The Tax Management Transfer Pricing Report ™ provides news and analysis on U.S. and international governments’ tax policies regarding intercompany transfer pricing.
By James E. Maule, Esq.
Villanova University School of Law, Villanova, PA
As I worked my way through a new provision of the Internal Revenue Code, trying to interpret it so that I could add a small discussion of its provisions to the Tax Management portfolio that I am currently in the process of revising, I noticed something that I had never previously seen in the Code. Just as interestingly, I don't know what to call it.
To explain this, I need to step back a little bit. Then I can create a background against which to describe what I noticed.
The Code is divided at two levels. One level of division is the separation of the entire title – as the Code is title 26 of the United States Code – into subtitles, subtitles into chapters, and so on. The other level of division divides Code sections. Why does this matter? As I tell my basic tax students when I take them through this explanation very early in the course, it is impossible to interpret phrases such as "for purposes of this subchapter" or "for purposes of this paragraph," or to determine what specific provisions are reached by a cross-reference to "part IV" without understanding what subchapters, parts, and paragraphs are.
For my students I prepare a chart that shows the "breakdown" of a Code section. As some readers know, and as others might not, a code section almost always – there are a few exceptions – is broken down into subsections. These are portions of the text that begin with a small letter in parentheses. Thus, one can refer to subsection (a) of §71, though one also can refer to it as §71(a). Technically, "section 71(a)" is an oxymoron, because the section is 71. But it works, at least until one tries to cite subsection (a) of §280A and ends up, if speaking aloud, referring to "section two eighty ay ay." So I try "section two eighty cap ay ay." Fun.
Hang on, the thing I noticed is about to enter. Subsections, when divided, are broken down into paragraphs, represented by numbers in parentheses. In turn paragraphs, when divided, are broken down into subparagraphs, represented by capital letters in parentheses. If divided, subparagraphs break down into clauses and clauses into subclauses. Clauses are represented by lower-case Roman numerals and subclauses by upper-case Roman numerals. Let's ignore the fact that in ancient Rome there were no lower-case letters, and thus no representation of numbers using what properly are called lower-case Western alphabet characters.
So, in working my way through the new §4980I, yes, that's forty-nine eighty eye, I came upon a subclause that was broken down into, into what? Let me show you:
§4980I. Excise tax on high cost employer-sponsored health coverage
* * * * *
(b) Excess benefit. For purposes of this section—
* * * * *
(3) Annual limitation. For purposes of this subsection—
* * * * *
(C) Applicable dollar limit.
* * * * *
(iii) Age and gender adjustment.
(I) In general. The amount determined under subclause (I) or (II) of clause (i), whichever is applicable, for any taxable period shall be increased by the amount determined under subclause (II).
(II) Amount determined. The amount determined under this subclause is an amount equal to the excess (if any) of—
(aa) the premium cost of the Blue Cross/Blue Shield standard benefit option under the Federal Employees Health Benefits Plan for the type of coverage provided such individual in such taxable period if priced for the age and gender characteristics of all employees of the individual's employer, over
(bb) that premium cost for the provision of such coverage under such option in such taxable period if priced for the age and gender characteristics of the national workforce.
What is this (aa) thing? Why had I never noticed it before now?
So I did some research. I searched the Code for instances of (aa). I found one other one. It's in §36B, which was enacted at the same time as was §4980I, that is, very recently, as part of the health care legislation. The need to break the Code down into yet another level suggests that the degree of complexity in tax legislation has taken an unfortunate logarithmic jump for the worse. Good drafting would find a way to avoid the use of a level below the subclause.
In looking for instances of (aa) in the Code, I learned – though I must have known this without having let it register in my memory – that some Public Laws amending the Code made use of this tag, but in a different manner. What does a drafter do when a drafter reaches the twenty-seventh subsection? The lower-case letters a through z have been used. So, it turns out, the "letter" after z is aa, followed by bb, and so on. We have yet to see what will follow zz. Will it be aaa? Or za? Or something else? Similarly, when a litany of subparagraphs in a Public Law reach (Z), it is followed by (AA), (BB), and so on. It is important to understand that in these instances, (aa) and (AA) do not represent new, deeper levels, but simply extensions of "lettered" segments for which there are, unlike the numbered segments, a finite number of single designators.
Other federal statutes and provisions in other titles of the United States Code are numbered and lettered differently, and often in ways that make the Code look tidy. State statutes often are modern-day tributes to Byzantine governance, with sections that resemble arrangements such as 40-K-1.3(z)-4.0(7-a,b(2))-5(g)(1.5z).
To keep up with this unnecessary inconsistency, years ago the Treasury Department came up with a different way of designating regulations segments. I bring this up, not only to demonstrate the arbitrariness of it all, but also to see if there are any ideas for naming the new (aa) thing in the regulations arrangement. Regulations sections are divided into paragraphs – there are no subsections – and paragraphs into subparagraphs. Paragraphs are designated not by numbers but by lower-case letters, so that a Regulations paragraph is equivalent in appearance to a Code subsection. Subparagraphs use numbers, thus taking on the characteristics of Code paragraphs. Subparagraphs are divided into subdivisions, designated by upper-case Roman numerals. There are no clauses or subclauses. Internal cross-referencing is a nightmare. We end up with citations such as Regs. §1.704-1(b)(2)(ii)(i). Say that out loud. Try explaining to a law review student editor why that is not a typographical error. I've yet to find anyone who claims to have an explanation for why Treasury chose to use a different – and arguably less refined – breakdown method.
So, perhaps the Treasury Department unwittingly provided a name for the new (aa) thing in the Code. Is it a subdivision? Until there are cross-references to an (aa) level text segment, we won't know for certain. Even if people offer ideas or claim it is one thing or another, until its name is inferentially codified, almost anything is possible.
What I do know is I now need to go back to the materials I have been preparing for the upcoming fall semester offering in Introduction to Federal Taxation and change one of the items I share with the students in digital format using the Blackboard classroom. I need to add the (aa) level to the chart depicting Code breakdown, and I also need to change the slide for that part of the course. But what label will I use for it? "No Name" as I use for the deep levels in Regulations? "Don't know?" "To be determined?" I wonder if I will hear someone ask, "Will this be on the exam?" The answer is no.
For more information, in the BNA Tax Management Portfolios, see Lowy, 100 T.M., U.S. Federal Tax Research.
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