Court Invalidates IRS Attempt by Rev Proc to Change Legislative Regulation (8/5/19; 12/10/20)

In Bullock v. IRS, 401 F. Supp. 3d 1144 (D. Mont. 2019), here, the court held that the IRS's use of a Revenue Procedure to revoke a requirement of a legislative regulation, issued with notice and comment, was invalid.

Section 6033(a)(1) requires tax exempt entities to file a return “stating specifically the items of gross income, receipts, and disbursements, and such other information for the purpose of carrying out the internal revenue laws as the Secretary may by forms or regulations prescribe.”  The IRS long ago adopted notice and comment regulations requiring the tax-exempt entity to identify on Schedule B of Form 990 persons contributing more than $5,000 during the taxable year.  26 C.F.R. § 1.6033-2(a)(2)(ii)(f).

Rev. Proc. 2018-38 eliminated the IRS’s previous requirement contained at 26 C.F.R. § 1.6033 that exempt organizations report donor information.

Two states, Montana and New Jersey sued to have the Rev. Proc. declared procedurally invalid for lack of adoption with notice and comment.  Each of the states claimed that they were injured by the change because they could use the Form B disclosures for their own tax administration purposes and were allowed to access that IRS information under the requirements for the IRS to share tax return information with the states.

The district court held that the states met the predicate requirements (such as standing) so that it could reach the merits of the states' claims.  (I won't discuss those predicate requirements, but they are interesting reading.)

On the merits of the states' claims, the court held, in effect, that the regulations requirement that the tax-exempt entities report donor information on Schedule B of Form 990 was a "legislative" rule which could be changed only by another legislative rule which would require that it be adopted by notice and comment regulation rather than in subregulatory guidance such as a Rev. Proc.  This is a straight-forward application of the APA distinction between legislative and interpretive rules. [for an errata correction I made to this sentence, see note at bottom of this blog]

JAT Comments.

Tax Court Holds It Lacks Jurisdiction to Review Interest Suspension Under 6404(h) (1/28/14)

Professor Leslie Book has another great blog on a recent tax court case, Corbalis v. Commissioner, 142, T.C. ___, No. 2 (2014), here.  See Corbalis v Commissioner: Tax Court Holds it Has Jurisdiction to Review Interest Suspension Decisions (Procedurally Taxing Blog 1/28/14), here.

The Tax Court's summary of the decision is:

Petitioners seek judicial review of Letters 3477 denying their claim for interest suspension under I.R.C. sec. 6404(g) and stating that the determinations are not subject to judicial review under I.R.C. sec. 6404(h). Respondent has moved to dismiss for lack of jurisdiction. 

Held: The Court has jurisdiction under I.R.C. sec. 6404(h) to review denials of interest suspension under I.R.C. sec. 6404(g). 

Held, further, the Letters 3477 were final determinations for purposes of I.R.C. sec. 6404(h) even though petitioners' concurrent claims for abatement under I.R.C. sec. 6404(e) were still pending.

I refer readers to the Procedurally Taxing Blog entry for a further rounded discussion of the Corbalis decision.

I want to bore down on a subsidiary question addressed in the Corbalis decision -- the deference, if any, to be accorded Revenue Procedures.  The Revenue Procedure made a distinction between types of 6404 relief, stating that one type may be entitled to judicial review and not the other, but provided no reasoning.  The Court said:

In many cases, we have discussed the deference due to pronouncements of the IRS. See, e.g., Taproot Admin. Servs., Inc. v. Commissioner, 133 T.C. 202, 208-210 (2009) (dealing with a disputed revenue ruling), aff'd, 679 F.3d 1109 (9th Cir. 2012). Revenue rulings are "an official interpretation by the Service". Sec. 601.601(d)(2)(i)(a), Statement of Procedural Rules. By contrast, section 601.601(d)(2)(i)(b), Statement of Procedural Rules, states that "[a] 'Revenue Procedure' is a statement of procedure that affects the rights or duties of taxpayers or other members of the public under the Code and related statutes or information that, although not necessarily affecting the rights and duties of the public, should be a matter of public knowledge." A statement of procedure does not purport to be an official interpretation, and respondent does not argue here that the procedure is entitled to deference as an interpretation of section 6404. The revenue procedure, in respondent's terms, "provides guidance for circumstances" in which taxpayers may file a claim for abatement of interest that should have been suspended. Respondent argues only "an intuitive interpretation" of the procedural guidance. 

There is no reasoning in support of the conclusion stated in the revenue procedure, and we discern none for distinguishing between section 6404(e) requests and section 6404(g) requests. Thus, the revenue procedure is not entitled to deference. See Exxon Mobil Corp. v. Commissioner, 689 F.3d 191, 200 (2d Cir. 2012), aff'g 136 T.C. 99, 117 (2011). A procedural pronouncement cannot restrict or revise section 6404(h). See Commissioner v. Schleier, 515 U.S. 323, 336 n.8 (1995); Estate of Kunze v. Commissioner, 233 F.3d 948, 952 (7th Cir. 2000), aff'g T.C. Memo. 1999-344. The wording and context of the statute, supplemented by more general legal principles, control.

Are Revenue Procedures Influential In Interpreting the Law: Of Profits / Carried Interests and Administrative Billion Dollar Largess (9/7/12)

An issue that has surfaced in the Presidential campaign is whether the private equity and hedge fund industries have improperly benefited from "carried interests" that allow them to claim capital gains tax treatment for income that is, at its core, compensation for management services that, if characterized as such, would be taxed as ordinary income.  See e.g., Victor Fleischer, What’s at Issue in the Private Equity Tax Inquiry (NYT Deal Book 9/4/12), here, dealing with an extrapolation where fee waivers are transformed into carried interests.  The potential tax revenue is in the mega billions.  The industry benefiting from claiming capital gains treatment for carried interests claims from time to time that it is the law (an unsupported claim) and attempts to support the claim with the notion that the IRS has blessed the capital gains treatment in two Revenue Procedures.  The purpose of this blog entry is to address the role of Revenue Procedures and dispel any the notion that the IRS has blessed a particular substantive tax treatment in a Revenue Procedure.

The balance of this blog consists of a revision that I have just made to my Federal Tax Procedure book as a substitution for the discussion of Revenue Procedures at Ch. 2 II.B.6.d. (beginning on p. 52 of footnoted version and p. 35 of nonfootnoted version).  Please note that the footnote numbers are interim from the draft for the next edition.

(2) Revenue Procedures.

Revenue Procedures are IRS publications advising the public of internal management and procedural matters. They thus differ from Revenue Rulings which advise the public of IRS substantive law positions. n170 For example, the IRS uses Revenue Procedures to advise the public about detailed requirements for requests for private letter rulings (discussed immediately below).  In this sense, they act as “check lists” that taxpayers and practitioners follow in order to seek private letter rulings.  Like Revenue Rulings, Revenue Procedures are published in the Internal Revenue Bulletins and Cumulative Bulletins.