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Chapter 2 Administrative Sources ©2013 CCH Incorporated. All Rights Reserved. 4025 W. Peterson Ave. Chicago, IL 60646-6085 800 248 3248 CCHGroup.com.

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Presentation on theme: "Chapter 2 Administrative Sources ©2013 CCH Incorporated. All Rights Reserved. 4025 W. Peterson Ave. Chicago, IL 60646-6085 800 248 3248 CCHGroup.com."— Presentation transcript:

1 Chapter 2 Administrative Sources ©2013 CCH Incorporated. All Rights Reserved W. Peterson Ave. Chicago, IL CCHGroup.com

2 Administrative Sources of Tax Law A Primary source of tax law comes from Administrative Authorities. –The Executive branch of the government is responsible for enforcing the laws created by Congress. –The Department of Treasury, part of the Executive branch, is headed by Secretary of Treasury, a Presidential cabinet appointee. The Treasury is charged with enforcing the Internal Revenue Code and administering the tax laws. Contemporary Tax Practice Chapter 2 2 of 36

3 Administrative Sources of Tax Law (Cont’d) Much of this responsibility has been delegated to a division of the Treasury, the Internal Revenue Service (IRS), which is headed by the Commissioner of Revenue Services (also appointed by President). –In practice, the IRS handles the daily administration of the tax law system. Contemporary Tax Practice Chapter 2 3 of 36

4 The Role of the IRS & Pronouncements The primary duty of the 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, the Service explains and interprets the Code and other tax laws. Contemporary Tax Practice Chapter 2 4 of 36

5 The Role of the IRS & Pronouncements (Cont’d) Guidance comes through IRS Pronouncements which constitute the primary source of Administrative Tax Authority. –IRS Pronouncements include the following: Regulations Revenue Rulings Revenue Procedures Private Letter Ruling Technical Advice Memoranda Field Service Advice Contemporary Tax Practice Chapter 2 5 of 36

6 Regulations Treasury/IRS definitive interpretation of Code provisions. –Regulations have the full force and effect of law – if the interpretation 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 substantive requirements for a particular Code Section. –Procedural - “how to” rules enforce rights and duties under the tax law. Contemporary Tax Practice Chapter 2 6 of 36

7 Regulations (Cont’d) Citing a Regulation –Reg. Sec (e)(1)(i) – Prefix is 1 = Income Tax Regulation, 213 is Code Section (medical expense deduction), 1 is the first regulation under this Code Section (e)(1)(i) are paragraphs and subparagraphs that deal with definitions, in particular, of medical care. Contemporary Tax Practice Chapter 2 7 of 36

8 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 provides rules for how to determine whether the taxpayer’s business entity should be classified as a partnership or an association taxed as a corporation for tax purposes. Reg. Sec provides that an entity which is not classified as a corporation under Reg may elect its tax classification and provides the manner by which a taxpayer may make such an election. It also provides default classification rules for those situations in which the entity (not classified as a corporation) does not elect its tax classification. Contemporary Tax Practice Chapter 2 8 of 36

9 Classifying a Regulation? (Cont’d) 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 tax classification. It provides rules for when an election must be made and how the election is made. The regulation also contains some substantive provisions as it provides for default tax classifications for those non- corporate business entities which don’t make an election. Contemporary Tax Practice Chapter 2 9 of 36

10 Regulations How do regulations become law? –A regulation project is assigned to a task force by Treasury Dept. Attorneys, economists, CPAs in Chief Counsel’s Office create draft regulations. –Draft regulations are Proposed Regulations which are published in the Federal Register as a Treasury Decision. Publication is followed by a 30-day comment period – comments can be written or oral. Contemporary Tax Practice Chapter 2 10 of 36

11 Regulations (Cont’d) Possible IRS actions after expiration of the comment period: –Issue final regulations, withdraw for further work, no action Proposed Regulations are not binding authority. ̶ Final Regulations published in the Federal Register have the full force and effect of law. Contemporary Tax Practice Chapter 2 11 of 36

12 Regulations (Cont’d) –Temporary Regulations, fast-track regulations, are issued in response to a recent tax law change or judicial decision law change required that Temporary Regulations be simultaneously published as Proposed 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. Contemporary Tax Practice Chapter 2 12 of 36

13 Revenue Rulings Official pronouncements of the IRS’ position with respect to the application 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 Contemporary Tax Practice Chapter 2 13 of 36

14 Revenue Rulings (Cont’d) Reg. Sec (e)(1)(ii) indicates that deductible medical care expenses include amounts paid for operations or treatments affecting any portion of the body, but not if the expenditure is merely beneficial to the general health of the individual. Sec. 213(d)(9) specifically excludes most cosmetic surgery from deductible medical care, unless the surgery or procedure is necessary to ameliorate a deformity arising from, or directly related to, a congenital abnormality, a personal injury resulting from an accident or trauma, or disfiguring disease. (See INDIV: 42,052). Contemporary Tax Practice Chapter 2 14 of 36

15 Revenue Rulings: Example Query: Taxpayer had breast cancer and was required to have a mastectomy (most of her breast tissue was removed). To improve her mental outlook and her physical appearance, her physician suggested breast reconstructive surgery. May taxpayer deduct the cost of her breast reconstruction surgery? Contemporary Tax Practice Chapter 2 15 of 36

16 Revenue Rulings: Example (Cont’d) Answer: Rev. Rul , IRB “Medical care does not include cosmetic surgery or other similar procedures, unless the surgery or procedure is necessary to ameliorate a deformity arising from, or directly related to, a congenital abnormality, a personal injury resulting from an accident or trauma, or a disfiguring disease. Section 213(d)(9)(A). Cosmetic surgery means any procedure that is directed at improving the patient's appearance and does not meaningfully promote the proper function of the body or prevent or treat illness or disease. Section 213(d)(9)(B). Contemporary Tax Practice Chapter 2 16 of 36

17 Revenue Rulings: Example (Cont’d) A's cancer is a disfiguring disease because the treatment results in the loss of A's breast. Accordingly, the breast reconstruction surgery ameliorates a deformity directly related to a disease and the cost is an expense for medical care within the meaning of §213(d) that A may deduct under §213 (subject to the limitations of that section).” Contemporary Tax Practice Chapter 2 17 of 36

18 Revenue Rulings as Authority Taxpayers may rely on a Revenue Ruling, if the facts of taxpayer’s case are substantially similar to that of the Ruling. 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 , IRB 109 –Rev. Rul 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. Contemporary Tax Practice Chapter 2 18 of 36

19 Revenue Procedures The “how to” rules – Statements issued by the National Office, after review, of the procedures that affect the rights and obligations of taxpayers or the general public with respect to the tax law or which should be a matter of public knowledge Contemporary Tax Practice Chapter 2 19 of 36

20 Revenue Procedures (Cont’d) –Revenue Procedures are statements of official IRS positions, and therefore, may be cited as precedent. –Published in IRB and CB May be located through tax services. Citations – Rev. Proc , IRB 936 Contemporary Tax Practice Chapter 2 20 of 36

21 Revenue Procedures (Cont’d) –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. Contemporary Tax Practice Chapter 2 21 of 36

22 Private Letter Rulings (PLR) National Office response to a specific taxpayer’s inquiry about the interpretation of the tax law as applied to the taxpayer’s 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 Contemporary Tax Practice Chapter 2 22 of 36

23 Private Letter Rulings (PLR) (Cont’d) 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 post 2000 – PLR Contemporary Tax Practice Chapter 2 23 of 36

24 Private Letter Rulings (PLRs) (Cont’d) How to make a ruling request? –See first Rev. Proc. of the year, e.g. Rev. Proc –The PLR format is similar to that of Revenue Rulings: (1) Issue(s), (2) Facts, (3) Applicable law, (4) Analysis and (5) Holding(s). Contemporary Tax Practice Chapter 2 24 of 36

25 Private Letter Rulings (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 medical expense. May the taxpayer request a letter ruling on his proposed transaction? The first Revenue Procedure of the year provides the requirements for making a ruling request. However, a Revenue Procedure is also typically released which states those issues on which the Service will not issue a private letter ruling. Contemporary Tax Practice Chapter 2 25 of 36

26 Private Letter Rulings PLR Example (Cont’d) See Rev. Proc , Section 3: Areas in which Rulings or Determination Letters will not be issued. (26) Section Medical, Dental, Etc., Expenses. --Whether a capital expenditure for an item that is ordinarily used for personal, living, or family purposes, such as a swimming pool, has as its primary purpose the medical care of the taxpayer or the taxpayer's spouse or dependent, or is related directly to such medical care. Contemporary Tax Practice Chapter 2 26 of 36

27 Other Forms of Letter Rulings Technical Advice Memoranda (TAMs) –IRS letter ruling issued in response to a request from a District Director or Appeals Officer for an answer to a technical question that arises during an audit Taxpayer specific, therefore, not generally authoritative as precedent, although may be relied upon by IRS and courts as a statement of position. Contemporary Tax Practice Chapter 2 27 of 36

28 Other Forms of Letter Rulings (Cont’d) Field Service Advices (FSAs) –National Office advice to IRS agents, Attorneys, or Appeals Officers who seek advice on how to treat a developing issue or on the hazards of litigating a particular issue Again not generally authoritative, although may be relied upon by Service and courts as a statement of position. Contemporary Tax Practice Chapter 2 28 of 36

29 Other Forms of Letter Rulings (Cont’d) Determination Letters –District Director’s response to a request for the tax consequences of a specific taxpayer transaction, for example, Is this pension plan we set up a qualified plan? Only applicable to taxpayer making request Note: TAMs, FSAs, Determination Letters – not published by IRS, but made available to public through FOIA –Best source to locate these releases – tax services. Contemporary Tax Practice Chapter 2 29 of 36

30 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 Counsel’s office to an internal request for legal analysis to be used in a Revenue Ruling, PLR, or TAM. Contemporary Tax Practice Chapter 2 30 of 36

31 Miscellaneous Technical Guidance (Cont’d) 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 Counsel’s response to a court decision which is adverse to an IRS position – what should the Service do? Acquiesce (follow the decision), not acquiesce (don’t follow the decision except as to specific taxpayer), do nothing. Internal Revenue Manual –Policies, procedures and guidelines governing the operations and organization of the IRS. Contemporary Tax Practice Chapter 2 31 of 36

32 Additional IRS Releases Informational Releases –Information Letters – National or District Office letters in response to a taxpayer request for guidance that point the taxpayer to a well-established interpretation of the Code. –Technical Information Releases (TIRs) – notice of a technical development 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 taxpayer’s liability. Contemporary Tax Practice Chapter 2 32 of 36

33 Additional IRS Releases (Cont’d) 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 Contemporary Tax Practice Chapter 2 33 of 36

34 Additional Releases – Value as Precedent Query: To what extent do these various additional informational and IRS technical releases constitute legally binding authority that may be relied upon by taxpayers and practitioners and bind the Service? Why? Answer: These IRS releases do not constitute binding authority to be relied upon by taxpayers and tax practitioners. This is because of their nature and character. Contemporary Tax Practice Chapter 2 34 of 36

35 Additional Releases – Value as Precedent (Cont’d) 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 releases and compliance related releases provide general information or general guidelines about the application of the 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 application of the tax law can be changed by subtle variation in facts. Recall the two cardinal rules of tax research – (1) know the facts, (2) read the Code.. Contemporary Tax Practice Chapter 2 35 of 36

36 Additional Releases – Value as Precedent (Cont’d) With respect to the technical releases, they also do not constitute binding legal authority. This is because releases such as General Counsel Memoranda, Action on Decision and the Internal Revenue Manual are documents generated for internal use. Although not legally binding, however, they may certainly provide useful inside information indicating the official IRS stance on a specific matter. Contemporary Tax Practice Chapter 2 36 of 36


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