After having focused on past events and activities, a look to the future is in order. The activities leading up to the Notice 2008-83 are well known and documented. Some of the reasoning behind the issuance of the Notice are known, but it is unlikely all of the reasoning will ever be fully known. Finally, the reaction to the Notice is known. Whether the conditions arise again that led to this Notice, one should look at the cost that was incurred.
Inspector General’s Investigation
The reaction to the Notice, both by the public and by Congress, has been documented. Congress, specifically, was not happy with the Notice, or the implications that it carried. However, it took Congress five months to overturn the Notice. Even when Congress did overturn it in 2009, it granted the Notice full force of law for those five months. With respect to the investigation, which Senator Grassley call for by the Inspector General, the Office of the Inspector General announced its investigation in April 2009:
At the request of Senate Finance Committee Ranking Member Charles Grassley, we are conducting an inquiry into the development and issuance of IRS Notice 2008-83. This notice provides guidance on the application of section 382(h) of the Internal Revenue Code to losses by banks. We will determine if the notice was appropriately developed and issued, whether it appropriately interpreted the statute, whether there were conflicts of interest in its development and application, and whether reports of its potential impact on tax revenues have been overstated.[i]
In October, the Inspector General announced the conclusion of the investigation:
During this reporting period, the OIG completed two inquires at the request of Senator Charles Grassley, Ranking Minority Member of the Senate Finance Committee. The first concerned the issuance, in October 2008, of IRS Notice 2008-83, which provided guidance on the application of Internal Revenue Code Section 382(h) regarding the recognition of losses incurred by failed banks that were acquired by other banks. This guidance engendered much critical comment in the industry and in Congress, and was ultimately nullified in the American Recovery and Reinvestment Act. The OIG inquiry set out the process by which the guidance was developed and promulgated by the IRS and the Department’s Office of Tax Policy.[ii]
The Inspector General’s investigation was concluded with an announcement of a process by which the Service should develop and promulgate any future guidance. The conclusion of the investigation appears to be due in part to the reversal of the Notice by Congress. However, given the accusation that Grassley raised in his request for the investigation, one has to imagine he was not satisfied with this result.
Next the limitation place on the Treasury by P.L. 111-5 was extremely specific. The language of the new law did not restrict the Treasury from issuing Notices, guidance, or even the content of the guidance. It only restricted the Treasury form limiting any exemptions or special rules to specific groups of people. The language almost implies that exemptions and special rules are allowed as long as they are applied to everyone.
Finally, the Courts seem agreeable to upholding Notices in the favor of the taxpayer. In the cases reviewed, the Courts upheld the relevant Notices for the benefit of the taxpayer. While the Courts do recognize the fact that Notices are not the same authority as the statute or the regulations, but they seem to be reluctant to punish the taxpayer for relying in good faith on a Notice that was published by the Treasury.
In light of the results of the Inspector General’s investigation, the language of P.L. 111-5, and the support of the Courts, it appears that the Treasury could continue to issue Notices that rewrite the associated statute as they interpret it. The outrage and reaction may be similar, but it is unlikely to be more effective than it was with this Notice.
[i]. Semiannual Report to Congress, October 1, 2008 – March 31, 2009, OIG-CA-09-009.
[ii]. Semiannual Report to Congress, April 1, 2009 – September 30, 2009, OIG-CA-10-002.