- 4.75.13.1 Introduction
- 4.75.13.2 Developing and Documenting the Facts
- 4.75.13.3 Sharing the Issues
- 4.75.13.4 Burden of Proof
- 4.75.13.5 Specific Issues - Special Considerations and Procedures
- 4.75.13.6 Researching an Issue and Citing the Law
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Examiners are responsible for determining whether the organization being examined:
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Meets the requirements for exemption;
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Has filed all required tax and information returns due; and
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Has reported any tax liabilities correctly.
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When a potential issue is identified, the examiner must:
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Determine if there are any unique considerations or procedures applicable to the issue;
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Thoroughly develop and document all of the facts pertaining to the issue;
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Conduct research to identify the applicable law, interpret its meaning in light of congressional intent; and
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In a fair and impartial manner, apply the law based on the facts and circumstances.
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This IRM addresses:
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Developing and documenting the facts;
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Researching Tax law; and
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Special considerations or procedures for specific issues.
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A quality examination includes obtaining evidence bearing upon the organization's tax status or tax treatment by an inspection of its premises, examining its books and records, and directly questioning the organization's representatives and management.
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A comprehensive examination of an organization's books and records includes, but would not be limited to, the following:
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Determining whether the books reflect and explain the organization's activities and expenditures, and commenting on questionable, unusual or unclear items;
Example:
An examiner lists several highly compensated employees of an organization in his/her workpapers along with their salaries. The listing of questionable salaries is not relevant by itself in developing facts unless an analysis of the duties and responsibilities of the salaried individuals accompanies the listing.
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Testing the organization's books and records for reliability and documenting these tests in the workpapers;
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Evaluating how the organization is utilizing its assets and resources;
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Determining the source and nature of the organization's receipts;
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Identifying unusual transactions, documenting the purpose of such transactions;
Note:
Useful sources of this information would include the adjusting entries in the general journal and discussions of unusual transactions in the minutes.
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Determining the relationships of all persons doing business with the exempt organization and determining whether those persons' private interests are being served at the organization's expense; and
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Evaluating purchases, sales, leases, and sharing arrangements, and securing an accurate valuation of the property.
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The examiner must use judgment when gathering facts to support a given position. Weight and file thickness are not necessarily a sign of effective fact gathering. Every document appearing in the file should have some relevanceor it should be omitted. The examiner generally should not keep copies of all the minutes, financial statements, leases, newsletters, etc. However, the examiner should secure:
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Samples of newsletters, the annual report and/or brochures describing an activity or identifying unrelated business income issues; and
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Copies of checks, contracts and agreements directly relating to an issue.
The examiner should index the documents secured to the Form 5773, EO Workpaper Summary Continuation Sheet, and include an analysis or statement in the workpapers showing how the documents support a specific issue or conclusion.
Example:
An examiner briefly notes each newsletter reviewed on a separate workpaper entitled "Newsletter" . Noting a particular article discloses an unallowable activity, the examiner makes a copy of it, but does not keep a copy of the whole newsletter. If the newsletter contained advertising, the examiner would analyze each page with ads, but it would not be necessary to keep a copy the newsletters, as the necessary details are recorded in the workpapers.
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The degree to which the examiner will collect and record facts will depend on the facts and circumstances of each case.
Example:
An examiner discovers an organization is engaging in substantive legislative activity through its publications and must defend an unagreed issue. The examiner should secure copies of all newsletters or publications reflecting the legislative activities, regardless of the volume. The examiner must keep in mind, that should the case reach Appeals, the Appeals Officer must have adequate documentation to uphold the Service’s position.
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Examiners should attempt to obtain information voluntarily from taxpayers. However, in certain circumstances they may have a need to issue a summons to obtain the records necessary to conduct an adequate examination.
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Delegation Order No. 4, Authority 3, provides Internal Revenue Agents with the authority to issue summonses, except John Doe summonses, and to perform other related functions. The group manager, or other supervisory official above that level, must authorize the issuance of the summons in advance.
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Examiners must consider all surrounding circumstances before issuing a summons. They must analyze each situation in the light of its particular facts and circumstances, and then weigh the importance of the desired information.
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Examiners should refer to IRM 25.5, Summons Handbook, and consult their manager when considering the need to issue a summons.
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It is important for the examiner to discuss potential issues with the taxpayer or the taxpayer's representative as soon as possible. Discussing the potential issues with the taxpayer or the taxpayer's representative can lead to an early resolution of the case.
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The examiner should also consider providing the taxpayer or the taxpayer's representative with a written summary of potential issues on Form 5701, Notice of Proposed Adjustment. The Form 5701 should include the issues, facts, law and examiner's position.
Caution:
Providing the taxpayer or the taxpayer's representative with a summary of the issues on Form 5701 does not relieve the examiner of the responsibility for discussing the potential issues with the taxpayer or the taxpayer's representative.
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IRC §7491(a)(1) shifts the burden of proof in a court proceeding from the taxpayer to the Service, if the taxpayer produces credible evidence regarding the factual issues relevant to determining tax liability, and satisfies the following criteria:
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Met all substantiation requirements of the Code and regulations;
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Maintained all records required by the Code and regulations;
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Cooperated with any reasonable request for information, documents and witnesses by the Service;
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Exhausted all its administrative remedies, including appeal rights; and
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Met certain net worth qualifications, but only if the taxpayer is a partnership corporation, or trust.
Exception:
There is no net worth qualification for individuals.
Caution:
Special rules apply to Qualified Revocable Trusts. See IRC § 7491(a).
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IRC § 7491 applies specifically to income, estate, gift, and generation-skipping transfer taxes. For this purpose, self-employment taxes are treated as income taxes.
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The new provisions are effective for court cases arising out of examinations started after July 22, 1998. The term examination includes an audit, the matching of amounts from information returns (IRP), and the review of a claim for refund prior to the issuance of the refund.
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Congress reasoned that individual and business taxpayers were at a disadvantage in court against the Internal Revenue Service, and there was fundamental unfairness in the process. With the burden of proof on the taxpayer, there was a presumption of guilt, until proven innocent. Congress believed that if a taxpayer is generally law abiding, the Service should prove that the position taken by the taxpayer is wrong.
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It should be noted that relatively few audits result in litigation, the outcome of tax litigation rarely turns on who has the burden of proof, and those cases where the taxpayer refuses to provide documents and refuses to cooperate, are not affected at all by IRC §7491(a). However, this does not mean examiners should not follow sound audit practices.
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Even before the new burden of proof provisions were enacted, the Service sought to make sure that its technical positions were well thought out, the facts were appropriately developed, audit conclusions were well supported, and the case file was well documented.
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If the examination ultimately reaches litigation, and it becomes necessary to determine whether examiner requests for information were made and were reasonable, the determination will depend upon the facts and circumstances of each case as documented in the case file.
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Examiners should use the Form 5464, Case Chronology Record (CCR), to document:
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When information was requested from the taxpayer;
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When information was received from the taxpayer;
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Whether the taxpayer responded fully and reasonably;
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Reasons given for delays in the taxpayer’s responses;
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Telephone calls;
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Reasons why taxpayers could not or would not provide the information; and
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The precise documents or other information provided by the taxpayer.
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The government and the courts can then use the CCR to determine whether taxpayers fully cooperated with reasonable requests for information.
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Examiners should utilize workpapers and audit reports to support audit adjustments, and document the extent of taxpayer cooperation, in some instances, this includes making complete copies of documents submitted by the taxpayer.
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These workpapers/reports should be used to:
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Explore and document all requirements of the law with respect to the treatment of an item for tax purposes;
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Fully describe all documents reviewed or inspected that support audit conclusions and proposed tax adjustments; and
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Fully describe the audit steps taken and analysis, which supports audit conclusions.
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IRC §7491(b) places the burden of proof on the Service in any court proceeding when the Service reconstructs any item of the taxpayer's income using solely statistical information on unrelated taxpayers. This is true whether the taxpayer does or does not cooperate and provides evidence or otherwise meets the requirements of IRC § 7491(a).
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The use of statistical data, such as Bureau of Labor Statistics (BLS) or Consumer Price Index (CPI) information, is still appropriate in some situations. If the Service has some direct or indirect evidence that links the taxpayer to unreported income generating activities, the burden of proof does not shift to the Service under this specific burden of proof. When this supplemental evidence is present, then the general burden of proof rule applies.
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IRC §7491(c) states that the Service now has the burden of proof in a court proceeding when the issue is a penalty, an addition to tax, or an additional amount imposed by the Internal Revenue Code.
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In any court proceeding, the IRS must first present evidence that imposition of the amount is appropriate. Only then must the taxpayer assume the burden of persuasion to raise appropriate defenses, such as reasonable cause, to the imposition of the penalty.
Note:
IRC §7491(c) applies only to individuals.
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The following are definitions that are related to the burden of proof requirements for the assessment of penalties:
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A penalty is any fine assessed under Title 26. For example, IRC §6662 imposes the accuracy related penalty;
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"Addition to Tax" is any amount computed by reference to the amount of tax. For example, IRC § 6654 imposes a penalty for the failure by an individual to pay estimated income tax; and
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"Additional Amount" refers to an amount that can be assessed by the Service that is not an addition to tax or penalty. An example is the amount imposed under IRC § 6673 for the sanctions and costs awarded by a court when a taxpayer's position is frivolous.
Note:
The definition of additional amounts under IRC §7491(c) does not include excise taxes imposed by Chapters 42 and 43 of the Internal Revenue Code, nor does it include interest under IRC § 6601.
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The Service must first present evidence a penalty, addition to tax, or additional amount is appropriately applied to the taxpayer. It is then the taxpayer's responsibility to present evidence of reasonable cause, substantial authority, or other similar defense in showing that the amount should not be asserted.
Example:
If a delinquency penalty is asserted under IRC §6651, the Service would meet its burden of proof by showing that the filing date was after the due date for the tax return, and that there was no evidence the taxpayer filed for an extension.
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Examiners should treat a penalty issue as any other issue by including the following information in the case file:
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The facts surrounding the issue;
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Applicable law;
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Application of the facts to the law;
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Audit conclusion; and
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Taxpayer's position.
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Examiners should consult IRM 20.1, Penalties, for additional information when developing penalty issues.
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This section provides procedures and other information for identifying and properly resolving specific issues the examiner may encounter during an examination.
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The status of an organization exempt under IRC §501(a) as an organization described in IRC §501(c)(3) cannot be modified from one section of the code to another section of the code. (Ex. IRC §501(c)(3) to IRC § 501(C)(7). If the organization does not meet the requirements of IRC §501(c)(3), its exempt status must be revoked.
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If there is evidence that an exempt organization has engaged in an activity that is inconsistent with its exempt status in a subsequent year, the examiner should conduct an immediate examination of the organization. It is not necessary to wait until a return is filed by the organization to expand the examination.
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Generally, the effective date of a revocation or modification of exempt status, is the date the organization first failed to qualify for exemption under the specific subsection of IRC § 501 stated in its most current determination letter.
Note:
The term "effective date" as used in the following discussion, means the effective date of the revocation or the modification.
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A revocation or a modification of an organization's exempt status may qualify for relief under IRC §7805(b). If the organization qualifies for relief under IRC §7805(b), the effective date of the revocation or modification is prospective. See IRM 4.75.13.5.3.2 below.
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The examiner must attempt to establish the date the organization first failed to qualify for exempt status.
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It is relatively easy to determine the effective date of a revocation or modification that is based on the occurrence of a single act, since the effective date is the first day of the year in which the act occurred.
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It is more difficult to determine the effective date of a revocation or modification if the revocation is based on an on-going activity. In this case, the examiner must attempt to determine the date the activities would have first caused the organization to fail to qualify for exemption. The examiner should consider using some or all of the following examination techniques to determine the effective date:
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Interview the officers, employees, or members of the organization;
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Inspect the prior year returns; and
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Review the determination file, if available.
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If the examiner determines the organization probably ceased to qualify for exemption during a prior year, he/she should expand the examination to include the prior year.
Exception:
In most instances the examiner will not expand the examination to a prior year if the statute of limitations for the assessment of tax has expired.
Caution:
The examiner must secure the approval of the group manager before the examination is expanded.
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In all instances, the effective date of the revocation or modification must be substantiated. If the examination is not expanded to prior years, the effective date of the revocation or modification will be the first day of the examination year when the determination was made, since this is the first date on which the revocation or modification can be substantiated.
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IRC § 7805(b) relief applies to revocation, modification, unrelated business income (UBI), excise taxes, private letter ruling or technical advice issues. Although the issues in Exempt Organizations (EO) are usually revocation or modification, there may be issues such as whether a proposed activity constitutes UBI. If the facts show that the original ruling or determination letter recognizing exemption was correct under the law and the facts presented by the organization when the letter was issued, but a subsequent change in the facts or law precludes the organization from continued recognition of exemption, revocation is effective as of the beginning of the first taxable year in which the organization altered its operations or the law changed. Under these circumstances, there is no need to request application of IRC §7805(b) relief.
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If the facts developed show the organization was never, in fact, entitled to recognition of exemption, even though the Service issued an exemption letter because of an omission or misstatement of material facts by the applicant organization, the revocation would ordinarily apply retroactively to the organization's first taxable year. In such cases, relief is generally not available under IRC §7805(b) and should not be recommended.
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If recognition of exemption was erroneous because of a misinterpretation of the applicable law by the Service which caused the organization to rely on its exemption letter, IRC §7805(b) relief should be recommended in determining the date of revocation.
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The following table recaps the situations described above:
SITUATION EFFECTIVE DATE OF REVOCATION IRC § 7805(b) APPLICABILITY Change in tax law or organization alters its operation subsequent to initial recognition of exemption First taxable year in which organization altered it operations or the law changed Not necessary Omission or misstatement of material facts by the applicant organization Retroactive to the organization's first taxable year Not Available Misinterpretation of law by Service Determined by IRC §7805(b) relief Is applicable and should be recommended The question of IRC §7805(b) relief may be raised by the examiner or the organization, by requesting the examiner to recommend such relief.
Note:
The examiner must advise any organization whose exemption may be revoked of the provisions of IRC §7805(b), if only to relate why relief is not being recommended.
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All cases in which relief under IRC §7805(b), whether recommended by the Area Manager, the Appeals Office, or the organization, must be referred to Exempt Organizations Technical (EO Technical).
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If the Area Manager believes that the organization is entitled to consideration for such relief, whether or not the organization has requested such consideration, and the revocation issue has been agreed upon, the case will be forwarded to EO Technical. The referral should include:
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A memorandum setting forth the reasons the Area Manager believes IRC §7805(b) relief should be granted; and
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The recommended effective date for revocation, and the reasons for selecting that date.
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When an organization requests IRC §7805(b) relief, the Area Manager will prepare a memo discussing the effective date requested by the organization.
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If that date is different from the one recommended by the Area Manager, or if relief is not recommended, the Area Manager should identify and explain what alternatives exist and lay a basis for selection of an effective date.
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The Area Manager should inform the organization that the request for IRC §7805(b) relief is being referred to EO Technical and indicate the recommended effective date of the revocation where one has been proposed.
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The request should contain:
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The Area Office case file;
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Form 6018-A, Consent to Proposed Adverse Action (if applicable); and
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A copy of the letter the Director, EO, has sent to the organization proposing to revoke its exemption letter.
Note:
Mandatory Review is responsible for protection of the statute of limitations.
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The Area Office case file should also contain definite information about when the action began or occurred that formed the basis for the recommendation of revocation. It will be forwarded to the address found in the most current Revenue Procedure on Rulings and Information Letters, which is published annually in the first Internal Revenue Bulletin each year, e.g., Rev. Proc. 2005-5.
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If the revocation or modification issue is not agreed and the case is appealed, the Appeals Office will forward the request for IRC §7805(b) relief, if still applicable, to EO Technical after the Appeals Office has reached its decision.
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If the Appeals Office, in considering an appeal of an exempt organization matter, believes consideration of relief under IRC§ 7805(b) is appropriate, even when such consideration has neither been requested by the organization, nor recommended by the Area Manager, the case will be referred to EO Technical. In such cases, the Appeals Office will prepare a memorandum of its reasoning.
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EO Technical, after considering IRC§ 7805(b) relief, will prepare a memorandum to the Area Office (or the Appeals Office) transmitting the decision of the Director, EO, giving the effective date of the revocation and the reasons. In cases where EO Technical agrees with the Area Manager's recommendation for relief and effective date of revocation, the reasons for such action will not normally be included in the memorandum. Differences of opinion between EO Technical and the Appeals Office or the Area Manager, if any, will be included within the transmittal memorandum.
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If the recommended relief under IRC §7805(b) is not being granted, such decision will be fully explained in the memorandum to the Area Manager (or to the Appeals Office).
Note:
All IRC §7805(b) relief cases are subject to mandatory review. See IRM 4.75.21, EO Special Examination Procedures, for processing information.
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When an issue is identified, the examiner should determine whether the issue is a mandatory technical advice issue or otherwise warrants a request for technical advice.
Note:
Technical advice means advice or guidance in the form of a memorandum furnished by Exempt Organizations Technical, in response to any technical or procedural question that develops during any proceeding on the interpretation and proper application of tax law, tax treaties, regulations, revenue ruling, notices, or other precedent, to a specific set of facts. Such proceedings include the examination of a taxpayer's return, the consideration of a taxpayer's claim for refund or credit, or any other matter involving a specific taxpayer.
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The examiner should review the list of mandatory technical advice issues in IRM 4.75.21, EO Special Examination Procedures, and review procedural memorandums issued after the IRM published date to determine if any additional technical advice issues have been identified.
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Given a specific set of facts, technical advice should be requested when:
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The law and regulations are not clear on the issue under consideration, and there is no published precedent for determining the proper treatment of the issue;
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There is a lack of uniformity regarding the disposition of an issue;
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A doubtful or contentious issue is involved in a number of cases;
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The issue is unusual or complex; or
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Securing technical advice would be in the best interest of the Service.
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The following are instances when a technical advice memorandum should not be requested:
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"Frivolous issues" should not be forwarded to EO Technical. A "frivolous issue" is one without basis in fact or law, or that espouses a position, which has been held by revenue rulings, case law, or the courts to be frivolous or groundless;
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An identical issue of the same taxpayer which the Area Office is currently considering; or
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An issue involving the same issue of the same taxpayer is in a docketed case for any taxable year.
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If the examiner determines that technical advice should be requested, he/she must first discuss the issue with the group manager and the taxpayer as soon as possible.
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The Service can not initiate the termination of an organization. The organization can initiate a termination by dissolving it's structure and distributing its assets.
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An examiner may be assigned the examination of an organization that has terminated, or an organization may decide to terminate while the examination is in process. If the organization has terminated and not previously notified the Service of its termination, the examiner should obtain the necessary information in order to update the Exempt Organization Business Masterfile (EO/BMF) to reflect the correct status of the organization. See IRM 4.75.13.5.6.1 and 2 for the proper procedures for updating the EO/BMF.
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If the terminating organization is incorporated, secure a complete copy of the Articles of Dissolution along with proof of filing from the State. If the organization has not filed Articles of Dissolution, secure a Resolution signed by at least two officers of the organization which indicates the date of dissolution. Resolutions are acceptable for unincorporated associations and for trusts. For trusts, the Resolution must be signed by the trustees.
Caution:
If the organization was terminated during or after its foundation status advance ruling period and it has not received a definitive foundation status classification letter from Rulings and Agreements, the examiner must determine the foundation status in addition to any other issues, as a part of the examination, even though the organization has terminated. See IRM 4.76.4, Private Foundations, for foundation classification procedures at the end of the advance ruling period.
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Secure a statement signed by an officer of the organization regarding the disposition of assets on hand at the time of dissolution.
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Determine whether the assets were properly distributed:
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For exempt purposes within the meaning of IRC §501(c)(3);
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To a state or local government for public purposes;
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To the federal government; and/or
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To an organization or organizations exempt under IRC §501(c)(3).
Note:
Consider the special distribution considerations for private foundations, if applicable. See IRM 7.26.7, Termination of Private Foundation Status.
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If the assets were not distributed properly, ask the organization to recover the assets and redistribute them properly. See IRM 7.25.3, Exempt Organizations Determinations Manual - Religious, Charitable, Educational, Etc., Organizations, for more information on the distribution of an IRC §501(c)(3) organization's assets on dissolution.
If Then The Organization The Examiner Will Recovers the improperly distributed assets and redistributes them Secure documentation of the redistributions and continue to process the termination Refuses to attempt to recover the improperly distributed assets Consider revocation of the organization's exempt status for the year or years in which the distributions were made Attempts to recover the improperly distributed assets but cannot Decide whether to propose revocation or accept the termination without further action based on all the facts and circumstances Note:
If the distributions are not recovered and are taxable income to the distributees, determine whether the distributions are required to be reported on an information return, e.g., Forms 1099-MISC. If information returns are required and due, but have not been filed, secure the delinquent returns. Determine whether the distributees' reported the distributions on their income tax returns. If the distributions were not reported, the examiner should consider proposing discrepancy adjustment(s) or referring the returns using Form 5666, TEGE Referral Information Report, and include it in the closed case file per IRM 4.75.16, Case Closing Procedures. The Form 5666 will be forwarded to EO Classification for processing by the closing unit. If the information returns are not due when the examination is closed, the examination closing letter should include an advisory paragraph addressing the filing requirements. If distributees' income tax returns are not due when the examination is closed, consider preparing Forms 5666 referring the future year income tax returns for examination.
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Determine whether tax-exempt bonds were outstanding at the time of the termination. If so, prepare Form 5666, TEGE Information Report, to recommend an examination by TEGE Tax Exempt Bonds for the year in which the termination took place.
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Secure any final returns due, but not filed.
Note:
An organization is required to file final returns when it ceases operations, dissolves, terminates, or liquidates. The final returns are due by the 15th day of the 5th month after the dissolution or termination is completed.
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If the organization has been properly terminated, prepare:
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A drafted termination letter. See Exhibit 4.75.13-1 for sample termination letter.
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If the termination was discovered during an examination, a drafted examination closing letter or report of examination should be prepared. See Exhibit 4.75.13-3 for the sample language to be used in a no-change letter issued to a terminated organization;
Note:
When incorporated organizations are administratively dissolved by the state, the letter should include an addendum to the effect that if the organization is reinstated with the state, a new Form 1023 will be required and that a user fee would be assessed for the filing of the application.
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Form 2363-A, Request for IDRS Input for BMF-EO Entity Change, to update the status code on the EO/BMF to 20, Termination;
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Form 3198–A, TE/GE Special Handling Notice. On the Form 3198-A, check the blocks for "Mandatory Review" and " Other" in the section titled "Mandatory Review/Operations, Planning & Review" and enter "Termination" in the space after "Other." In the "Other Instructions " section (bottom of the form), enter "IRC 6104(c) Notification Requirements." Make the entries on the Form 3198-A with a red pen or pencil or highlight them with a yellow marker;
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When completing Form 5599, use Disposal Code 14, Termination, unless a disposal code with a higher priority, e.g., revocation, unagreed closing, agreed tax change, closing agreement or change in foundation status, applies. See Document 6379, Exempt Organizations Management Information Systems Codes; and
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Two (2) copies of the drafted termination letter and documentation of the dissolution, one for the determination file and one for the file. Attach the copies to the inside left of the case folder.
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The case should be closed to EO Mandatory Review.
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After the case is reviewed by Mandatory Review and the final letters have been issued to the organization, the reviewer will prepare a memorandum to EP/EO Processing stating, "The attached information is being submitted to update the determination file (microfiche). The termination letter has been issued and IDRS updated by EO Examinations." The reviewer will date a copy of the termination letter and attach the dated termination letter and documentation of the dissolution to the memorandum, and mail it to the EP/EO Processing at the following address:
EP/EO Processing
550 Main Street
Room 4010
Cincinnati, OH 45202
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If the terminating organization is incorporated, secure a complete copy of the Articles of Dissolution along with proof of filing from the State. If the organization has not filed Articles of Dissolution, secure a Resolution signed by at least two officers of the organization which indicates the date of dissolution. Resolutions are acceptable for unincorporated associations and for trusts. For trusts, the resolution must be signed by the trustees.
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If the organization is described in one of following IRC sections, the examiner should verify that the assets were distributed in accordance with the requirements of the specific IRC section:
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IRC § 501(c)(9), Voluntary Employees’ beneficiary associations;
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IRC § 501(c)(12), Local Benevolent Life Insurance Associations, Mutual Irrigation and Telephone Companies, and like organizations;
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IRC § 501(c)(16), Corporations organized to finance crop operations;
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IRC § 501(c)(19), Charitable trusts or foundations described in Treasury. Regulation § 1.501(c)(19)-1(e);
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IRC § 501(c)(22), Multi-employer Pension Plan;
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IRC § 501(c)(27), Qualified State-Sponsored Workers’ Compensation Organizations;
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IRC § 501(e), Cooperative Hospital Service Organizations; and
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IRC § 501(f), Cooperative Service Organizations of Operating Educational Organizations.
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If the assets were not distributed properly, ask the organization to recover the assets and redistribute them properly.
If Then The Organization The Examiner Will Recovers the improperly distributed assets and redistributes them Secure documentation of the redistributions and continue to process the termination Refuses to attempt to recover the improperly distributed assets Consider revocation of the organization's exempt status for the year or years in which the distributions were made Attempts to recover the improperly distributed assets but cannot Will decide whether to propose revocation or accept the termination based on all the facts and circumstances -
Determine whether the distributions are taxable income to the distributees, and whether the distributions are required to be reported on an information return, e.g., Forms 1099-MISC. If information returns are required and due, but have not been filed, secure the delinquent returns. Determine whether the distributees' reported the distributions on their income tax returns. If the distributions were not reported, the examiner will consider proposing discrepancy adjustment(s) or referring the returns using Form 5666, TEGE Referral or Information Report, to EO Classification. See the instructions in IRM 4.75.16, Case Closing Procedures. If the information returns are not due when the examination is closed, the examination closing letter should include an advisory paragraph addressing the filing requirements. If distributees' income tax returns are not due when the examination is closed, consider preparing Forms 5666 referring the future year income tax returns for examination.
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The examiner will secure any final returns due, but not filed.
Reminder:
An organization is required to file final returns when they cease operations, dissolve, terminate, or liquidate. Its final returns are due by the 15th day of the 5th month after the dissolution, or termination is completed.
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After the examiner has determined the organization has been properly terminated, he/she will prepare:
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A drafted termination letter. See Exhibit 4.75.13-2. for sample termination letter.
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A drafted examination closing letter or report of examination. See Exhibit 4.75.13-3 for the suggested language to use in a no-change letter issued to a terminated organization;
Note:
When incorporated organizations are administratively dissolved by the state, the letter should include an addendum to the effect that if the organization is reinstated with the state, a new application for exemption will be required.
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Form 2363-A to update the Status Code on the EO/BMF to 20, Termination;
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Form 3198–A, TE/GE Special Handling Notice. On the Form 3198-A check the blocks for "Mandatory Review" and " Other" in the section titled "Mandatory Review/Operations, Planning & Review" and enter "Termination" in the space after "Other." Make the entries on the Form 3198-A with a red pen or pencil or highlight them with a yellow marker;
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When preparing Form 5599, use Disposal Code 14, Termination, unless a disposal code with a higher priority, e.g., revocation, unagreed closing, agreed tax change, or closing agreement applies. See Document 6379 for closing code priorities; and
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Copies of the drafted termination letter and documentation of the dissolution for the determination file.
Note:
The examiner will attached the copies to the inside left of the case folder.
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The group will close the case to EO Mandatory Review.
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After the case is reviewed by Mandatory Review and the final letters have been issued to the organization, the reviewer will prepare memorandum to EP/EO Processing stating, "The attached information is being submitted to update the determination file (microfiche). The termination letter has been issued and IDRS updated by EO Examinations." The reviewer will date the copy of the termination letter and attach the dated termination letter and documentation of the dissolution to the memorandum and mail it to EP/EO Processing at the following address:
EP/EO Processing
550 Main Street
Room 4010
Cincinnati, OH 45202
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IRC § 6001 provides that every person liable for any tax imposed by Title 26, or for the collection thereof, shall keep such records, render such statements, make such returns, and comply with such rules and Regulations as the Secretary or his delegate may from time to time prescribe.
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Whenever in the judgment of the Secretary or his delegate, it is necessary, he may require any person, by notice served upon such person or by Regulations, to make such returns, render such statements, or keep such records, as the Secretary or his delegate deems sufficient to show whether or not such person is liable for tax under Title 26.
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IRC § 6033 provides, in general, that every organization exempt under IRC § 501(a) shall file an annual return, stating specifically the items or gross income, receipts, and disbursements, and such other information for the purpose of carrying out the Internal Revenue laws as the Secretary may by forms or Regulations prescribe, and shall keep such records, render under oath such statements, make such other returns, and comply with such rules and Regulations as the Secretary may from time to time prescribe.
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Treas. Reg. § 1.6001-1(c) provides, in part, that organizations exempt from tax under IRC § 501(a) shall "keep such books and records as are required to substantiate the information required by IRC § 6033."
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An "Inadequate Records Notice" places taxpayers on notice that their record keeping practices are deficient and must be improved to meet the requirements of the law. The issuance of an "Inadequate Records Notice" may result in a follow-up examination or compliance check, and is a tool to enforce taxpayer compliance with legal requirements to keep adequate records for filing complete and accurate returns.
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The determination as to whether a taxpayer has maintained adequate records or has complied with a record retention agreement is a matter of judgment based on the facts and circumstances of the particular case. Factors to be considered in reaching a decision include, but are not limited to:
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Prior history and present degree of noncompliance;
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Indications of willful intent;
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Evidence of refusal to keep records;
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Other evidence of harm to the Government;
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Probability that poor record keeping will result in significant changes to the return;
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Likelihood that compliance can be enforced if the taxpayer fails or refuses to correct the inadequacies; and
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Anticipated revenue in relation to the time and effort required to obtain compliance.
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If the taxpayer has failed to comply substantially with the law and regulations for maintaining adequate books and records, the examiner should discuss the inadequacies with the group manager to determine whether to issue an "Inadequate Records Notice."
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When discussing the inadequate records issue with the taxpayer, the examiner should:
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Avoid criticizing the work of the taxpayer's employees, accountants, or attorneys in a way that would suggest wrongdoing or negligence;
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Focus on explaining how the taxpayer's books and records are inadequate; and
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Explain the steps that need to be taken to bring them into compliance with applicable statutes.
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Examiners should document:
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The nature of the inadequacies of the taxpayer's records;
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Managerial discussions; and
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The basis for the conclusion reached.
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If the case includes a record retention agreement, the examiner must contact Large, Midsize, Small Business (LMSB) Operating Division in order to obtain the assistance of a Computer Audit Specialist.
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When the examiner and group manager have agreed that an " Inadequate Records Notice" is appropriate, the examiner will prepare Form 2807, Agreement to Maintain Adequate Books of Account and Records, and attempt to secure an agreement with the taxpayer. The specific books and records should be described in Form 2807.
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If the taxpayer does not sign the Form 2807, the examiner should note the attempt made to secure the agreement in the workpapers, and discuss the facts and circumstances with the group manager.
Reminder:
All managerial discussions must be documented.
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The examiner will personally serve the Form 2807, or send it by certified mail. If the examiner holds a closing conference with the organization, he or she should serve the Form 2807 to an officer or trustee authorized to sign tax returns and, preferably, to the officer or trustee who signed the return(s) under examination during the closing conference.
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The examiner will complete the record of service on the Form 2807 at the time of delivery.
Note:
If the examiner sends the Form 2807 by certified mail, the return receipt will constitute the record of service and will be attached to the copy of the Form 2807 retained in the case file.
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The examiner will prepare a detailed Form 5666, TE/GE Referral Information Report, in both agreed and unagreed situations. The "Information Obtained" section should state that the package is documentation for an "Inadequate Records Notice."
Note:
The Form 5666 should recommend a follow-up examination no less than two years subsequent to the year of the current examination.
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When the case is closed, the Form 5666 should be placed on the left hand side of the folder as instructed per IRM 4.75.16, Case Closing Procedures, so that EO Classification can be properly notified of the need for a subsequent follow-up examination or compliance check.
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Regardless of whether or not the organization signs the Form 2807, the case will be closed to EO Mandatory Review. The following items must be included with the case file:
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Form 4620, Transmittal Letter - Exempt Organizations, which should include a recommendation that Mandatory Review issue the "Notice of Inadequate Records" letter;
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Form 2807, Agreement to Maintain Adequate Books of Account and Records;
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Form 5666, TEGE Referral Information Report;
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Form 5599, EO Examined Closing Record, using Disposal Code 08, Written Advisory; and
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Advisory Letter 3609 which should include an addendum that contains references to the applicable sections of the IRC and Treasury Regulations and a statement which indicates that "continued failure to maintain adequate records may place your exempt status in jeopardy."
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If the taxpayer signed Form 2807, the reviewer will issue a copy of the executed Form 2807 with the "Notice of Inadequate Records " letter shown in Exhibit 4.75.13-4. The "Notice of Inadequate Records" may be sent by either certified or non-certified mail. The reviewer will summarize why the records are not adequate and list the specific books of account and records the taxpayer must maintain on page two of the "Inadequate Records Notice" using a summary of the agreed Form 2807.
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If an agreement has not been reached or the taxpayer has not executed Form 2807, the reviewer will issue the "Notice of Inadequate Records" letter in Exhibit 4.75.13-4 by certified mail. The reviewer will summarize why the records are not adequate and list the specific books of account and records the taxpayer must maintain on page two of the "Inadequate Records Notice" using a summary from the unagreed Form 2807 to list the specific books of account and records the taxpayer must maintain. The list must be specific as to the records that must be kept by the taxpayer but care must be taken not to dictate to the taxpayer how the records are to be kept.
Note:
The " Notice of Inadequate Records" letter shown in Exhibit 4.75.13-4 is a modification of Letters 978 and 979 to specifically address exempt organizations law and record keeping requirements.
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EO Mandatory Review will forward the Form 5666 to EO Classification in Dallas for a future year audit in both agreed and unagreed situations. Classification will then make the determination whether a follow-up examination is warranted.
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At the appropriate time, if a follow-up examination or compliance check is deemed to be appropriate by EO Classification, the examiner will consider the following:
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The examiner should document in the case file consideration of the inadequate record keeping issue and state whether or not the taxpayer has corrected the inadequacies. If the examiner concludes that the taxpayer is substantially complying with requirements to keep adequate records, he or she should follow normal examination procedures with regard to the scope of the examination and report writing;
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The examiner should include the inadequate records notice information in the case file when closing the examination;
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If, upon follow-up, the examiner concludes that the taxpayer is not substantially complying with requirements to keep adequate records, he or she should consider additional enforcement measures, such as the assertion of penalties or revocation.
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The examiner will include the inadequate records notice information in the case file when closing the examination.
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Upon follow-up, if the examiner concludes that the taxpayer is not substantially complying with requirements to keep adequate records, he or she should consider additional enforcement measures, such as the assertion of penalties or revocation.
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Treas. Reg. § 1.6033-2(1) (2) provides, in part, that every organization which is exempt from tax, whether or not it is required to file an annual information return, shall submit such additional information as may be required by the Internal Revenue Service for the purpose of inquiring into its exempt status and administering the provisions of subchapter F, Chapter 1 of subtitle A of the Code, IRC § 6033, and Chapter 42 of subtitle D of the Code.
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IRC § 6033, Treas. Reg. §1.6001-1(c) and Treas. Reg. §1.6033-2(a) (1) and (i) (2) require any organization exempt from tax under IRC §501(a), to supply the Service with such information as is required by the revenue procedures and the instructions for Form 990, Return of Organization Exempt From Income Tax, and Schedules thereto and to keep such books and records as are necessary to substantiate such information.
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Failure to maintain proper books and records and make them available to the examiner, may result in revocation of an exempt organization's exempt status because the organization is not observing the conditions required for such status.
Caution:
Except in unusual circumstances, the examiner will not propose revocation of an organization's exempt status due to inadequate records unless an "Inadequate Records Notice" was issued as a result of a prior examination.
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Revenue Ruling 59-95,1959-1 C.B. 627, although drafted prior to enactment of IRC §6652, has never been withdrawn and can be used to support revocation, where the organization will not supply the information necessary to enable the Service to make a determination as to whether there have been any substantial changes in the organization's character, purpose, or methods of operation, and there is a substantial doubt that the organization should continue to be exempt.
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If the organization has continued to fail to comply substantially with the law and regulations for maintaining adequate books and records, or fails to provide requested information, the examiner should discuss the inadequacies with the group manager to determine whether to propose revocation of its tax-exempt status.
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When the group manager and the examiner have decided revocation is appropriate, the workpapers and report of examination must demonstrate:
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How the information requested from the taxpayer is material in establishing the organization's right to continued exemption;
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That the organization was given an adequate opportunity to provide the requested information; and
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That the organization was advised of the consequences of failing to provide such information.
Note:
The group manager should consider requesting advice and/or guidance from Area Counsel during the development of a revocation issue based on the failure to maintain or provide records.
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When a qualification or status or foundation classification issue is identified during the examination of an IRC § 501(c)(3) organization, the examiner must determine whether it is subject to declaratory judgment under IRC §7428.
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If the issue is subject to declaratory judgment under IRC §7428, the examiner must take care to "share" all documentation of the issue with the taxpayer because the case may be decided solely on the basis of the Administrative Record.
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When a declaratory judgment issue is identified, the examiner should refer to IRM 4.75.32 for instructions on the development of the issue and special procedures to be followed.
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The following is a list of those issues which are subject to Declaratory Judgement under IRC § 7428.
FROM: TO: IRC § 509(a)(1) IRC § 509(a)(2) or 509(a)(3) IRC § 509(a)(2) IRC § 509(a)(1) or 509(a)(3) IRC § 509(a)(3) IRC § 509(a)(1) or 509(a)(2) IRC § 509(a)(1) and 170(b)(1)(A)(i) IRC § 509(a)(1) and any other subsection of IRC § 170(b)(1)(A), e.g. IRC § 170(b)(1)(A)(vi) IRC § 509(a)(1) and 170(b)(1)(A)(vi) IRC § 509(a)(1) and any other subsection of IRC § 170(b)(1)(A), e.g. IRC § 170(b)(1)(A)(iii) A public charity under IRC § 509(a)(1), 509(a)(2) or 509(a)(3) A private non-operating foundation described in IRC § 509(a) or a private operating foundation described in IRC § 4942(j)(3) A private operating foundation described in IRC § 4942(j)(3) A private non-operating foundation described in IRC § 509(a) A private non-operating foundation described in IRC § 509(a) A private operating foundation described in IRC § 4942(j)(3) -
An IRC § 501(c)(3) organization's cannot be modified to a non § 501(c)(3) organization. The organization must be revoked and reapply on Form 1024.
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An organization's classification as private foundation under IRC § 509(a) cannot be modified to a public charity classification under IRC §§509(a)(1), 509(a)(2), or 509(a)(3), unless the initial classification was in error at the time it was made. The organization must terminate its private foundation status under IRC §507.
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The following procedures should be followed if the examiner is unable to contact the organization by telephone and the organization does not respond to the initial contact letter.
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Examiners should analyze each case individually in order to assert good judgment in determining the appropriate steps to take. Some procedures might not be warranted in every case, particularly with entities having relatively low incomes and assets. However, the following guidelines should normally be followed in cases where the examiner cannot locate the taxpayer:
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Inspect correspondence in the case file for any change of address noted by the U.S. Postal Service;
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Review the case file for possible sources of information that may lead to the taxpayer's whereabouts;
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If the organization is a subordinate under a group ruling, contact the parent organization to secure the current address of the organization or the name and address of the current officers;
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Use ChoicePoint™ to find current names and addresses for the organization, officers, directors, or trustees;
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Check telephone and/or city directories for names and addresses of officers, directors, or trustees as well as the organization;
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Check the current address by submitting Form 6882, IDRS/Master File Information Request. The information returned will be from the latest return module posted to the master file and will include entity and address data;
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Contact the Post Office for a current address using Form 4759, Address Information Request;
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Check Internet resources for possible leads;
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For corporations, check the state annual corporate registration for the name of the current corporate agent; and
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Contact third parties such as current or former employees or return preparers.
Note:
Examiners must follow all third-party procedures as outlined in Treasury Regulation § 301.7602-2, if applicable.
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If the taxpayer cannot be located after following the applicable procedures above, send examination letters by certified mail to the organization’s last known address and the last known officers, as reported to the state or to the Service, whichever was most recently reported.
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The letters should have a date by which a response is required, such as 30 days after the date of the letter.
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Refer to Exhibit 4.75.13-5 for examples of closing procedures to be followed for various " unable to locate" situations.
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Certain industry cases and issues warrant continuing coordination and are included in the Exempt Organization Technical Advisor Program.
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Any Team Examination Program (TEP) case, formerly known as Coordinated Examination Program (CEP), and non-TEP case can be included in the Technical Advisor Program.
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In addition to the industries included in the EO Technical Advisor Program, case/group managers are responsible for compliance with all coordinated issues, including Large & Mid-Size Business (LMSB) Coordinated Issues. See IRM 4.40.1 through IRM 4.40.3 for LMSB Technical Advisor Procedures.
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EO Area Managers are encouraged to request technical assistance from EO Rulings and Agreements with respect to technical problems and to seek clarification and guidance on issues which may or may not arise in an examination of a particular return.
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Case/group managers examining cases within an industry will:
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Receive notice from the Technical Advisor that their case has been included as an identified industry case when the case is assigned; and
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Advise the Technical Advisor of any large case which is engaged in the business activity of a particular designated industry and is not an identified industry case.
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Refer to IRM 4.75.33 for additional information on the Technical Advisor Program.
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Case files requiring suspension of action will normally be held in EO Mandatory Review until such time as action on the case can resume. These will include, but are not limited to, technical advice cases and Section 1254 suspense cases.
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Prior to forwarding a suspense case to Mandatory Review, it will be the group’s responsibility to ensure the statute is protected for at least one year. Upon receipt in EO Mandatory Review, it will be the reviewer's responsibility to secure any necessary statute extensions. Also, as necessary, Mandatory Review will secure extensions on subsequent years if there is a continuing issue.
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Technical Assistance cases will be maintained in the groups with a copy of the technical assistance memorandum kept in Mandatory Review for information and follow up.
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Cases involving issue(s) having nationwide ramifications or those within a particular judicial jurisdiction are, at times, suspended to ensure uniform and consistent treatment of the issue(s). This includes cases in which the issue is the same or similar to an issue(s) in a case awaiting final action by Rulings and Agreements or the Office of the Chief Counsel (Tax Exempt and Government Entities)
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Cases involving issues which have been identified as Form 1254 suspense cases should be sent to EO Mandatory Review. The examining agent should have completed the examination with regard to all other issues prior to forwarding the case to Mandatory Review.
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The Mandatory Review Manager will be advised of any statutes that expired prior to receipt of returns being suspended.
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The following procedures will be followed before forwarding the case to Mandatory Review:
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Prepare the Form 1254. (References to Examination should be changed to TE/GE);
Note:
For a group of cases with an identical issue, a Form 1254 should be prepared for one of the cases, and the remaining identical issue cases should be listed on Form 1254-A, which is attached to Form 1254.
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Update the AIMS status to the appropriate suspense code; and
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Prepare and mail Letter 1014 to the taxpayer advising him of the reasons for suspended action on his tax return, and to inform the taxpayer of the status of the case.
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The Forms 1254 or 1254-A will be placed in a special suspense file maintained and controlled in Mandatory Review. Until advice is received, no action should be taken to close the case, except as may be necessary to protect the Government's interest (i.e., protect the statute).
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When a final decision is made on any issue in suspense, the case files will be returned to the originating Area with a synopsis of the decision. Any other guidelines available at that time will also be included with the file.
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Conclusions reached by examiners must reflect correct application of the law, regulations, court cases, revenue rulings, etc. Examiners must correctly determine the meaning of statutory provisions and not adopt strained interpretation.
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The Federal tax system is constantly changing. Examiners must keep well informed of the ever-growing body of tax authorities and advances in the management and storage of information.
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In the words of Supreme Court Justice Jackson, "No other branch of the law touches human activities at so many points. It can never be made simple." Income tax law is too complex for examiners to immediately perceive its ramifications and provisions in all examinations.
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This section focuses on researching Federal tax law, evaluating the significance of various authorities, and supporting conclusions reached with appropriate citations. The profiles of various tax authorities in this chapter are intended to help examiners become familiar with the most common, but by no means all, sources or available research techniques.
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The Internal Revenue Code of 1986 is the primary source of Federal tax law. It imposes income, estate, gift, employment, miscellaneous excise taxes, and provisions controlling the administration of Federal taxation. The Code is found at Title 26 of the United States Code (U.S.C.). The U.S.C consists of fifty titles.
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For ease of use, the Code is divided into different units, and includes subtitles, chapters, subchapters, parts, and sections. Listed below are the Code sections which fall within the eleven subtitles of the current Code.
Subtitle Contents IRC Sections A Income Taxes 1–1563 B Estate and Gift Taxes 2001–2704 C Employment Taxes 3101–3510 D Miscellaneous Excise Taxes 4041–5000 E Alcohol, Tobacco, and Certain Other Excise Taxes 5001–5881 F Procedure and Administration 6001–7873 G The Joint Committee on Taxation 8001–8023 H Financing of Presidential Election Campaigns 9001–9042 I Trust Fund Code 9500–9602 J Coal Industry Health Benefits 9701–9722 K Group Health Plan Portability, Access, and Renewability Requirements 9801–9806 -
Sections are usually arranged in numerical order. This sometimes leads to the need to show a Code section number followed by a capital letter not in parentheses. An example is IRC § 280A. This designation is used because subsequent legislation created additional Code sections in Part IX, requiring the addition of new Code sections after section 280. Since section 281 already existed, new sections were added by creating sections 280A, 280B, 280C, etc.
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The Internal Revenue Code is generally binding on all courts of law. The courts give great importance to the literal language of the Code, but the language does not solve every tax controversy. Courts also consider the history of a particular Code section, its relationship to other Code sections, Committee Reports, Treasury Regulations, and Internal Revenue Service administrative policies.
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It is often necessary to cite Internal Revenue Code sections in reports and to taxpayers in support of a position on an issue. For convenience, the Internal Revenue Code is abbreviated IRC and the symbols § or §§ are used in place of section and sections respectively.
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When making reference to a Code section, usually no reference is made to the title, subtitle, chapter, subchapter, or part. Code sections are divided into subsections, paragraphs, subparagraphs, and clauses. For example, IRC § 170(b)(1)(A)(vi) is subdivided as follows:
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IRC § 170; Code section, Arabic numbers;
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Subsection (b); lower case letter in parentheses;
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Paragraph (1); Arabic number in parentheses;
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Subparagraph (A) ; capital letter in parentheses; and
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Clause (vi); lower case roman numerals in parentheses
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The Code is continually changing. It is important that examiners determine the law applicable to the year under examination. To do so, determine whether the applicable law has been modified, and if so, the date on which the changes became effective. Many publishers provide this information in small print immediately following the current Code section.
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Federal income tax legislation originates in the House of Representatives. Hearings are held by the House Ways and Means Committee. When a bill is introduced in the House, a Committee Report is published which often states the reason the bill is being proposed. This reasoning establishes the legislative intent behind the finalized law.
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After the bill clears the House, it is considered by the Senate. The Senate Finance Committee holds hearings and prepares a report explaining any changes made to the House bill. A Conference Committee later resolves any differences between the House and Senate versions of the bill and issues its own report.
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When the bill passes both the House and Senate, it is sent to the President to be signed. Once signed, the bill becomes law and a new or amended section of the Code is enacted. Committee Reports are useful tools in determining Congressional intent behind certain tax laws, and helping examiners apply the law properly.
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Committee Reports are published in full in the Congressional Record, and in part, in the Internal Revenue Bulletin and Cumulative Bulletin. Selected reports are found in many commercial tax services.
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Committee Reports are identified by a number representing the session of Congress and a sequence number. For example, the Tax Reform Act of 1986 was enacted by Public Law 99–514. House, Senate, and Conference Reports accompanying that legislation are cited as follows:
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House Report 99-426, 1986-3 C.B. Vol. 2;
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Senate Report 99-313, 1986-3 C.B. Vol. 3; and
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Conference Report 99-841, 1986-3 C.B. Vol. 4.
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The reports are published in the Cumulative Bulletin (IRM 4.10.7.2.4). In each citation, " 99" refers to the 99th Congress. Some publishers refer to the reports collectively as "Committee Reports, P.L. 99–514."
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The Code of Federal Regulations (CFR) is a codification of the general and permanent rules published in the Federal Register (F.R.) by the Executive departments and agencies of the Federal Government. It is divided into fifty titles which represent broad areas subject to Federal regulation. Each title is divided into chapters usually bearing the name of the issuing agency. Each chapter is subdivided into parts covering specific regulatory areas. Title 26 comprises the Internal Revenue Regulations and is cited 26 CFR.
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The Federal Income Tax Regulations are the official Treasury Department interpretation of the IRC and follow the numbering sequence of IRC sections.
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Legislative and interpretative regulations are issued by the Secretary of the Treasury. If the IRC states " The Secretary shall provide such regulations . . ." , then the regulations issued are legislative. Interpretative regulations are issued under the general authority of IRC § 7805(a) , which allows regulations to be written when the Secretary determines they are needed to clarify an IRC section.
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The courts consider the merit of both interpretative and legislative regulations. However, more weight is given to legislative regulations than to interpretative regulations.
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Regulations are written by the Legislative and Regulations Division or Tax Exempt and Government Entities Office of Associate Chief Counsel (Technical), Internal Revenue Service, and are approved by the Department of the Treasury. There are three classes of regulations: proposed, temporary, and final.
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Proposed Regulations - Proposed regulations provide guidance concerning Treasury’s interpretation of an IRC section, but do not have authoritative weight. The public is given an opportunity to comment on proposed regulations and public hearings may be held if sufficient written requests are received. Since proposed regulations have no authoritative weight, taxpayers and examiners are not bound by them. Proposed regulations become binding when adopted by a Treasury Decision and they become final regulations;
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Temporary Regulations - Temporary regulations are often issued soon after a major change to provide guidance for the public and Internal Revenue Service employees with respect to procedural and computational matters. Unlike proposed regulations, temporary regulations are authoritative and have the same weight as final regulations. Public hearings are not held on temporary regulations; and
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Final Regulations - Final regulations are issued after public comments on proposed regulations are evaluated. They supersede both temporary and proposed regulations. A final regulation is effective the day it is published in the Federal Register as a Treasury Decision, unless otherwise stated.
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The Service is bound by the regulations. The courts are not.
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If both temporary and proposed regulations have been issued on the same Code section and the text of both are similar, examiners’ positions should be based on the temporary regulations because it can be cited as an authority for proposing an adjustment.
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When no temporary or final regulations have been issued, examiners may use a proposed regulation to support a position. Indicate that the proposed regulation has no authoritative weight, but is the best interpretation of the Code section available.
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Regulations are printed in the following publications:
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Federal Register;
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Code of Federal Regulations (CFR);
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Under the heading "Treasury Decisions " (T.D.) in the Internal Revenue Bulletins (I.R.B.) and the Cumulative Bulletin (C.B.); and
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Tax services of commercial publishers, such as CCH Incorporated and Research Institute of America.
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The citation for a regulation contains three basic organizational units:
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Part number;
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Code section number; and
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Regulation section number.
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Treas. Reg. § 1.61-9(c) is illustrated below:
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61 - Code Section; and
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9(c) - Regulation section and subsection.
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The first division is the CFR part number and indicates the subject of the regulation. The part number appears before the decimal point in a citation. In the citation Treas. Reg. § 1.61-9(c), the number 1 refers to Part 1 of the CFR, which is income tax. If the regulation were on employment taxes, the number 31 would precede the decimal point;
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The numbers immediately after the decimal point refer to the Code section to which the regulations apply. In the citation Treas. Reg. § 1.61-9(c), the number 61 refers to IRC § 61. The regulations are sequenced by Code section numbers. For example, Treas. Reg. § 31.6051 comes before § 31.6052 but after § 301.6047; and
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The section number of the regulation is separated from the Code section by a hyphen. Again, using the citation Treas. Reg. § 1.61-9(c), the number 9 is the regulation section number and (c) is the subsection.
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References to regulation sections do not correspond to Code sections.