In theory, it should be fairly straightforward to find the tax law. At the federal level, we have the Internal Revenue Code (Title 26 of the U.S. Code) available at a congressional website, Cornell Law School site and from commercial tax publishers. Regulations can also be found at the Cornell Law School website, perhaps a few others (including this blogger’sites for regs published in the Federal Register for 2011 through the present), and commercial research publishers. And the U.S. Tax Court and many other federal courts publish their opinions on their websites (but not all). The best way to find everything and have the ability to confirm currency of the information is via a commercial tax publisher.
But, there are challenges of finding the law even with complete access to it for a fee, in how it sometimes is assembled. I’ll demonstrate this using temporary regulations issued in July 1987 (TD 8145), an IRS notice issued in 1989 that modified parts of the 1987 regulations, a 2020 effort to replace the 1989 notice, and an oddity of a incorrect explanation of part of the 1989 notice in the 2019 IRS Pub 535 on business expenses (it was correct in prior versions of this pub). I’ll also attempt to explain why this all happened, AND how it can all be avoided. After all, the tax law is complex enough and should not be made even more complex by challenges of finding that law!
The Tax Reform Act of 1986 made personal interest expense non-deductible. It created passive activity loss limitations which also created a category of interest expense on passive activities. To enable an individual borrower to classify their interest expense between personal, business, investment and passive activity, the IRS issued TD 8145 giving us Reg. 1.163-8T referred to as the interest tracing rules.
P..L. 100-647 (TAMRA, 11/10/88) included a modification to IRC section 7805 that temporary regulations expire three years after issuance and also have to be issued as proposed regulations. This was effective November 20, 1988. TD 8145 issued in July 1987, as well as a few other TRA’86 regs, were excepted from the 3-year expiration date so because issued earlier, seemed to have become unimportant in relation to all of the guidance the IRS had to issue for the numerous TRA’86 changes.
The IRS issued a new notices in 1988 and 1989 that modified the TD 8145 regulations at 1.163-8T. I think this was done as it was easier given the immense workload of the IRS, than reissuing these regs as proposed and/or temporary regs that would then be subject to the 3-year expiration date. One of these notices was Notice 89-35.
Notice 89-35 modified Reg. 1.163-8T(c)(4)(iii)(B) to change the special 15-day allocation account for debt proceeds deposited into an account to a 30 day before or after, any account rule, with a similar change to the rule for debt proceeds received in cash at Reg. 1.163-8T(c)(5)(i). These rules were summarized in some IRS documents such as in Publication 535, Business Expenses. See for example, the text on page 14 of the 2018 Pub 535, first column, available here – https://web.archive.org/web/20191114021648/https://www.irs.gov/pub/irs-pdf/p535.pdf.
However, there was a change to this text in Pub 535 for 2019 (note, this link goes to the current pub which in 2020 is the 2019 version). The new text refers to a 15-day before or after, any account rule. Thus, it is not properly summarizing Reg. 1.163-8T(c)(4)(iii)(B) or Reg. 1.163-8T(c)(5)(i) or its modification by Notice 89-35. How did that happen and where did this strange 15-day, any account rule come from? The summary of Notice 89-35 continues to be correct in Publication 550, Investment Income and Expenses (page 31, middle column)
Due to the age of Notice 89-35 and that it modifies a regulation, it is not easy for taxpayers and practitioners to find Notice 89-35 (one reason I know about it was I was using it with clients back in 1989!). Thus, for many, finding the rule in Pubs 535 and 550 is helpful but needs to summarize the law correctly which would be use of the explanation that was in the 2018 and earlier versions of Pub 535.
And, there is more! The Tax Cuts and Jobs Act (TCJA) added new section 163(j) a limitation on business interest. The extensive regulations on this included proposed regs issued 9/14/20 (REG-107911-18). While the focus is section 163(j), they also include Prop. Reg. 1.163-14 and 1.163-15. The -14 and -15 rules basically cause Notices 88-20, 88-37 and 89-35 that modified Reg. 1.163-8T to finally get on a path to being part of final regs – after 32 years! The rules at Prop. Reg. 1.163-14 basically add rules on interest categorization when individuals and their passhtough entites are involved while Prop Reg. 1.163-15 is the 30-day rule in Notice 89-35.
BUT, there is still a “finding” problem. How will someone reading Reg. 1.163-8T(c) and its 15-day rule know that there is a more generous 30 day before/after, any account rule at what will eventually be Reg. 1.163-15? I always remind my students that they need to look at the headings of all of the regs for a particular Code section, but I’m guesing not everyone does this. And then when we see an incorrect summary of the law in an IRS publication, it reduces the chances of getting what are already complex rules applied correctly.
Solution? First, all temporary regulations issued before November 20, 1988 need to be finalized. This is likely the best solution and would eliminate the need for reg-modifying notices to be outstanding (and often not known by practitioners) for decades. It would make the law easier to find. If the IRS continues with issuance of Reg. 1.163-14 and -15, it should still make a modification to Reg. 1.163-8T(c) to tell readers to go to Reg. 1.163-15. I know that would require reissuance of the temp reg, but that wuld be a good thing and it could all be updated.
What do you think?