Internal Revenue Manual - 32.1.4 Outlining and Drafting Substantive Regulatory Text

IRS Resources

Part 32. Published Guidance and Other Guidance to Taxpayers
Chapter 1. Chief Counsel Regulation Handbook
Section 4. Outlining and Drafting Substantive Regulatory Text

32.1.4 Outlining and Drafting Substantive Regulatory Text

32.1.4.1 Overview of Drafting Process
32.1.4.2 Outlining a Regulation before Drafting
32.1.4.3 Draft Identification Block
32.1.4.4 Drafting
Exhibit 32.1.4-1 Regulation Checklist
Exhibit 32.1.4-2 Sample Advanced Notice of Proposed Rulemaking (ANPRM)
Exhibit 32.1.4-3 Sample Notice of Proposed Rulemaking (NPRM)
Exhibit 32.1.4-4 Sample Notice of Proposed Rulemaking by Cross-Reference to Temporary Regulation
Exhibit 32.1.4-5 Sample Temporary Regulation
Exhibit 32.1.4-6 Sample Final Regulation
Exhibit 32.1.4-7 Sample Notice of Proposed Rulemaking by Cross-Reference to Temporary Regulation that Amends Existing Final Regulation
Exhibit 32.1.4-8 Sample Existing Final Regulations Amended by Temporary Regulations

32.1.4.1 (08-11-2004)
Overview of Drafting Process

After the initial policy decisions are made, the drafting team should begin drafting the regulation. Outlines are not required, but may be useful in certain cases. The drafting team should consult this Handbook and contact the FRL assigned to the project to ensure compliance with all required procedures. See Exhibit 32.1.4-1, Regulation Checklist.

32.1.4.1.1 (08-11-2004)
Drafting Standards — Executive Order 12866

Executive Order 12866 mandates that the following drafting standards are to be used (unless one or more standard is determined to be unreasonable):
1. Draft regulations to minimize litigation,
2. Draft regulations to provide a clear legal standard for affected conduct rather than a general standard, to promote simplification and burden reduction,
3. Specify in clear language the preemptive effect, if any, to be given to the regulation,
4. Specify in clear language the effect, if any, on existing Federal law or regulation, including all provisions repealed, circumscribed, displaced, impaired, or modified,
5. Specify in clear language the retroactive effect, if any, to be given to the regulation,
6. Specify whether administrative proceedings are to be required before parties may file suit in court and, if so, describe those proceedings and any requirement of the exhaustion of administrative remedies, and
7. Define key terms used in regulations, either explicitly or by reference to other regulations or statutes that explicitly define those items.

32.1.4.2 (08-11-2004)
Outlining a Regulation before Drafting

An outline is not required but outlining may help structure the regulation into manageable pieces. Additionally, an outline enables the drafter to visualize different ways to organize a regulation without the burden of editing text. For example, an initial outline may organize a regulation in the same sequence as the corresponding Code section, and a later outline might show that the regulation is shorter and clearer if organized by the type of taxpayer affected.

The drafting team should consider the following general guidelines:

Place general provisions before specific provisions,
Place more important provisions before less important provisions,
Place more frequently used provisions before less frequently used provisions,
Place permanent provisions before interim, transitional, and " grand-fathered" provisions, and
Place technical "housekeeping" provisions, usually including the applicability date and transition rules, at the end.

Example 1: An initial outline may reveal that the organization of the regulation results in too many levels of subtopics. Before drafting any text, the drafting team should correct this problem by breaking a large section into two smaller sections. This eliminates the lowest levels.

THIS	NOT THIS
-1 VOLUNTARY PRODUCTION OF RECORDS -2 INVOLUNTARY PRODUCTION OF RECORDS (a) Summons (1) Courts that can approve issuance (2) Ex parte proceedings (i) Notice after proceeding (ii) Special court approval (b) District conference (c) Appellate conference	-1 PROCEDURE FOR PRODUCING RECORDS (a) Voluntary basis (b) Involuntary basis (1) Summons (i) Courts that can approve issuance (ii) Ex parte proceedings (A) Notice after proceeding (B) Special court approval (2) District conference (3) Appellate conference

Example 2: The initial outline may reveal that the organization of the regulation is lopsided. The drafting team should combine sections that are too small or divide sections that are too large.

THIS	NOT THIS
New (a)(1) portion of old (a)(1) (2) portion of old (a)(1) (3) portion of old (a)(1) (4) portion of old (a)(1) etc. New (b)(1) old (a)(2) (2) old (a)(3) (3) old (a)(4) (4) old (a)(5) New (c) old (b)	(a)(1) 5 pages (2) 4 lines (3) 14 lines (4) 6 lines (5) 5 lines (b) 1 page

32.1.4.3 (08-11-2004)
Draft Identification Block

Until a regulation is put in signature package, the regulation should include the draft identification block on the first three lines of the first page of every draft, flush at the left margin.
The draft identification block includes:
- The type of draft (precirculation or circulation) and the draft date
- The project number
- The drafter's organization, branch number, and name
Example:

Circulation draft of 10-31-2002
REG-123456-02
PA:APJP:2:JOAttorney

32.1.4.4 (08-11-2004)
Drafting

The drafting team should consider the following when drafting the text of regulations:
1. Be precise; avoid legalese; to the extent possible, use singular nouns and pronouns; use the active voice; use gender-neutral terms; use short, simple sentences and brief paragraphs
2. Do not use "i.e.," "e.g.," "shall," "such," "herein, " "thereunder," "hereinafter," "above," or "below." Use " for example," "must," "that," and "in this paragraph" and "in this section" .

32.1.4.4.1 (08-11-2004)
Organizing General Rules and Exceptions (Stop Sign Format)

The drafting team should place the general rule before exceptions and special rules. This is referred to as a "stop sign format." For the stop sign format to work, the general rule must contain a cross-reference to the exceptions or special rules and a statement about the scope of those rules.

Writing a regulation using the stop sign format may reduce the complexity of a long regulation. This format allows the reader to determine if the exceptions or special rules apply without reading the entire regulation.

Example:

If an additional set of complex requirements applies to a corporation with assets or gross receipts that exceed particular thresholds:

THIS	NOT THIS
Additional rules apply to corporations with assets that exceed [threshold 1] or gross receipts that exceed [threshold 2]. See [cross-reference to later rules].	For additional rules applicable to certain large corporations, see [cross-reference to later rules].

32.1.4.4.2 (08-11-2004)
Using a Logical Organization

After developing a particular rule and any exceptions, the drafting team should review the rule to ensure that the organization is logical.

Example:

THIS	NOT THIS
A taxpayer receives tax result [X] if: The taxpayer [condition 1]; The taxpayer [condition 2]; and [condition 3].	A taxpayer that [condition 1] receives tax result [X] if the taxpayer [condition 2], provided that [condition 3].

32.1.4.4.3 (08-11-2004)
Incorporating Material from an Existing Regulation

A new regulation may incorporate rules in an existing regulation. For example, a new regulation might provide that, "For purposes of making this determination, the provisions of §1.XXX-X(a)(5) apply. "
If a new regulation will not incorporate all the rules of another regulation section, the drafting team should specify the exception with language such as, "However, the rule in §1.XXX-X(a)(5)(iii) (include general description) does not apply." If the new regulation will add to the incorporated rules, the drafting team should note the addition with language such as, "In addition, the following special rule applies to returns described in §1.XXX-5 (include general description)."
The drafting team should not use internal incorporation if changes to the incorporated provisions are needed to conform them to the new regulation. For example, do not incorporate an S corporation rule into a partnership provision by stating, "Substitute 'partnership' for 'S corporation' each place that it appears."
The drafting team should be aware that any future changes to incorporated existing regulations will automatically affect the new regulation. For example, if §1.XXX-1 incorporates material from §1.XXX-5, an amendment to §1.XXX-5 will also amend §1.XXX-1.

32.1.4.4.4 (08-11-2004)
Using Cross References

A cross-reference refers to rules in another part of a regulation or in a separate regulation. The drafting team should explain the cross-reference, usually with an identifying parenthetical. For example, a cross-reference to §1.382-1 might be explained with: (limitation on net operating losses and built-in losses of a corporation following an ownership change). Similarly, a cross-reference to another part of the regulation that provides an exception might read as follows, "Except as otherwise provided in paragraph (b)(3) of this section (relating to the de minimis exception), this section is effective January 1, 2003."

32.1.4.4.5 (08-11-2004)
Definitions

If a regulation repeatedly uses words that need to be defined, the drafting team should define the words in a separate paragraph or section, usually at the beginning of the regulation.
The drafting team should not define ordinary words used in their usual dictionary meaning. If a term is rarely used, it does not need to be separately defined. Instead, the drafting team should consider replacing the term with specific explanatory language in the few places it appears.

The drafting team should not include operative rules within definitions.

THIS	NOT THIS
Tax on sales. A tax is imposed on each sale of an alcoholic beverage. Definition. For purposes of this section, alcoholic beverage means beer and wine.	Definition. For purposes of this section, alcoholic beverage means beer and wine. A tax is imposed on each sale of an alcoholic beverage.

In the definition section of a regulation, the drafting team should underline the terms defined. Do not put the term in quotation marks. Only underline the term the first time when it is being defined. The drafting team should use "means" or "is" in definitional sentences. For example, "The term qualified individual means any natural person who..."

If a regulation contains a series of definitions, the definitions may be listed in alphabetical order in a separate section or paragraph and need not be individually designated. The drafting team should begin each definition with the term being defined. If a definition has lower level paragraphs, the drafting team should designate those paragraphs based on the designation of the overall definitional section.

Example:

(b) Definitions.
Employee means a person who—
(1) [TEXT]; and
(2) [TEXT]
Employer means...
Taxable year means...

Use the following instructional paragraph to add a new definition to an alphabetical series:

Example:

Par. 2. In §1.XXX-2, paragraph (b) is amended by adding a new definition in alphabetical order to read as follows:
§1.XXX-2 [HEADING OF REGULATION].
* * * * *
(b) Definitions.
Employee means a person who—
(1) [TEXT]; and
(2) [TEXT]

32.1.4.4.6 (08-11-2004)
Using Handles and Acronyms

The drafting team should use handles as a substitute for long, unwieldy phrases that are used repeatedly. For example, the phrase: " the amount of any income, war profits, and excess profits taxes paid or accrued during the taxable year to any foreign country or possession of the United States with respect to foreign mineral income from sources within that country or possession," might be substituted with a handle, such as " (foreign mineral income taxes)" after the second use of the word "possession."
Acronyms also keep the regulation text clean. For example, ozone-depleting chemicals becomes ODCs, voluntary employees’ beneficiary association becomes VEBA, and foreign oil related income becomes FORI.
The drafting team should assign a handle or acronym when a phrase or term is first used in the regulation. The drafting team should spell out the handle or acronym in parentheses without quotation marks following the phrase or term for which it will substitute.

32.1.4.4.7 (08-11-2004)
Examples

The drafting team may use examples in the regulation to illustrate specific provisions of the regulation. It is not necessary to set forth all the facts that form the basis for an example’s conclusion. Instead, the drafting team should provide only the facts necessary to illustrate the pertinent rule and include intermediate legal conclusions as assumed facts. The drafting team should then provide the legal analysis the example is meant to illustrate. An example cannot be the source of a rule.
Examples follow a specified format. The drafting team should begin the paragraph containing one or more examples with a brief introductory text. Single-space the text of an example. If an example has more than one paragraph, the drafting team should designate each paragraph. If there is only one example, use the heading "Example." . If there are multiple examples, number the headings " Example 1." , "Example 2. " , etc. Descriptive titles should be used to assist the reader whenever possible.
For computations, the drafting team should use the percent sign "%" , the dollar sign "$" , and the multiplication sign "x" . The drafting team should use letters of the alphabet, rather than proper names, to designate taxpayers. Use different portions of the alphabet for different types of taxpayers. For example, A, B, and C for three individuals, and X and Y for two corporations.
For a series of examples relying on a common set of facts, the drafting team may provide the facts before beginning the examples. The drafting team may also instruct the reader in an example to assume the same facts, with modifications, as in the previous example.
If using a numbering system in an example, the drafting team should begin with (i) and progress as follows:
- (i), (ii), (iii), etc.
- (A), (B), (C), etc.
- (1), (2), ( 3), etc.
- (i), (ii), ( iii), etc.

The drafting team should identify the first line of each numbering level used in an example and should avoid using multiple numbering levels in examples whenever possible.

Example 1:

(g) Examples. The following examples illustrate the rules of this section:

Example 1. No qualified intermediary. (i) A uses the calendar year as the taxable year and the cash receipts and disbursements method of accounting...

(ii) Under the agreement, B must deposit cash into the qualified escrow account equal to the agreed upon fair market...

Example 2. Qualified intermediary . (i) The facts are the same as in Example 1, except that the agreement between A and B requires B to pay $100,000 to a qualified intermediary (QI)...

(ii) QI deposits the $100,000 received from B into a qualified escrow account, the $100,000 is invested in a...

Example 2:

(4) Examples. The rules of this paragraph (h) are illustrated by the following examples in which X is an S corporation owned 50% by A and 50% by A’s brother B:

32.1.4.4.8 (08-11-2004)
Special Formats

The various types of special formats used in drafting regulatory text are discussed separately in this subsection.

32.1.4.4.8.1 (08-11-2004)
Table of Contents

A table of contents lists the caption headings in the regulation. The drafting team should designate the table of contents as paragraph (a) if there is one regulation section. If there are multiple regulation sections, or multiple sections are anticipated, the drafting team should designate the table of contents as section -0.

The drafting team should start the table of contents with undesignated introductory text identifying the table of contents. The table of contents appears flush left, single-spaced. All paragraph headings end with a period. The drafting team should not underline paragraph headings. It is not necessary to include every paragraph level in the table of contents, but the drafting team must be consistent from section to section.

Example:

Par. 2. Section 52.4681-0 is amended as follows:
1. The introductory text is revised.
2. Entries are added for §52.4682-5.
The revision and addition read as follows:
§52.4681-0 Table of contents.
This section lists the table of contents for §§52.4681-1 through 52.4681-5.
* * * * *

§52.4681-5 Exports.

(a) Overview.
(b) Exemption or partial exemption from tax.
(1) In general.
(2) Tax imposed if exemption amount exceeded.
(i) Post-1989 ODCs.
(ii) Post-1990 ODCs.
(3) Mixtures.
(c) Exemption amount.
(d) Effective date.

32.1.4.4.8.2 (08-11-2004)
Lists

The drafting team should begin each list with introductory material identifying the list.
If the introductory material ends in a complete sentence, the drafting team should end the introduction with a colon and end each item in the list with a period.

If the introductory material ends in an incomplete sentence, the drafting team should end the introduction with two dashes (no space between the dashes and no space between the last word of the introduction and the dashes) and end each item in the list (except the last one) with a semicolon. After the last semicolon use "and" or "or" and end the last item in the list with a period. Flush language is not allowed at the end of the list.

Example 1:

(iii) Examples of capital service costs. Costs incurred in the following departments or functions are generally allocated among production or resale activities:

(A) The administration and coordination of production or resale activities (wherever performed in the business organization of the taxpayer).

(B) Personnel operation, including the cost of recruiting, hiring, relocation, assigning, and maintaining personnel records or employees.

(C) Purchasing operations, including purchasing materials and equipment, scheduling and coordinating delivery of materials and equipment to or from factories or job sites, and expediting and follow-up.

Example 2:

(a) In general. An escrow account, trust, or fund that is not a qualified settlement fund is a disputed ownership fund if—

(1) It is established to hold money or property subject to conflicting claims of ownership;

(2) The fund is subject to the continuing jurisdiction of a court; and

(3) Money or property cannot be paid or distributed from the fund to, or on behalf of, a claimant or transferor without the approval of the court.

32.1.4.4.8.3 (08-11-2004)
Titles of Forms, Publications, and Notices

A regulation may refer to a form, publication, or notice. The drafting team should include the title of the item when first discussed in the preamble and first discussed in each regulation section amended. The drafting team should place the title in quotation marks, offset by commas.

Example:

If the taxpayer timely files Form 3115, "Application for Change in Accounting Method," . . . the Form 3115 will be . . .

32.1.4.4.8.4 (08-11-2004)
Citations

The drafting team should set out citations in parentheses.

Examples:

Paperwork Reduction Act (44 U.S.C. 3504(h))

Taxpayer Relief Act of 1997, Public Law 105-34 (11 Stat. 788, 955 (1997))

Notice 97-65 (1997-2 C.B. 326 (December 22, 1997)), (see §601.601(d)(2)(ii)(b) of this chapter)

Rev. Proc. 81-46 (1981-2 C.B. 621), (see §601.601(d)(2)(ii)(b) of this chapter)

32.1.4.4.8.5 (08-11-2004)
Graphs, Time Lines, Flowcharts, etc.

Regulations may contain graphs, time lines, flowcharts, diagrams, pictures, drawings, formulas, and tables as either substantive rules or examples. The OFR has special printing requirements with respect to documents with graphs, timelines, flowcharts, etc. Documents containing these features may need to be prepared in camera-ready copy. The FRL assigned to the project will help the drafting team prepare the document to meet the OFR requirements.

32.1.4.4.9 (08-11-2004)
Sample Documents

For sample documents, see the following exhibits:
- Exhibit 32.1.4-2, Sample ANPRM
- Exhibit 32.1.4-3, Sample NPRM
- Exhibit 32.1.4-4, Sample NPRM By Cross-Reference To Temporary Regulation
- Exhibit 32.1.4-5, Sample Temporary Regulation
- Exhibit 32.1.4-6, Sample Final Regulation
- Exhibit 32.1.4-7, Sample NPRM By Cross-Reference To Temporary Regulations That Amend Existing Final Regulations
- Exhibit 32.1.4-8, Sample Existing Final Regulations Amended By Temporary Regulations