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Administrative Regulations and Rulings

Administrative Regulations and Rulings. Administrative Regs and Rulings (Second Primary Source). Treasury and IRS Pronouncements  Regulations  Revenue Rulings  Revenue Procedures  Letter Rulings. Overview of Regulations (2 of 2). Treasury Department Administers U.S. tax laws

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Administrative Regulations and Rulings

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  1. Administrative Regulations and Rulings

  2. Administrative Regs and Rulings (Second Primary Source) • Treasury and IRS Pronouncements Regulations Revenue Rulings Revenue Procedures Letter Rulings

  3. Overview of Regulations(2 of 2) • Treasury Department • Administers U.S. tax laws • Secretary of Treasury • Member of Presidential cabinet • IRS Commissioner appointed by Pres. (Mark Everson) • A division of Treasury Department

  4. Regulations Are the IRS’s / Treasury’s official interpretation of the IRC §7805(a) “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.”

  5. Regulations Thus, being statutorily mandated, regs are binding (are, in fact, written by staff of IRS office of Chief Counsel, who is also a Treasury Assistant General Counsel) Two (unofficial) Classifications • Legislative • General

  6. Regulations Legislative • Written by Treasury at direction of Congress, essentially carrying out a law making function (Congress does not want to address the detail and complexities of the issue), and • Have the effect of law. • Have the greatest precedential value of any Treasury pronouncement.

  7. Legislative Regulations (cont’d) Examples • §199 – Income Attributable To Domestic Production Activities. “(g) Regulations. The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section.”

  8. Legislative Regulation AuthorityIn Code Sec. 121(c)(2)(B) • (2) Sales and exchanges to which subsection applies. This subsection shall apply to any sale or exchange if— (A) subsection (a) would not (but for this subsection ) apply to such sale or exchange by reason of— (i) a failure to meet the ownership and use requirements of subsection (a) , or (ii) subsection (b)(3), and (B) such sale or exchange is by reason of a change in place of employment, health, or, to the extent provided in regulations, unforeseen circumstances.

  9. Legislative Regulations (cont’d) Examples • §385 – distinguished debt from equity in “thinly capitalized” corporations. • “(a) Authority to prescribe regulations - • The Secretary is authorized to prescribe such regulations as may be necessary or appropriate to determine whether an interest in a corporation is to be treated for purposes of this title as stock or indebtedness (or as in part stock and in part indebtedness).”

  10. Regulations General • All other • Supreme Court views general regulations as having the force and effect of law, unless they conflict with the statute [Maryland Casualty Co., 251 US 342 (1920)] • Although binding, they are subject to challenge, but challenger bears the burden of proof

  11. Regulations General (cont’d) • Authorized by §7805(a) • “(a) Authorization • 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.”

  12. Regulations General (cont’d) • Are Treasury’s Official interpretation of the Statute • Are issued first as Proposed regs (w/o yet having the effect of law) • When finally issued, are issued as a Final Regulation. • Note: Distinguish from Temporary Regs, discussed later. • Preambles to regulations (in the Treasury Decision) are a useful overview.

  13. Regulations General (cont’d) • For example Treasury Decision “T.D. 9209” issued July 12, 2005 contains the final regulations governing Code Sec. 179. • Reg. § 1.179-2 • Reg. § 1.179-4 • Reg. § 1.179-5 • Reg. § 1.179-6 • The preamble in the TD explains

  14. Regulations – Preamble Excerpt • The changes made to section 179 by section 202 of JGTTRA were applicable for section 179 property placed in service by a taxpayer in taxable years beginning after 2002 and before 2006. Section 202 of JGTRRA expanded the definition of section 179 property to include off-the-shelf computer software (a category of intangible property) and increased the $25,000 and $200,000 limitation amounts of section 179(b)(1) and (b)(2), respectively, to $100,000 and $400,000, respectively. In addition, the $100,000 and $400,000 amounts were indexed annually for inflation for taxable years beginning after 2003 and before 2006. JGTRRA also modified section 179 to provide that any election or specification for taxable years beginning after 2002 and before 2006 may be revoked by the taxpayer with respect to any section 179 property, and that such revocation, once made, shall be irrevocable. ….

  15. Proposed Regulations Regulations are first issued in proposed format Are published in the Federal Register, and in the IRB. Public has 30-days to comment Treasury may then hold hearings for public testimony (depends on comments received) Then, Treasury may change, issue as proposed again, or issue as a Treasury Decision

  16. Proposed Regulations (cont’d) • Do not have effect of law, but are important in that • they give a strong clue to IRS’ position, and • what could be the final published position and guidance

  17. Proposed Regulation Example • Prop. Reg. sec. 1.707-7 (Nov. 26, 2004): “SUMMARY: This document contains proposed regulations relating to the treatment of transactions between a partnership and its partners as disguised sales of partnership interests between the partners under section 707(a)(2)(B) of the Internal Revenue Code (Code). The proposed regulations affect partnerships and their partners, and are necessary to provide guidance needed to comply with the applicable tax law. This document also provides notice of a public hearing on these proposed regulations.”

  18. Proposed Regulation Controversey Involving SE Tax on LLC Members

  19. Can LLC Members Meet the Limited Partner Exception? Prop. Reg. 1.1402(a)-2 • In Jan. 1997, for self-employment tax purposes, IRS issued Prop. Reg. 1.1402(a)-2 on the definition of a limited partner under Code Sec. 1402(a)(13) . • The proposed reg, which was to go into effect if and when it became a final reg, would have provided that a partner was a limited partner (thus not subject to SE tax) if: • he had no personal liability for partnership debts, or • had no authority to contract on behalf of the partnership, or • Did not participate in the partnership's trade or business for more than 500 hours during the taxable year.

  20. Prop. Reg. 1.1402(a)-2 • The proposed reg provide that an individual who is not a limited partner, is a general partner and net earnings from self-employment is included in the partner's distributive share of partnership income and loss.

  21. Congressional Reaction to Proposed Regs1997 Act Section 935 (no IRC Sec) • The 1997 Act provided that no temporary or final regulation could be issued or made effective by IRS on the definition of a limited partner under Code Sec. 1402(a)(13) before July 1, 1998. (Act § 935) . • Under a “Sense of the Senate” provision in the Senate-passed version of the '97 Act (H.R. 2014, § 734), the Senate had expressed its concern that Prop. Reg. 1.1402(a)-2 exceeded IRS's regulatory authority and would effectively change the law administratively without congressional action.

  22. 1997 Act Section 935 (no IRC Sec) • The Senate also expressed it's concern that the proposed regulation would have a substantial impact on the tax liability of certain individuals and affect those individuals' entitlement to social security benefits. • Since then, the Proposed Regulations have been neither withdrawn nor finalized.

  23. Treasury Decision Regulations, when issued in final form after public circulation and comment, hearings held if deemed necessary, and revised based on public comment and hearings, are issued as a Treasury Decision.

  24. Temporary Regulations (Distinguish from Proposed Regulations) Responsive to new law – for immediate guidance to taxpayers Effective immediately upon publication – not subject public comment or hearings Fully in effect and must be followed until superceded (IRS issues in proposed format simultaneously) Expires 3 years after issuance (§7805) (However, superceding regulations not always ready).

  25. Code Sec. 7805(b) • Effective Date - • “Retroactivity of regulations. -- •      (1) In general. -- •      Except as otherwise provided in this subsection, no temporary, proposed, or final regulation relating to the internal revenue laws shall apply to any taxable period ending before the earliest of the following dates: •           (A) The date on which such regulation is filed with the Federal Register. (cont’d)

  26. Code Sec. 7805(b) • Effective Date – (cont’d) •           (B) In the case of any final regulation, the date on which any proposed or temporary regulation to which such final regulation relates was filed with the Federal Register. •           (C) The date on which any notice substantially describing the expected contents of any temporary, proposed, or final regulation is issued to the public.”

  27. Example of Effective Date Provisions in Final Reg. Sec. 1.121-4 • (l) Effective date. This section is applicable for sales and exchanges on or after December 24, 2002. • (j) Taxpayers who would otherwise qualify under §§1.121-1 through 1.121-4 to exclude gain from a sale or exchange of a principal residence before December 24, 2002 but on or after May 7, 1997, may elect to apply §§1.121-1 through 1.121-4 for any years for which the period of limitation under section 6511 has not expired. .

  28. Example of Effective Date Provisions in Final Reg. Sec. 1.121-4 • (k) Audit protection. The Internal Revenue Service will not challenge a taxpayer's position that a sale or exchange of a principal residence occurring before December 24, 2002 but on or after May 7, 1997, qualifies for the section 121 exclusion if the taxpayer has made a reasonable, good faith effort to comply with the requirements of section 121. Compliance with the provisions of the regulations project under section 121 (REG-105235-99 (2000-2 C.B. 447)) generally will be considered a reasonable, good faith effort to comply with the requirements of section 121. (The Temp Reg §1.121-3T(l). contains similar provisions)

  29. Citing Regulations(1 of 2) • Numerical System • 1st number: Type • 2nd number: Section • 3rd number: Reg. number • T: Denotes temporary reg. • Example: Treas. Reg. 1.162-5

  30. Citing Regulations(2 of 2) • Commonly encountered types of Regulations • 1: Income tax • 20: Estate tax • 25: Gift tax • 31: Employment tax • 301: Procedural matters

  31. Assessing Regulations • Taxpayers asserting regulations are improper bear burden of proof • Disregard of regs may result in a negligence penalty • §6662: 20% of underpayment

  32. Example of the difficulty of having regulations declared invalid.Tax Court Now Agrees That Reg Denying Deduction For Interest On Business Tax Deficiency Is ValidEdward A. Robinson, III, (2002) 119 TC No. 4

  33. Edward A. Robinson, III, (2002) 119 TC No. 4 • A divided Tax Court has held that Reg. § 1.163-9T(b)(2)(i)(A), which denies a deduction for interest paid by an individual on a deficiency arising from an unincorporated business, is valid. • Accordingly, the Tax Court will no longer follow its earlier decisions in Redlark, James, (1996) 106 TC 31, revd & remd (1998, CA9) 81 AFTR 2d 98-1483 and Kikalos, Nick, (1998) TC Memo 1998-92, revd (1999, CA7) 84 AFTR 2d 99-5933, in which it had found the reg to be invalid.

  34. Edward A. Robinson, III, (2002) 119 TC No. 4 • Section 163 generally allows the deduction of interest paid or accrued during the tax year. • TRA ’86 added Sec. 163(h) which prohibits any deduction for "personal interest." • Section 163(h)(2) provides in part that personal interest "means any interest allowable as a deduction ... other than (A) interest paid or accrued on indebtedness properly allocable to a trade or business...."

  35. Edward A. Robinson, III, (2002) 119 TC No. 4 • Issue: Is interest paid to the IRS on a tax deficiency relating to a Schedule C business “interest paid or accrued on indebtedness properly allocable to a trade or business...." • Temp. Reg. 1.163-9T(b)(2)(A) provides that all interest paid by an individual with respect to a tax deficiency is personal interest and hence nondeductible. • Robinson tried to convince the Tax Court that the Temporary Regulation is invalid. He failed.

  36. Edward A. Robinson, III, (2002) 119 TC No. 4 • The summary of the legislation prepared by the Joint Committee, published 13 days after the Conference Committee reached agreement. stated that "interest on underpayments of tax (other than certain deferred estate taxes) is treated as personal interest under the provision." • The TRA ‘86 official Conference Report, which was published 20 days later, simply stated that "personal interest also generally includes interest on tax deficiencies." • More than six months later, the Joint Committee staff published its Blue Book concerning TRA ’86, which stated that personal interest also includes interest on underpayments of individual federal, state, or local income taxes notwithstanding that all or a portion of the income may have arisen in a trade or business.

  37. Edward A. Robinson, III, (2002) 119 TC No. 4 • The opinion noted that every appellate court that addressed this issue reached the conclusion that the statutory language at issue is silent or ambiguous as to what constitutes "indebtedness properly allocable to a trade or business." • Therefore, Judge Chabot focused on whether the challenged Temporary Reg. was a permissible construction of the statute. • The question was not whether the adopted interpretation was the best or the only interpretation of the relevant statutory language but, rather, whether it was reasonable, i.e., whether the Temporary Regulation reasonably harmonized the plain language, origin, and purpose of the statute it purported to implement.

  38. Edward A. Robinson, III, (2002) 119 TC No. 4 • An interpretative Regulation is to be upheld if it "implements the congressional mandate in some reasonable manner.“ (Vogel Fertilizer Co., 455 US 16 , 70 L Ed 2d 792) • The plurality opinion acknowledged that the Joint Committee staff summary was not the official legislative history for TRA ’86 • In Redlark, an earlier decision, the Tax Court gave no weight to the statement in the Blue Book because it conflicted with the language in the official legislative history and prior case law.

  39. Edward A. Robinson, III, (2002) 119 TC No. 4 • According to Robinson, the Blue Book warrants consideration whether or not the legislative history of Section 163(h) is inconclusive or inconsistent with Temp. Reg. 1.163-9T(b)(2)(i)(A) . • Therefore, the plurality opinion (signed by six of the 15 participating judges, with five others concurring) stated that because Section 163(h)(2)(A) is ambiguous, the Temporary Regulations were valid because they were a permissible construction of the statutory language. This conclusion was based primarily on the Joint Committee documents, which supported the interpretation of the statutory language embodied in the Regulations.

  40. Edward A. Robinson, III, (2002) 119 TC No. 4 • The concurring opinion of Judge Thornton, joined by Judges Gerber and Gale, expressed concern that the plurality opinion could contribute to confusion over the interpretive weight that the Tax Court would accord to non-authoritative congressional staff material. • All five of the dissenting judges rejected the plurality's reliance on the Blue Book as support for its conclusion

  41. Edward A. Robinson, III, (2002) 119 TC No. 4 • In his dissenting opinion, Chief Judge Wells made three primary arguements: • That the meaning of Section 163(h)(2)(A) could be discerned from a plain reading of the statutory language. • Prior decisions had defined the required nexus between an interest expense on a deficiency and a trade or business. Congress did not indicate any intent to overturn these prior decisions. • The plurality placed undue emphasis and reliance on the Blue Book in validating the questioned Regulation.

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