July 21, 2020
Reliance on Treasury Department and IRS Tax Guidance
The Treasury Department and Internal Revenue Service
withdraw a proposed treasury regulation based on the
(IRS) use several forms of guidance to help taxpayers
comments they receive. After considering the public’s
understand the Internal Revenue Code (IRC) and to inform
comments, the agencies may issue a final regulation and
taxpayers of Treasury and the IRS’s position on particular
publish it in the Federal Register as a treasury decision.
tax issues. For the most part, this tax guidance can be split
into three categories: (i) treasury regulations, (ii) sub-
Treasury and the IRS issue temporary treasury regulations
regulatory guidance published in the Internal Revenue
when they conclude that the public requires immediate
Bulletin (IRB), and (iii) unpublished sub-regulatory
guidance before the publication of final treasury
guidance (i.e., sub-regulatory guidance not published in the
regulations. Temporary treasury regulations also are
Federal Register or the IRB). Former IRS Chief Counsel
published in the Federal Register as treasury decisions.
have remarked that the type of guidance issued reflects a
When Treasury and the IRS issue a temporary treasury
balance between taxpayers’ need for certainty and Treasury
regulation, they simultaneously issue a corresponding
and the IRS’s need for latitude in administering tax laws.
proposed treasury regulation. IRC Section 7805(e)
mandates that temporary treasury regulations expire three
In a tax dispute with Treasury or the IRS, taxpayers can rely
years after issuance.
on treasury regulations and sub-regulatory guidance
published in the IRB (such as revenue rulings, revenue
Pursuant to a memorandum of agreement between Treasury
procedures, notices, and announcements) to support their
and the Office of Management and Budget (OMB) dated
tax position, as long as the guidance is not contrary to or
April 11, 2018, tax regulatory actions that are likely to
inconsistent with the law. Taxpayers are generally unable to
result in any of three types of tax regulations are subject to
rely on unpublished sub-regulatory guidance in tax
another layer of review. These are (i) regulations that create
disputes. Given that Treasury and the IRS often issue
serious inconsistencies or interfere with actions taken or
unpublished sub-regulatory guidance in response to time-
planned by another agency; (ii) regulations that raise novel
sensitive issues, taxpayers may choose to exercise caution
legal or policy issues; and (iii) regulations that have an
when the need for clarity and certainty is at its greatest, and
annual nonrevenue effect on the economy of $100 million
might wait for Congress to potentially enact clarifying
or more. Subject to listed exceptions, the OMB’s Office of
legislation or for courts to address the legal issue in
Information and Regulatory Affairs (OIRA) reviews these
litigation. That said, Treasury and the IRS sometimes may
tax regulatory actions in accordance with Executive Order
include a statement in their unpublished sub-regulatory
12866. During the OIRA review process, OIRA may meet
guidance conveying that they will not take a position
with business representatives, nongovernmental
inconsistent with or contrary to the guidance.
organizations, and the public to discuss these actions.
This In Focus analyzes the ability of taxpayers to rely on
In litigation disputing the validity of a treasury regulation,
valid treasury regulations and the more common types of
Treasury and the IRS may argue that a court should show
sub-regulatory tax guidance.
deference to their interpretation of a statute that they
administer. Historically, courts distinguished tax
Common Types of Treasury and
regulations promulgated under specific statutory grants of
IRS Tax Guidance
authority from tax regulations promulgated under IRC
Section 7805(a), which provides the Treasury Secretary
Treasury Regulations
with a general power to issue “all needful rules and
Treasury regulations are the most significant type of tax
regulations” to enforce the IRC. Courts showed greater
guidance issued by Treasury and the IRS, and courts
deference to Treasury and the IRS when they promulgated
generally afford them the greatest deference. Treasury
tax regulations pursuant to a statute that expressly called for
regulations can provide guidance on newly enacted
the agencies to create detailed rules to implement the statute
legislation and tax issues that arise with respect to pre-
or fill a particular gap. However, following the U.S.
existing laws. Taxpayers may rely on final and temporary
Supreme Court’s decision in Mayo Foundation for Medical
treasury regulations, but may not rely on proposed treasury
Education and Research v. United States, courts now apply
regulations unless they contain an express statement
the judicial deference framework established by the
permitting reliance.
Supreme Court in Chevron U.S.A. Inc., v. Natural
Resources Defense Council to evaluate whether a treasury
Generally, proposed treasury regulations are published in
regulation is valid, regardless of whether the agencies acted
the Federal Register as a Notice of Proposed Rulemaking,
under a specific statutory grant of authority or IRC Section
which invites the public to review and comment on the
7805(a).
proposed regulation. Treasury and the IRS may modify or
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Reliance on Treasury Department and IRS Tax Guidance
Revenue Rulings
in the IRB, but later sub-regulatory guidance can render a
Revenue rulings are the IRS’s official interpretation of tax
notice or announcement moot.
laws, related statutes, tax treaties, and regulations as applied
Treasury has stated it will not take positions inconsistent
to a specific set of facts. They are published in the IRB.
with an announcement or a notice published in the IRB
Taxpayers may rely on revenue rulings when the taxpayer’s
when the announcement or notice is in effect. In
facts are substantially the same as the taxpayer’s facts
determining the validity of the IRS’s action in an
addressed in the revenue ruling. Revenue rulings foster
announcement or notice, it is unclear if courts will afford
uniformity and enable taxpayers to make informed
decisions about their tax obligations.
Treasury and the IRS any deference.
Revenue rulings do not carry the same level of authority as
Administrative Procedure Act
treasury regulations. Taxpayers can rely on a revenue ruling
Challenges to the Validity of
published in the IRB, but later sub-regulatory guidance can
Treasury and IRS Tax Guidance
render a revenue ruling moot. Treasury has stated it will not
Section 553 of the Administrative Procedure Act (APA)
take positions inconsistent with a revenue ruling published
generally requires federal agencies to follow notice-and-
in the IRB when the revenue ruling is in effect. Courts have
comment rulemaking procedures before issuing, amending,
not come to a consensus on what, if any, deference they
or repealing legislative rules (i.e., rules that carry the force
should afford to the IRS’s interpretation in a revenue ruling,
of law). The APA does not require federal agencies to apply
but they usually apply the framework set forth in the U.S.
these same procedures to interpretive rules. The IRS
Supreme Court’s opinion in Skidmore v. Swift & Company,
contends, in Internal Revenue Manual 32.1.1.2.6, that most
under which a court gives the IRS’s interpretation weight
treasury regulations are interpretive rules, because the tax
that is consistent with the strength of the agency’s
statute that the treasury regulation implements “contains the
persuasiveness.
necessary legal authority for the action taken and any effect
of the regulation flows directly from that statute.”
Revenue Procedures
Contemporary case law suggests that some of the tax
The IRS announces administrative practices and procedures
guidance that the IRS designates as interpretive rules are, in
through revenue procedures published in the IRB. While a
fact, legislative rules subject to APA notice-and-comment
revenue ruling informs the public of Treasury and the IRS’s
rulemaking procedures. In Chamber of Commerce of United
position on the application of a law, treaty provision, or
States v. Internal Revenue Service, a district court
regulation to a specific set of facts, a revenue procedure
determined that a temporary treasury regulation was not an
may provide return filing or other instruction concerning
interpretive rule because it was substantive. The temporary
that position. Revenue procedures cover diverse topics,
treasury regulation adjusted the computation for
such as the adoption of accounting methods, the
determining whether a corporation should be treated as a
computation of certain expenses, the methods of electronic
surrogate foreign corporation. The court held that the
filing, and the types of transactions that Treasury and the
adjustments were “not mere interpretations of the statute,
IRS are scrutinizing. Taxpayers may rely on revenue
but substantive modifications to the application of the
procedures when their facts are substantially the same as
statute.”
those described in the revenue procedure.
The court relied on the U.S. Supreme Court’s
decision in Chrysler Corporation v. Brown, which
Like revenue rulings, revenue procedures do not have the
describes legislative rules as substantive rules “affecting
same level of authority as treasury regulations. Taxpayers
individual rights and obligations.”
can rely on a revenue procedure published in the IRB, but
Another district court case, Bullock v. IRS, suggests a court
later sub-regulatory guidance can render a revenue ruling
could invalidate any type of tax guidance if the court finds
moot. Treasury has stated it will not take positions
the guidance constitutes a legislative rule and Treasury and
inconsistent with a revenue procedure published in the IRB
the IRS have failed to adhere to APA notice-and-comment
when the revenue procedure is in effect. Some courts have
rulemaking procedures. The district court found that a
applied Sk idmore deference when reviewing the IRS’s
revenue procedure was a legislative rule because it
interpretation in a revenue procedure, but again there is no
effectively amended a prior legislative rule—a treasury
consensus on the proper standard of deference, if any.
regulation promulgated after a public notice-and-comment
Announcements and Notices
period. In response to the decision in Bullock, the IRS
published Notice 2019-47 in the IRB, which provides
The IRS makes public pronouncements through
penalty relief for taxpayers who relied on the revenue
announcements and notices when time is of the essence.
procedure invalidated by the district court.
Announcements have immediate or short-term value. They
can summarize laws and regulations without making
The application of APA notice-and-comment rulemaking
substantive interpretations, explain regulations that are
procedures to Treasury and IRS tax guidance is a quickly
imminent, and notify taxpayers of approaching deadlines.
developing area of law. Treasury and IRS tax guidance may
Notices may contain substantive interpretations of the IRC
also face procedural challenges to their validity under the
or other laws. Treasury and the IRS have used notices to
Paperwork Reduction Act, the Regulatory Flexibility Act,
inform taxpayers of the types of transactions that they are
and the Congressional Review Act.
scrutinizing. Treasury and the IRS may publish
announcements and notices in the IRB. Generally,
Milan N. Ball, Legislative Attorney
taxpayers can rely on announcements and notices published
IF11604
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Reliance on Treasury Department and IRS Tax Guidance


Disclaimer
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https://crsreports.congress.gov | IF11604 · VERSION 1 · NEW

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