The Office of Chief Counsel: a renewed commitment to guidance - Internal Revenue Service

"Transformation" is an overused, and probably by now passe, word that was intended to describe change that certain consultants advised executives to bring to their organizations. As one who observed corporate transformations from the outside, I confess to having had substantial doubt about whether I really understood what the word meant. I will say, however, that it does accurately describe the difference between the Internal Revenue Service 20 years ago and the IRS today. The IRS today is a different institution, and its potential for offering the public a valuable service has been enormously enhanced by the structural changes that Commissioner Charles Rossotti has effected.

The mission of the Office of Chief Counsel is to serve America's taxpayers fairly and with integrity by providing correct and impartial interpretation of the internal revenue laws and the highest quality legal advice and representation for the IRS. The reorganization of the IRS provides a better platform for the fulfillment of this mission by allowing the Chief Counsel's office to focus its resources more efficiently and effectively. This gives the IRS a better opportunity to provide clear and prompt advice to the public and the field. I am committed to utilizing this new structure to ensure that such guidance is given in a timely manner.

Organization of Chief Counsel -- Yesterday and Today

In the old IRS, problems arose geographically and were resolved in an uneven fashion. The field organization was more concerned about process than substantive technical issues. There were, in effect, 33 different manifestations of the IRS, each one different from the others, some to a significant degree. Each district director had responsibility for almost all IRS operations within a geographic area. Coordination of efforts between districts was cumbersome and difficult. Today, the IRS is organized by the kind of taxpayer served. These include the Large and Mid-Size Business Division (LMSB), the Small and Self-Employed Division (SB/SE), the Tax Exempt and Government Entities Division (TE/GE), and the Wage and Income Division (W&I). The structures of these divisions differ in response to the particular needs of the taxpayers that fall within each division's responsibilities.

LMSB, which serves TEI's constituents, is structured in a way that facilitates a focus on the specific problems of tax administration, compliance, and tax policy as they arise in and affect a particular industry. LMSB has five industry aggregations: Financial Services; Heavy Manufacturing & Transportation; Retailers, Food, Pharmaceuticals & Healthcare; Natural Resources & Construction; and Communications, Technology & Media. See Chart 1: Large & Mid-Size Business Division. Each is headed by an Industry Director, who reports directly to the LMSB Commissioner, Larry Langdon. The Industry Directors supervise Directors of Field Operations (DFOs) to whom the LMSB team managers report. This streamlined organization gives a coherence and direction to the consideration of substantive issues that the IRS never before had. The new lines of authority are nationwide. Accordingly, early identification and resolution of technical issues industry-wide can be a primary goal of field operations.

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The industry aggregations provide two main benefits. First, they allow for the development of expertise in the commerce of each industry. Each industry-related group has a senior advisor who has spent much of his or her career in the private sector of that industry. This resource should assist the Industry Director and the DFOs in understanding the business context of potential issues. Second, the industry aggregations allow for the consideration of industry-specific issues. Each Industry Director has a substantive focus in addition to a managerial focus.

Division Counsel are organized in a fashion that follow the IRS's structure. See Chart 2: LMSB Counsel Structure. Although Division Counsel are not divided among industry lines, LMSB Area Counsel are placed geographically to coincide with the industry aggregations. See Chart 3: Geographic and Industry Divisions and Chart 4: LMSB Counsel Headquarters Structure. For example, an Area Counsel in the northeastern United States aligns with the Financial Services Industry of LMSB. The Area Counsel serve as counsel to the Industry Directors, allowing for better communication and understanding between the Chief Counsel's office and the client organization. These counsel also facilitate interchange with the technical counsel (Associate Chief Counsel Offices) in the National Office.

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The IRS restructuring in the field produces at least two significant benefits to taxpayers. First, it offers a better forum for discussion and resolution of industry-wide issues. For example, the Industry Issue Resolution program could not have as easily been conceived and implemented under the old structure. Second, it permits a closer working relationship between counsel and the field, which should improve the timeliness of advice given.

Unlike 20 years ago, the Chief Counsel's office in the National Office is organized along substantive lines rather than functional lines, consolidating technical expertise by topic rather than by product. The results are the Associate Counsel Offices, which are divided into six substantive areas: Corporate; International; Income Tax & Accounting; Financial Institutions & Products; Pass-Throughs & Special Industries; and Procedure and Administration. See Chart 5: Chief Counsel Structure. TE/GE and Criminal Tax also act in Associate Counsel roles with respect to the substantive issues of those areas. Each Associate Counsel is responsible for advising both the public and field with regard to its specific substantive area.

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These two Chief Counsel organizational changes, in the field and in the National Office, enhance the opportunities for closer work between the IRS and the Office of Chief Counsel. The field, both IRS and Counsel, can now seek help directly from attorneys organized by technical expertise. This has several potential benefits. First, simpler lines of communication usually make for clearer and more timely advice. The field is more focused on identifying issues that may need guidance, and the advice is more certain to be uniformly applied, both of which can happen more quickly. In addition, the technical positions are reviewed by attorneys who are focused not on winning cases but on the proper application of the law.

Division Counsel are well positioned to help ensure that material facts are developed so that proper legal advice is given. Too frequently, case-specific advice turns on poorly developed facts. Legal advice can only be as sound as the material facts on which it is premised. Division Counsel will be involved to help revenue agents spot the appropriate issues, which is the right goal from a tax administration perspective. Taxpayers should also have more access to the field attorneys advising the agents during audit. Chief Counsel attorneys will serve only in an advisory role, however, and will not run the audit. Furthermore, it should be made clear to the taxpayer when counsel is involved to develop an issue for litigation. The public benefits when both sides understand the objectives and how issues are being considered.

The new IRS structure allows us to coordinate cases to achieve better and more efficient enforcement. To that end, I have reassigned major case planning from the Associate Counsel to the Division Counsel. Associate Counsel should be concerned with developing guidance on statutory interpretation, and litigation is not a proper vehicle to achieve that goal. The role of Associate Counsel in litigation is to assist Division Counsel in assuring that the integrity of the IRS's technical positions is maintained. This provides better opportunities to ensure that the issues that the IRS should be raising are being raised, and that they are being raised in the right way.

Published Guidance

A system of self-assessment, such as ours, requires the IRS to issue guidance to assist taxpayers in determining what works and what does not. In general, the level of published guidance issued by the IRS has decreased substantially since I was last here in the Office of Chief Counsel. In January of 2001, Tax Notes published a report detailing the decline in published guidance. (1) Overall, the number of precedential published guidance (regulations, revenue rulings, revenue procedures, and notices) noticeably decreased between 1980 and 2000. The total number of precedential guidance issued in 1980 was 508; in 2000, the number was only 236. See Chart 6: IRS Published Guidance, 1980 - 2000.

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The number of final and temporary regulations issued annually has wavered through the years. It was at its highest point in 1980 at 83, but dipped below 50 per year in 1989, 1990, 1993, 1997, and 1999. There seems to have been a downward trend in the number of regulation projects overall.

The most telling numbers are with respect to revenue rulings. In 1980, the IRS published 355 revenue rulings. In 1990, this number shrank to 112. In 2000, it was only 58. The number of revenue rulings has been less than 100 every year since 1992. By comparison, the number of Notices increased from 10 in 1980 to 66 in 2000. From 1994 to 2000, the number of Notices averaged in the high 60s each year. Notices typically address broader sets of facts than revenue rulings and are important in alerting the public to IRS concerns.

In 1999, Booz Allen & Hamilton performed a study for the IRS as part of the restructuring process. According to this study, the IRS published 434 revenue rulings in 1979. Ninety-seven percent of these rulings dealt with substantive issues, and only three percent were ministerial. See Chart 7: Revenue Rulings -- 1979. By comparison, in 1998, the IRS issued only 65 revenue rulings, and 38 percent of these rulings were substantive and 62 percent were ministerial. See Chart 8: Revenue Rulings -- 1998. The IRS is issuing substantive revenue rulings at about five percent of the level it achieved in 1979.

The current level of published guidance is unacceptable to Commissioner Rossotti, Assistant Treasury Secretary Mark Weinberger, and me. Thus, the IRS and Treasury are committed to increasing the amount of published guidance. A chief obstacle to the issuance of greater published guidance has been the separate and seriatim policy review by the Office of Chief Counsel and by Treasury. Traditionally, published guidance has been reviewed sequentially by the Associate Counsel offices, the Chief Counsel, and Treasury. This process can result in extensive delays even if no significant policy issues arise.

Published guidance is a particularly important tool in the tax shelter area. If we want to have an effect on the marketing of transactions that the IRS believes should be interdicted, we must vastly improve our timeliness in identifying these transactions to the public. We have a public duty to provide timely guidance to taxpayers who are trying to comply with the law. Treasury and the Office of Chief Counsel are committed to early and joint review to increase the level of published guidance. Issuing guidance quickly requires us to develop our principal position and announce it rather than attempting to refine all the possible arguments. Too often published guidance is delayed while we attempt to formulate the perfect solution to all potential problems. We should focus instead on excellent advice that covers the general issues. More specific problems that may arise can be addressed in later guidance.

The Chief Counsel's office cannot function as an academic institution. Our role is to issue guidance that addresses the major issues as soon as possible so the public and the field are aware of the positions of the agency. That guidance must be in a form that is reliable.

Regulations

Regulations are the most reliable form of guidance that we provide to taxpayers. I am concerned about the amount of time it takes for us to issue or amend regulations. There are many sections of the Internal Revenue Code where guidance is needed and yet no regulations have been promulgated. There are also temporary regulations that have been on the books for an extended period of time. In fact, I believe there are temporary regulations still around that I helped draft when I was with the IRS 20 years ago.

Aside from the seriatim policy review, the primary obstacle to issuing more guidance has been our attempt to find the perfect answer that addresses all potential issues all at once. We should consider issuing regulations that set forth broad principles rather than detailed rules that strive to anticipate all the questions. When we do set forth specific rules, we should state the rule rather than hiding it in the examples to be discerned only by inference. Subsequent revenue rulings may be issued to give more specific explanations. Instead of waiting to issue regulations until all the problems have been uncovered and then solved, we should promulgate those sections that we can break off. Any guidance is better than no guidance at all.

Revenue Rulings

After regulations, revenue rulings may be the most important and reliable form of guidance that the IRS can provide to taxpayers. We should issue more revenue rulings more quickly so that taxpayers will know the IRS's position about what works and what does not. As previously mentioned, the number of revenue rulings has substantially declined in recent years, and the number of substantive rulings, as compared with ministerial ones, has declined even further.

We are examining the processes by which rulings are issued and the levels of review required by the Office of Chief Counsel and Treasury in an effort to make our ruling process more efficient. We already have an expedited process in place for rulings and procedures with little or no policy import. We are considering whether this process may be expanded to cover more areas, enabling us to get out more guidance more quickly, without sacrificing the quality of the product.

Treasury and I are discussing the implementation of a new revenue ruling program we are calling "traffic light" rulings. Three levels of rulings will be issued:

* "Red light" rulings will be issued regarding those transactions that do not work under current law. The IRS will challenge such transactions.

* "Yellow light" rulings will be issued regarding transactions that do work under current law, but which the IRS believes do not comport with sound tax policy. The government will make regulatory changes or seek legislative changes to shut down such transactions. Legislation and regulations will be prospective only; in the meantime, the taxpayer may continue doing such transactions.

* "Green light" rulings will state that the transaction works under current law. The IRS will not challenge those transactions nor will it seek legislative changes.

The purpose of these revenue rulings will be twofold. First, they will better assist taxpayers and the field by indicating the IRS's position with respect to specific issues. The public and the field will know, in the IRS's view, which transactions work, which transactions fail, and which transactions are questionable. This information is necessary if taxpayers are expected to accurately comply with the internal revenue laws in our system of self-assessment. Second, we hope to encourage those responsible for promoting new transactions to come to us if they believe the transaction is technically sound. This would allow the IRS to become aware of current transactions early so that taxpayers need not wonder about the IRS's position on such transactions until audit.

Private Letter Rulings

While private letter rulings play an important role for taxpayers, they presently serve an undesirable role as a form of informal public guidance. PLRs are extremely fact specific and are only intended to apply to the taxpayer addressed. Section 6110(k) of the Internal Revenue Code acknowledges this as one of our tax system's fundamental policies. These rulings became public because the IRS was using the rulings to dispose of similar cases, and it therefore seemed that PLRs were a body of "private law." During the past 25 years, PLRs have become hybrid guidance. (2) Taxpayers and practitioners divine the position of the IRS from them without having the benefit of certainty in reliance on them. Meanwhile, the IRS is tempted to speak through them. In turn, this diminishes the felt need to issue the guidance publicly.

PLRs are also extremely time consuming for Chief Counsel attorneys. The question is whether resources are better spent providing guidance to the public as a whole rather than to individual taxpayers. We are examining whether the program needs to be updated. For example, I am discussing with the Associate Counsel areas in which "comfort" rulings are given and whether resources should be redirected to providing public guidance. As has been done in the past, revenue procedures may be issued to address significant or recurring issues.

Field Service Advice

The Field Service Advice program, in my opinion, is broken. It was never meant to be a means of providing guidance to the public. It was intended to provide informal guidance to the field to help address discrete issues. Issues are being addressed using facts that are not well developed and there is a low level of review for legal analysis. The lack of authoritative published guidance, however, has caused taxpayers to turn to FSAs to determine how the IRS views certain issues. I am working with the technical and operating divisions of the Office of Chief Counsel, as well as LMSB, SB/SE and TE/GE, to develop a process to issue authoritative published guidance for these issues, while continuing to provide appropriate advice to the field.

"No Action" Letters

We are considering new types of guidance in an effort to increase our efficiency. Guidance similar to the SEC "no action" letter may be appropriate in suitable circumstances. For example, a good area for the use of such letters may be in the realm of financial instruments. Developers of financial instruments would seek from the IRS a letter stating whether a particular product will have the intended consequences. After analyzing the product and consulting with the developer, the IRS might issue a letter simply stating that the product works and that the IRS will not challenge it.

Spending less time drafting a response that lists all the facts, the relevant law, and the analysis would greatly reduce the turnaround time for this type of guidance. Chief Counsel attorneys would be able to spend more time simply analyzing the product. The hope is that this type of guidance will encourage developers to come to the IRS when they have products that they believe are technically sound. This will also assist the IRS in its attempts to address tax shelters. It will allow them to stay on top of the market and issue guidance regarding current transactions that do or do not work. "No action" letters might also reduce the amount of Chief Counsel resources dedicated to private letter rulings.

Guidance Task Forces

As evidence of our renewed commitment to providing guidance, the Office of Chief Counsel and LMSB are discussing a new approach to providing guidance at the field level. The purpose is to bring in the Office of Chief Counsel at a much earlier level. Issues that arise in the field will be communicated to the Chief Counsel's office earlier in the process, and guidance from the Chief Counsel's office will be issued more quickly.

When an emerging issue is identified in the field, an issue team will be formed. The team will be directed by the Industry Director, or if the issue crosses industries, by the Director of Pre-Filing and Technical Guidance. The team may include examiners, technical advisers, and field specialists, as well as representatives from Appeals or other operating divisions as needed. The team will also include attorneys from the Office of Chief Counsel.

The issue team will conduct the necessary research on the issue and evaluate the effect of the issue. Based on this evaluation, the team will propose whether administrative or published legal guidance is needed. The purpose is to have the Office of Chief Counsel participate in emerging issue development and provide direction related to the types of issue guidance or guidelines that need to be developed. If published legal guidance is needed, such decisions will be made quickly and the Associate Chief Counsel will commit to providing that guidance promptly with early and joint participation by Treasury.

Conclusion

The IRS, Office of Chief Counsel, and Treasury are committed to improving the published guidance program to better assist taxpayers, both in the National Office and in the field. The new structure of the IRS and the Office of Chief Counsel ensures that the appropriate issues are raised and agency positions are communicated. Coordinated efforts implemented early in the guidance process should ensure that guidance is provided quickly and consistently in response to taxpayer issues or transactions in the market. We are examining the guidance program and revamping those areas that have proven unreliable in the past. We are also considering new forms of guidance that should better aide the field and the public. We hope that these efforts will result in a system that better fulfills our responsibilities to the public in the Office of Chief Counsel.

Chart 7

Revenue Rulings - 1979

Ministerial rulings (14)     3%
Substantive rulings (420)   97%

Note: Table made from pie chart.
Chart 8

Revenue Rulings - 1998

Substantive rulings (21)   38%
Ministerial rulings (44)   62%

Note: Table made from pie chart.

(1) Marion Marshall, Sheryl Stratton & Christopher Bergin, The Changing Landscape of IRS Guidance: A Downward Slope, 90 Tax Notes 673 (Jan. 29, 2001).

(2) The courts have recognized that although private letter rulings may not be used as precedent, they are a good indication of the IRS's position. The Supreme Court has stated, "... although the [taxpayers] are not entitled to rely upon unpublished private rulings which were not issued specifically to them, such rulings do reveal the interpretation put upon the statute by the agency charged with the responsibility of administering the revenue laws." Hanover Bank v. Commissioner, 369 U.S. 672, 686 (1962).

B. JOHN WILLIAMS, JR. is Chief Counsel for the Internal Revenue Service. He formerly served as a judge on the United States Tax Court and a partner in the Washington office of Sherman & Sterling. This article is adapted from Chief Counsel Williams's remarks before the 52nd Midyear Conference on March 19, 2002.

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