Tax Authority – Hierarchy
Tax Authority – HierarchyConfidence Levels Tax Reporting Positions
Confidence Levels – Authority Hierarchy – Reporting Position analysis is perhaps the most difficult part of a tax practitioner’s work.
Confidence Levels Tax Reporting Positions is perhaps the most difficult part of a tax practitioner’s work.
- Will (at least 90%):While the term is not defined by law, this means a virtually certain position. Be cautious in using this term as it can relay a certain level of confidence.
- Should (at least 70%):While not defined by law, the preponderance and weight of support are favorable. Be cautious in using this term as it can relay a certain level of confidence.
- More Likely than Not (at least >50%): Reasonable belief that the tax treatment of an item at the time the return is more likely than not the proper tax treatment (i.e., there is a greater than 50% chance it will be upheld if challenged by the IRS) based on an analysis of pertinent facts and authorities in the manner described in Regs. Sec. 1.6662-4(d)(3)(ii). [Regs. Sec. 1.6664-4(f)(2)(B)]
- Substantial Authority (at least 40%):An objective standard involving an analysis of the law and application of the law to the relevant facts. Substantial authority exists if the weight of the authority supporting the treatment is substantial in relation to the weight of the authority supporting contrary treatment. [Regs. Sec. 1.6662-4(d)]
- Realistic Possibility of Success (at least 33%):A reasonable and well-informed analysis of the law and the facts by a person knowledgeable in tax law would lead such a person to conclude that the position has approximately a one-in-three (or greater) likelihood of being sustained on its merits. [AICPA SSTS No. 1]
- Reasonable Basis (20%):If a position on one or more authorities, it will generally satisfy reasonable basis even though it does not satisfy the substantial authority standard (not merely arguable or not merely a colorable claim). [Regs. Sec.1.6662-3(b)(3); Joint Committee on Taxation Interest and Penalty Study (JCS-3-99)]
- Below Reasonable Basis, including Frivolous (below 20%):A position that is patently improper with no plausible argument in support of the position. [Not defined by statute or regulation]
The analysis utilizing an established for types of authority for Federal Income Tax purposes.
Hierarchy Sources – Tax Authority
1. Internal Revenue Code (IRC) / United States Code (USC)
2. Treasury Regulations (Treas.Reg.) / Code of Federal Regulations (CFR)
3. U.S. Supreme Court (U.S. or L.Ed. or S.Ct.)
4. U.S. Circuit Courts of Appeals (F. or F.2d.). 13 total.
5. Federal courts of original jurisdiction (decisions may be appealed to a Circuit Court of Appeals):
A. U.S. District Courts (cited as F. Supp.)
Federal District Court decisions will vary on a particular topic since each court decision by a separate, geographically bound court. 94 districts nationwide.
B. U.S. Tax Court
The tax court is a national court and will only follow the decision of the Circuit Court in which the taxpayer. As a result, Tax Court decisions are not necessarily consistent on a particular topic. Tax court decisions as follows:
I. Regular decisions rendered on particular topics which are still unsettled or controversial. Decisions may be made by one judge or reviewed by the entire court. (cited as TC since 1942; BTA before 1942)
II. Memorandum decisions, generally made by one judge, are also primary authority but on less controversial, settled issues. (cited as TCM)
C. U.S. Court of Federal Claims (cited as FedCl since 1992; ClCt from 1982-1992; CtCl before 1982) National court that handles all types of claims against the U.S. government, including those in the tax area.
7. Revenue Rulings (cited as Rev. Rul.)
Issued by the IRS, establishing official IRS interpretation of the tax law for specific types of transactions. Binding for the IRS for the future tax treatment of such transactions.
8. Private Letter Rulings (cited as PLR or LtrRul)
Issued by the IRS upon request to an individual taxpayer regarding tax treatment for a specific transaction being considered.