THE LEGISLATIVE PROCESS AND SOURCES OF TAX
INFORMATION
Despite the many broad restrictions that exist, numerous opportunities for abuse
remain. Moreover, they will exist as long as the tax system encourages particular
economic activities. Such restrictions also clearly make tax planning more difficult. As
we mentioned in the introductory chapter, effective tax planning requires that the tax
and nontax implications of proposed transactions be considered for all parties to the
transaction. But as we just discussed, simply determining the tax implications of
proposed transactions is not a trivial undertaking: It requires knowledge of tax rules
that are inherently ambiguous. A crucial step in minimizing the ambiguities of the tax
implications of proposed transactions is seeking the proper authority for applying a
particular tax rule. The remainder of this chapter reviews how one does just this for
U.S. tax rules. This should provide some idea of how the tax professionals you may
hire spend their time. It will also help make it feasible for you to research your own tax
problems, and it should give you a better idea of how the tax system is laid out.
Primary and Secondary Authorities
We can distinguish between primary and secondary types of authority for
determining the appropriate tax treatment for a transaction. The most important
primary authority is the Internal Revenue Code (IRC). The Code provides statutory
authority. Gathering authoritative support for the proper tax treatment of a particular
transaction should always begin here. Other primary authorities include treasury
regulations, judicial decisions, administrative pronouncements (for example, by the
IRS), and Congressional Committee Reports. Secondary authorities consist primarily
of tax professionals (for example, accountants and lawyers), commercial tax services,
and tax journals. We now discuss each of these authorities. To develop an
understanding of how the primary authoritative sources can help clarify the way a
transaction should be treated for tax purposes, we must understand the legislative
process, the means by which tax bills are enacted. The passage of such legislation
gives rise to the most dramatic changes in tax rules.
Regulations and Revenue Rulings That Result from the Passage of a Tax
Act
Once a bill is passed, the Treasury is generally the first to interpret it. It issues
Treasury Regulations, which provide general interpretations. Interested parties (such
as tax lawyers, tax accountants, and other affected taxpayers) can request hearings
on proposed regulations. The Treasury Department also issues Revenue Rulings,
which are specific interpretations of existing or new laws. These result from a request
for rules clarification from a taxpayer with a particular set of actual or proposed
transactions. For example, a rulings request might be made when two corporations
planning a tax-free reorganization wish to obtain IRS assurance that their merger will
not be taxable to the target company’s shareholders; that is, the IRS will bless the
merger, in advance of the transaction, as being a tax-free reorganization. Revenue
Rulings represent official IRS policy. The Treasury will publish a rulings request from
a taxpayer as a Revenue Ruling if it is of sufficient general interest. Otherwise, it issues
a private letter ruling. Private rulings are available to the public under the Freedom of
Information Act, but they cannot be cited as precedent in a court of law. Still, they may
be valuable as an indicator of IRS policy. Another form of letter rulings is technical
advice memoranda. When auditing a technical tax matter, the IRS district or appeals
office may refer the matter to the IRS national office in Washington, D.C., for technical
advice concerning the appropriate tax treatment. The answer is made available to the
public as a letter ruling known as a technical advice memorandum. Revenue Rulings
are published in the weekly Internal Revenue Bulletins. They are also published in the
“Current Matters” section of the Commerce Clearing House (CCH) and by Research
Institute of America (RIA) tax services (described more fully later in this chapter).
Because Revenue Rulings may be revoked or amended, their current status must be
determined before relying upon them. Merten’s Law of Federal Income Taxation
contains a convenient current status table, as do the CCH and RIA tax services.
The Role of Judicial Decisions
Judicial decisions also play an extremely important role in interpreting the tax
rules. The two court levels are courts of original jurisdiction and courts of appeal.
Courts of original jurisdiction include the U.S. Tax Court, U.S. district courts, and the
U.S. claims court. Only U.S. district courts offer jury trials. The U.S. Tax Court hears
only tax cases, and the presiding judge is more familiar with the tax law than is the
typical judge presiding in other courts. Courts of appeal include the 13 circuit courts
(numbered 1 through 11 plus the District of Columbia plus the Federal Circuit Court)
and the Supreme Court. Legal precedent is circuitspecific—that is, different circuits
can hand down different decisions based on identical facts. When this happens, the
Supreme Court is often called upon to provide a final, overarching answer. Decisions
of the U.S. Tax Court for the more important cases are published in the Tax Court
Reporter. Memorandum decisions of the U.S. Tax Court (dealing primarily with
questions of fact with only one judge writing the decision) are published in CCH’s Tax
Court Memorandum Decisions and in RIA’s TC Memorandum Decisions. All tax-
related cases from all of the other courts (district courts, claims court, circuit courts of
appeal, and the Supreme Court) are published in CCH’s U.S. Tax Cases and RIA’s
American Federal Tax Reports, among other places.
Secondary Authorities
To this point we have discussed almost exclusively sources of primary authority:
statutory (Internal Revenue Code), administrative (Treasury Regulations, Treasury
Rulings), and judicial (cases from the U.S. Tax Court, district courts, claims court,
circuit courts, and Supreme Court). For the nonexpert, secondary authorities are
probably more useful, particularly the commercial tax services. The two most popular
tax services are CCH’s Standard Federal Tax Reporter and RIA’s United States
Federal Tax Reporter. Each section of these services begins with a layperson’s
discussion of an area of the tax code, introducing the subject in general terms. This is
followed in turn by (1) the text of the IRC section (the statutes established by the
passage of tax legislation), (2) the text of Treasury Regulations (Treasury’s
interpretation of the Code), (3) editorial explanations (sometimes including tax-
planning tips), and, finally, (4) synopses of court decisions, Revenue Rulings, and
other Treasury pronouncements that pertain to the Code section, along with citations
to complete documents. Another extremely useful reference is the Bureau of National
Affairs’s Tax Management Portfolios, of which there are several hundred. Each
portfolio, 50–200 pages long, deals with a specific tax topic (such as sale-and-
leaseback transactions or corporate acquisitions planning). The material proceeds
from the general to the specific and offers excellent bibliographies. Also useful are the
frequent excerpts from the congressional record that pertain to the enactment of
relevant legislation. Note, too, the helpful sample contracts or wordings to be included
in the corporate minutes. These are likely to pass muster with the taxing authority to
secure the desired tax treatment. Another useful reference is CCH’s Tax Articles, which
lists articles and their abstracts by Code section number, by topic, and by author. In
addition, the RIA tax service offers its “Index to Tax Articles,” organized by Code
section number.
