Sources of Federal Tax Law
Learn about the principal sources of federal income-tax law, including the Constitution, the Internal Revenue Code, judicial opinions, agency regulations, and informal agency pronouncements.
The system of federal income taxation is one of the largest and most elaborate institutions ever devised. In this lesson, we'll familiarize ourselves with the major players in the federal tax system and survey the most significant sources of federal tax law.
Congress, of course, enacts all federal tax laws. The Treasury Department is charged with implementing the federal tax laws and often propounds binding regulations to fill gaps or clarify ambiguities in tax statutes. The federal agency responsible for the lion's share of the work in administering the tax laws is the Internal Revenue Service, or IRS, which is a subordinate agency of the Treasury Department. See Internal Revenue Manual § 18.104.22.168 (June 2, 2015).
General Constitutional Taxing Authority
Congress's taxing power, like all its other powers, derives from the Constitution. Article One, Section Eight, Clause One empowers Congress to, quote, "[l]ay and collect taxes," unquote. U.S. Const. art. I, § 8, cl. 1. Read in isolation, this provision seems to confer virtually boundless taxing authority.
However, Article One, Section Nine, Clause Four forbids Congress, but not the states, from imposing any direct tax unless the tax is apportioned among the states according to their respective shares of the national population. U.S. Const. art. I, § 9, cl. 2; see also U.S. Const. art. I, § 2, cl. 3, as modified by U.S. Const. amend. XIV, § 2. Broadly speaking, a direct tax is a general tax on accumulated wealth or a tax on real estate. See Union Elec. Co. v. United States, 363 F.3d 1292 (Fed. Cir. 2004).
The Apportionment Requirement and the Sixteenth Amendment
The apportionment requirement means that any federal direct tax must be administered so that each state's share of the tax burden correlates to that state's share of the national population. Suppose California has one-sixth of the nation's population. This means that exactly one-sixth of revenue collected from a federal direct tax must come from California's residents. See Erik M. Jensen, The Apportionment of Direct Taxes: Are Consumption Taxes Constitutional?, 97 Colum. L. Rev. 2334, 2340-41 (1997).
The apportionment requirement entails such political and administrative difficulty that imposing a federal direct tax is nearly impossible, as tax rates would necessarily vary among states. Practically speaking, then, the Constitution forbids a federal direct tax. See id.; Erik M. Jensen, The Taxing Power, the Sixteenth Amendment, and the Meaning of Incomes, 33 Ariz. St. L.J. 1057, 1067-68 n. 50 (2001).
In eighteen ninety-five, the United States Supreme Court held that the apportionment requirement applies not only to a tax on real estate, but also to a tax on any income from real estate, like rents. Pollock v. Farmers' Loan & Tr. Co., 158 U.S. 601 (1895). In response, Congress and the states enacted the Sixteenth Amendment, which expressly empowers Congress to tax all income from any source, without apportionment. The Sixteenth Amendment is thus the constitutional foundation of the modern federal income-tax system. See U.S. Const. amend. XVI.
The Internal Revenue Code and Treasury Regulations
Most federal income-tax legislation appears in Title Twenty-Six of the United States Code, also termed the Internal Revenue Code, or IRC. The IRC is an extremely prolific document. Even more prolific, however, are the binding regulations that the Treasury Department has issued to implement and interpret the IRC. These regulations appear mostly in Title Twenty-Six of the Code of Federal Regulations.
Technically, Treasury regulations are subordinate to the IRC. However, Treasury regulations have the full force of law until they're overturned. See Mayo Found. for Med. Educ. & Research v. United States, 562 U.S. 44 (2011). Overturning a Treasury regulation is very difficult. Thus, as a practical matter, tax practitioners tend to put Treasury regulations on more or less equal footing with the IRC.
The combined length and complexity of the IRC and Treasury regulations are staggering. But even these documents can't fully address the virtually infinite variety of situations that arise in administering the tax laws. To that end, the IRS continually propounds various types of nonregulatory guidance.
Nonregulatory guidance technically lacks the force of law. Even so, courts and practitioners usually give nonregulatory guidance significant weight, assuming the guidance rests on a reasonable interpretation of the law. See Aeroquip-Vickers, Inc. v. C.I.R., 347 F.3d 173, 178 (6th Cir. 2003). Of course, some specific types of nonregulatory guidance receive greater deference than others do.
The nonregulatory guidance that usually receives the greatest deference is the revenue ruling. A revenue ruling represents the IRS's formal application of the tax laws, usually to a specific recurring fact pattern. The IRS intends for taxpayers and practitioners to rely on revenue rulings as agency precedent. Thus, the IRS typically puts great deliberation and care into any revenue ruling before releasing it. See id.; Rev. Proc. 89-14, 1989-1 C.B. 814, 1989 WL 519042, as corrected by 1989-11 I.R.B. 32 (Feb. 21, 1989).
Next up is the private letter ruling. A private letter ruling is the IRS's response to a request for guidance from a specific taxpayer. Private letter rulings are made public, but they aren't meant to be relied upon as formal agency precedent. Thus, the IRS may not devote quite the same care to private letter rulings as to revenue rulings. See Internal Revenue Service, Understanding IRS Guidance - A Brief Primer, https://www.irs.gov/newsroom/understanding-irs-guidance-a-brief-primer. As a result, private letter rulings may receive less deference than revenue rulings, though courts and practitioners often consult them for guidance. See Aeroquip-Vickers, 347 F.3d at 180-82.
There are many other types of IRS nonregulatory guidance, including various official publications, official memoranda from the IRS's Office of Chief Counsel, and the Internal Revenue Manual, or IRM. Of these, the IRM deserves special mention.
The IRM, publicly available on the IRS's website, is the authoritative compendium for the IRS's internal policies, procedures, and guidelines. See Internal Revenue Manual § 22.214.171.124.1. (Jan. 1, 2017). Though the IRM lacks the force of law, IRS employees are generally expected to understand and abide by the IRM. Thus, the IRM is an extremely valuable resource for taxpayers and practitioners dealing directly with the IRS, for instance, during an audit.
Finally, let's talk about the courts' role in federal tax law. Broadly speaking, the courts interpret the tax laws to resolve controversies between the IRS and taxpayers. At the trial level, federal tax litigation takes place in the United States Tax Court, the federal district courts, and the Court of Federal Claims. Appellate litigation generally occurs in the circuit courts of appeal, subject to review by the United States Supreme Court. See 26 U.S.C. §§ 6213(a), 7482(a)(1); 28 U.S.C. §§ 1254, 1291, 1346(a)(1).
Any Supreme Court decision is, of course, binding nationwide. A decision by a circuit court of appeal is binding only within the particular circuit, or geographical area, over which the court presides. Thus, the IRS will usually follow the decision in that circuit, but not necessarily in other circuits. See Internal Revenue Manual § 126.96.36.199 (Mar. 14, 2013). A decision by one of the various trial courts may not be binding outside the particular case. Even so, trial-court decisions often prove persuasive, especially decisions from the highly regarded and well-respected United States Tax Court.