Taxpayer FSA use.
The IRS makes FSAs public because, although not specifically defined in the Code, they are part of a more generically defined category of Chief Counsel Advice (CCA). In 1998, CCAs became a category of "written determinations" required by Sec. 6110 to be released routinely to the public. In addition, the Internal Revenue Service Restructuring and Reform Act of 1998 provided a timetable for the release of FSAs issued prior to 1999.
An FSA is "case-specific written advice provided to field personnel by the Offices of the Associate Chief Counsel [located in the IRS National Office] ... in response to a request for assistance from any field office." For example, an FSA may help taxpayers (1) interpret and apply the Code and the regulations, (2) develop factual information necessary to apply the law to a particular case properly or (3) assess litigation hazards or strategies (Chief Counsel Directives Manual (CCDM) 22.214.171.124.3.A and Chief Counsel Advice Notice CC-2002-226 (5/16/02)).
FSAs are usually initiated by Chief Counsel attorneys in local offices. An FSA request is made by informal written memorandum or e-mail to the National Office (CCDMs 126.96.36.199 and 188.8.131.52), where it is assigned to a National Office attorney whose branch is responsible for the principal issues raised in the request. The attorney may coordinate with other National Office attorneys familiar with the issue, communicate and discuss the issues informally with the local IRS office and develop further factual information.
In most cases, the National Office does not receive any factual or legal presentation from the taxpayer, and there is no requirement that the taxpayer be advised that an FSA is being requested. However, if the taxpayer is advised, the National Office will receive and consider written submissions if forwarded by the requester (see CCDM 184.108.40.206.3.B).
A National Office attorney drafts the FSA in a format used for letter rulings and technical advice memoranda (TAMs), with letters and numbers representing the taxpayer's identifying details. The FSA is reviewed by an immediate manager (Branch Chief, Assistant Branch Chief or Senior Technical Reviewer), who signs it. FSAs are only rarely reviewed at higher levels within the Chief Counsel Office. Thus, while the FSA is "signed" in the name of the Assistant or Associate Chief Counsel, that individual generally is unaware that the issue exists or that the FSA has been issued.
Effect of FSAs on Taxpayers
As provided by Sec. 6110(k)(3), an FSA generally "may not be used or cited as precedent," unless provided otherwise by regulation. No regulation exists for treating an FSA as precedent, and each FSA carries a legend that it cannot be relied on. The only reported decisions addressing use of FSAs have held that any reliance on them was misplaced and that FSAs are not precedential (Marsh & McLennan Companies, 50 FedCl. 140 (2001) at fn. 5; Rhone-Poulenc Surfactants, 114 TC 533 (2000)).
However, because, under Sec. 6110, FSAs are written by the same Chief Counsel Attorneys, get the same degree of review, and are released in the same manner and subject to the same statutory rules applicable to TAMs and letter rulings, they are generally thought to have the same legal effect. (The Chief Counsel's recent announcement that he plans to fold the current FSAs back into the TAM process reinforces this equality.) Accordingly, a review of the accepted uses of TAMs and letter rulings may guide taxpayers on using FSAs.
Like other written determinations listed in Sec. 6110(b)(1)(A), FSAs may be considered "authorities" for determining "substantial authority" for or against a particular position. Under Regs. Sec. 1.6662-4(d)(3)(iii), letter rulings and TAMs issued after Oct. 31, 1976 are "authority," but the regulation does not mention FSAs specifically. However, it was issued prior to Sec. 6110's addition of FSAs into the "written determination" definition. Because FSAs are "written determinations" governed under the same "no precedent" provision of Sec. 6110 and written by the same Chief Counsel attorneys, their omission from the "substantial authority" listing of Regs. Sec. 1.6662-4(d)(3)(iii) should seemingly not prevent them from being considered authority for penalty purposes.
The statutory directive that an FSA is not precedent means that another taxpayer may not require the IRS or a court to follow an FSA's holding. This does not mean that FSAs are not helpful in arguing for a particular position. As the Supreme Court stated 40 years ago about letter rulings:
Although the petitioners are not entitled to rely upon [then] unpublished private letter rulings which were not specifically issued to them, such rulings do reveal the interpretation put upon the statute by the agency charged with the responsibility of administering the internal revenue laws. (Hanover Bank, 369 US 672 (1962).)
In that case, the Supreme Court found that the letter rulings were "further evidence that our construction ... is compelled by the language of the statute."
Thus, while letter rulings are not binding on the IRS or the courts, they still have persuasive value; see Wisconsin Power and Light Co., 38 F3d 329 (7th Cir. 1994), or Woods Investment Co., 85 TC 274 (1985), fn. 15.
Finally, in some cases, a taxpayer might be able to argue that Congress would have been aware of the Service's administrative position when it drafted or amended a statutory provision. Thus, the position may be helpful in determining what Congress intended by the provision's language; see Knapp, 90 TC 430 (1998) (Wells, J. dissenting) ("Congress added greater weight to the existing, non-precedential, `historic treatment' by respondent in documents such as PLRs and TAMs.").
Even if not used directly to interpret a statutory provision, the consideration of a letter ruling might indicate the IRS's administrative practice on a particular subject or provision, or its abuse of discretion in treating taxpayers differently (Vons Companies, 51 FedCl. 1 (2001); IBM, 343 F2d 914 (Fed. Cir. 1966)). If a ruling shows an inconsistent pattern of interpretation, it might demonstrate that there is no clear interpretation of the law, and hence no special deference should be provided to the IRS'S current position. If a position set forth in nonprecedential rulings is at odds with the Service's current thinking in the case, the courts might look to the IRS to show the rationale behind the change (Transco Exploration, 949 F2d 837 (5th Cir. 1992) ("Although the Commissioner is entitled to change his mind, he ought to do more than to stride to the dais and simply argue in the opposite direction.")).
Often, taxpayers are as concerned with avoiding disputes with the Service as they are with ultimately prevailing on a litigated issue. Therefore, knowing the position the IRS is likely to take and what arguments may affect that position are critical to determining the taxpayer's reporting position on a return and its approach to an audit. FSAs may be a good indicator of that, particularly when precedential and public guidance has not been issued or public precedents are dated and practical business and tax realities may have changed.
Although the IRS National Office has consistently cautioned agents not to cite or rely on FSAs, a primary purpose of FSAs is to ensure that the Service's field personnel apply the law correctly and uniformly (Tax Analysts, 117 F3d 607 (DC Cir. 1997)). While agents are not required to follow FSAs, they hold them in high regard and generally follow them. Thus, FSAs are particularly important when resolving disputes with local examination or Appeals.
Even if an FSA holding is not governing, taxpayers should not ignore an analysis set forth by the IRS. A specific document may not be entitled to reliance, but that does not mean that its underlying analysis is not correct or at least arguable. The rationale, logic and cited sources in an FSA should be considered when evaluating a tax position.
FSAs, like other nonprecedential taxpayer-specific opinions of Chief Counsel, are important original resources in determining the tax law and the Service's position on a particular law. They must be evaluated and weighed with other nonprecedential and precedential sources of tax law in the same manner as those other sources. Particularly, FSAs should be considered as having weight equal to that of letter rulings and TAMs. In most cases, regulations and other public guidance can be more significant in determining the law and government positions, although at times FSAs are the only, or most recent, rendition of the IRS's position.
FROM DANIEL J. WILES, J.D., WASHINGTON, DC
Editor: Annette B. Smith, CPA Partner Washington National Tax Service PricewaterhouseCoopers Washington, DC
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|Title Annotation:||IRS Field Service Advice|
|Author:||Smith, Annette B.|
|Publication:||The Tax Adviser|
|Date:||Jul 1, 2002|
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