Gleaning IRS Guidance

CPAs who practice in the litigation support-expert testimony arena often seek professional guidance with regard to valuing unique assets, properties, or business interests. Sometimes, the guidance they seek relates to applying unusual valuation adjustments (discounts and premiums); adjustments for special market conditions; or preferred approaches, methods, and procedures in special circumstances. Typically, CPAs first research the relevant professional appraisal standards, appraisal literature, and appraisal organization publications and course materials. If these sources are insufficient, CPAs may next research the relevant statutory authority, judicial precedent, and administrative rulings, particularly if the valuations will be subject to judicial scrutiny.

When seeking professional guidance regarding litigation-related valuation, CPAs first consider statutory authority and judicial precedent regarding the specific litigation matter. However, if this guidance is still insufficient, CPAs may look to Internal Revenue Service (IRS) pronouncements. Even though such pronouncements may have no legal standing with regard to the subject litigation matter, numerous IRS pronouncements and publications provide professional guidance concerning preferred valuation methodologies, procedures, data sources, and reporting.
To use these pronouncements and publications effectively, CPAs need to understand the relationship and relative authority of IRS pronouncements, as well as their relative precedent value (or lack thereof) with regard to federal taxation valuation matters.

Federal tax law
The authorities that constitute "the law" with regard to federal taxes are the Internal Revenue Code (IRC) and the Code of Federal Regulations (CFR). The IRC codifies all federal tax laws including income, estate, stamp, gift, excise, and other taxes. To implement the IRC, the federal government designated the Treasury Department to supervise administration and enforcement of the federal tax laws and created the IRS. The IRC is the final statutory authority on federal taxation issues.

The current codification of the U.S. tax laws is the IRC of 1986. The IRC is divided into subtitles, chapters, subchapters, parts, subparts, sections, subsections, paragraphs, subparagraphs, and clauses. Subtitle A includes the tax law related to income taxes. Subtitle B includes the tax law related to estate and gift taxes. A sample citation would be, for example, IRC Section 2001 estate and gift tax imposition and rate of tax.

The CFR is the annual accumulation of executive agency regulations published in the daily Federal Register, combined with all regulations issued previously that are still in effect. Title 26 of the CFR pertains to the IRC, and Part 1 of Title 26 relates to federal income tax. A sample citation would be, for example, T.26 CFR Ch. 1 Pt. 20 estate tax.

Official IRS positions
The IRS regularly publishes its official positions in various publications. Among these publications are regulations which explain IRS positions, set rules of operation, and provide details on complying with the federal income, gift, and estate tax laws (for example, Regs. Sec. 54.4975-11 employee stock ownership plan requirements). Regulations are typically classified into the general categories: (1) legislative, (2) interpretative, and (3) procedural. Regulations often include examples with computations that are intended to assist taxpayers (and valuation analysts) in understanding the statutory language.

Regulations represent the official Treasury Department interpretation of the IRC. The courts generally accord regulations the full force and authority of the Code, as long as they are reasonable and consistent with the statutory provisions they interpret. Before final regulations are issued, a notice of proposed rulemaking must be issued to give the public a chance to comment on the proposed rules.

A proposed regulation generally is given little weight as a legal precedent. Nonetheless, it may be relevant to a valuation because it reveals the direction of IRS policy in a particular area. Sometimes, a proposed regulation states that taxpayers may rely on it until the issuance of a final regulation.

After a major statutory change to the IRC, the IRS often issues temporary regulations, which are usually effective upon publication. Temporary regulations give taxpayers (and valuation analysts) guidance on procedural or computational matters until the IRS develops (and the Treasury Department approves) final regulations. Temporary regulations are always issued concurrently as proposed regulations.

When the IRS Commissioner, with the approval of the Treasury Secretary, has finalized the instructions and interpretations of a regulation, a Treasury Decision (for example, T.D. 8940) is issued. A Treasury Decision includes a preamble statement that describes the contents of the new final or proposed regulation in a manner suitable for readers who are not experts in the subject matter of the rulemaking document.

The promulgation date of a Treasury Decision is the date the document is filed by the Federal Register (FR) for public inspection. Such regulations are effective for the period covered by the law section they interpret unless they specifically provide otherwise.

Revenue rulings
A revenue ruling (for example, Rev. Rul. 59-60) is an official interpretation by the IRS of the tax laws, related statutes, tax treaties, and regulations that has been published in the weekly Internal Revenue Bulletin (IRB). A revenue ruling states the IRS position on how the law is applied under certain facts. A revenue ruling may have any of the following authority on other IRS pronouncements: amplify, clarify, distinguish, modify, obsolete, revoke, supersede, supplement, and suspend.

Revenue rulings do not have the force or the authority of regulations (or of federal court cases). Revenue rulings simply present the IRS view of the tax law, and the IRS may not rely on a revenue ruling that is contrary to a regulation.

A taxpayer may rely on a revenue ruling if the facts of the case are substantially the same as those in the ruling and if the ruling has not been superseded. Revenue rulings generally apply retroactively, as do modifications or revocations of revenue rulings. Soon after it is released, a revenue ruling is published in the weekly IRB.

Other pronouncements and publications
In addition to the aforementioned pronouncements and publications, the IRS issues the following:

Revenue Procedures (Rev. Proc.) (for example, Rev. Proc. 97-19, 1997-1 C.B. 644). A revenue procedure is an official statement of the IRS practice and procedure that affects the rights or duties of taxpayers under the IRC or that contains information the IRS believes should be public knowledge. Revenue procedures are first published in the IRB and later in the Cumulative Bulletin (CB). As the name suggests, revenue procedures usually address the procedural aspects of tax practice. Although revenue procedures do not have the force and effect of regulations, they do have the same precedent value as revenue rulings.
Federal Register. The IRS is required by law to give interested persons an opportunity to participate in the rulemaking process. The daily FR is the medium for making federal agency regulations and other legal documents of the executive branch available to the public.
Internal Revenue Bulletin. The IRB is the authoritative publication of the official rulings and procedures of the IRS. Published weekly, the IRB is a means of promoting the uniform application of tax laws by both the IRS and taxpayers.
Cumulative Bulletin. In order to provide a permanent reference source, the contents of the weekly IRB are consolidated semiannually into an indexed CB. In the illustrative citation above regarding revenue procedures, Rev. Proc. 97–19 is the nineteenth revenue procedure that was issued in 1997. Rev. Proc. 97-19 is printed in Volume 1 of the 1997 CB, on page 644.

IRS instructional publications
The Internal Revenue Manual (IRM) is a compilation of instructions by the IRS for the guidance of its employees when administering various tax laws (for example, IRM Sec. 87 appeals technical and procedural guidelines). The IRM does not have legal precedent standing. It is useful to CPAs, however, in that it clarifies the meaning of specific tax terms, amplifies the regulations, and sets forth the IRS position on numerous topics.

The objective of the IRM is to be the chief line of communication of IRS National Office policy to IRS field agents. The IRM sets forth the policies, procedures, instructions, and guidelines for the IRS organization and its operations. It also addresses the day-to-day conduct of IRS examinations, agents, appeals officers, and other personnel. The IRS is currently reorganizing the IRM completely.

Although the IRS is bound by the procedural rules it adopts, the IRM policies and guidelines are not legally binding. This is because IRM procedures are directory and not mandatory. The value of the IRM as a practitioner’s professional guidance tool is to indicate the direction of the IRS thinking on a particular issue.

The IRS Valuation Training for Appeals Officers is a course book for appeals officers. The course book provides valuation analysts with IRS insights into valuation concepts and methodologies. Specific areas discussed in the course book include the financial analysis and valuation of closely held corporations and methods for valuing real estate, tangible personal property, art objects and collectibles, preferred stock, and intangible assets and intellectual property. In addition, this course book discusses valuation discounts and premiums, restrictive agreements and buy-sell agreements, and valuation-related tax penalties.

Announcements, notices, and news releases
The IRS uses notices and announcements to provide guidance on a particular topic or procedure. Taxpayers may rely on IRS notices and announcements. They are considered "substantial authority" for purposes of the valuation accuracy-related penalty. In terms of legal authority, announcements and notices are the "equivalent of revenue rulings and revenue procedures" (according to Rev. Rul. 87-2).

Internal Revenue news releases (IRs)—

Update taxpayers on compliance statistics.
Remind taxpayers of recent changes in the IRC.
Announce administrative appointments within the IRS.
Release certain revenue rulings and procedures.
The IRs, announcements, and notices are issued periodically, but they are officially published in the IRB.

To rely on IRS pronouncements for professional guidance on valuation and other matters, CPAs need a working knowledge of IRS publications, understanding both their content and their relative precedent value. As true as this is for CPAs who rely on IRS pronouncements for professional valuation guidance in federal taxation matters, it is even truer for CPAs who rely on IRS pronouncements (even in part) for professional valuation guidance in litigation matters.

In the upcoming Part 2 of this article, we’ll discuss IRS advance rulings and determinations, as well as new types of IRS pronouncements.

Robert F. Reilly, CPA/ABV, CFA, ASA, CBA, is managing director of Willamette Management Associates, Chicago.