Welcome to the 4th and final part of Chapter 3 where I’ll show you everything you need to know about the Hierarchy of Tax Authority (exciting stuff here). This is today’s learning outcome:

1. Recall the appropriate hierarchy of authority for federal tax purposes

Types of Authority

There are two types of authority when it comes to tax research

1. Primary authority – directly from the source
2. Secondary authority – commentary on the source

In this lesson we will cover the primary authority when it comes to tax research and the hierarchy of importance. The three primary authorities fall in line with the three branches of government.

1. Statutory authority 
2. Administrative authority
3. Judicial authority 

Statutory Authority

Examples of statutory authority are

• Tax treaties
• Internal Revenue Code (IRC)
• State tax law
• The US Constitution

How a tax bill becomes a tax law – For the most part, statutory authority (sometimes referred to as legislative authority) will come from the IRC which is the codification of tax laws passed by Congress. For a tax bill to become tax law (and therefore part of the IRC) it must follow this process:

1. All tax bills are born out of the House Ways and Means Committee. This is a group of representatives who draft tax bills that will be voted on by the entire House of Representatives.
2. The bill will be voted on by the House of Representatives and if it passes it will move onto the Senate.
3. The bill first goes to the Senate Finance Committee where it can be tweaked or even completely rewritten. However, the Senate can’t take any action until it receives a bill from the House.
4. The bill is voted on by the Senate and if it passes then the bill goes into a reconciliation process.
5. Joint Conference Committee is created to work out the differences between the two bills that were passed.
6. Compromise bill has to be passed by both the Senate and the House.
7. President signs or vetoes.
8. If the president vetoes then Congress can override with a two-thirds vote.

Administrative Authority

Congress writes the tax law but the Treasury and the Internal Revenue Service (IRS) must collect and enforce those taxes. Here are the most common forms of guidance from the administrative authority:

1. Regulations – regulations are issued by both the Internal Revenue Service and Treasury Department to provide guidance for new legislation or to clarify existing issues with specific Internal Revenue Code sections.
2. Revenue Ruling – a revenue ruling is an official interpretation by the IRS of the Internal Revenue Code, related statutes, tax treaties and regulations. For example, the IRS will explain if certain automobile expenses are deductible based on a certain set of facts.
3. Revenue Procedure – While a revenue ruling generally states an IRS position, a revenue procedure provides return filing or other instructions concerning an IRS position. As per the prior example, a revenue procedure will explain what form you need to file to take those automobile deductions.
4. Private Letter Ruling – If a taxpayer is unsure of how a transaction will be taxed then they can submit a request to get a private letter ruling from the IRS. This will explain with certainty how the transaction will be treated based on the specific taxpayers set of facts and circumstances.
5. Technical Advice Memorandum – This is like a private letter ruling but after the fact. If a taxpayer is being audited and they want advice on a transaction that has already been executed then they request a technical advice memorandum.
6. Notice – A notice is a public pronouncement that may contain guidance involving an issue with a substantive interpretations of the IRC (not as important).
7. Announcement – An announcement is a public pronouncement that has only immediate or short-term value (not as important).

Judicial Authority

I discussed this topic in part one of this chapter: Audits, appeals and judicial process but let’s do a brief review and highlight key facts.

Trial Courts – These are commonly called Courts of Original Jurisdiction because when you have a tax dispute with the IRS you need to go to one of these courts first.

1. U.S. Tax Court
   • 19 traveling judges appointed by the president
   • Most cases heard by the Tax Court
   • Taxpayer doesn’t pay the tax until they lose
   • No Jury
   • Judges are experts in federal taxation
   • May elect for a small case ($50,000 or less) but the decision is final (no appeals)
2. U.S. Court of Federal Claims
   • National jurisdiction
   • 16 judges
   • Taxpayer must pay the tax first and then sue the IRS for a refund
   • No Jury
3. U.S. District Court
   • Several different jurisdictions throughout the U.S.
   • Taxpayer must pay the tax first and then sue the IRS for a refund
   • Jury option available

Appellate Court – The losing party has a right to appeal unless the court case was heard by the Small Cases Division of the U.S. Tax Court (as previously stated).

1. U.S. Court of Appeals
   • Hears appeals from the U.S. Tax Court and the District Courts
2. U.S. Court of Appeals for the Federal Circuit
   • Hears appeals from the U.S. Court of Federal Claims

Supreme Court – This is the final stop. Tax cases rarely make it to the Supreme Court but when they do it’s usually a constitutional issue concerning a tax.

Hierarchy

Each authority has it’s own weight and is deemed more reliable than other authorities. For example, when you do tax research on the tax treatment of a specific transaction you want the highest level of authority when taking a tax position.

Statutory Authority

• US Constitution – Highest source of tax authority
• Next highest is IRC
• Then Foreign Tax Treaties

Administrative Authority

• Regulations have the highest weight
• Revenue rulings
• Private letter rulings

Judicial Authority

• Level of the court where the ruling was made (Supreme Court rulings carry higher weight)
• Date the ruling was made

Key Takeaways

1. Know the three different primary authorities. Easy way to remember is by remembering the three branches of government (Judicial, Administrative, and Legislative.
2. Know how a tax bill becomes tax law.
3. Know the difference between the courts and know the appeals process.
4. Know the hierarchy of authority.

For a nifty chart breaking all of this down click here.