The Legal Effect of IRS Pronouncements on Virtual Currency - McDermott Will & Emery

The Legal Effect of IRS Pronouncements on Virtual Currency


Given limited guidance by US tax authorities regarding taxation of virtual currency activities, taxpayers with such holdings may find themselves in uncharted territory as to whether to take positions that are contrary to IRS pronouncements. This article explores relevant notices, rulings and FAQs, and reviews the types of deference that courts tend to put on different types of IRS interpretations and guidance.

In Depth

Taxpayers who hold virtual currency have limited guidance as to the taxation of their activities. As of the date of this article, government advice is limited to US Internal Revenue Service (IRS) Notice 2014-21 (2014-16 I.R.B. 938), Revenue Ruling 2019-24 and 2019 Frequently Asked Questions (IR-2019-167). No specific Code sections or Treasury regulations address virtual currency. This means that taxpayers can follow the limited guidance about virtual currency available if they agree with the IRS’s positions. But what if they don’t agree? Can taxpayers choose to take tax positions that are contrary to IRS pronouncements? The answer is yes, but there can be consequences to their decisions.

This article explores the legal effect of the above-mentioned Notice, Ruling and FAQs about virtual currency, explaining the sort of deference that courts tend to put on different types of IRS pronouncements.

IRS Interpretive Role

The IRS’s role “in administering the tax laws enacted by the Congress” is to translate them into detailed regulations, rules and procedures. To do this, the IRS’s Office of Chief Counsel releases various “documents and publications that provide guidance to taxpayers.” Rulings, Notices and FAQs are among the types of publications and information that the IRS issues.

The IRS is a bureau of the US Department of the Treasury. In the US legal system, both the Treasury Department and the IRS are part of the executive branch and help the US president administer federal tax laws. The US Constitution grants the US Congress the power to legislate tax laws. Given the complexity of the US tax system, however, Congress often delegates some of that rulemaking authority to the Treasury, which in turn issues Treasury regulations that can have the force of law. The IRS issues many types of pronouncements of varying legal weight and precedential value. Thus, when judging the legal weight of any IRS action or pronouncement, it is necessary to consider whether the Treasury is acting pursuant to a congressional delegation of power to make binding tax rules or acting pursuant to general executive branch powers to enforce the law.

The Treasury cannot unilaterally make binding tax law unless the Congress has specifically delegated rulemaking authority to it. Therefore, short of working with the Treasury to enact Treasury regulations, the IRS only has the authority to provide taxpayers with its views on the proper interpretations of tax laws and to challenge—on audit (subject to judicial review)—what it views as abusive or incorrect tax positions that taxpayers take on their tax returns. If a taxpayer challenges the IRS’s position in court, the IRS must convince the court that its tax position is the correct one for the court to accept.

Judicial Deference Given to Rulings, Notices and FAQs

As a rough rule of thumb, federal courts tend to give Treasury and IRS pronouncements different levels of deference under various doctrines named after Supreme Court cases. In general, there are three levels of deference that courts apply to Treasury regulations and IRS guidance. The highest deference is given to Treasury regulations that include a reasonable or permissible interpretation of an ambiguous statute. This is referred to as Chevron deference (Chevron, 467 U.S. 837 (1984)).

The next level down in deference is Skidmore deference, which is for administrative pronouncements other than Treasury regulations. The Skidmore doctrine directs courts to take into account the IRS’s experience and expertise. Under Skidmore deference, the courts retain their ability to ignore the IRS’s views—even if reasonable—if the courts believe a better interpretation of tax law is to the contrary (323 U.S. 134 (1944); IRS pronouncements do not receive the higher level of deference provided under Chevron deference, which typically applies to Treasury regulations).

The last level of deference is referred to as Aver or Seminole Rock deference. This deference is given to agency interpretations of their own regulations that should control unless the interpretations are “plainly erroneous or inconsistent with the regulation” (Aver, 519 U.S. 452 (1997), Seminole Rock, 325 U.S. 410 (1945)).

Under these different standards for deference, courts give lower deference to IRS pronouncements than they do to Treasury regulations, only according such pronouncements with the weight that is warranted given the persuasiveness of the IRS’s positions (U.S. v. Mead Corporation, 533 U.S. 218 (2001)). And, the recent Supreme Court decision in Kisor v. Wilkie (Kisor v. Wilkie, No. 18-15, 588 U.S. ___ (2019)) is likely to have an impact on the deference courts give to ambiguous regulations.

This brings us back to the government guidance that is currently available with respect to virtual currency. The remainder of this article applies these doctrines to the Revenue Ruling, the Notice and FAQs.

Revenue Rulings

A revenue ruling is published in the Internal Revenue Bulletin by the IRS National Office as an official interpretation of the Code, related statutes, tax treaties and Treasury regulations. A revenue ruling sets out the IRS’s conclusions on how the law is applied to a specific set of facts. They are issued in reply to specific taxpayer requests for guidance and to address factual situations that the IRS wants to speak to. Taxpayers can rely on rulings as authoritative and as precedent because the IRS (but not taxpayers) is bound by them (GAO, Highlights of GAO–16-720, “Treasury and OMB Need to Reevaluate Long-Standing Exemptions of Tax Regulations and Guidance,” September 2016).

Although courts need not view rulings as being as authoritative as Treasury regulations, rulings can be treated as more persuasive or authoritative than notices because rulings are the result of more deliberation, come from the National Office and apply the IRS’s interpretation of the law to a specific set of facts. Although rulings do not bind a court, taxpayers whose circumstances are substantially the same as those described in a ruling can rely on it without fear of penalty. Taxpayers with different circumstances are free to ignore the ruling. And courts can reject the positions taken in a ruling.

IRS Notices

A notice provides taxpayers with guidance on matters of general importance, often announcing enactment of a regulation or changes to technical tax rules. (The Internal Revenue Bulletin describes itself as “the authoritative instrument of the Commissioner of Internal Revenue for announcing official rulings and procedures of the Internal Revenue Service and for publishing … items of general interest” (1991-1 C.B. iii.).)

The IRS tends to use notices to get its views out quickly about rapidly evolving areas of the tax law. The IRS might also issue a notice prior to the time when the Treasury issues regulations in an effort to shape taxpayer reporting during the regulatory formation process. Although notices are not controlling legal authority, taxpayers can rely on them as authoritative and as precedent because the IRS is bound by its notices (GAO, “Highlights.”). Notices do not bind a court; they do not have the “full force of law” as do the Code and Treasury regulations. (See Cantwell v. Deutsche Bank Sec., Inc., No. 3:05-CV-1378-D, 2005 U.S. Dist. LEXIS 20597, at *19 n.7 (N.D. Tex. Sept. 21, 2005) noting that “IRS Notices are not binding on this or any court.” See also Guilzon v. Commissioner, 985 F.2d 819, 822 (5th Cir. 1993) finding that notices are not authoritative, and the court should only look to them for guidance when a statute and its legislative history are “completely ambiguous” (emphasis in original).)

And, notices have less precedential value than a ruling. (See Samonds v. Commissioner, 66 T.C.M. (CCH) 235 (1993) noting that an IRS Notice “is an administrative pronouncement which like a revenue ruling or revenue procedure does not constitute authority for deciding a case in this Court.”) Indeed, although there is very little case law with respect to the deference courts give to notices, the limited authority makes it clear that notices can be accorded less deference than rulings. (See, e.g., Stubbs Overbeck & Associates v. United States, 445 F.2d 1142, 1146-47 (5th Cir. 1971); Neuhoff v. Commissioner, 75 T.C. 36, 46 (1980), “[A]lthough they are entitled to some consideration, they do not control when contrary to statute or the expressed intention of Congress”; True Oil Co. v. C.I.R., 170 F.3d 1294 (10th Cir. 1999) citing Storm Plastics, Inc. v. United States, 770 F.2d 148, 154 (10th Cir. 1985).)

Notices and revenue rulings are, thus, akin to announcements of the IRS’s litigating position. They are only as strong as the legal authorities cited, the persuasiveness of the IRS’s interpretations and the relevance of the particular facts. Moreover, notices are not predictors of litigation success. (See, e.g., IES Industries, Inc. v. United States, 253 F.3d 350 (8th Cir. 2001) rev’g (in relevant part) 1999 U.S. Dist. LEXIS 22610 (N.D. Iowa 1999) and Compaq Computer Corp. v. Commissioner, 277 F.3d 778 (5th Cir. 2001) rev’g 113 T.C. 214 (1999). In these cases, the respective appeals courts reversed lower-court decisions that adopted the IRS position in Notice 98-5 describing so-called “abusive foreign tax credit tax shelters.”) To have the force and effect of binding law, the Treasury must issue the same content in a regulation. This makes sense because notices and revenue rulings do not involve the same deliberative process, public comment and upper-level Treasury review that is involved in issuing Treasury regulations.

Thus, although notices are not controlling legal authorities, they have some significance than notices because they represent the IRS’s opinion as to how tax laws should apply to subject transactions.


FAQs are issued by the IRS as sources of general information. FAQs are not authoritative and do not serve as precedent in tax disputes (GAO, “Highlights”). It is likely that courts would provide even less deference to FAQs than notices or revenue rulings.

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Whether dealing with rulings, notices or FAQs, taxpayers need to determine whether they believe the government’s positions are correct. Taxpayers who disagree with the IRS’s positions should discuss their concerns with their tax advisors to address the consequences to them of taking positions contrary to IRS pronouncements.