While the question of the Service’s authority and ability to issue Notices that change the interpretation of the Statute, taxpayers have the ability to rely on this Notice during the time period between its release and Congress’s response. This would imply that even when Congress disagrees with the Service’s interpretation and action, it would protect the taxpayer, and honor the Service’s actions. The Courts have also ruled on this issue as well, and the response provided in L.E.F. v US[i], Estate of Judith U. Harrison, et al. v. Commissioner[ii], and John L. Seymour v. Commissioner[iii] will give some indication as to the Court’s willingness to honor the Service’s publications.
L.E.F. v. US
In the case of L.E.F. v. US, the taxpayer relied on a Notice for procedures on how to prove a sales tax exemption. When the Service challenged the taxpayer in court, claiming that the taxpayer had not obtain proper certification, the taxpayer demonstrated that it had followed the procedure set forth in the Notice. The Court not only supported the taxpayer and found that the taxpayer had obtained the proper certification by following the Notice, but also threatened the Service with estoppel stating:
Viking clearly relied on Patrick’s statement to its detriment, as it is now being called upon to pay all of the taxes which should have been collected from P&E, plus penalties and interest. And the affirmative misconduct requirement is satisfied because a government agent provided incorrect information in response to an inquiry. These circumstances may suffice to bring this case within the very small class of cases where estoppel should be permitted against the government.[iv]
Here the Court protected a taxpayer that had relied on a Notice, even to the detriment to the Service and ultimately the Government.
Estate of Judith U. Harrison V Commissioner
In the case of Estate of Judith U. Harrison, et al. v. Commissioner, an interesting scenario appears. Here, the Notice is given force of law by the Regulations. Reg §20.7520-4(a) states that “if the valuation date is after April 30, 1989, and before June 10, 1994, an executor can rely on Notice 89-24, 1989-1 C.B. 660, or Notice 89-60, 1989-1 C.B. 700, in valuing the transferring interest.”[v]In the case at hand, the taxpayer tried to make use of this reliance of the Notices to allow for the use of a similar Revenue Ruling. Unfortunately for the taxpayer such an analogy was not found to be valid. Not only was the connection tenuous, as the Notice did not utilize the same tools that the Ruling did, but also the Court found “other administrative and judicial rulings in place at the time the Notices were issued dealt with this question, and the estates are not entitled to ignore the principles established therein.”[vi]This example is slightly unique, as a Regulation is essentially promulgated a Notice. If the taxpayer had relied on the Notice to value the transferring interest, then only an argument attacking the associated Regulation would have been appropriate. Since the Treasury authored both the Regulation and Notice, it is unlikely that the Treasury would have been able to successfully argue against the correctness of either document.
John L. Seymour v. Commissioner
In John L. Seymour v. Commissioner, the taxpayer attempted to deduct interest that he paid to his wife on debt incurred during the divorce. In this case, the taxpayer did not rely on the available Notices. However, the Court found the associated statute and regulations insufficient. The Court looked to all guidance available and found that the “petitioner’s suggested allocation disregards the provisions of section 163(h)(3) and the guidance provided by Notice 88-74, 1988-2 C.B. 385, concerning the characterization of qualified residence interest. We determine that the proper allocation of petitioner’s indebtedness to his residence must be made in accordance with this guidance.”[vii]Again, the petitioner ignored the available Notice, while the Court not only considered it, but also stated that the taxpayer must have used the Notice for his allocation. The lack of support in the form of statute or regulations caused the Notice to effectively carry the weight of law in the eyes of the Court.
In these three cases, the courts have upheld all reliance on the associated Notices in all instances. In the first case, the Court supported the taxpayer’s position to the point of threatening the Service with estoppel. In the second case, the Notice was given force of law by the Regulations, and the third case, the court treated the available Notice as law, since the existing guidance was so limited. In these cases, the Notices in question have not contradicted the existing law, but all three show the Court’s willingness to rely on a Notice. In the scenario of Notice 2008-83, where both commentators and ultimately Congress deemed the Notice as contradictory to the Statute, the Court might agree and overturn the Notice. As previously mentioned, the case of Stobie Creek, the Court does recognize the fact that Notices are not promulgated and do not carry the full weight of statute or regulations. It is more likely that a taxpayer would be expected to show reasonable due diligence.
[i]. L.E.F. INC. v. U.S., AFTR 2d 97-5743, 7/23/1997
[ii]. Estate of Judith U. Harrison, et al. v. Commissioner, 115 TC 161
[iii]. John L. Seymour v. Commissioner, 109 TC 279
[iv]. L.E.F. v. U.S.
[v]. Estate of Judith U. Harrison v Commissioner
[vi]. Estate of Judith U. Harrison v Commissioner
[vii]. John L. Seymour V Commissioner.