To Rely On or Not to Rely On? Sub-Regulatory Tax Guidance in Turbulent Times: Sometimes criticism of IRS guidance seems justified, other times not so much.

• Date: 01 January 2021
• Author: Lerner, Matt

Taxpayers face an ever-increasing melange of sub-regulatory guidance from the Internal Revenue Service and the Treasury Department. (2) This guidance can take the form of proposed regulations, revenue rulings, notices, announcements, private letter rulings, and myriad other documents. Taxpayers in the middle of planning transactions, preparing returns, or tax controversies are often left wondering whether they can rely on such materials or take a position contrary to them, and whether and how such documents may be used against them. Those mysteries have no pat answers, but experience and policy statements suggest certain basic conclusions to help one navigate the confusion.

On March 5, 2019, Treasury and the IRS released a policy statement reaffirming their commitment to the tax regulatory process (hereafter the Policy Statement). The Policy Statement responded to growing concern that Treasury and the IRS were using sub-regulatory guidance to avoid the notice-and-comment process established by the Administrative Procedure Act. (3) The Policy Statement reiterated that sub-regulatory guidance does not have the force and effect of law. However, that does not mean IRS agents and Appeals officers will not follow such guidance, nor does it mean courts will not be influenced by the views of the agency charged with enforcing the tax laws. Moreover, such guidance may influence the level of comfort a tax practitioner provides in a written tax opinion. Below, we address the different types of guidance and offer observations on how they may affect planning transactions and preparing and defending tax returns. We focus on the role such guidance plays in the substantive interpretation of the law and on possible penalty avoidance. We consider the ways in which both the IRS and taxpayers may use such guidance offensively or defensively.

Substantive Interpretations

PROPOSED REGULATIONS AND GUIDANCE PUBLISHED IN INTERNAL REVENUE BULLETIN

Proposed regulations do not have the force and effect of law. Taxpayers generally may not rely on them to establish the substantive interpretation of the Internal Revenue Code for planning purposes, unless there is an express statement in the preamble that permits such reliance. The Internal Revenue Manual states that if there are no final or temporary regulations currently in force addressing a particular matter, but there are proposed regulations on point, the Office of Chief Counsel ordinarily will not take any position in litigation or advice that would yield a result that would be harsher to the taxpayer than what the taxpayer would be allowed under the proposed regulations. (4)

The IRS publishes certain types of guidance in the Internal Revenue Bulletin (IRB): revenue rulings, revenue procedures, notices, and announcements. The documents do not have the same effect as Treasury regulations, because they are not issued through notice-and-comment rulemaking. However, they may be used as precedents in the disposition of other cases and may be cited or relied upon for that purpose. (5)

IRS agents will typically follow proposed regulations and IRB guidance when they are averse to the taxpayers position, absent an existing final or temporary regulation to the contrary. Even when recognizing that proposed regulations are not law, agents often view them as the best available interpretation of an ambiguous statute and adopt their view of the words' meaning when favorable to the IRS. Likewise, agents typically follow IRS-favorable guidance from the IRB and will reject arguments to the contrary, absent materially different facts...