The Case for the Internal Revenue Code

It seems to be a generally accepted belief that our Internal Revenue Code (the Code) is too complex. But this belief has no foundation in reality. The Code is a model of clarity and simplicity for all it is to accomplish (I bet you never heard anyone say that before).

Let’s be clear, the Code provides a means for laying and collecting taxes on every taxable transaction that Congress has deemed appropriate — no matter what legal, financial, or human structuring that it comes under. We should able to agree that any written code that is to accomplish this task will by necessity be involved. This is especially true given the complexity of business and financial transactions today. The beauty of our Code is that it addresses this colossal task very well.

Let me describe the Code for those of you who are skeptical. The Code is very well organized. It is divided into eleven subtitles, with each subtitle covering a different type of tax (such as income tax, estate and gift tax, employment tax, excise taxes, etc.). Each subtitle is further subdivided into smaller units, including chapters, subchapters, parts, subparts, sections, subsections, paragraphs, subparagraphs, sentences, clauses, and subclauses. Code sections are the heart of the Code. Code sections are typically very brief. The longest Code sections are only a few pages long. Code sections are very precise. Every word counts (except when the IRS or the courts overlook or ignore a word here and there). Moreover, the Code has a very descriptive index that makes it easy to find relevant material.

To illustrate the clarity and simplicity of the Code, we should look at the Treasury Regulations (the Regulations). The Treasury Department promulgates the Regulations. The Regulations spell out much of our federal tax law, sometimes by supplementing Code sections or outlining judicially created law and at other times creating law from scratch. Like the Code, the Regulations generally carry the weight of law.

But the Regulations are very poorly organized. Generally the Regulations begin with a prefix number that represents the corresponding Code subtitle (e.g., 1 for income tax, 20 for estate tax, etc.). Then there are sections and subsections, with the sections referring to Code sections. Not every Code section has a corresponding Regulation section. Sometimes the Regulation subsections follow the Code subsections and in other cases the subsections are merely random. As with the Code, the sections are the heart of the Regulations. Regulation sections are very verbose, detailed, and often poorly written (if not outright conflicting). Regulation sections often run on and on. Even worse, some of the Regulations include circular references that only lead you back to the place where you started. The Section 1502 consolidated return regulations provide numerous examples of each of these points. Worse than that, the Regulations have no index. Some individual Regulation sections do have individual indexes, which they are almost always incomprehensible and deceptively worded. Therefore it is very difficult to find relevant material in the Regulations.

There have been many occasions where, when reading the Regulations, I have thought to myself, “Okay, I am a pretty smart guy, probably smarter than most, and I like myself and all, but honestly, I don’t know what the past three or four pages that I just read said. I know that it has the answer I am looking for because I recognize all of the right key words, but it just isn’t doing anything for me.” It is at that point that I start over at the beginning with a renewed determination. For some strange reason the children’s’ story about “the little engine that could” seems to come to mind. That is often when the breakthrough comes. Eureka. The Regulation is poorly worded, it contains a circular reference or a reference that goes no where, it fails to mention anything about my client’s facts, or it is beyond human comprehension.

I have worked with enough tax practitioners to know that I am not alone here. It has been my experience in working with tax practitioners that there are generally three ways to deal with this type of issue. The first is to find something else to do and hope no one asks you any questions (this one is limited to associate attorneys at large firms or partners at large firms that can pass the work off to associate attorneys). This one might be called the “walk away and look innocent” technique. The second is to curse and possibly throw the Code (which often contains the Regulations in the back) against the wall, out of the window, or at anything else that might be in throwing distance. The third is in some combination to cry, drink, sleep, and seek the solace of a loved one with the aim of discovering a new career. And that is how experienced seasoned tax practitioners react. God help the non-tax practitioner.

Having spent countless hours poring through the Code and the Regulations, I can tell you that our Code is not too complex. Our Code is clear, simple, and well organized given what it was designed to do. We should not complain about the Code; we should complain about the Treasury Regulations.