Treasury Regulations

Thinking about the I.R.C.

Primary Authority

Constitution

Internal Revenue Code

(U.S.C. Title 26)

Treasury Regulations
 Overview
 Congress passes tax laws which are included in the Internal
Revenue Code.
 The legislative process was discussed extensively in our previous
class.

 Congress has given the Treasury Department the authority to issue

Treasury Regulations.
 Treasury Regulations are official interpretations issued by the
Department of the Treasury of how a particular IRC section is to
be applied.

 Treasury Regulations are also known as Federal Tax Regulations

Federal Register

https://www.federalregister.gov/

The Federal Register is a daily publication that consists of four types of entries:

1. Presidential Documents, including Executive orders and proclamations.

2. Final Rules and Regulations

3. Proposed Rules and Regulations

4. Notices, including scheduled hearings and meetings open to the public, grant
applications, administrative orders, and other announcements of government
actions.
Federal Register (FR)

 The FR is cited by volume and

page number __ FR __
Volume # Page #

Link to pdf version of federal register by GPO

Federal Rulemaking Process
The Federal Administrative Procedure Act sets forth the procedures that the
Department of the Treasury and other agencies must follow to establish
regulations.
First, IRS announces a Proposed Regulation
Step
by issuing a Notice of Proposed Rulemaking
1 (NPR). The NPR is published in the Federal
Register.
Second, the IRS holds hearings and the
Step
public is invited to participate. The
2 proposed regulation may be modified or the
IRS may withdraw the regulation issuing a
Notice of Withdrawal.

Step
Finally, the IRS issues a Final Regulation and
3 publishes it in the Federal Register. Final
Regulations are issued as Treasury
Decisions.
 Federal Rulemaking Process
 Compliance with the Administrative Procedures Act is important
because if the procedure is not followed the taxpayer may
challenge the validity of the regulation.
Three (3) Levels of Treasury Regulations
Proposed Regulations
(Issued to the public in a Notice of Proposed
Rulemaking)

Temporary Regulations
(Issued in Treasury Decisions)

Final Regulations
(Issued in Treasury Decisions)
Proposed Regulations
 Proposed regulations provide for a public comment period (30-60
days) during which interested parties may submit written
comments and participate in hearings.

 Proposed regulations are not binding and courts generally do

not give them judicial deference, but provide useful insight as
to how the IRS is interpreting a code section.

 It may take months or years before a proposed regulation is

adopted as a final regulation.
Proposed Regulations
 Exception to the rule: When the IRS indicates in the Notice of Proposed
Rulemaking that the proposed regulation may be relied upon by the public
to support a tax position.

 If the IRS indicates that a proposed regulation can be relied by the

public to support a tax position then the regulation is referred to as a
reliance regulation.

 Proposed regulations may be modified before they become final

regulations.
Final Regulations
 Final regulations are issued as Treasury Decisions.

 Final regulations have the highest authoritative value.

 Courts generally follow the language of final regulations.

 Final regulations must be signed by the Secretary of the Treasury.

Temporary Regulations
 Temporary regulations are usually issued when guidance is needed
urgently.

 Temporary regulations have the same authority as final regulations.

 Agency issues both proposed regulations and temporary regulations at

the same time, the proposed regulations trigger the normal comment
period, whereas the temporary regulations become effective upon
publication in the Federal Register.

 Temporary regulations are valid for three (3) years after issuance.

 Temporary regulations are designated by a T at the end of the

regulation number. (Example Treas. Reg. §1.702-3T)
Code of Federal Regulations (CFR)
 Regulations are codified by
subject in the Code of Federal
Regulations.

 The CFR is divided into Titles.

Title 26 contains Tax
Regulations.

 Numbering of the tax regulations

in the CFR correspond to the IRC
section that the regulation
interprets.
Numbering System for Treasury
Regulations

Title Part

31-Employment
40-Excise
301-Procedure and
Administration
Classification Tax Regulations
 Tax Regulations are classified in two types:

Legislative Interpretative
Regulations Regulations
Legislative Regulations

 Legislative regulations are specifically authorized in the tax

law enacted by Congress pursuant to a delegation by
Congress to the Secretary of the Treasury.

The law enacted by Congress contains the following language:

The Secretary shall prescribe such regulations as may be

necessary or appropriate to carry out the purposes of this
chapter including…
Legislative Regulations

 Legislative regulations are given the highest level of judicial

deference by courts.

 Chevron deference: A court will sustain a legislative regulation

unless it is arbitrary, capricious, or contrary to the law/statute
(Chevron U.S.A Inc. vs. Natural Resources Defense Council,
Inc.)
Interpretive Regulations
 Interpretive regulations are issued pursuant to I.R.C.§ 7805(a)
which grants the IRS authority to interpret the language of the tax
code when a statute/law does not specifically direct the Secretary to
issue regulations.

IRC § 7805(a) gives the Secretary the general authority to issue

‘‘all needful rules and regulations for the enforcement’’ of the
Code.
Interpretive Regulations

 Interpretive regulations are afforded less deference than

legislative regulations and are not sustained when the
interpretive regulation:

(1) is unreasonable and

(2) does not implement the mandate of Congress.

Procedural Regulations

 Procedural regulations address matters and issues

related to tax procedure such as how to make an
election to treat a transaction a certain way.

 Example: What is the procedure to obtain tax-exempt

status for a non for profit organization?
Caveat on Regulations
The Internal Revenue Code is amended frequently and the IRS
sometimes is unable to keep pace with the Code as amended by
Congress.

Compare the date of the IRC amendments to the date that the
respective regulation was issued to ascertain that the regulation
is current.

Also, delay by the Treasury Department in issuing new

regulations in response to amendments to the IRC carries no
weight for purposes of interpreting a code section.
Effect of not following Regulations
 Temporary and Final Regulations have the full effect and force
of the law.

 If a taxpayer challenges the validity of a regulation in a court of

law and looses, the taxpayer is subject to a 20% penalty imposed
on the portion of the underpayment of tax that results from
negligence or disregard of the rules and regulations and,
potentially, a $25,000 penalty for filing a case to delay the
implementation of tax laws.

 Fraud penalty: 75% of the underpayment that results from the

fraud (See IRC § 6663).
Which Regulations is the IRS Working On?

 IRS issues a Guidance Priority List each year to identify and

prioritize the tax issues that should be addressed through
regulations, revenue rulings, revenue procedures, notices, and other
published administrative guidance

 The list can be obtained from the IRS website.

Citation of Regulations

 Treas. Reg. § 1.72-16(a) (2018).

 Treas. Reg. § 1.338-4T(k) (2018).

 Treas. Reg § § 1.72-16(a), 1.338-4T(k) (2018).

Exercise
ABC Corp. is the largest real estate broker in the country. When
Congress was considering tax legislation, ABC Corp. spent
hundreds of thousands of dollars lobbying (unsuccessfully) against
the proposal, because it feared enactment of the proposal would
dampen home sales.

After the legislation was enacted, ABC Corp. spent additional tens
of thousands of dollars trying to influence officials at the Treasury
Department and the IRS to issue guidance as taxpayer-friendly as
possible.

Are these expenses deductible?