Tuesday, October 2, 2012

"IRS Rules" is Wrong!

One of my, if not my biggest, pet peeves with popular press reporting on taxes is when reporters blame "IRS Rules" for some perceived tax abuse.  For example, today's New York Times (also linked on TaxProf) claims that the difference in tax treatment between a partnership interest and a fee from a corporation is one such rule.

I thought the Internal Revenue Code provided for a separate tax on corporations and for partnerships to be treated as flow-through entities, which is why carried interest is taxed differently than fees paid by a corporation.  Or maybe the Supreme Court? Or the Circuit Courts?  Even Treasury Regulations don't come directly out of the IRS.  The IRS does an incredible amount of work administering the tax laws of the largest economy in the world, and there really are rules published by the IRS that can have substantive effect , but the IRS does not (and cannot) make these more fundamental structural legal choices.

Why care so much?  Because the use of "IRS rules" gives the impression that somehow there is a shadowy underworld of bureaucrats conspiring with shifty practitioners and taxpayers to avoid or undermine obviously correct tax consequences, rather than face the difficult policy choices inherent in constructing a tax law which involve real and difficult trade-offs.  As someone who struggles with these issues, this concerns me. How is the country supposed to engage in a real policy debate without directly confronting these difficult policy choices?    Perhaps not all is lost, though - the Times editorial board seems to be able to get it right.

More personally, however, I suppose I am just tired of explaining to people that the IRS had nothing to do with why Bain can form entities in the Cayman Islands and defer paying taxes.  Oh well.


  1. That's always bugged me to no end, too. Thanks Adam!

  2. I do think in the US their needs to be a clearer distinction of the roles of Treasury, IRS, and OMB in the tax law development process. If you go the US Treasury Department's website it is not that transparent in my opinion in discussing the role of the Treasury vs the IRS in actually developing tax law. In theory in the Canadian system you have much more of a bright line between the Dept of Finance which develops tax "law" and the Minister of Revenue/Canada Revenue Agency(they are not technically the same under the law)which administers the tax system. Having said for example the Department of Finance only has(at least as of a few years ago)three or four full time people to negotiate tax treaties so in a really complex negotiation lets Canada-UK or Canada-US it is almost invetiable that legal staff end of up getting secondded from Canada Revenue to the negotiation process.

    Here is what the Department of Finance(Canada) has to say about their role:

    The Department of Finance Canada develops and evaluates federal tax policies and legislation in the areas of personal income tax, corporate income tax and sales and excise tax. The actual collection of taxes and interpretation of tax law are the responsibility of the Canada Revenue Agency (CRA). For information on tax collection, visit the CRA website.

    The Department of Finance Canada also monitors our tariff policies and those of other nations, and it develops new policies that will best serve our economy.

  3. After a lot of thought there is an "issue" that I do think needs to be brought as delicately as possible and that if you dug deep and looked at which individuals develop tax policies at Treasury and IRS one "might" think there might be "revolving" door problem. Now I am not accusing any individuals of anything untoward but when you have attorney advisor working for the government for only two or three year stints between working in the private sector I do think their needs to be some type of publically known safeguards against even the appearance of impropriety.

    Now the revolving door issue has always been a problem take in Canada how many high Deputy Ministers and other public servants end up in the private sector and serving on corporate boards. See the likes of Norman Spector, Paul Tellier, Nick LePan, David Dodge, Don Drummond, Kevin Lynch and the list goes on. These people though are/were very high level well known public figures with many years of experience in government but also with public reputations to keep. At some level its known in Canada that higher echelon public servants will eventually find there way to the public sector it is also assumed that when someone like Kevin Lynch is gone he is gone for good(which makes sense in his case as there were no more "higher" positions he could be promoted too). I do have personally have to say I find it uncomfortable that someone could work in private tax law then work for Treasury then work privately then work for Treasury again before going back to the private sector. I have a feeling I just stepped on beehive. Perhaps there are safeguards(and I am sure they are in a strict legal sense) but I think it is the appearance more than the actual occurence.

  4. To be fair, I think this is a problem in US administrative law generally and not unique to tax administration. Whether an agency has rulemaking authority, to what extent courts should defer to their rules, and the difference between interpretative and legislative rulemaking continues to come before the Supreme Court across many areas, with little clear guidance emerging. But at a minimum, the press should be able to make clear that provisions of Title 26 of the US Code, otherwise known as the Internal Revenue Code, are not within the discretion of the IRS.

  5. Agreed. The issue is how Title 26 is written. Technically Congress writes Title 26 but no one actually thinks individual members of Congress actually have read all of Title 26 even members of Finance and Ways and Means. The people who actually understand it tend to be staffers on Finance, Ways and Means, JCT, and Treasury. The issue in my personal opinion is who are these "people" and to whom are they accountable to. That is what the press should be looking at.