Primary & Secondary Authority & Tax Law

The U.S. Congress legislates under the dome.

Secondary authorities are by standard definition those that purport to explain what a primary authority has declared as the law. For example, court decisions often seek to explain and interpret the language of statutes passed by the U.S. Congress and signed by the president.

16th Amendment

The income tax amendment was enacted in 1913.

The primary authority for the proposition that the government of the United States is empowered to tax incomes is the 16th Amendment to the Constitution, which conveys to Congress "power to lay and collect taxes on incomes, from whatever source derived."

Internal Revenue Code

Arrest indicates serious failure of compliance practice.

Congress has exercised this power in the Internal Revenue Code (IRC), published as Title 26 of the United States Code (USC). Recourse to a variety of other authorities becomes necessary both in "compliance practice," which deals with the question of how income from particular past or continuing arrangements and transactions should be reported, and "tax planning," which deals with the same issue in an earlier stage, when the future arrangements and transactions are under discussion.

Grades of Authority

Regulations come in a variety of forms.

The distinction between "primary" and "secondary" is actually a gradation. The Constitution authorizes statutes. Those statutes in turn authorize regulations, and those regulations in turn authorize Internal Revenue Service rulings and letters. Any link in this chain may be considered "secondary" vis-a-vis the link before it.

An Example

Tax-exempt nonprofits can be religious organizations.

An example of a common dispute in the application of the tax laws of the United States may help make the above points more concrete. The IRC authorizes certain nonprofit tax-exempt organizations---religious, charitable, artistic, etc. It does so in very general terms and says nothing about how the nonprofits must be structured---whether they need a board of directors or trustees, who is or is not qualified to be a member of the board, whether a for-profit can properly have a nonprofit corporation as a subsidiary and so forth.
Yet the IRS employees who process applications for recognition of tax exemption often have strong opinions on how those organizations should be structured. An IRS reviewer may demand evidence that the members of an applicant organization's board have relevant experience, or demand statements that the directors plan to take an active part in the affairs of the organization, for example.

Unbacked Opinions

What is the authority for this obstacle?

According to the authors of "Nonprofit Governance: Law, Practices, and Trends," the structure of such entities is entirely a state law concern, but it is difficult to persuade IRS officials of that. "The lawyer or other representative of the organization should stand up to [such officials] ... and state that if they persist with their position(s), the matter will be referred to the IRS National Office for resolution."
Nonetheless, some organizations prefer not to fight, or wrongly believe that they must comply with the specialist's demands. In such cases, even the least authoritarian of "secondary" authorities---the unbacked opinion of an individual official---de facto has enough force to determine how those organizations will conduct their business.

References

• Thomson/RIA: Major Types of Authority
• Chapman and Cutler LLP: Income Tax Planning and Compliance
• "Nonprofit Governance: Law, Practices, and Trends"; Bruce R. Hopkins & Virginia C. Gross; 2009

Resources

• "Taxation for Decision Makers"; Shirley Dennis-Escoffier and Karen A. Fortin; 2008