Academic journal article Journal of Accountancy

Private Letter Rulings: When/how/if

Academic journal article Journal of Accountancy

Private Letter Rulings: When/how/if

Article excerpt

Taxpayers--generally through their CPAs--often apply for Internal Revenue Service private letter rulings to ensure proposed transactions will have the intended tax consequences. Such rulings may enable taxpayers to restructure proposed transactions to avoid adverse tax consequences. Private letter rulings, however, are not always appropriate or beneficial. This article discusses and presents in flowchart form the factors taxpayers and their CPAs should consider before requesting private letter rulings (see exhibit 1, page 63).


A letter ruling is a written statement issued by the IRS national office to a taxpayer or the taxpayer's authorized representative interpreting and applying the tax laws to a specific set of facts. Private letter rulings on most tax questions are issued through the IRS associate chief counsel (domestic division). Private letter rulings for exempt organizations and pension plans are issued through the associate chief counsel (employee plans and exempt organizations division).

A letter ruling generally is binding on an IRS district office for purposes of determining a taxpayer's liability. A ruling is not binding on the IRS or the taxpayer if

* It contains misstatements or omissions of material fact. For example, assume X and Y apply for and receive a private letter ruling allowing them to enter into a tax-free reorganization to form a parent-subsidiary group. However, the ruling request does not explain fully the consideration used to effect the reorganization. Accordingly, on audit the IRS may find the ruling nonbinding because of the omission of a material fact.

* It involves a different tax. For example, a married couple negotiating a divorce in a community-property state secure a private letter ruling on whether a particular item is an income interest for federal income tax purposes. If the spouse with the income interest dies before the divorce is final, the ruling is not binding on the IRS in determining the federal estate tax on that spouse's estate because the ruling relates to the income tax.

* The taxpayer fails to comply with a condition of the ruling. For example, as part of a ruling request a taxpayer demonstrates compliance with the statutory requirements for a merger. In the ruling, the IRS says it will approve the request only if the taxpayer also meets state law requirements. If the taxpayer fails to do so, the ruling is nonbinding. Because a letter ruling is the IRS's application of the tax law to the particular transaction described in a ruling request, it is "a holding of the IRS on that transaction only," so one taxpayer may not rely on a letter ruling issued to another taxpayer (revenue procedure 93-1).

Only the national office can revoke a letter ruling (typically because of statutory, judicial or administrative changes in the tax law). If an IRS district director or chief- appeals office, thinks a previously issued letter ruling should be modified or revoked, the taxpayer is informed--except in cases involving fraud and jeopardy or termination assessments. The taxpayer has 10 calendar days to reply in writing regarding any disagreements. After determining the facts and considering the taxpayer's arguments, the district director or chief-appeals office decides whether to recommend revocation of the letter ruling to the national office. Such a revocation generally will not affect the taxpayer who relied in good faith on the ruling and complied with its facts and conditions.


When taxpayers or their CPAs believe it beneficial to secure a ruling, they first must determine whether the IRS will rule on the transaction. As a matter of policy, the national office answers individuals' and organizations' inquiries about the tax effects of their acts or transactions or about their status for tax purposes "whenever appropriate in the interest of sound tax administration. …

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