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Administrative sources of federal tax law originate in the executive branch of
the government.
Specifically, the Treasury Department is the executive body responsible for
administering the federal tax laws of the United States.
And the Internal Revenue Service, or IRS, a division of the Treasury,
is charged with collecting taxes and enforcing the Internal Revenue Code.
To facilitate these objectives, Code Section 7805A
authorizes the Treasury Secretary or delegate to prescribe rules and
regulations necessary to administer the code.
It states, quote, except where such authority is expressly given by this title
to any person other than an officer or employee of the Treasury Department,
the Secretary shall prescribe all needful rules and regulations for
the enforcement of this title, including all rules and regulations as may be
necessary by reason of any alteration of law in relation to internal revenue.
In other words, this code section allows the IRS to issue legally binding rules and
regulations concerning Title 26 of the United States Code of Federal Regulations.
Consequently, most administrative sources of Federal tax law
are issued by either by the US Treasury Department or the IRS.
There are five main types of administrative pronouncements.
Regulations, revenue rulings, revenue procedures, letter rulings, and
other pronouncements.
Let's briefly review each type.
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Regulations are issued by the US Treasury to provide official
interpretive guidance on the meaning and application of the Internal Revenue Code.
Regulations take one of three different forms.
Final regulations, also called treasury decisions, have the full force and
effect of law.
However, before a regulation can be considered final, it must first be
previewed in proposed form, which allows time for public commentary and revision.
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Note that proposed regulations do not have the effect of law.
The third form, temporary, typically results from a congressional or
judicial change in the tax law or its interpretation.
Temporary regulations have the same authoritative weight as final regulations
as they tend to consider issues requiring immediate guidance.
However, because they have not been subjected to public feedback, temporary
regulations are also simultaneously issued in the proposed form and
expire three years after issuance.
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Regulations follow the same organizational numbering system as the code.
However, a prefix is added to indicate the type of issue to which they relate.
For example,
a prefix of 1 indicates that the regulation pertains to income tax issues.
While a prefix of 301 relates to procedural matters.
Returning to the code section example from earlier,
the treasury's official interpretive guidance for
applying code section 1231 is found in its treasury regulation 1.1231.
Note that the numbering system for regulation subparts and
beyond rarely collate with code sections.
You probably know or expect that the Internal Revenue Code is rather large, but
how large is it really?
While there is some debate, Andrew Grossman,
an attorney at the US Congress Joint Committee on Taxation,
places the code at about 2,600 pages long.
He knows that this is about two-and-a-half times the length of Steven King's novel
IT, except you replace scary clown with accounting methods.
One explanation of the sheer length of the code is that it is difficult to concisely
explain algebraic concepts.
One of the worst such attempts was former Section 341(e),
relating to collapsible corporations, where one sentence had
more than 450 words, twice as many as in Abraham Lincoln's Gettysburg Address.
But let's think about that for a minute.
If the code is a massive 2,600 pages and the treasury regulations explain and
interpret the code, how large are the regulations?
Well, from one publisher,
the regulations comprise nearly this many separate volumes.
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From a different perspective, the Tax Foundation estimates that as of 2015,
the code and regulations combined exceed 10 million words,
not counting appendices or references.
This amount reflects a 621% increase in
the number of words over the past 60 years or so.
Wow is right.
The second major type of administrative pronouncements are revenue rulings.
Issued by the National Office of the IRS, revenue rulings indicate
how the IRS will apply the tax law to a specific transaction or situation.
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Because they are not directly approved by the Secretary of the Treasury, and
deal with more restricted issues,
revenue rulings do not carry the same weight as regulations.
They are, however, legally binding to all taxpayers.
The third type of administrative pronouncements are revenue procedures,
which as the name implies, deal with internal practices and
procedures of the IRS.
Revenue procedures aim to increase taxpayer compliance, and help the IRS
administer tax law more efficiently by answering important questions,
such as where to file a tax return, or how to change a fiscal year end?
The fourth type of administrative pronouncements are letter rulings,
which are specific responses to tax-related inquiries.
They take several forms including private letter rulings,
which typically concern proposed transactions.
Technical advice memoranda, which deal with completed transactions.
And determination letters, which deal with lower level, non-controversial IRS issues.
For brevity, let's focus on private letter rulings,
which are issued by the national office of the IRS.
These rulings are labeled private because they are only provided for
a substantial fee at a taxpayer's request.
They provide specific and narrowly defined anticipatory guidance on
how the IRS will treat a transaction before it occurs.
That is a proposed transaction.
Because such rulings are based on taxpayer-specific facts,
they technically are only binding on the taxpayer making the request.
However, when an anonymized version of the letter ruling is disclosed publicly,
it can sometimes be used by other taxpayers for guidance and
the avoidance of certain accuracy-related penalties.
The IRS issues about 2,500 private letter rulings each year.
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Finally, there are numerous other miscellaneous administrative
pronouncements, which are larger issue by the IRS.
This include the Internal Revenue Bulletin, Field Service Advices,
Chief Counsel Memoranda, and Publications.
You will learn more about these and other pronouncements throughout the course.
Michael P Donohoe, PhD, CPAAssociate Professor of Accountancy and PwC Faculty Fellow
