Tax Lawyer's Blog

Tax researchers, planners and return preparers should have a thorough understanding of how the tax laws are structured.

I found this outstanding primer on the organizational structure of the Internal Revenue Code and the Treasury Regulations at the Georgia State University College of Law website.

INTERNAL REVENUE CODE

Congress and the Treasury use organizational terms to direct readers to specified portions of the statutory or regulatory tax law.

The United States organizes federal law (i.e. the U.S. Code) by titles. Title 26 consists of the Internal Revenue Code (hereafter, the Code), which breaks down into the increasingly narrower categories listed below:

•  Subtitles

•  Chapters

•  Subchapters

•  Parts

•  Subparts

•  Sections

•  Subsections

•  Paragraphs

•  Subparagraphs

•  Other (i.e., subsubparagraphs, sentences, or clauses)

Many tax textbooks list these organizational terms, but few emphasize their importance to researchers in correctly interpreting the tax law. Perhaps for this reason, many individuals disregard or discount the importance of organizational terms when learning to do tax research.

However, they do so at their peril since these terms appear frequently in the Code and Regulations.

Often, the language in which organizational terms appear narrows the application of a definition or legal rule to a specified portion of the tax law while at other times such language indicates where the reader might find exceptions to a definition or legal rule.

Consistently ignoring organizational terms when reading the Code and Regulations eventually leads to serious error.

Example 1: Though short, §63(a) contains three organizational terms:

Except as provided in subsection (b), for purposes of this subtitle, the term “taxable income” means gross income minus deductions allowed by this chapter (other than the standard deduction).

As this passage illustrates, organizational terms often instruct tax researchers where definitions and rules apply and where exceptions and other relevant provisions can be found. Specifically, this statute defines “taxable income” as gross income less deductions the same chapter allows (i.e., Chapter 1) but only when the term appears in the same subtitle (i.e., Subtitle A) with the one exception occurring in §63(b) where the Code defines “taxable income” differently for individuals who do not itemize deductions.

Subtitles

Title 26 (i.e., the Code) breaks down into subtitles:

• Subtitle A deals with income taxes and ranges from §1 to §1564, covering about the first 65 percent of the Code.
• Subtitle B deals with estate and gift taxation and ranges from §2001 to §2704 (about two percent of the Code).
• Subtitle C deals with employment taxes and withholding, ranging from §3101 to §3510 (also about two percent).

Like Subtitles B and C, the remaining eight subtitles are small compared to Subtitle A.

Chapters

The Code divides subtitles into chapters.

The statutory law contains 100 chapters numbered consecutively without starting anew within each subtitle.

Tax researchers generally spend much time in Chapter 1, which deals with “Normal Taxes and Surtaxes” and ranges from §§1 to 1400L, covering about 63 percent of the Code. Almost all of Subtitle A consists of Chapter 1.

In contrast, Chapter 2 covers “Tax on Self-Employment Income” in only three sections (i.e., §§1401 to 1403).

Subchapters

Subchapters partition chapters.

Chapter 1 consists of Subchapters A through Y. Some of the better-known subchapters in Chapter 1 include Subchapter C (dealing with corporations), Subchapter K (covering partnerships), and Subchapter N (involving international transactions).

Parts and subparts

Parts and subparts further divide many subchapters. Though tax professionals generally do not speak in terms of parts and subparts, the tax law does, requiring you to be familiar with these divisions.

Sections

The most often cited organizational term is the Code section.

The law assigns unique numbers to each section within the Code, so tax professionals frequently use Code section numbers in referring to specific portions of the tax law.

Recalling the more important Code section numbers is an important skill that can make you a better tax researcher. For example, knowledge of Code section numbers often helps researchers to locate tax authority quicker.

Also, the tax law frequently cites Code section numbers.

Those without Code section knowledge must look up referenced sections to avoid misinterpretation or misapplication.

Example 2: Section 367(a)(1) states,

If, in connection with any exchange described in section 332, 351, 354, 356, or 361, a United States person transfers property to a foreign corporation, such foreign corporation shall not, for purposes of determining the extent to which gain shall be recognized on such transfer, be considered a corporation.

Thus, to fully comprehend the scope of §367(a)(1), you must know the subject matter of the five Code sections referenced. The unfamiliar reader must take time to locate and review these sections or risk misapplying the statute. In contrast, the reader who is already familiar with these sections and recalls their general provisions saves time.

Pointer: Cramming to memorize Code sections is one way students learn such numbers but often is unnecessary. Instead, students can form the habit of reading and studying the Code simultaneously with their textbooks. Over time, this practice facilitates the later recall of specific Code sections previously read and, in the author’s opinion, represents a much more efficient and effective method than memorizing.

Subsections, pararaphs, subparagraphs

In the Code, small letters signify subsections, Arabic numbers represent paragraphs, capital letters identify subparagraphs, and small Roman numerals denote the next organizational level, which the Code inconsistently designates in various places as either sub-subparagraphs, sentences, or clauses.

The Code uses large Roman numerals for any further division of the “other” category.

The following statutory citation shows where the organizational terms appear in the partitioning hierarchy.

TREASURY REGULATIONS

The U.S. Treasury Department uses some of the same terms to partition its regulations into smaller pieces.

As you probably know already, regulatory citations consist of a prefix (preceding the decimal), related Code section number (between the decimal and hyphen), and the regulation’s number (immediately following the hyphen). Treasury further breaks down each regulation into paragraphs, subparagraphs, and other partitions.

The example below illustrates this citation system:

But how Treasury uses organizational terms can confuse the uninitiated.

For example, some novice researchers may assume that paragraphs and subparagraphs in regulations correspond with similarly numbered or lettered portions of the Code. However, no such relationship exists.

The portion of a regulation cite following the regulation number—(b)(2)(ii) in the example immediately above—does not refer to the related Code provision with the similar citation pattern—(b)(2)(D)(ii) in the earlier statutory example. That is, the (b)(2) in the two cites does not refer to the same portion of the tax law.

Specifically, §911(b)(2) deals with annual limitations on the foreign earned income exclusion. In contrast, Reg. §1.911-4(b)(2) clarifies what is not considered a “housing expense” when calculating the so-called “housing cost amount.”

Regulations use small letters to denote paragraphs and Arabic numerals to identify subparagraphs. In contrast, the Code uses Arabic numerals to represent paragraphs and capital letters to signify subparagraphs. In the examples above, the paragraph designations appear as (2) and (b) in the statutory and regulatory citations, respectively. Similarly, the subparagraphs are (D) and (2) in the statutory and regulatory cites, respectively.

After small Roman numerals, regulations typically use capital letters for further partitioning. In contrast, capital letters in Code citations precede small Roman numerals—i.e., (D) came before (ii) in the cite appearing as the earlier statutory example.

A regulation sometimes refers to portions of itself (using organizational terms) and sometimes to its related Code provision (again, using organizational terms).

Failing to distinguish between a regulation’s reference to the Code and its reference to itself can lead to misinterpretations or misapplications, but the difference may not be immediately clear. As an aid, recall that the Code uses Arabic numerals for paragraphs while regulations rely on small letters. Thus, the form of the citation reference indicates whether the regulation is referring to itself or the related Code section.

Example 3: Reg. §1.911-4(b)(1) reads,

For purposes of paragraph (a) of this section, housing expenses include rent, the fair rental value of housing provided in kind by the employer, utilities (other than telephone charges), real and personal property insurance, occupancy taxes not described in paragraph (b)(2)(v) of this section, nonrefundable fees paid for securing a leasehold, rental of furniture and accessories, household repairs, and residential parking.

Is “paragraph (b)(2)(v) of this section” a statutory or regulatory reference? Both the Code and regulations use the organizational term “paragraph.” But since regulations use small letters to denote paragraphs, such as (b), this reference is to a regulatory provision or, more specifically, Reg. §1.911-4(b)(2)(v). Another indicator that “paragraph (b)(2)(v) of this section” refers to a regulatory provision, based on the earlier discussion, is that a small Roman number immediately follows the Arabic numeral—i.e., (v) immediately follows (2). In contrast, a Code citation would contain a capital letter between the Arabic numeral (b) and the small Roman numeral (v).

Happy research and bon voyage on your code rides.