Monte A. Jackel is a managing director at PricewaterhouseCoopers LLP and a contributing columnist for Tax Notes. All views expressed herein are the personal views of the author and not necessarily those of any other person, firm, or organization.
In this article, Jackel follows up on a recent Tax Analysts forum on the tax guidance process and provides his insights on the process.
Copyright 2011 Monte A. Jackel. All rights reserved.
On July 22 Tax Analysts held a roundtable discussion of the tax guidance process run by Treasury's Office of Tax Policy (OTP) and the national office of the IRS Office of Chief Counsel (OCC). The roundtable discussion was pretty calm as those things go.1
Being one who has served as both an attorney in the OTP2 as well as an attorney in the national office of the OCC,3 I offer up some personal perspectives on the guidance process. Before discussing them, however, some background on the OTP and OCC is provided.
B. Office of Tax Policy
The website for the OTP states:
The Office of Tax Policy develops and implements tax policies and programs, reviews regulations and rulings to administer the Internal Revenue Code, negotiates tax treaties, provides economic and legal policy analysis for domestic and international tax policy decisions, and provides estimates for the President's budget, fiscal policy decisions, and cash management decisions. [Emphasis added.]
Given the stated objectives of the OTP, why is it that the office seems to be involved in the drafting of almost every piece of public guidance issued by the IRS? Is every item of public tax guidance an item relating to tax policy? What grant of authority authorizes the OTP to, in the words of its stated objectives, review all "regulations and rulings to administer the Internal Revenue Code"?
The code and the regulations are not perfectly symmetrical on this point. First, section 7701(a)(11) defines the term "Secretary" to mean the Treasury secretary and his delegate, whereas the term "Secretary of the Treasury" means only the Treasury secretary. Second, although section 7805(a) refers to the secretary to prescribe all needful rules and regulations for the enforcement of the code, reg. section 301.7805-1(a) states that "the Commissioner, with the approval of the Secretary, shall prescribe all needful rules and regulations for the enforcement of the Code." Which one is it?
Whatever the correct technical interpretation of those provisions, I do not quarrel with the OTP being involved in just about every regulation and revenue ruling project. The OTP attorneys are of the highest caliber and training. The problem this creates, however, is that in my experience the OTP is not staffed with enough attorneys to properly do the work necessary to keep guidance projects flowing on a current basis. If the OTP is to perform this role effectively and without undue burden on its attorneys, it needs more staff, and the staff who are hired should be paid a salary more comparable to that of their peers in private practice. Yes, I know there is a budget shortfall, but, as was pointed out at the Tax Analysts forum, being "cheap" at the front end results in much more cost at the back end. Or, to use a once popular advertising jingle, "You can pay me now or pay me later."
C. Office of Chief Counsel
The IRS website for the OCC states:
Mission: Serve America's taxpayers fairly and with integrity by providing correct and impartial interpretation of the internal revenue laws and the highest quality legal advice and representation for the Internal Revenue Service. [Emphasis added.]
The stated goal of the office, to provide "correct and impartial interpretation of the internal revenue laws," is a daunting task. There are many highly qualified attorneys in the OCC who clearly are not paid fairly for the hard work they perform. Similar to the OTP, the OCC is understaffed for the role it is asked to perform. Further, even when the office gets budget authority to fill positions it desperately needs, it must fill the positions for which it is budgeted. In other words, if the OCC is budgeted to hire two GS-12 attorneys, it cannot hire one GS-15 attorney, for example, even if the combined salary would have been the same. These rules, it is understood, come from the Office of Personnel Management, a place where some would say "all things are bureaucratic." Also, guidance projects have a tendency to linger or die if important people leave either the OTP or OCC -- and important people will continue to leave if they are not paid a competitive wage. That is just simple economics.
Moreover, many of the functions of the national office of the OCC need to be reorganized along functional business lines instead of the hodgepodge division of authority that exists today. For example, portions of the corporate and passthroughs divisions could be combined into one single unit known, for example, as Business Transactions, and the balance of the corporate division -- the function giving rulings and advice on some purely corporate aspects, say reorganizations and spinoffs -- could be a separate part of the corporate division. The balance of the national office could also be reorganized more along functional lines. Here the OCC could take a cue from the major accounting firms, which are organized much more along business lines to ensure a strong understanding of the business issues for which they are providing tax advice. That is even more critical for the OCC because understanding the business environment ensures that new guidance is useful and relevant to the manner in which taxpayers are operating.
D. The Guidance Process
1. Politics of the process. The review process of guidance projects by the OTP and the national office of the OCC has become more politicized over the years. Like it or not, decisions have been made based on outside pressures from interest groups and the personal views of the policymakers in both the OTP and OCC.
That clearly does not happen on the majority of the projects. But it does happen. Witness guidance on the codified economic substance doctrine. The OTP has taken the view that no guidance should be provided and has thus precluded commentators from adding meaningful feedback that could be used in developing authoritative guidance on this important provision. Witness also the partnership antiabuse rule of reg. section 1.701-2 in 1994-1995, which was driven for political reasons, and the self-employment tax proposed regulations in 1997-1998, which were stopped by political pressures.
I do not know what can be done to deal with the political pressures, but I think that if the employees working in both offices were compensated at a higher rate, more top talent could be hired and retained, and that problems such as that could be minimized.
2. Too many reviewers. There are just too many reviewers in the chain of command in both offices. It slows the guidance process enormously. True, many stakeholders in the OCC, and the IRS generally, have a need to have input on a guidance project. But in my experience, that review is not the real source of the clog in the guidance process. Rather, the delays are principally caused by political interactions between high-level officials in both the OTP and the OCC. The many responsibilities of those individuals in some cases do not leave them enough time to dedicate to reviewing the final version of a guidance project. Thus, the guidance process grinds to a halt. Also, on occasion the parties may disagree on the appropriate tax policy decision. When that occurs, the process is slowed by what some may call the game of "I can overrule you but you cannot overrule me." Lastly, officials from Treasury's Office of General Counsel, who are not part of the OTP, must approve regulations before they are issued as final regulations.
There should be a set procedure for Treasury and IRS review of regulations and rulings, and it clearly should be a much more streamlined process. No one can reasonably defend the slow pace of guidance over the past several years.
3. Playing God. Section 7805(b) provides that regulations can be issued with retroactive effect only in prescribed cases. However, there are no such restrictions imposed on revenue rulings, at least not by statute. A common practice is to issue a revenue ruling instead of a regulation to provide for full retroactivity of the IRS position. In those cases, the loss in deference level between a regulation and a revenue ruling is thought to be worth the ability to take a position to impose a retroactive date not supported by section 7805(b).
There seems to be no set process as to when, in cases of potential retroactivity, an item of guidance is to be a revenue ruling rather than a regulation. There should be.
Similarly, revenue procedures are often issued when there is questionable or no basis in the law for the relief provided in the revenue procedure; otherwise, a revenue ruling or regulation would have been issued. Revenue procedures should not be used as a vehicle to issue disguised statements of law when the law just does not support the legal position taken in the revenue procedure. This practice should stop, and the assistance of Congress should be sought to remedy the problem.
4. Manner of providing guidance. An issue that has come to the fore in today's guidance environment is that guidance is issued on a more informal basis, such as directives from the separate IRS divisions or questions and answers posted on the IRS website. Is it good for "guidance" to come out of the divisions of the IRS on important issues, like the Large Business and International Division directive on codification of the economic substance doctrine? The directive in that matter is clearly better than no guidance at all, but it is not "authority" under reg. section 1.6662-4(d)(3)(iii) and therefore cannot be cited to avoid an accuracy-related penalty under section 6662. Either the regulations under section 6662 have to be amended to incorporate directives such as this, as well as questions and answers posted on the IRS website,4 or those modes of providing guidance should be curtailed. Given the current slow pace of traditional forms of public guidance, limiting those practices would not be good for the tax system.
Also, the continued use of old proposed regulations with retroactive effective dates, when those regulations are neither finalized nor revoked, should be curbed by reviewing the outstanding guidance and either finalizing or removing the proposed regulation.5
5. Losing touch with the real world. Some guidance projects are clearly being avoided. It does not seem that this inaction is being caused solely by the complexity of the project, since complex projects are often published as guidance. Take, for example, the lack of guidance on the definition of significant purpose in section 6662, which drives the definition of tax shelter. Another example is the provision of guidance on the various statutory terms used in new section 7701(o), the economic substance statute. Are those projects being avoided because of their complexity, or because "uncertainty" is believed to be a better tax policy approach? Although some could find the OTP's and the OCC's reluctance to provide guidance on section 7701(o) understandable,6 how does one explain the failure to provide guidance on the meaning of the term "significant purpose" in section 6662, given that this provision was added to the statute in 1997 and is critical in defining how the penalty system works, as well as helping define the rules and regulations in Circular 230?
The guidance process is not easy to understand if viewed from the outside, or to participate in productively if on the inside. The people who work on projects in both the OTP and the OCC do a commendable job at a pay scale that is disproportionate to the effort and time expended. However, improvements can clearly be made to the guidance process. Hopefully others will continue this debate and provide their own thoughts and recommend ways to improve the guidance process.
1 See Amy S. Elliott, "Roundtable Panelists Bemoan Tax Guidance Processes," Tax Notes, Aug. 1, 2011, p. 473, Doc 2011-15950, or 2011 TNT 142-1.
2 From 1992-1994.
3 From 1994-1995 and 2004-2005.
4 The most well known of these are the questions and answers on Schedule UTP.
5 See, e.g., prop. reg. section 1.337(d)-3.
6 I am not one of them.
END OF FOOTNOTES
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