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excess, and any excess of costs resulting from pre-existing wage contracts. is eligible for pass-through. For example, suppose a hospital grants a 5.5 percent wage increase to its employees who are not low-wage and a 20 percent to employees who are low-wage. The 20 percent increase to the low-wage employees did not cause any of the wage rates to exceed $3.50 (or $2.75) an hour. In the budgeted fiscal year, total adjustments to the ages of low-wage workers amounted to $10,000 (20 percent of the low-wage base of $50,000). Of that amount, $2.750 represented the standard 5.5 percent increase and $7,250 represented the excess over 5.5 percent. The $7,250 would be eligible for treatment as a pass-through if all other requirements were met.

Make a similar computation of cost excesses to determine the eligibility of costs associated with binding, pre-existing labor contracts. Only pre-existing labor contract costs that are more than 5.5 percent of the total last fiscal year costs associated with those respective pre-existing labor contracts are to be included with low-wage excesses as eligible for pass-through.

The following shows how to get the entry for item 76:

(a) If the low-wage and pre-existing contract excesses amount to $10,000, and

(b) the entry in item 65, column (d) is $8,000, then $8,000 of the total of $10,000 in low-wage adjustments may be used as allowable cost increases, subject to the overall 6 percent limitation (the item 82 test) and the base period profit or net revenue margin limitation.

The final entry for item 76 is the lesser of item 65 (i.e., total excess wage expenses over the 5.5 percent limitation) or the sum of low-wage cost excesses and pre-existing labor contract cost excesses.

To receive consideration for pass-through treatment, attach detailed documentation to support low-wage and pre-existing contract excesses.

Item 77.-Pensions and group insurance cost increases, etc. (item 22(a), column (d)), are eligible for "spillover" treatment. The amount of pensions and group insurance eligible for spillover is the amount of increase in such costs which are more than the appropriate dollar limitation for the nonwage/ salary cost category (as shown in the entry for item 66). However, the amount of spillover cannot cause the total of allowable cost increases in the nonwage/ salary category to exceed actual cost increases in that category. For example, if:

(a) the entry in item 22 (a), column (d) is $10,000, and (b) the entry in item 66, column (a) is $8,000, and

(c) the entry in item 69, column (d) is $1,000, then $1,000 of the $2,000 excess (the excess of pensions, etc., in item 22(a), column (d) over the nonwage/salary limitation in item 66, column (a)) for this cost category may be used as allowable cost increases, subject to the overall 6 percent limitation and the base period profit or net revenue margin limitation.

Item 78.-Self-explanatory.

Item 79.-When the actual cost increases in the nonwage cost category exceed the category limitation, and such cost increases are due to FICA and/or unemployment insurance, only that part of the nonwage cost increases due to FICA and unemployment insurance may be passed through above the category limitation. The maximum amount eligible for this provision is that amount shown as the entry in item 22 (b), column (d).

For example, if :

(a) the entry in item 66, column (a) is $10,000, and
(b) the entry in item 67, column (b) is $12,000, and
(c) the entry in item 22 (b), column (d) is $3,000, and

(d) the entry in item 78=$1,000, then

$1,000 of the total $3,000 in FICA and unemployment insurance increases may be used as additional allowable cost, subject to the overall 6 percent limitation and the base period profit or net revenue margin limitation.

Items 80-84.-Self-explanatory.

Items 85 and 86.-Do not include new technology/services revenues (item 35) as price increase revenues.

Item 87.-Self-explanatory.

Item 88.-If the price increase revenues in item 87 would not cause you to exceed your base period net revenue (profit) margin limitation, then item 88 (a) is equal to item 87 less item 82.

If the amount of the allowable costs in item 82 is greater than or equal to the price increase revenues in item 87, then enter that part of the price increase revenues which causes the base period net revenues (profit) margin to be exceeded.

If the amount of price increase revenues shown in item 87 would cause you to exceed both your allowable cost limitation (item 82) and the base period net revenue (profit) margin limitation (item 53), then the amount subject to exception is equal to item 87 less item 82, plus any additional amount of realized revenues by which the base period limitation is exceeded.

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66 Limitation (item 32, col. (a) x 2.5%, except for FY beginning on or after 1/1/73, then show the amount in item 33, col. (a) x 2.7%).

67 Actual (item 32, col. (d), except for FY beginning on or after 1/1/73, then see instructions for col. (b) in this addendum)

68 Allowable (lesser of items 66 or 67; if negative, enter zero) 69 Excess over allowable (item 67 less item 68)

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76 Enter the lesser of item 65 or the sum of low-wage and pre-existing contract cost increase excesses. but not less than zero (see instructions)

77 Enter the lesser of item 69 or the excess of item 22(a), col. (d) over item 66 (but not less than zero)

FICA Pass-Through

78 Subtract item 77 from item 69 and enter results (if negative, enter zero) 79 Enter the lesser of item 78 or item 22(b), col (d) (but not less than zero)

80 Total (sum of items 75, 76, 77, and 79) ....

81 Maximum allowable cost increases (item 14, col (a) x 6%)

82 Justified allowable cost increases (least of items 74, col. (b). 80, or 81: if negative, enter zero)
83 Express item 82 as a percentage of AAR in last FY (item 82 item 14, col (a))
84 Cost increases in excess of allowable (item 74, col. (b) less item 82).

85 Annualized increase in AAR resulting from price increases implemented to date in
budgeted FY (see instructions).

86 Annualized amount of additional AAR proposed as a result of price increases in the budgeted FY (see instructions)

87 Total increases in AAR due to price (sum of items 85 and 86)

88 (a) Amount of price increase subject to exception (see instructions)

(b) Express item 88(a) as a percentage of AAR in last FY (item 88(a) item 14, co! (a))



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Washington, D.C.


The purpose of this statement is to describe, in general terms, the Internal Revenue Service's compliance and enforcement tasks; to describe recent developments, in practice and in court decisions, in the application of the Freedom of Information Act (FOIA) to the Revenue Service; and to describe some possible future applications of the FOIA to the Internal Revenue Service (IRS). Similarities between the compliance and enforcement activities of the Cost of Living Council and the Revenue Service indicate the FOIA requires the Council to disclose more information than it currently does.


There exists an extensive body of law determining tax liability. The IRS mission is in part "to encourage and achieve the highest possible degree of voluntary compilance with the tax laws."

Where the law is unclear, potential taxpayers are permitted to seek a ruling as to the requirements of the law; where possible tax liability is great, and, in certain instances where required by law, taxpayers virtually always seek such advance rulings. Information submitted to obtain these rulings, and the information incorporated into the texts of the rulings themselves, is often trade or financial data not required by law to be made public, or, in some cases, privileged trade secrets. The IRS has routinized procedures for dealing with these requests. IRS is also responsible for "determining the extent of compliance and causes of noncompliance" with the law; the Service routinely refers many of these cases to the Justice Department for prosecution. The enforcement process deals with financial information not required to be disclosed to the public. Established procedures exist for dealing with taxpayers in this audit and compliance process, These two different kinds of activity, advance rulings and enforcement, do not encompass all of the activities of the IRS, nor are these two activities equally important. These two activities are, nevertheless, major facets of IRS operations. In each case, as noted, established internal procedures exist for dealing with rulings and compliance. These procedures have taken the form of the Internal Revenue Manual. The actual advance rulings themselves are usually unpublished; of the estimated 30,000 rulings issued each year, about 600 are made public.


In litigation under the Freedom of Information Act, Tax Analysts and Advocates (TA/A), the public interest tax law firm, and others, have established the principle that the Internal Revenue Manual and the unpublished file of advance rulings, as well as a number of other types of documents, are required to be disclosed. Public access to the IRS Manual is now an accomplished fact; court decisions ordering the IRS to open its rulings files are still being appealed by IRS attorneys.

1. When the IRS proposes regulations, public comments on those regulations are routinely made public. Existing IRS rules, however, purport to allow those who submit comments to keep them confidential by so requesting, whether the comments are statutorily confidential or not. Reg. Sec. 601.601(b). TA/A takes the position that this regulation is illegal, and has requested and received comments which the taxpayer originally deemed confidential.

2. The Treasury Department supervises and sets policy for the IRS. As a result of a TA/A lawsuit, the Office of Tax Analysis, and the Office of the Tax Legislative Counsel, both in Treasury, now make available to the public on a continuing basis indexed files of all its correspondence with persons outside the Executive Branch. The correspondence is routinely made public.

3. Thanks to another TA/A suit, Part XI of the Internal Revenue Manual was released to the public in December 1972. Part XI, which is over 800 pages long, deals with the operations of the IRS office which issues all IRS rulings and letters of technical advice. It outlines in detail the procedures followed by Service personnel in processing rulings, requests for technical advice, congressional correspondence, and legislative projects.

4. In early 1973, IRS released its "prime issues" list. This is a list of those topics that are currently much in dispute between the IRS and taxpayers. The list identifies issues which the IRS feels are so important that it will always go to court on them, rather than negotiate with taxpayers. This list has been published by TA/A in its weekly magazine, Tax Notes.

5. Under pressure from TA/A's and other's suits, and from taxpayers in general, IRS released almost all of the IRS Manual to the public by June 1973. The Manual details the internal operating procedures of the IRS and takes up 32 linear feet of shelf space. Virtually all of those portions of the Manual which relate to personnel procedures, administration, inspection, administrative appeals and settlements, and portions of the parts which relate to audits, investigation, delinquent returns and accounts, and intelligence are now available to the public.


In June 1973, TA/A won a federal District Court decision requiring the release of all IRS letter rulings, which are interpretations of the law issued to individual taxpayers upon taxpayer request. Also covered by the suit are technical advice memorandums and the rulings indexing and digesting system. These rulings, according to the court decision, are permanently filed for agency reference, constitute interpretations adopted by the agency, are relied on by the agency as precedents, and are "records" within the plain meaning of the FOIA. The court held that confidential financial information and trade secrets should simply be excised before rulings were made public; their presence did not defeat disclosure of the rest of the document containing them. The court concluded that the rulings were "private law," or "secret law," and that IRS claims that disclosure would disrupt its administrative processes were insubstantial.

The decision, by Judge Aubrey E. Robinson, Jr., Tax Analysts and Advocates v. IRS, . F. Supp. (June 6, 1973) (D.D.C.), has been appealed by the IRS. The case has been fully briefed on appeal and now awaits oral argument and decision in the United States Court of Appeals for the District of Columbia.

More recently, in January 1974, U.S. District Court in Detroit has applied the Freedom of Information Act to compel the IRS to produce unpublished letter rulings that were requested by a defendant in a criminal suit for use in preparing its defense. Fruehauf Corp. et al. v. Commissioner, F. Supp.


IRS "Technical Memorandums" are agency-adopted interpretations of Treasury Decisions and Treasury and IRS rulemakings. They are centrally filed and after filing are consulted by IRS personnel in connection with future rulings. These "tech memos" are never released to the public. Although these memos take the form of inter- or intra-agency memorandums, their content and use may require their disclosure despite the general exemption for such internal documents. Hence the current IRS practice may not be in compliance with law.

When IRS loses a court case, it usually issues a notice as to whether it acquiesces in the result on the specific facts, in the result generally under the legal principles set forth in the court opinion, or whether the IRS refuses to acquiesce in the decision at all. IRS action is noticed to the public in the form of a one-sentence statement. The public notice is invariably based on an internal memorandum setting forth an IRS position on the case; the memorandum concludes with a recommendation of "acquiescence" or "nonacquiescence" in the decision. These memos are centrally filed and used as precedent by IRS personnel. They are not released to the public. These memos may be required to be disclosed, and therefore current IRS practice may not be in compliance with law. Finally, when the IRS considers a difficult ruling request, or faces an intricate policy question, it frequently requests the "Interpretative Division" in its Office of Chief Counsel to prepare a General Counsel's Memorandum or “GCM," which provides basic policy guidance for IRS personnel. In general, GCMs resemble the memos supporting recommendations of acquiescence or nonacquiescence. GCMS were once published, but they are now kept confidential.


The goals of COLC operations are (1) to moderate inflation, while minimizing adverse effects on supply; (2) to limit the speed and size of pass-through of cost

increases in the economic system, while not substantially inhibiting the expansion of capacity and supply; and (3) to prevent the onset of large inflationary wage increases.


The current price control program of CoLC, Phase IV, is a mandatory wage and price control program requiring prenotification of proposed price increases by companies with over $100 million in annual sales, quarterly reports by companies over $50 million in sales, and other regular reports from various sectors of the economy. The mandatory controls covered, in November 1973, about 50% of the economy on the price side and about 46% of the labor force. Current CoLC policy is to restrain price increases through cost absorption and profit margin constraints. Pass-through price increases are supposed to reflect only dollar-fordollar increases in factory prices; no additional profit is allowed.


The program includes continual consultation by Cost of Living Council and Internal Revenue Service personnel (their role is described below) with companies, associations, and public groups. These consultations concern the COLC regulations and also the prenotification and quarterly reports requirements; the consultations include public hearings.

Different sectors of the economy are treated differently in accordance with their "unique characteristics and structural problems.” Firms may submit exception requests, seeking favored treatment from CoLC, where "genuine hardship and loss will result." Cf. James W. McLane, CoLC Deputy Director, "Outline of the Economic Stabilization Program," House General Government Appropriations Subcommittee, Nov. 9, 1973, page 10. Classes of firms may obtain exceptions. Some exception applications may be earmarked as having "precedental effect or presenting major policy issues." Id., p. 30.


IRS conducts for COLC a large-scale compliance investigation, audit, and enforcement process. Under the supervision of the CoLC, and with broad delegated operating authority, the IRS processes orders, makes decisions, and issues orders with respect to price stabilization submissions. IRS regional offices nationwide process special filings such as applications for modifications of prenotification requirements and applications for volatile pricing authority. The IRS economic stabilization arm has designed and refined specific internal management processes whereby field officials are held accountable for program quality, timeliness, effec tiveness, and managerial effectiveness. Also, there are independent reviews conducted by a separate IRS audit organization that reviews the ongoing program from both operational and managerial aspects. Problem areas are formally indentified and program reviews formally conducted. CoLC has issued detailed instruc tions to each IRS regional office for prompt posting of information into the CoLC ADP system.

IRS handles all prenotification and reporting submissions from larger companies except "certain particularly sensitive ones" which are processed by COLC. Cf. E. F. Preston, IRS Ass't Comm'r (Stabilization), statement before the same hearing, p. 43. IRS reviews reports, audits profit margins, and monitors key industries, responds to requests for technical assistance, and answers public inquiries.


There is a good deal of similarity between the principles of operation of the IRS and the CoLC. There is a good deal of difference between the size and permanence of the two organizations. Another difference is that while the entire private sectors is subject to IRS jurisdiction. COLC in recent months has been concentrating primarily on the largest labor and corporate entities.

Each agency administers a body of law which the agency interprets through regulations and which it further interprets in answers to requests from private parties. In the case of both IRS and CoLC, there are many cases in which prior agency answers to requests are practically or legally required before the private requestor can undertake a contemplated business transaction. Both agencies have formally established procedures, such as COLC's "decisional check lists" and guidelines for requests for exceptions, for dealing with such requests. Both

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