited by their treasury decision number in the Analysis and Explanation: TD 8839.

OTHER PUBLISHED IRS PRONOUNCEMENTS
Other IRS pronouncements have less authority than the regulations because they do not comply with the formal notice and hearing requirements, but they are still quite valuable to tax practitioners because they demonstrate how the IRS will rule on particular issues.

REVENUE RULINGS are issued by the National Office of the IRS and give the IRS interpretation of tax law as it applies to specific facts of broad application. They represent the IRS's official interpretation of the law and are designed to promote uniform interpretation of the law by all IRS offices and to guide taxpayers.

REVENUE PROCEDURES are statements of IRS procedure published by the National Office.

NOTICES AND ANNOUNCEMENTS are published by the IRS in the Internal Revenue Bulletin. Notices and Announcements state important items of general interest, such as amendments to forms or changes in tax law.

PRIVATE LETTER RULINGS (PLRs) are issued by the IRS to specific taxpayers, applying tax law to the taxpayer's specific situation. Taxpayers often request letter rulings with respect to proposed transactions, so they will know ahead of time that they will not get into trouble with the IRS for doing what they propose to do. A PLR cannot be cited as authority by anyone other than the taxpayer who requested the ruling.

TECHNICAL ADVICE MEMORANDA (TAMs) are issued by the National Office of the IRS to District or Appeals Offices of the IRS in response to specific questions from those offices or from taxpayers and usually regarding issues that are already in dispute. A TAM can only be relied on by the taxpayer who requested it or for whose dispute it was requested.

OTHER REFERENCE MATERIALS
CHIEF COUNSEL ADVICE is issued by the Office of Chief Counsel. This advice comes in many forms and is issued to various IRS personnel and offices advising them on the Chief Counsel's legal opinion on general topics or regarding particular questions that have been posed to the Chief Counsel's Office. The various types of advice are Field Service Advice (FSAs), Chief Counsel Advice (CCAs), Chief Counsel Memoranda (CCMs), Chief Counsel Notices (CCNs), Service Center Advice (SCAs), and General Counsel Memoranda (GCMs).

COORDINATED ISSUE PAPERS (CIPs) are written by representatives from the Chief Counsel's Office, the National Office, and various Field Offices, according to what industries are addressed in a particular document as a part of the Industry Specialization Program (ISP). The primary purpose of the ISP is to identify, coordinate, and resolve complex and significant industry wide issues, providing guidance to field examiners and ensuring uniform application of law. Although these papers are not official pronouncements on the issues, they do set forth the IRS's current philosophy on the particular subject.

The MARKET SEGMENT SPECIALIZATION PROGRAM (MSSP) focuses on developing highly trained examiners for a particular market segment. A market segment may be an industry such as construction or entertainment, a profession like attorneys or real estate agents, or an issue like passive activity losses. An integral part of the approach used is the development and publication of Audit Technique Guides. These Guides contain examination techniques, common and unique industry issues, business practices, industry terminology, and other information to assist examiners.

IRS PUBLICATIONS are written by the Forms and Publications Division of the IRS. Their purpose is to put the tax laws and regulations in plain English, while dividing the information into topic areas. There are usually no Code or regulation citations in the publications. Publications are reviewed by the Office of Chief Counsel to ensure technical correctness, but they cannot be relied upon as law. Publications are usually updated annually, while some are updated more often.

IRS PENALTIES HANDBOOK was promulgated by the IRS as Part 20 of the Internal Revenue Manual. Its purpose is to consolidate and improve the penalties structure of the Internal Revenue Code and explain all aspects of penalties.

COMMITTEE REPORTS
The House Ways and Means Committee introduces tax legislation and usually writes a report on the bill, explaining what their rationale and philosophy is. The bill is sent to the Senate Finance Committee, which may amend the bill and also issue a report, explaining their thinking behind any changes. Bills generally then go to the Joint Committee on Taxation, which consists of members of both houses of Congress. After the legislation has been passed and signed into law, the Joint Committee usually issues a Joint Committee Report, which is the legislative history behind the proposed bill and often referred to as the "Bluebook."

U.S. TAX TREATIES

Tax treaties govern the treatment of taxpayers who could be subject to tax in the United States and another country. Tax treaties usually eliminate double taxation of such taxpayers. Tax treaties originate from the Treasury Department and include the United States as one of the parties and another country as the other party. The United States Treasury Department starts with a model treaty and works with a country in drafting the treaty. Tax treaties can be for income or estate and gift taxes. One of the most important parts of a treaty is the "Exchange of Information" agreement, which is included in almost all tax treaties.

Once ratified by the Senate, treaties have the force of law.