Representation before the IRS · Legal Authority and References

Authoritative versus non-authoritative source material

“Authority” in Federal tax is not a matter of judgment. Reg. § 1.6662-4(d)(3)(iii) supplies a closed list, and the regulation says “only the following are authority.” Everything a practitioner reads that is not on it — the treatise, the journal article, the firm memorandum, another practitioner’s opinion — is not authority, however persuasive. Knowing the list is the topic; knowing what it excludes is the point.

The rule

The list. See the figures table (Reg. § 1.6662-4(d)(3)(iii)). Read it once for shape: statutes, regulations, published administrative guidance, court cases, legislative history, and a defined set of written determinations and internal documents.

What is not authority. See the figures table. The regulation names them: “Conclusions reached in treatises, legal periodicals, legal opinions or opinions rendered by tax professionals are not authority.” But it adds the sentence that makes research worthwhile: “The authorities underlying such expressions of opinion where applicable to the facts of a particular case, however, may give rise to substantial authority.”

The standard the list serves. See the figures table (Reg. § 1.6662-4(d)(2)). Substantial authority is objective, sits below more likely than not and above reasonable basis, and is met only where “the weight of the authorities supporting the treatment is substantial in relation to the weight of authorities supporting contrary treatment.” All relevant authorities are taken into account, “including the authorities contrary to the treatment.”

Two consequences of that framing. “There may be substantial authority for more than one position with respect to the same item.” And “the possibility that a return will not be audited or, if audited, that an item will not be raised on audit, is not relevant” to whether the standard is met.

A well-reasoned construction can be enough. “There may be substantial authority for the tax treatment of an item despite the absence of certain types of authority. Thus, a taxpayer may have substantial authority for a position that is supported only by a well-reasoned construction of the applicable statutory provision.”

When something stops being authority. See the figures table. Two refinements matter: a Tax Court opinion is not treated as overruled by a court of appeals to which the taxpayer has no right of appeal, unless the Tax Court adopts that holding; and a private letter ruling is not authority if revoked or inconsistent with a subsequent proposed regulation, revenue ruling or other IRB pronouncement.

Written determinations, and the paradox in them. A written determination is “a ruling, determination letter, technical advice memorandum, or Chief Counsel advice” (IRC § 6110(b)(1)(A)), and “unless the Secretary otherwise establishes by regulations, a written determination may not be used or cited as precedent” (IRC § 6110(k)(3)).

Yet Reg. § 1.6662-4(d)(3)(iv)(A) provides that there is substantial authority for a taxpayer’s treatment where it is supported by the conclusion of a ruling or determination letter issued to that taxpayer, by a technical advice memorandum in which that taxpayer is named, or by an affirmative statement in a revenue agent’s report for a prior taxable year of that taxpayer. The protection is personal, and it fails where there was a material misstatement or omission, or the facts later develop materially differently.

Current figures

How it works in practice

The list is closed, and “only” means only. A practitioner who builds a file from a treatise and two journal articles has built a file with no authority in it. The remedy is not to abandon the research but to follow it down: read what the treatise cites, and put those authorities in the file. The regulation says so expressly.

Weigh against, not just for. Substantial authority requires the supporting weight to be substantial in relation to the contrary weight, and every relevant authority counts, including contrary ones. A memorandum that lists four supporting authorities and does not mention the revenue ruling going the other way has not applied the standard — it has skipped it.

Audit risk is irrelevant, and saying so protects you. The regulation excludes the likelihood of audit from the analysis entirely. A client who argues that a position is safe because it will not be looked at is making an argument the regulation forecloses, and a practitioner who accepts it is reasoning outside the standard.

Two right answers are possible. Because the test is relative weight, there may be substantial authority for more than one treatment of the same item. That is not a defect in the analysis; it is how the standard is built. It also means “the IRS disagrees” does not by itself defeat substantial authority.

Know where the three standards sit. From lowest: reasonable basis (§ 1.6662-3(b)(3)), then substantial authority, then more likely than not — see the figures table for how the regulation defines the top of the ladder. Disclosure on Form 8275 works at the reasonable basis level; substantial authority avoids the substantial understatement penalty without disclosure. Getting the ladder wrong produces advice that is either needlessly cautious or unprotected.

A private letter ruling issued to someone else is authority but not precedent — and both are true. It appears on the § 1.6662-4 list (if issued after 31 October 1976), so it carries weight in the substantial authority analysis. It cannot be cited as precedent under IRC § 6110(k)(3). Those are different questions: one is about penalty protection, the other about what binds. Practitioners collapse them constantly.

The taxpayer’s own ruling is worth far more than anyone else’s. A ruling or determination letter issued to this taxpayer, a TAM naming this taxpayer, or an affirmative statement in a prior-year RAR for this taxpayer gives substantial authority outright. Check the client’s own history before researching outward — a favourable statement in a closed prior-year report may already settle the question.

Authority can lapse under you. The regulation withdraws authority status to the extent something is overruled or modified. Two traps: a Tax Court opinion survives a contrary court of appeals decision in a circuit the taxpayer cannot appeal to; and a PLR falls away the moment a later revenue ruling or proposed regulation is inconsistent with it. Date-check anything relied on.

How this has changed

The list has fixed dates in it, and they are original rather than recent. Private letter rulings and technical advice memoranda count only if issued after 31 October 1976; actions on decisions and general counsel memoranda only if issued after 12 March 1981, with the odd exception for GCMs published in pre-1955 Cumulative Bulletin volumes. Those dates track the enactment of IRC § 6110 and the IRS’s own release practices, and they have not moved.

Chief Counsel advice joined the written determination definition later. IRC § 6110(b)(1)(A) now defines a written determination as “a ruling, determination letter, technical advice memorandum, or Chief Counsel advice.” CCA was brought into § 6110’s disclosure regime after litigation in the 1990s over whether it had to be released. It is therefore subject to the same no-precedent rule.

The three-standard ladder is a post-1989 structure. Reasonable basis, substantial authority and more likely than not took their current shape with the accuracy-related penalty regime introduced by the Omnibus Budget Reconciliation Act of 1989 and the regulations under it. Material describing a two-way split between “substantial authority” and “frivolous” is describing the older penalty structure.

The Blue Book’s status is settled by the regulation, whatever courts say about it. General Explanations prepared by the Joint Committee on Taxation are expressly listed as authority for this purpose. Courts have at times been sceptical of the Blue Book as an interpretive aid because it is written after enactment; that debate does not change its place on the § 1.6662-4 list.

Exam focus

Know that Reg. § 1.6662-4(d)(3)(iii) is a closed list — “only the following are authority” — and be able to name its main categories.

Know that treatises, legal periodicals, legal opinions and tax professionals’ opinions are not authority, but the authorities underlying them may be.

Know the ladder: reasonable basis < substantial authority < more likely than not.

Know that substantial authority is a weighing that includes contrary authorities, that more than one position may have it, and that audit risk is irrelevant.

Know that a written determination may not be cited as precedent (IRC § 6110(k)(3)) yet a ruling issued to the taxpayer, a TAM naming them, or an affirmative statement in their prior-year RAR gives them substantial authority.

Know that authority lapses when overruled or modified — with the Tax Court and right-of-appeal refinement, and the PLR-superseded-by-later-guidance rule.

Check yourself

1. Which of the following is NOT authority under Reg. § 1.6662-4(d)(3)(iii)? (A) A revenue procedure (B) A conclusion reached in a leading tax treatise (C) A private letter ruling issued in 2015 (D) A Joint Committee on Taxation General Explanation Answer: B. Treatises, legal periodicals, legal opinions and tax professionals’ opinions are expressly excluded, though the authorities they cite may qualify.

2. Where does substantial authority sit relative to the other standards? (A) Above more likely than not (B) Below reasonable basis (C) Below more likely than not and above reasonable basis (D) Equivalent to more likely than not Answer: C. Reg. § 1.6662-4(d)(2) places it expressly between the two; reasonable basis is the lowest of the three.

3. In deciding whether substantial authority exists, what weight is given to the chance the return will not be audited? (A) Substantial weight (B) Some weight, depending on the item (C) None — it is not relevant (D) It is decisive for small items Answer: C. Reg. § 1.6662-4(d)(2) excludes it expressly.

4. A private letter ruling issued to an unrelated taxpayer in 2015 supports a position. What is its status? (A) Binding precedent (B) Authority for the substantial authority analysis, but it may not be cited as precedent (C) Neither authority nor precedent (D) Authority only for the taxpayer who received it Answer: B. It is on the § 1.6662-4 list, and IRC § 6110(k)(3) bars its use as precedent.

5. A Tax Court opinion supports the taxpayer’s position. A court of appeals in a circuit to which the taxpayer has no right of appeal has held the other way. Is the Tax Court opinion still authority? (A) No — it has been overruled (B) Yes, unless the Tax Court adopts the court of appeals’ holding (C) Only if the taxpayer discloses on Form 8275 (D) Only for years before the appellate decision Answer: B. Reg. § 1.6662-4(d)(3)(iii) states the refinement expressly.