To Rely On or Not to Rely On? Sub-Regulatory Tax Guidance in Turbulent Times
Sometimes criticism of IRS guidance seems justified, other times not so much

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Taxpayers face an ever-increasing mélange of sub-regulatory guidance from the Internal Revenue Service and the Treasury Department.2 This guidance can take the form of proposed regulations, revenue rulings, notices, announcements, private letter rulings, and myriad other documents. Taxpayers in the middle of planning transactions, preparing returns, or tax controversies are often left wondering whether they can rely on such materials or take a position contrary to them, and whether and how such documents may be used against them. Those mysteries have no pat answers, but experience and policy statements suggest certain basic conclusions to help one navigate the confusion.

On March 5, 2019, Treasury and the IRS released a policy statement reaffirming their commitment to the tax regulatory process (hereafter the Policy Statement). The Policy Statement responded to growing concern that Treasury and the IRS were using sub-regulatory guidance to avoid the notice-and-comment process established by the Administrative Procedure Act.3 The Policy Statement reiterated that sub-regulatory guidance does not have the force and effect of law. However, that does not mean IRS agents and Appeals officers will not follow such guidance, nor does it mean courts will not be influenced by the views of the agency charged with enforcing the tax laws. Moreover, such guidance may influence the level of comfort a tax practitioner provides in a written tax opinion. Below, we address the different types of guidance and offer observations on how they may affect planning transactions and preparing and defending tax returns. We focus on the role such guidance plays in the substantive interpretation of the law and on possible penalty avoidance. We consider the ways in which both the IRS and taxpayers may use such guidance offensively or defensively.

Substantive Interpretations

Proposed Regulations and Guidance Published in Internal Revenue Bulletin

Proposed regulations do not have the force and effect of law. Taxpayers generally may not rely on them to establish the substantive interpretation of the Internal Revenue Code for planning purposes, unless there is an express statement in the preamble that permits such reliance. The Internal Revenue Manual states that if there are no final or temporary regulations currently in force addressing a particular matter, but there are proposed regulations on point, the Office of Chief Counsel ordinarily will not take any position in litigation or advice that would yield a result that would be harsher to the taxpayer than what the taxpayer would be allowed under the proposed regulations.4

The IRS publishes certain types of guidance in the Internal Revenue Bulletin (IRB): revenue rulings, revenue procedures, notices, and announcements. The documents do not have the same effect as Treasury regulations, because they are not issued through notice-and-comment rulemaking. However, they may be used as precedents in the disposition of other cases and may be cited or relied upon for that purpose.5

IRS agents will typically follow proposed regulations and IRB guidance when they are averse to the taxpayer’s position, absent an existing final or temporary regulation to the contrary. Even when recognizing that proposed regulations are not law, agents often view them as the best available interpretation of an ambiguous statute and adopt their view of the words’ meaning when favorable to the IRS. Likewise, agents typically follow IRS-favorable guidance from the IRB and will reject arguments to the contrary, absent materially different facts.6 Conversely, notwithstanding the Manual provision described above, agents sometimes decline to give taxpayers the benefit of favorable proposed regulations, on the grounds that they are not yet law. Agents might look for factual distinctions by which they may avoid applying taxpayer-favorable IRB guidance, but generally will not refuse to apply on-point IRB pronouncements. Indeed, the IRS announced in the Policy Statement that IRS personnel will not take a position inconsistent with sub-regulatory guidance published in the IRB when such guidance is in effect. Therefore, such sub-regulatory guidance can shape and meaningfully impact tax planning and compliance, by providing comfort as to how the IRS will interpret the law, and provides a useful tool for advocacy in tax controversies.7

Because sub-regulatory guidance does not have the force and effect of law, the existence of negative precedents in sub-regulatory guidance does not foreclose the possibility for a taxpayer to take a position inconsistent with that guidance. Taxpayers must consider how well-reasoned the guidance is, the degree of opposition to the guidance (such as comments submitted as part of the rulemaking process through which the proposed regulation may be finalized), judicial analysis of the guidance, and whether the law in the area is well developed. Whereas IRS agents may be reluctant to accept such analysis, Appeals officers, with their independence and broad settlement authority, often compromise in cases based on compelling arguments demonstrating that such guidance is flawed or potentially subject to successful judicial challenge. Such a compromise is more likely for quickly issued announcements and notices, and less likely for old, often-cited revenue rulings. From a tax planning perspective, taxpayers may hesitate to take a position contrary to sub-regulatory guidance, regardless of how likely they are to prevail against the IRS, and instead may be inclined to structure a transaction in a manner consistent with the sub-regulatory guidance or forgo it entirely to avoid a potentially protracted dispute with the IRS.

Guidance Not Published in the IRB

Numerous other forms of sub-regulatory guidance are not published in the IRB. Those materials typically may not be used or cited as precedent. They include private letter rulings (PLRs), technical advice memoranda (TAMs), chief counsel advice (CCAs), and generic legal advice memoranda, which the IRS issues in response to a particular set of facts involving a specific taxpayer or to give general guidance to taxpayers, examiners, and the IRS. Notwithstanding the non-precedential nature of this guidance, taxpayers often cite it to support their own independent analysis of existing law.8

Although the IRB states that “unpublished rulings will not be relied on, used, or cited as precedents by Service personnel in the disposition in other cases,” taxpayers can expect that, in examinations, revenue agents will interpret the relevant statutes and regulations in accordance with such sub-regulatory guidance, even though it lacks precedential value. In fact, revenue agents routinely cite PLRs and other non-precedential sub-regulatory guidance in Notices of Proposed Adjustments and Revenue Agent Reports when they support the IRS’ position. Although agents often point out that such rulings are nonbinding when taxpayers seek to rely on them, agents generally will not reach conclusions inconsistent with such rulings and statements where they reflect a consistent and well-established legal interpretation. Taxpayers must be mindful of the fact, however, that it is often difficult to discern the relevant facts in such documents due to the heavy redaction in them. Where agents can legitimately question the factual similarity between the rulings and a taxpayer’s situation, they may not be influenced by prior, taxpayer-favorable rulings. Appeals officers often give significant weight to well-reasoned sub-regulatory guidance, and taxpayers have a reasonable opportunity to convince Appeals to follow favorable sub-regulatory guidance. Likewise, where appropriate, Appeals can be convinced by well-reasoned taxpayer arguments that a PLR or other non-precedential sub-regulatory guidance is not a reasonable interpretation of existing law or that the reasoning is not applicable to the taxpayer’s case. Moreover, Appeals recognizes the hazards of litigation attendant on IRS reliance on non-precedential guidance and may also consider whether it is in the IRS’ interest for a court to be asked to rule.

Legal Effect of Sub-Regulatory Guidance in Courts

As discussed above, the IRS generally will not take a position in court inconsistent with sub-regulatory guidance published in the IRB. In addition, courts often view the IRS as bound by its pronouncements in revenue rulings and have held that the IRS cannot choose to litigate against officially published rulings without first withdrawing or modifying those rulings.9 The Policy Statement provides that in litigation before the US Tax Court, as a matter of policy, the IRS will not seek Auer10 or Chevron11 deference for interpretations set forth only in sub-regulatory guidance.12

The degree of deference a court is likely to give to sub-regulatory guidance depends on the type of guidance and how well reasoned that guidance is. For example, as described above, taxpayers have successfully argued that their position is consistent with published IRS guidance, because courts often feel it would be unfair to punish a taxpayer for doing what the IRS said it could. When it is the IRS arguing for the court to apply sub-regulatory guidance in the IRB, the court may defer to such published guidance when it is well reasoned or long established or both, but it is less likely to do so if the guidance reaches a conclusion with minimal analysis or seems designed to support a litigating position.13 We believe a court would not be heavily influenced by sub-regulatory guidance not published in the IRB because of its lack of precedential value, except perhaps where it is part of an unbroken string of consistent determinations.14 Although a court would likely give little deference to IRS forms and instructions or frequently asked questions because they generally do not contain any legal analysis, we believe courts would be reluctant to allow the IRS to adopt a position contrary to such guidance where a taxpayer followed it, absent compelling circumstances or obvious error.

Legal Effect of Sub-Regulatory Guidance in Tax Planning

Even though a taxpayer may ultimately prevail against the IRS in the face of negative sub-regulatory guidance, this does not mean that such guidance does not affect tax planning. Tax opinions are frequently required as a condition to closing in mergers and acquisitions (for example, a “contractual condition opinion”). Failure to deliver the opinion of a reputable tax practitioner at closing can derail the transaction.15 Negative sub-regulatory guidance may be considered a material risk and thus may affect a tax practitioner’s ability to issue an otherwise “will” level of opinion on a particular tax matter in satisfaction of the terms of the purchase and sale agreement.16 Conversely, there are many examples of such guidance that have become so widely accepted that they are routinely relied on in issuing opinions.17 Therefore, the practical importance of sub-regulatory guidance in shaping the tax planning and the tax opinions practice cannot be ignored.

Penalty Protection

Certain sub-regulatory guidance serves as authority for the purpose of defending against the accuracy-related penalty under Section 6662 of the Internal Revenue Code. The Treasury Regulations identify as authority for the purpose of determining whether a taxpayer has substantial authority for its position sub-regulatory guidance published in the IRB, private letter rulings, technical advice memoranda, general counsel memoranda, and IRS information or press releases.18 The IRM, IRS forms and instructions, and frequently asked questions posted on the IRS website do not constitute authority. However, in practice, a court is unlikely to impose a penalty if a taxpayer follows directly applicable sub-regulatory guidance. Similarly, it is unlikely that a court would impose a penalty if a taxpayer declines to follow applicable negative sub-regulatory guidance if the taxpayer otherwise has substantial authority for its position.


There has been substantial criticism of the IRS for issuing sub-regulatory guidance in lieu of notice-and-comment regulations. Where the purpose is to try to influence taxpayer behavior in areas where the IRS position is questionable, without exposing the guidance to scrutiny under the Administrative Procedure Act, such criticism is fair. The same is true for in terrorem notices promising regulations that never come. However, the guidance often represents a good-faith effort by the agency to help taxpayers deal with complex legal issues, especially shortly after a change in the law. Moreover, it can be a valuable tool for taxpayers, in that they may argue against the correctness of such guidance, while at the same time they may be able to use it effectively against the IRS when it is favorable to their position, even if it is not binding on the agency.

Matthew Lerner is a partner and global head of tax controversy at Sidley Austin LLP. Shiukay Hung is a senior director at Tishman Speyer. Alexandra Minkovich is a tax partner in Baker McKenzie’s Washington, D.C., office. Eric Solomon is a partner at Steptoe & Johnson LLP. Tom West is a principal at KPMG’s Washington National Tax practice.

Matthew Lerner
Shiukay Hung
Alexandra Minkovich
Eric Solomon
Tom West








  1. The authors would like to thank Joel Lifshitz of Sidley Austin LLP for his assistance in researching and writing this article.
  2. For purposes of this discussion, sub-regulatory guidance is any guidance released by Treasury or the IRS other than final or temporary Treasury regulations.
  3. There are instances where the IRS issued a notice to 1) state its interpretation of the law and 2) announce its intention to issue regulations relating to that law at a later time but with the warning to taxpayers that such regulations would be retroactive to the date of publication of the notice. One example is Notice 2007-55, 2007-2 CB 13, which reversed a longstanding interpretation of Section 897(h)(1). Notice 2007-55 promised to issue regulations that would apply to transactions occurring on or after June 13, 2007. As of the date of publication of this article, no such regulations have been published or proposed.
  4. Internal Revenue Manual
  5. Revenue Procedure 89-14, 1989-1 CB 814.
  6. From time to time, examination teams may try to argue that “no-rule” areas in revenue procedures represent unfavorable pronouncements on the issue, rather than just a determination that the issue is not appropriate for ruling. That is not a proper interpretation, and taxpayers should not accept such an outcome.
  7. For example, tax practitioners often rely on Revenue Ruling 2008-1, 2008-1 CB 248, for the interpretation of “significant possibility” in the design of complex financial products.
  8. The Internal Revenue Manual, IRS forms and instructions, and frequently asked questions have even less precedential value than the other types of documents described above, because they generally do not contain any legal analysis, and the IRM expressly states that it does not create substantive rights for taxpayers. Nonetheless, in the authors’ experience, agents are unlikely to challenge positions on returns that follow the specific instructions on an IRS form.
  9. See, for example, Dover Corporation v. Comm’r, 122 TC 324 (2004); Rauenhorst v. Comm’r, 119 TC 157 (2002).
  10. Auer v. Robbins, 519 US 452 (1997) (deference afforded to an agency’s interpretation of its own rules).
  11. Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 US 837 (1984) (significant deference afforded to an agency’s reasonable interpretation of an ambiguous statute).
  12. The Policy Statement is not binding on the IRS and does not apply to Justice Department attorneys litigating refund suits.
  13. Georgetown University Hospital v. Bowen, 821 F.2d 750 (DC Cir. 1987); aff’d, 488 US 204 (1988).
  14. Chief Counsel Advice would likely be perceived as even less influential, both by Appeals and courts, because as internal advice to IRS personnel, it is one-sided, with no opportunity for the taxpayer to participate in the process.
  15. See, for example, The Williams Companies, Inc. v. Energy Transfer Equity, L.P., CA Nos. 12168 & 12337 (Del Sup. Ct. 2017).
  16. A “will” level of opinion generally denotes the opinion writer’s view that there is “no material risk of being wrong.” See Robert Rothman, Tax Opinion Practice, 64 The Tax Lawyer 301 (Winter 2011).
  17. For example, a 1992 Field Service Advice Memoranda (1992 FSA LEXIS 159) continues to shape the drafting of promissory notes.
  18. Treasury Regulations Section 1.6662-4(d)(3)(iii).

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