Valuation Guidance from IRS Publications
Valuation analysts who practice in the bankruptcy arena often seek professional guidance with regard to the appraisal of unique assets, properties or business interests. Analysts sometimes seek professional guidance with regard to (1) the application of unusual discounts/premiums, (2) adjustments for special market conditions, (3) preferred approaches, methods and procedures in special circumstances, and the like. Typically, analysts first research the relevant professional standards, appraisal literature and appraisal organization publications/course materials. When these reference sources are lacking, analysts may next research the relevant statutory authority, judicial precedent and administrative rulings. This is particularly true for valuations that will be subject to judicial review.
When seeking professional guidance related to a bankruptcy valuation, analysts first consider the authority of the Bankruptcy Code and Rules and the decisions of the U.S. Bankruptcy Court. When such guidance is not available, analysts often seek guidance from Internal Revenue Service (IRS) pronouncements. Even though such pronouncements have no legal standing with regard to bankruptcy matters, analysts know that there are numerous IRS pronouncements that provide professional guidance with regard to preferred valuation methodologies, procedures, data sources and reporting.
This column will provide an overview of the various IRS pronouncements and will summarize the precedent value (or lack thereof) of these pronouncements with regard to federal taxation valuation matters. This overview should help valuation analysts assess the relative authority of IRS pronouncements for purposes of extrapolating professional guidance to non-taxation areas such as bankruptcy-related valuations.
Since the publication of the first income tax regulations in 1914, the IRS has provided a great deal of professional guidance to valuation analysts. The following are brief descriptions of (1) federal taxation authority and (2) important IRS pronouncements and publications. Each summary includes a description of the topic, communication title with abbreviation, brief commentary on the purpose of the publication and a citation to relevant examples.
Federal Tax Law
The following authorities constitute "the law" with regard to federal taxes:
A proposed regulation generally is given little weight as a legal precedent. Nonetheless, it may be relevant to a valuation practitioner. This is because a proposed regulation reveals the direction of IRS policy in a particular area.
Internal Revenue Code (IRS) (e.g., IRC §2001 estate & gift tax imposition and rate of tax)
The Internal Revenue Code codifies all federal tax laws including income, estate, stamp, gift, excise and other taxes. To implement the Internal Revenue Code, the legislative branch of the federal government (1) designated the Treasury Department to supervise administration and enforcement of the federal tax laws and (2) created the IRS. The Internal Revenue Code is the final statutory authority with regard to federal taxation issues.
The first codification of the nation's various tax laws was created by the U.S. Congress in 1939 and was titled the Internal Revenue Code of 1939. Congress recodified all of the tax laws in the Internal Revenue Code of 1954. The current codification of the U.S. tax laws is the Internal Revenue Code of 1986.
Code of Federal Regulations (CFR) (e.g., T.26 CFR Ch. 1 Pt. 20 estate tax)
The Code of Federal Regulations 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 Code of Federal Regulations pertains to the Internal Revenue Code, and Part 1 of Title 26 relates to federal income tax.
The IRS regularly publishes numerous official positions, including the following:
Regulations (e.g., Regs. §54.4975-11 "ESOP" requirements)
Regulations explain IRS positions, set rules of operation and provide details on complying with the federal income, gift and estate tax laws. Regulations are typically classified into three general categories: (1) legislative, (2) interpretative and (3) procedural.
Regulations represent the official Treasury Department interpretation of the Internal Revenue Code. The courts generally accord regulations the full force and effect of law, 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, and the public must be given 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 practitioner. This is because a proposed regulation reveals the direction of IRS policy in a particular area. Sometimes, a proposed regulation will be issued stating that taxpayers may rely on it until the issuance of a final regulation.
Treasury Decisions (e.g., T.D. 8940)
When the IRS commissioner, with the approval of the Treasury secretary, has finalized the instructions and interpretations of a regulation, a Treasury Decision is issued. A Treasury Decision includes a preamble statement that describes the contents of the new final or proposed regulation in a manner sufficient to apprise a reader who is not an expert 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 for public inspection. Such regulations are effective for the period covered by the law section they interpret unless they specifically provide otherwise.
Revenue Rulings ("Rev. Rul.") (e.g., Rev. Rul. 59-60)
A revenue ruling is an official interpretation by the IRS of the tax laws, related statutes, tax treaties and regulations that has been published in the Internal Revenue Bulletin. It states the IRS position on how the law is applied under certain facts. A revenue ruling may have any of the following effects on other documents: amplify, clarify, distinguish, modify, obsolete, revoke, supersede, supplement and suspend.
Revenue rulings are published by the IRS national office in the Internal Revenue Bulletin for the information and guidance of both taxpayers and IRS officials. Revenue rulings do not have the force or the effect of regulations, and the IRS may not rely on a revenue ruling that is contrary to a regulation.
A taxpayer may rely on a revenue ruling (1) if the facts of his or her case are substantially the same as those in the ruling and (2) if the ruling has not been superseded. Revenue rulings generally apply retroactively, as do modifications or revocations of revenue rulings.
Revenue Procedures ("Rev. Proc.")
A revenue procedure is an official statement of the IRS practice and procedure (1) that affects the rights or duties of taxpayers under the Internal Revenue Code or (2) that contains information the IRS believes should be public knowledge. Revenue procedures are published in the Internal Revenue Bulletin.
Although revenue procedures do not have the force and effect of regulations, they do have the same precedential value as revenue rulings.
Federal Register (F.R.)
The IRS is required by law to give interested persons an opportunity to participate in the rulemaking process. The Federal Register, published daily, is the medium for making available to the public federal agency regulations and other legal documents of the executive branch.
Internal Revenue Bulletins (I.R.B.)
The Internal Revenue Bulletin is the authoritative instrument for publishing official rulings and procedures of the IRS. It is produced on a weekly basis. The IRB is intended to serve as a means of promoting correct and uniform application of tax laws by both the IRS and taxpayers.
Cumulative Bulletin (C.B.) (e.g., 959-1 C.B. 237)
In order to provide a permanent reference source, the contents of the weekly Internal Revenue Bulletin are consolidated semiannually into an indexed Cumulative Bulletin.
Internal Revenue Manual (IRM) (e.g., IRM §87 appeals technical & procedural guidelines)
The Internal Revenue Manual is a compilation of instructions by the IRS for the guidance of its employees when administering the various tax laws. The IRM does not have any legal precedent standing. However, it is useful to taxpayers in that it (1) clarifies the meaning of general terms, (2) amplifies regulations and (3) sets forth the IRS position. Also, the IRM requires IRS employees to deal with taxpayers in a specified manner.
The IRM sets forth the policies, procedures, instructions and guidelines for IRS operations and organizations. It addresses the day-to-day conduct of IRS agents and other personnel. Although the IRS is bound by the procedural rules it adopts, the policies and guidelines are not legally binding since they are directory, and not mandatory.
The value of the IRM as a valuation practitioner's professional guidance tool is to indicate the direction of the IRS thinking on a particular issue. The IRS is currently in the process of completely reorganizing the IRM, intent on resurrecting it for field agents as a chief line of communication with IRS national office policy.
IRS Valuation Training for Appeals Officers
This course book provides valuation practitioners with IRS insights into valuation concepts and methodologies. Some of the specific areas discussed in the course book include (1) the financial analysis and valuation of closely held corporations and (2) methods for valuing real estate, art objects and collectibles, preferred stock, intangible assets and notes. In addition, this course book discusses valuation discounts, restrictive agreements and buy-sell agreements, and valuation-related tax penalties.
Announcements, Notices and News Releases
Notices and announcements are used by the IRS to provide guidance on a particular topic or procedure. They may be relied on by taxpayers and are considered substantial authority for purposes of the valuation accuracy-related penalty.
Internal Revenue news releases (IRs) are used to update taxpayers on compliance statistics, remind them of recent changes in the Internal Revenue Code, announce administrative appointments within the IRS, and release certain revenue rulings and procedures. The IRs are issued periodically, but their official publication is in the Internal Revenue Bulletin.
Advance Rulings and Determinations
Advance rulings and determinations provide a response to taxpayers as to their status for tax purposes and as to the tax effects of their acts or transactions.
Private Letter Rulings (PLR) (e.g., IRS PLR 79-05013)
A private letter ruling is a written response issued to a taxpayer by the IRS national office that interprets and applies the tax laws to that specific set of facts. Private letter rulings constitute a historical record of interpreting the IRS position. They have a high level of credibility since the IRS is unlikely to reverse itself once a position has been established.
The IRS generally has the discretion to issue letter rulings whenever it is in the interest of sound tax administration to do so. In certain tax areas, however, rulings are mandatory; the taxpayer must request a ruling, and the IRS must issue one in response. Although each letter ruling states that it can only be relied on by the taxpayer to whom it is addressed, some courts have used a letter ruling as an indication of the IRS position on a particular issue.
A determination letter is a written statement issued by an IRS district director in response to a written inquiry by a taxpayer. A determination applies the principles and precedents previously announced by the IRS national office to a taxpayer's specific set of facts.
Technical Advice Memorandums (TAM) (e.g., Ltr. Rul. 9436005 (TAM))
Technical advice memorandums are written determinations containing advice or guidance furnished by the IRS national office upon request of a district director. IRS district directors may request technical advice on any technical or procedural question that develops during an audit or the claim of a taxpayer. Generally, the legal force and effect of a TAM is the same as that of a private letter ruling.
In contrast to letter rulings, which are issued on the request of the taxpayer and may address prospective transactions, technical advice memorandums (1) are given only on request of the government and (2) concern only closed transactions. However, a taxpayer may ask the government to request a technical advice memorandum on a particular issue arising during a proceeding.
Technical Memorandums (TM)
In order to summarize and explain published regulations, the IRS issues Technical Memorandums. TMs state the issues involved, identify controversial legal or policy questions, discuss the reasons for the approach taken and provide background information.
New Types of IRS Pronouncements
The following are examples of new types of IRS pronouncements:
Although the IRS has issued general information letters for many years, they just became available for public disclosure in 2000. Information letters are written statements issued to a taxpayer that call attention to an established interpretation of tax law without applying it to a specific set of facts.
Market Segment Specialization Program Guides (MSSPs)
MSSPs consist of industry-specific guides used to train IRS examiners to understand and apply audit techniques needed in a particular market segment. A market segment generally consists of an industry or a profession. However, in some instances, an issue requiring specialized auditing techniques may comprise a market segment.
Chief Counsel Advice
Chief Counsel Advice is written advice or instruction from the IRS National Office component of the Office of Chief Counsel that is issued to field employees. It conveys (1) a legal or IRS position on a "revenue provision" or (2) a legal interpretation of law relating to the assessment or collection of a liability under a revenue provision. A "revenue provision" includes the Internal Revenue Code, regulations, revenue rulings, revenue procedures, other published or unpublished guidance, or tax treaties.
Summary and Conclusion
In order to rely on IRS pronouncements for professional guidance, it is important for a valuation analyst to have a working knowledge of IRS publications. It is also important for the analyst to understand the relative precedent value of the various IRS pronouncements. This is true for analysts who rely on IRS pronouncements for professional guidance with respect to taxation valuations. This is even more true for analysts who rely on IRS pronouncements (even in part) for professional guidance when performing valuations for bankruptcy.