Lack of Regulations Does Not Allow IRS to Refuse to Consider Application for Extended Replacement Period Where Statute is Self-Executing

If the tax law provides for an application for special treatment to be made in such time and manner as the IRS may require, can a taxpayer make the application if the IRS hasn’t gotten around to writing any regulations or provided other guidance on the subject?  This was the issue addressed by Chief Counsel Memorandum 201537021.

The actual issue in question is not one many of us would often encounter.  Under IRC §1359 a “qualifying vessel operator” may defer recognition on the disposition of a “qualifying vessel”.  The real issue arose under a provision that allows for acquisition of replacement property more than three after the disposition of the property in question if a taxpayer applies to the IRS and receives permission to use a later date.

Specifically, IRC §1359(b)(2) provides the period may extend to:

(2) subject to such terms and conditions as may be specified by the Secretary, on such later date as the Secretary may designate on application by the taxpayer. Such application shall be made at such time and in such manner as the Secretary may by regulations prescribe.

While this section was added to the IRC by the 2004 American Jobs Creation Act, the IRS has yet to issue any regulations with regard to this section.

In the matter being considered a taxpayer was asking for this extended period and the question that arose was whether the IRS had to consider the taxpayer’s application or whether, since the IRS had never actually prescribed the time and manner of making the election, the IRS could simply dismiss the application out of hand.

The memorandum concludes the key issue is to determine if the statute, as enacted, is “self-executing.”  The memorandum notes that a statute is self-executing if the regulations will deal only with how, and not whether, a tax is be applied and the mere absence of regulations is not sufficient to allow the IRS or taxpayers to refuse to apply the substantive provisions in the law.

The memorandum notes that Courts had found statutes to be self-executingwhere the statutes provided the following:

  • "'The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this chapter, including . . . regulations . . . providing for the application of this chapter in the case of transferors who are [non-resident aliens].'" See Estate of Neumann, 106 T.C. at 217-18, 221 (quoting section 2663; applying the statute in the case of a non-resident alien and holding that the regulations contemplated reflected "a 'how' characterization").
  • "'The Secretary shall prescribe such regulations as may be necessary or appropriate to prevent the avoidance of those provisions of this title [dealing with certain tax elements] . . . through the use of related persons. . . .'" See H Enters., 105 T.C. at 79, 81-82 (quoting section 7701(f); applying the provisions to related corporations because nothing in the language of the statute or the legislative history foreclosed application to related persons in absence of regulations).
  • "[I]f the Transportation Tax is not collected from the purchaser, 'under regulations prescribed by the Secretary,' the carrier shall pay the tax to the government." See Temsco Helicopters, 409 F. App'x at 67 (quoting section 4263(c); determining that the language of the statute set a straightforward requirement that was not contradicted by the legislative history, and that there was already a procedure for computing the tax and paying it to the government).
  • "'The Secretary shall prescribe regulations under which items of tax preference shall be properly adjusted where the tax treatment giving rise to such items will not result in the reduction of the taxpayer's tax under this subtitle for any taxable years.'" See Occidental Petroleum Corp., 82 T.C. at 819, 829 (quoting section 58(h); holding that "the failure to promulgate the required regulations can hardly render the new provisions of section 58(h) inoperative").

However, citing the Tax Court’s holding in Alexander v. Commissioner, 99 TC 467 (1990), the memo noted that if a statute provides that a treatment shall apply only to the extent provided in regulations prescribed by the IRS.

Considering these items and the legislative history of the provision, the memorandum concludes:

Here, unlike the statute in Alexander, section 1359(a) does not specify that it will apply "only to the extent provided in regulations." Cf. id. at 473. The contemplated regulations are therefore more accurately characterized as indicating "how," rather than "whether," the section applies. See Estate of Neumann , 106 T.C. at 221. Moreover, the legislative history does not indicate that regulations are intended to be a prerequisite to application of section 1359(a). See H.R. Conf. Rep. No. 108- 755, at __, reprinted in 2004 U.S.C.C.A.N. 1341, 1427; see also H Enters., 105 T.C. at 82-84 (supporting application of a statute where legislative history indicated Congress did not intend otherwise). Additionally, the language of section 1359(a) sets a straightforward requirement: a taxpayer may elect not to recognize gain on a qualifying vessel replaced during the period specified in section 1359(b). See Temsco Helicopters, 409 F. App'x at 67 (applying statute absent regulations where statute set straightforward requirement).

The memo continues that the IRS has an obligation to consider this application, noting:

By not allowing a taxpayer to apply for an extended time under section 1359(b)(2) because the Service has not prescribed the time and manner for the application, the Service would thwart the clear congressional intent -- to allow taxpayers to make an election. See Occidental Petroleum Corp., 82 T.C. at 829 ("[T]he failure to promulgate the required regulations can hardly render the new provisions . . . inoperative."). Thus, the Service should consider a qualifying vessel-operator's application under section 1359(b)(2) even though the Service has not prescribed the time and manner for the application.

While most of us likely don’t have qualifying vessel gain deferral applications to deal with (at not on a regular basis), the concepts in this memorandum are important because Congress often passes laws that leave certain details to the IRS.  And, as was true with this law, the IRS may simply not get around to providing those details for a long time (11 years and counting in this case). 

Noting exactly how the law was drafted will, therefore, become important in such cases.  Likely when the next major tax law is passed (as often happens in the first term of a new President) the bill will contain a number of provision that will ask the IRS to write regulations.  By understanding the nature of a self-executing statute as opposed to one that will mandate IRS action we can help our clients determine how soon they may be able to take advantage of (or be subject to) provisions in new laws.