General Practice, Solo & Small Firm DivisionMagazine
Tax Research A Hierarchy of Authorities
BY SUSAN LINDLEY AND RON S. JONG
© American Bar Association. All rights reserved. Susan Lindley and Ron S. Jong practice primarily tax law in Boulder, Colorado, with the law firm of Lindley & Jong, LLP.
It’s inevitable. When you do tax research, you run across citations to various authorities: opinions of several different courts, statutory and regulatory cites, and a wide array of IRS pronouncements. What’s the hierarchy of these authorities? Which authorities are potentially binding, and on whom—your clients, the IRS, the opposing side in a civil suit, all of the above?
Even if tax is not your practice specialty, you may find yourself meeting with an IRS Revenue Agent to discuss why the facts of your client’s case do not support the additional tax the agent alleges is owed. You are unable to reach an agreement. Soon after, you receive a "Revenue Agent’s Report" from the agent. The report sets out why the agent believes tax is owed, based upon the facts. While a revenue agent cannot settle cases based on the law, only on the facts, the report nevertheless cites a confusing array of legal authorities in support of the agent’s position.
Because you disagree with the report, you plan to administratively appeal the agent’s findings to the Appeals Office through a "letter of protest" (see Your Client Got a Notice From the IRS! Where Do You Start?, Susan Lindley and Ron S. Jong, The Compleat Lawyer, Summer 1996, Vol. 13, No. 3). Your letter will need to cite to legal authority to support your position and rebut that of the agent. How much weight should you give to the authorities cited in the agent’s report and how do you find the most authoritative cites for the positions you take in your letter of protest?
When attempting to support a tax position or assess the strength of your opponent’s position, it is crucial that you be familiar with the various authorities that might be cited in a tax case, as well as with the hierarchy of those authorities. This will help determine how much weight to give each cite. The Revenue Agent’s Report you wish to rebut cites to several statutes of 26 U.S.C. § 1 et seq., the Internal Revenue Code (I.R.C.) and its regulations, and to various court decisions. No problem there, you say, as any lawyer should be familiar with these authorities and know how much weight to assign to the cites. However, tax research does have its peculiarities.
Hierarchy of Primary Sources
Primary sources of law come from a branch of government. The I.R.C. comes from Congress, the legislative branch. Court opinions come from the judicial branch. Treasury regulations as well as a slew of other materials come from the IRS, in its role as an administrative function of the executive branch.
A hierarchy exists for these primary authorities. After the Constitution, the I.R.C., case law from the Supreme Court, and cases from the taxpayer’s own circuit are at the top of the pecking order. Cases from other appellate circuits are only persuasive. Some non-binding trial court cases might not be given any deference or acknowledgment at all by the court or the IRS. Regulations have different weights depending on the type of regulation. IRS pronouncements have varying degrees of weight; taxpayers can rely on only some pronouncements and only for some purposes.
Constitution. Yes, the Constitution is the supreme law of the land. However, it is unlikely that you’ll be citing to the Constitution in tax research unless you’re representing a tax protestor.
Statutes. I.R.C. sections, like any other federal statute, are laws passed by Congress and are applicable nationwide. As with any legal research, pay close attention to applicable and relevant statutes as they will likely be your strongest authority. Tax research rarely depends on just one section of the I.R.C., however, so keep an eye out for related I.R.C. sections or other statutes, in addition to the obvious ones. Note that the I.R.C. is often not cross-referenced. You should check available intra-code cross reference tables.
Also, while substantive provisions of revenue acts may be carried over into the I.R.C. itself, effective dates often are not, so you may need to go back to the revenue act to find effective dates. Assuming that the enactment date is also the effective date is dangerous. Note that tax treaties with other countries are basically treated like statutes and may come into play in the international tax arena; for example, when non-U.S. source income or foreign citizens are involved.
Regulations. Always check to see whether regulations have been promulgated for relevant statutes. This is especially important in tax research as specifics, such as dollar amount thresholds, may appear in the regulations but not in the statutes. Moreover, regulations often present a clearer, though longer, explanation of what the law is (according to the IRS). There are several categories of Treasury Regulations promulgated by the IRS. Not all regulations are created equal.
Treasury regulations can be either "legislative" or "interpretive." Legislative regulations are promulgated for a specific statute by the IRS under specific grant of authority from Congress. That is, Congress required the IRS to write a regulation for a particular statute. Legislative regulations are more authoritative than interpretive regulations, which are promulgated pursuant to I.R.C. § 7805(a), which grants the IRS a general rule-making authority.
Legislative and interpretive regulations may also be issued as final, temporary, or proposed regulations. Final regulations have undergone notice and comment and are issued as Treasury Decisions with a T.D. prefix. Temporary regulations differ in that they must expire within three years. Proposed regulations have not gone through notice and comment and have no more weight than a position espoused in a brief, according to a tax court case.
A caveat on regulations: many regulations are outdated but still on the books—always check whether a regulation has been superseded or is no longer applicable. Also note that the IRS might not consider itself bound by an adverse court decision regarding a regulation, unless the court is the U.S. Supreme Court, and so will not necessarily withdraw that regulation.
Court decisions. Like all other areas of the law, if the Supreme Court says so then it is so. Its decisions are the law until or unless Congress later changes the law with subsequent new legislation. There are three trial courts that decide tax issues: the U.S. Tax Court, U.S. district courts, and the U.S. Court of Federal Claims. Tax court and district court decisions are appealed to the court of appeals for the taxpayer’s geographical residence while Court of Federal Claims cases are appealed to the Court of Appeals for the Federal Circuit.
Since there are 11 circuits based upon taxpayer residence, the tax court effectively has 11 courts of appeal. Check whether a federal circuit opinion may be more favorable to your client than court of appeals decisions in the client’s home circuit—you don’t want to be in a position of having filed a losing position in one forum if the other forum would have been a winner.
The revenue agent’s report cites to opinions of the tax court, a district court, and several courts of appeals, none of which are in your client’s circuit. You know from first-year law school that decisions in other circuits may be persuasive but are not controlling on your circuit and so you are not overwhelmed by the agent’s cites. Moreover, your own research turns up a favorable Tax Court Memorandum Opinion (TCM), decided in your circuit, that is on-point with the facts of your case.
A TCM is an opinion of the tax court that is not officially published but is available from commercial publishers. As unofficial publications TCMs are not supposed to have precedential value nor are they supposed to be cited. TCMs are deemed to be unofficial decisions not worthy of official publication because the issue decided is considered well settled.
It is the policy of the tax court to not cite TCMs in official "regular" opinions (a published opinion written by one tax court judge that represents the ruling of the entire court) or "reviewed" opinions (a published opinion that is reviewed by all the judges of the tax court) since TCMs are not supposed to have precedential value. However, despite this policy, tax court opinions do sometimes cite TCMs. Moreover, the sitting chief judge of the tax court was quoted as making remarks, a few years back, that taxpayers should not discount the value of TCMs in advocating a position in tax court.
IRS pronouncements are below the primary sources of law in the hierarchy. The IRS issues numerous types of pronouncements, which are essentially statements of its positions on various issues. Pronouncements are meant to provide guidance to both taxpayers and IRS employees. They can be found in the Internal Revenue Bulletin and the Cumulative Bulletin. Depending on the type of pronouncement, it may be binding on the IRS, perhaps on a reliance theory. However, because pronouncements are not law and do not undergo notice and comment like final regulations, more than likely pronouncements will not be binding on taxpayers. Moreover, taxpayers can rely on only some pronouncements and only for some purposes.
Action on Decision. Ok, say that you’ve found a case, in another circuit, that rules in your favor. Again, a case in another circuit is not binding in your circuit, merely persuasive. Is there a way to determine the likelihood that you will prevail on that same issue in your own circuit? Look for an "Action on Decision" (AOD). An AOD may be issued by the IRS to let taxpayers know whether the IRS will acquiesce or non-acquiesce an adverse decision of the tax court or whether the IRS will appeal a decision of a trial or appellate court.
With an AOD, the IRS puts taxpayers on notice of what its position will be on that issue in future litigation. AODs will also reveal the rationale for the IRS’s decision. So if the IRS has acquiesced on your issue in another circuit, then you can feel better about your case; if they have not acquiesced, you know you are more likely to be facing a battle.
Jumping Off Points
For a reasonably priced and good guide to locating specific authorities, we recommend Federal Tax Research: Guide to Materials and Techniques by Gail Levin Richmond, 5th Edition (University Textbook Series, The Foundation Press, Inc., 1997).
If you can’t locate the law librarian or get a copy of Richmond’s book, then get a current copy of the I.R.C. and regulations and start checking court reporters for decisions. The IRS pronouncements can be found (with difficulty due to poor indexing) in the Internal Revenue Bulletin (published weekly) or the Cumulative Bulletin (a six-month compilation of the Internal Revenue Bulletin).
Better yet, get a CD-ROM tax library. There are several CD-ROM libraries available that include the I.R.C., regulations, court opinions, IRS pronouncements, and other information. They are word searchable and cheap. Look to commercial publications, treatises, and articles for help in understanding the concepts and finding cross-references. Finally, as in all legal research, make sure you check to see if the authority you wish to rely on is currently valid. Tax laws change frequently.
Revenue Rulings and Revenue Procedures. Revenue Rulings apply the tax laws to a hypothetical fact pattern; these rulings are basically examples. If your factual situation is substantially the same as the one in the Revenue Ruling, you can be fairly confident in relying on the legal outcome stated in the Revenue Ruling. At the very least, reliance on the applicable Revenue Ruling will prevent penalties. Revenue Procedures provide guidance on IRS practice and procedural matters. Again, Revenue Rulings and Procedures do not undergo notice and comment and fall below final and temporary regulations in the pecking order.
Private Letter Rulings (PLR). PLRs are in effect advance rulings the national office of the IRS will sometimes give to an inquiring taxpayer. Along with a fee, the taxpayer provides the IRS a fact pattern. The IRS applies the law, as it sees it, to the facts and responds in writing with its proposed tax treatment. However, the IRS is not bound to follow its own ruling unless the PLR is coupled with a closing agreement and the taxpayer’s actual facts are as set forth in the PLR. In any case, no other taxpayer may rely on the PLR, only the taxpayer for whom the PLR was issued. PLRs can, however, give other taxpayers an indication of the IRS’s thinking on a particular fact pattern.
Technical Advice Memorandum (TAM). TAMs are similar to PLRs in that a fact pattern is submitted to the IRS’s national office for a ruling on what the tax treatment should be under the facts submitted. Unlike a PLR, which is submitted by a taxpayer, TAMs are submitted by an IRS district director who has a question arising from tax return audits. TAMs do not have precedential value for taxpayers, although the district director is bound by the advice.
Determination Letter. Determination letters are similar to PLRs but are issued by district offices and address the status of exempt organizations and pension plans.
General Counsel Memorandum (GCM). GCMs are issued by the Office of Chief Counsel and provide the reasoning behind revenue rulings, letter rulings, and technical advice memoranda. GCMs do not have precedential value.
Publications for use in preparing returns. You’ve seen these—for example, Publication Number 535 on business expenses. These publications are provided by the IRS as their attempt at user-friendly guidance to taxpayers on how to prepare a return. Note that these publications are the IRS’s statement on how they want to see returns prepared. If you disagree with one of these publications, check the law. When the law says otherwise, the publication is wrong. Be careful with these publications—the IRS takes the position that a taxpayer may not rely on them as authority against a contrary IRS position even if the publication was right on point.
Other Legal Publications
Back in law school, your legal research instructor drilled into your head the notion that any lawyer worth her salt will first go read the statutes. You’ve taken this notion to heart and consider yourself a pretty good legal researcher. But, alas, after reading and rereading what you hope are the applicable I.R.C. sections, you find yourself heaping unspeakable invectives upon the perverse bureaucrat who wrote the statute. Here is where commercial publications and treatises, with their editorial comments, might come to the rescue.
Commercial publishers include Commerce Clearing House, Research Institute of America, and Tax Analysts. Besides unofficially publishing the I.R.C., regulations, and IRS pronouncements, they also publish newsletters, looseleaf services, and provide editorial comments.
The editorial comments are often helpful in explaining the tax law and may provide valuable cross-references to other I.R.C. provisions and other sources of law. These publications can provide a conceptual framework to understand the law and the issues and may be a good place to start when you are unfamiliar with a particular issue.
Remember, however, these commercial publications are not the law. The editorial comments are merely one writer’s interpretation of what the law says, and are sometimes wrong. Be careful. Articles in legal publications (such as GP Solo & Small Firm Lawyer) and law review articles may also be helpful in navigating through the jungle of tax laws. Treatises provide a big picture reality check and are fertile ground for helpful cites to other authority. CL