The Basics of Private Letter Rulings

Article excerpt

A taxpayer contemplating a complex transaction with uncertain effects on tax liability can request a Private Letter Ruling from the IRS. The National Office of the IRS issues about 2,000 private letter rulings per year, and the process takes approximately two months.

Letter rulings can "provide interpretation and application of law and regulation with respect to that taxpayer the Service will follow" (Jay Starkman, "Applying for a Private Letter Ruling," Journal of Accountancy, January 2010, p. 21). Letter rulings "can be useful to taxpayers who wish to be certain of how a transaction will be taxed before proceeding with it . . . [and] allow taxpayers to avoid unexpected costs" (William H. Hoffman, James E. Smith, and Eugene Willis, Individual Income Taxes, Southwestern, 2010). These "rulings are issued for a fee upon a taxpayer's request and describe how the IRS will treat a proposed transaction for tax purposes" (Hoffman, Smith, and Willis 2010). The process a taxpayer should follow in applying for - and ultimately receiving - a private letter ruling is set out by the IRS each year. The steps of the process are generally as follows:

* Confirm there is a need.

* Obtain and follow the most recent IRS guidance for making a request.

* See if the ruling falls under an automatic or simplified method.

* Confirm that the IRS has not declared the subject a "no ruling" topic.

* Seek direct IRS guidance.

* Pay the user fee.

* Maintain contact with the IRS while your ruling is pending. (Starkman 2010)

The IRS defines a letter ruling as a:

[W]ritten determination issued to a taxpayer by an Associate office in response to the taxpayer's written inquiry, filed prior to the filing of returns or reports that are required by the tax laws, about its status for tax purposes or the tax effects of its acts or transactions. A letter ruling interprets the tax laws and applies them to the taxpayer's specific set of facts. (Revenue Procedure 2010-1)

A letter ruling is issued "when appropriate in the interest of sound tax administration .... [and] may be revoked or modified for a number of reasons" (Revenue Procedure 2010-1).

Revenue Procedure 2010-1

Revenue Procedure 2010-1, 'Letter Rulings, Information Letters and Determination Letters," supersedes Revenue Procedure 20091 and "explains how the Service provides advice to taxpayers on issues ... the forms of advice and the manner in which advice is requested by taxpayers and provided by the Service." Requests for letta: rulings must be made "on issues within the jurisdiction" of the appropriate Associate Chief Counsel's office. Each office has its own area, including corporate, financial institutions and products, income tax and accounting, international, passthrough and special industries, procedure and administration, and tax-exempt and government entities.

There are certain issues that the IRS will ordinarily decline to issue a letter ruling on, including the following:

* If the request involves an issue under examination or consideration for litigation;

* Certain areas because of the factual nature of the problem;

* Issues that are part of an integrated transaction;

* Which entity is a common law employer;

* Requests by business associations or groups;

* Requests that do not address tax status, liability, or reporting obligations;

* Requests made by a foreign government;

* Federal tax consequences of proposed legislation;

* Before regulations or proposed guidance are issued;

* Frivolous issues used to avoid tax liability;

* Issues that are adequately addressed elsewhere;

* Alternatives or hypothetical situations; and

* Property conversions after a return has been filed (Revenue Procedure 2010-1).

Revenue Procedure 2010-3 "provides a revised list of those provisions of the code . …