The application of administrative tax guidelines in 3 recent cases

Three courts – the Supreme Court, the Sixth Circuit and the Tax Court – have recently rejected administrative guidelines in tax cases because the guidelines were either wrong as applied, unnecessary or unenforceable.

The takeaway: Administrative guidelines issued by the Treasury Department and the Internal Revenue Service are not impervious to attack. Years ago, some believed that “fiscal exceptionalism” warranted less judicial review of administrative tax directives than the administrative directives of other federal agencies. In recent years, this notion has been disillusioned. Examination will continue not only on whether the tax guidelines are substantially consistent with their enabling statute and whether they serve an interpretative role, but also whether the very act of enacting the guidelines correctly followed the rules of procedure in under which the guidelines were issued. .1

Introduction: Three recent tax cases involve the judicial treatment of administrative directives from the Treasury Department and the IRS. In Kellet,2 Tourbillon,3 and Boechler,4 the court rejected or ignored the administrative guidelines. In Kellet, the Tax Court rejected a tax procedure favorable to the taxpayer even though the literal terms of the tax procedure applied. In Tourbillon, the Sixth Circuit declined to rely on an arguably taxpayer-friendly rule, even though the Treasury Department issued the rule under an express grant of authority in the specific section of the Internal Revenue Code in cause. And in Boechlerthe Supreme Court did not quote or otherwise comment on a regulation interpreting a legislative section in question.

Kellet: Tax procedure 2000-505 provides that “the Service shall not interfere with a taxpayer’s treatment of costs paid or incurred to develop software for a particular project….” But in Kellet, the Commissioner effectively disrupted — and denied — the deduction of the taxpayer’s current expenses incurred in developing software. At the trial of the case, the commissioner did not dispute the taxpayer’s claim that he developed software. Nevertheless, the Tax Court, finding on behalf of the Commissioner, concluded that the taxpayer “has not demonstrated that the Code permits such a deduction”. Thus, before the Tax Court, the taxpayer cannot rely on administrative directives but must also demonstrate that these directives are in accordance with its enabling legislation.

Admittedly, the Commissioner is not bound by a tax procedure even though he announced that taxpayers can generally rely on the tax procedures published in the Internal Revenue Bulletin to determine the tax treatment of their own transactions.6 Nevertheless, it is odd that the Commissioner published a procedure for taxpayers to follow and then argued in the Tax Court that the procedure he published was invalid as it applied to the taxpayer in Kellet. In any event, Congress changed the law to provide that any amount paid or incurred to develop software may be treated as a deductible research or experimentation expense currently effective for tax years beginning after 31 December Under current law, Kellet must now be decided for the taxpayer.

TourbillonIf 50% or more of the voting power or stock value of a foreign corporation is held by one or more U.S. shareholders, each of whom owns 10% or more of the stock, the corporation is a controlled foreign corporation (“CFC ”). Each US shareholder is required to currently include certain categories of CFC income in federal income.8 The inclusion—“Subpart F Inclusion”—is required even if the SEC does not distribute the income to the US shareholder.

One category of such income is the sales income of the foreign-based company.9 An example is the purchase by an SEC of property manufactured outside the country of the SEC’s organization when the sale of the property by the SEC is to a related person for use, consumption or disposal outside that country. country. Without the inclusion of Subpart F, if the foreign country in which the sale to the related person is made is a tax haven that does not tax sales income, and if the foreign country in which the manufacture is made has a territorial system that does not tax income from sales outside its territory, the sales income would not be taxed, if ever, until the foreign sales company distributes its income to its parent company in the United States . Congress was offended by the resulting tax avoidance and consequently enacted the foreign-based corporation sales income provision.

In Tourbillon, the taxpayer arranged the legal structure of its foreign operations with the intention of placing its manufacturing operations in the same SEC that sold the manufactured good with the hoped result that the income from the sales of the SEC would not constitute income from sales of a company established abroad. To achieve this objective, the taxpayer relied on an income tax regulation determining whether an overseas sales company also engaged in manufacturing activities.ten The majority opinion of the Sixth Circuit, however, refused to rely on the settlement even if the relevant statutory provision expressly directed the Treasury Department to publish the regulations. The majority did not perceive any gap in the legal regime for which regulation was necessary even if Congress saw such a deficiency and expressly demanded the settlement. The dissenting judge saw the flaw and would have relied on the settlement to decide the case.

The taxpayer filed a petition for certiorari with the Supreme Court on July 5, 2022.11 If the Supreme Court grants the motion — and the odds are likely slim — it will be interesting to see how the Court handles the Sixth Circuit’s refusal to rely on a settlement that was issued under an express grant of authority. in the specific law publish it.

Boechler: As we mentioned earlier,12 the Supreme Court has ruled that a taxpayer is entitled to an extension of the thirty-day period – the period is “fairly taxed” – to ask the Tax Court to review an adverse collection due process ruling if the taxpayer has a good reason to file the request beyond the thirty-day period. The Court based its decision on its interpretation of IRC §6330(d)(1).

The court’s decision contradicts a Treasury Department regulation that states that the taxpayer “must” apply to the Tax Court within thirty days for judicial review,13 but this regulation had no bearing on the question posed, which was whether the law itself “clearly set out” a jurisdictional requirement. The Supreme Court held that it had not said so and therefore had no jurisdiction. The reference to the Treasury Department’s regulations for interpretative assistance would have revealed that the law itself did not contain a clear statement of jurisdiction. implicit in Boechler is it Chevron respect14 has no place in a question of statutory interpretation where a party arguing for a particular interpretation is confined to the statutory text. If other rules of statutory interpretation require a “clear statement” in the statutory text, further limitation of the application of administrative directives can be expected.15


1 Appeal status pending Silver c. Treasury Department.

2 Kellet v. CommissionerTC Memorandum 2022-62 (June 14, 2022).

3 Whirlpool Financial Corp. vs. Commissioner19 F.4e 944 (6e Cir. 2021), cert. filed, _US_ (July 5, 2022).

4 Boechler, PC v. Commissioner, 142 Sup. CT. 1493 (2022).

5 §5.01, 2000-2 CB at 601.

6 Rev. proc. 89-14, 1999-1C.B. 814.

seven IRC §174(c)(3).

8 IRC §§951(b), 957(a).

9 IRC §954(d)(1).

ten Treasures. Reg. §1.954-3(a)(4)(ii) as amended by TD 9563 (December 15, 2011).

11 Petition for Cert. filed, ___ US ___ (July 5, 2022).


13 Treasures. Reg. §301.6330-1(f)(2)(A-F1).

14 Chevron USA, Inc, c. Natural Resources Defense Council, Inc., 468 US 1227 (1984).

15 See West Virginia v. Environmental Protection Agency2022 WL 2347278 (2022).

© 2022 Miller, Canfield, Paddock and Stone PLC National Law Review, Volume XII, Number 214