r11 chp 02 1 chapter 2 administrative sources

8/3/2019 R11 Chp 02 1 Chapter 2 Administrative Sources

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Chapter 2

Administrative Sources

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Administrative Sources of Tax Law A Primary source of tax law comes from

Administrative Authorities. The Executive branch of the government is responsible forenforcing the laws created by Congress.

The Department of Treasury, part of the Executive branch,is headed by Secretary of Treasury, a Presidential cabinetappointee.

The Treasury is charged with enforcing the InternalRevenue Code and administering the tax laws.

Much of this responsibility has been delegated to a

division of the Treasury, the Internal Revenue Service(IRS), which is headed by the Commissioner ofRevenue Services (also appointed by President). In practice, the IRS handles the daily administration

of the tax law system .


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The Role of the IRS & Pronouncements Primary duty of IRS is to administer the tax law system. In administering the tax law system, the IRS:

Interprets the Tax Code Enforces the tax laws.

Collects tax liabilities. Interpreting the Code

To help taxpayers determine tax liabilities, theService explains and interprets the Code and othertax laws.

Guidance comes through IRS Pronouncements whichconstitute the primary source of Administrative TaxAuthority.

IRS Pronouncements include the following: Regulations Revenue Rulings Revenue Procedures Private Letter Ruling Technical Advice Memoranda Field Service Advice


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Regulations Treasury/IRS definitive interpretation of Code provisions.

Regulations have the full force and effect of law if theinterpretation is reasonable and consistent with the Code.

Classifications Interpretive (majority of regulations) explain Code

provision. Legislative delegation of authority by Congress charging

the Treasury with the duty of determining the substantiverequirements for a particular Code Section.

Procedural - how to rules enforce rights and dutiesunder the tax law.

Citing a Regulation Reg. Sec. 1.213-1(e)(1)(i) Prefix is 1 = Income Tax

Regulation, 213 is Code Section (medical expensededuction), 1 is the first regulation under this CodeSection (e)(1)(i) are paragraphs and subparagraphs thatdeal with definitions, in particular, of medical care.


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Classifying a Regulation?Section 7701(a)(2) of the IRC defines a

partnership for tax law purposes and Section.7701(a)(3) defines a corporation for tax purposes.

Reg. Sec. 301.7701-2 provides rules for how todetermine whether the taxpayers business entityshould be classified as a partnership or anassociation taxed as a corporation for taxpurposes.

Reg. Sec. 301.7701-3 provides that an entity whichis not classified as a corporation under Reg.

301.7701-2 may elect its tax classification andprovides the manner by which a taxpayer maymake such an election. It also provides defaultclassification rules for those situations in which theentity (not classified as a corporation) does not

elect its tax classification.


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Classifying a Regulation? (Contd)

Query: This is an example of what type of regulation?

Answer: Primarily it is procedural because it provides

the rules by which a business entity may elect its taxclassification. It provides rules for when an electionmust be made and how the election is made. Theregulation also contains some substantive provisionsas it provides for default tax classifications for thosenon- corporate business entities which dont make anelection.


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Regulations

How do regulations become law? A regulation project is assigned to a task force by

Treasury Dept. Attorneys, economists, CPAs in Chief Counsels Office

create draft regulations. Draft regulations are Proposed Regulations which are

published in the Federal Register as a TreasuryDecision.

Publication is followed by a 30-day comment period comments can be written or oral.

Possible IRS actions after expiration of the comment period: Issue final regulations, withdraw for further work, no action

Proposed Regulations are not binding authority.


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Regulations (Contd)

Final Regulations published in the FederalRegister have the full force and effect of law.

Temporary Regulations, fast-track

regulations, are issued in response to arecent tax law change or judicial decision. 1998 law change required that Temporary

Regulations be simultaneously published asProposed regulations

Which lapse if not finalized within 3 years of issuance. While Temporary Regulations are in existence,

they have the full force and effect of law.


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Revenue Rulings Official pronouncements of the IRS position with respect to theapplication of tax law provision(s) to a hypothetical set of facts. Organization: (1) Issue, (2) Facts, (3) Law, (4) Analysis, (5) Holding Sec. 213(d)(1)(A) defines medical care to include amounts paid for the

diagnosis, cure, mitigation, prevention of disease or for the purpose of

affecting any structure or function of the body Reg. Sec. 1.213-1(e)(1)(ii) indicates that deductible medical care

expenses include amounts paid for operations or treatments affectingany portion of the body, but not if the expenditure is merely beneficial tothe general health of the individual.

Sec. 213(d)(9) specifically excludes most cosmetic surgery fromdeductible medical care, unless the surgery or procedure is necessary toameliorate a deformity arising from, or directly related to, a congenitalabnormality, a personal injury resulting from an accident or trauma, ordisfiguring disease. (See INDIV: 42,052).


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Revenue Rulings Example

Query: Taxpayer had breast cancer andwas required to have a mastectomy(most of her breast tissue wasremoved). To improve her mentaloutlook and her physical appearance,her physician suggested breast

reconstructive surgery. May taxpayerdeduct the cost of her breastreconstruction surgery?


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Revenue Rulings: Example (Contd) Answer : Rev. Rul. 2003-57, IRB 2003-22.Medical care does not include cosmetic surgery or other similar

procedures, unless the surgery or procedure is necessary toameliorate a deformity arising from, or directly related to, acongenital abnormality, a personal injury resulting from anaccident or trauma, or a disfiguring disease. Section213(d)(9)(A). Cosmetic surgery means any procedure that is

directed at improving the patient's appearance and does notmeaningfully promote the proper function of the body or preventor treat illness or disease. Section 213(d)(9)(B).

A 's cancer is a disfiguring disease because the treatment results

in the loss ofA

's breast. Accordingly, the breast reconstructionsurgery ameliorates a deformity directly related to a disease andthe cost is an expense for medical care within the meaning of213(d) that A may deduct under 213 (subject to the limitationsof that section).


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Revenue Rulings as Authority Taxpayers may rely on a Revenue Ruling, if the facts of

taxpayers case are substantially similar to that of theRuling.

The IRS follows Rulings but is not bound by them(except as to the specific set of facts.)

Courts (esp. general federal courts, not the Tax Court)tend to give greater weight to Rulings as authority.

Published in both IRB and CB Citing Rev. Rulings

Rev. Rul. 2004-75, 2004-31 IRB 109 Rev. Rul. 81-122 1981-1 CB 202 Tax services (CCH, RIA) are an important locator tool for Rulings

Tax services will also let you know if the Ruling has been revoked,revised, modified or limited.


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Revenue Procedures

The how to rules Statements issued bythe National Office, after review, of theprocedures that affect the rights andobligations of taxpayers or the generalpublic with respect to the tax law or whichshould be a matter of public knowledge


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Revenue Procedures (Contd)

Revenue Procedures are statements of official IRSpositions, and therefore, may be cited as precedent.

Published in IRB and CB May be located through tax services. Citations Rev. Proc. 2006-49, 2006-47 IRB 936

Examples How to file a private letter ruling request? How to request a change in accounting method? Update regulations through Rev. Proc. changes in standard

mileage rate business, charitable, medical miles.


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Private Letter Rulings (PLR) National Office response to a specific taxpayers inquiry

about the interpretation of the tax law as applied to thetaxpayers unique set of facts.

Value as precedent: May be relied upon by individual taxpayer making request

(attach to relevant return) Generally not considered as precedent by Service, but

May be cited as substantial authority to avoid certain penalties The IRS and Courts have relied on PLRs as authority when it helps

their analysis. Not published, but made available through Freedom of Information

Act (FOIA) Citation pre 2000 PLR 9046004

post 2000 PLR 200835025


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PLRs (Contd)

How to make a ruling request? See first Rev. Proc. of the year, e.g. Rev.

Proc. 2008-1. The PLR format is similar to that of Revenue

Rulings: (1) Issue(s), (2) Facts, (3) Applicablelaw, (4) Analysis and (5) Holding(s).


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PLR Example Query? Taxpayer would like to install a pool as treatment

for his back problem. However, he does not want to incur

the expense if the cost is not deductible as a medicalexpense. May the taxpayer request a letter ruling on hisproposed transaction?

The first Revenue Procedure of the year provides the requirements formaking a ruling request. However, a Revenue Procedure is alsotypically released which states those issues on which the Service willnot issue a private letter ruling.

See Rev. Proc. 2008-3, Section 3: Areas in which Rulings orDetermination Letters will not be issued.

(26) Section 213. --Medical, Dental, Etc., Expenses. --Whether a capital expenditure for an item that is ordinarilyused for personal, living, or family purposes, such as aswimming pool, has as its primary purpose the medicalcare of the taxpayer or the taxpayer's spouse or dependent,or is related directly to such medical care.


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Other Forms of Letter Rulings Technical Advice Memoranda (TAMs)

IRS letter ruling issued in response to a request froma District Director or Appeals Officer for an answer toa technical question that arises during an audit

Taxpayer specific, therefore, not generally authoritative asprecedent, although may be relied upon by IRS and courts asa statement of position.

Field Service Advices (FSAs) National Office advice to IRS agents, Attorneys, or

Appeals Officers who seek advice on how to treat adeveloping issue or on the hazards of litigating aparticular issue

Again not generally authoritative, although may be reliedupon by Service and courts as a statement of position.


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Other Forms of Letter Rulings(Contd)

Determination Letters District Directors response to a request for the tax

consequences of a specific taxpayer transaction, forexample, Is this pension plan we set up a qualifiedplan?

Only applicable to taxpayer making request

Note: TAMs, FSAs, Determination Letters notpublished by IRS, but made available to publicthrough FOIA

Best source to locate these releases tax services.


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Miscellaneous Technical Guidance

Announcements and Notices Quick notice to public

Often issued as a precursor to an official release,such as a Ruling, Procedure or Regulations.

Published in IRB and CB

General Counsel Memoranda (GCM)

Response of Chief Counsels office to aninternal request for legal analysis to be usedin a Revenue Ruling, PLR, or TAM.


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Miscellaneous Technical Guidance(Contd)

Technical Memoranda (TM) Transmittal letter from Commissioner of IRS to Asst. Secretary of

Treasury for Tax Policy explaining Final Regulations.(Information now contained in Preamble to Final Regulations.)

Action on Decision Chief Counsels response to a court decision which is adverse toan IRS position what should the Service do?

Acquiesce (follow the decision), not acquiesce (dont follow thedecision except as to specific taxpayer), do nothing.

Internal Revenue Manual Policies, procedures and guidelines governing the operations

and organization of the IRS.


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Additional IRS Releases Informational Releases

Information Letters National or District Office letters in responseto a taxpayer request for guidance that point the taxpayer to awell-established interpretation of the Code.

Technical Information Releases (TIRs) notice of a technicaldevelopment that must be acted upon quickly.

News Releases items of general interest.

Audit Related Releases Closing Agreements agreement between the Service and a

taxpayer regarding a particular tax issue or liability. Audit No-change Letter a letter to a taxpayer that audit will not

result in change to taxpayers liability.


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Additional IRS Releases (Contd)

Compliance-Related Releases Publications self-help booklets with general

tax information organized in a topical manner. Instructions to Tax Forms how to fill out

forms


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Additional Releases Value asPrecedent

Query: To what extent do these variousadditional informational and IRS technicalreleases constitute legally binding authoritythat may be relied upon by taxpayers andpractitioners and bind the Service? Why?

Answer: These IRS releases do not constitute

binding authority to be relied upon bytaxpayers and tax practitioners. This isbecause of their nature and character.


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Additional Releases Value as Precedent (Contd) Audit releases, for example, relate only to the audit process at

hand. Thus, they are limited in application to the specific

taxpayer for the specific tax year. Informational releasesand compliance related releases provide generalinformation or general guidelines about the application ofthe tax law without reference to specific fact scenarios.Without reference to facts general advice about the tax law

is not binding. As we know, the outcome of the applicationof the tax law can be changed by subtle variation in facts.Recall the two cardinal rules of tax research (1) knowthe facts, (2) read the Code.

With respect to the technical releases, they also do notconstitute binding legal authority. This is because releasessuch as General Counsel Memoranda, Action on Decisionand the Internal Revenue Manual are documents generatedfor internal use. Although not legally binding, however, theymay certainly provide useful inside information indicatingthe official IRS stance on a specific matter

r11 chp 02 1 chapter 2 administrative sources

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