IRS Notices – Purpose and Authority
While Congress authors the Internal Revenue Code and associated Regulations, the responsibility of enforcement is given to the Treasury. The Treasury has the power to author Regulations, but delegates its responsibility of enforcement and collection to the Internal Revenue Service, an agency within the Treasury. In order to enforce the Code and Regulations, and to collect the amounts due by taxpayer to the government, the IRS must interpret and apply the Code and Regulations. In order to fulfill these responsibilities, the Service makes use of Announcements and Notices, as well as other documents, to notify tax papers of items of general importance. While Announcements are generally public pronouncements that have an immediate or short termed focus, Notices have a longer-term focus and generally are concerned more with substantive interpretations of the Code[i].
While Notices are an important way for taxpayers to receive information from the Service concerning how the Service interprets a given section of the Code, one should remember that Notices are not Code or Regulations, and do not carry the same weight. The legal weight of a Notice was discussed in Stobie Creek Investments, LLC v. U.S., and the Court stated that:
As a general proposition, IRS notices are press releases stating the IRS’s position on a particular issue and informing the public of its intentions; such notices do not constitute legal authority… IRS notices are not promulgated pursuant to a notice-and-comment period, the process which gives regulations their legal authority and entitles them to Chevron deference[ii].
Here the Court looked at the fact that Notices are not subjected to the same scrutiny that a Code section, the legislative process, or Regulations, the notice-and-comment period, and found that Notices are lacking in the authority needed for a court to defer to them. This results in a statement of interpretation issued by the Service that is not binding on the taxpayer, and which the Courts are not obligated to uphold. Whether the Courts choose to uphold Notices will be discussed later in this paper.
Notice 2008-83 and §382
On October 1, 2008 the Service issued Notice 2008-83. Due to the nature of the notice and its importance, the entire Notice is reproduced here:
The Internal Revenue Service and Treasury Department are studying the proper treatment under section 382(h) of the Internal Revenue Code (Code) of certain items of deduction or loss allowed after an ownership change to a corporation that is a bank (as defined in section 581) both immediately before and after the change date (as defined in section 382(j)). As described below under the heading Reliance on Notice, such banks may rely upon this guidance unless and until there is additional guidance.
SECTION 2. TREATMENT OF DEDUCTIONS UNDER SECTION 382(h)
For purposes of section 382(h), any deduction properly allowed after an ownership change (as defined in section 382(g)) to a bank with respect to losses on loans or bad debts (including any deduction for a reasonable addition to a reserve for bad debts) shall not be treated as a built-in loss or a deduction that is attributable to periods before the change date.
SECTION 3. RELIANCE ON NOTICE
Corporations described in section 1 of this notice may rely on the treatment set forth in this notice, unless and until there is additional guidance.
SECTION 4. SCOPE
This notice does not address the application of any provision of the Code other than section 382.
The principal author of this notice is Mark S. Jennings of the Office of Associate Chief Counsel (Corporate). For further information regarding this notice, contact Mark S. Jennings at (202) 622-7750 (not a toll-free call)[iii].
This simple Notice starts out statement about how the Service has been studying what the proper interpretation of §382 is, and this Notice is a result of that study. In the next section, the Notice effectively negates the restrictions that §382(h) normally places on an acquisition. The general rule of §382 related to losses is §382(h)(1)(B):
(i) In general. If the old loss corporation has a net unrealized built-in loss, the recognized built-in loss for any recognition period taxable year shall be subject to limitation under this section in the same manner as if such loss were a pre-change loss.
(ii) Limitation. Clause (i) shall apply to recognized built-in losses for any recognition period taxable year only to the extent such losses do not exceed—
(I) the net unrealized built-in loss, reduced by
(II) recognized built-in losses for prior taxable years ending in the recognition period.
The treatment of “pre-change loss” is found in §382(a),
the amount of the taxable income of any new loss corporation for any post-change year which may be offset by pre-change losses shall not exceed the section 382 limitation for such year.
Finally, the limitation is found in §382(b):
Except as otherwise provided in this section, the section 382 limitation for any post-change year is an amount equal to—
(A) the value of the old loss corporation, multiplied by
(B) the long-term tax-exempt rate[iv].
Normally, when a company A acquires company B, if company had built-in losses, such as NOLs, the company A could only take advantage of such losses up to the amount of losses times the long term tax-exempt rate, which in October 2008 was 2.19%[v]. By removing the limitation, the Service and Treasury allowed acquiring banks to take full advantage of the built-in losses, while other industries could only use the 2.19% allowed under §382.
This Notice had an immediate impact on the market. Two days after the Notice was released, Wells Fargo made a bid for Wachovia[vi]. Previous to the Notice, Citigroup had been in negotiations with Wachovia, but the negotiations deteriorated, and Citigroup had walked away from the deal. With the Notice, Wells Fargo now had an incentive to buy the struggling bank. Wachovia had accumulated large losses, which was a large reason the bank needed to find a company to buy it. Prior to the Notice, §382 limited the amount of losses that an acquiring company could utilize. In this case, Wells Fargo, one of the few banks that continued to make money, and could make use of the losses for tax purposes, would not be interested due to the §382 limitations. Once the Service issued this Notice, Wells Fargo now had the opportunity to purchase Wachovia, and take full advantage of the losses that Wachovia had accumulated. Even paying a premium over what Citigroup had initially offered Wells Fargo could benefit more from the deal due to the tax advantage. Due to the timing, the Notice was glibly named the Wells Fargo Notice[vii]. The timing would also lead to questions concerning the true intent behind the purpose and an investigation into potential conflicts of interest.
[i]. Raabe, William A., Debra L. Sanders, and Gerald E. Whittenburg. “Administrative Regulations and Rulings.” In Federal Tax Research. 8 ed. Mason, OH: South-Western College/West, 2008. 135.
[ii]. STOBIE CREEK INVESTMENTS, LLC v. U.S., Cite as 102 AFTR 2d 2008-5442 (82 Fed. Cl. 636), 07/31/2008.
[iii]. Notice 2008-83, 2008-42 IRB 905, 10/01/2008.
[iv]. Internal Revenue Code §382
[v]. Revenue Ruling 2008-49. IRB 2008-40, 10/06/2008
[vi]. Paley, Amit R.. “A Quiet Windfall For U.S. Banks.” washingtonpost.com. http://www.washingtonpost.com/wp-dyn/content/article/2008/11/09/AR2008110902155.html (accessed December 9, 2009).
[vii]. White, George. “Notice 2008-83: The Ripples Keep Spreading.” AICPA Publications. http://www.cpa2biz.com/Content/media/PRODUCER_CONTENT/Newsletters/Articles_2009/Tax/spreading.jsp (accessed December 9, 2009).