The tax law as applied to a particular transaction or state of facts may not always be clear and certain. As helpful and resourceful as your accountant, CPA and tax lawyer may be, there may be a time when a taxpayer absolutely positively needs to know the IRS’s position before venturing forward. Under carefully circumscribed circumstances, it is possible to obtain a Private Letter Ruling from the IRS which will be binding upon both the IRS and the taxpayer.
It will not be surprising that seeking a Private Letter Ruling is a very involved process that should not be undertaken lightly. The legal time and costs involved are likely to be substantial, and in most cases a user fee must be paid to the IRS for the privilege of its review of the ruling request.
The IRS issues guidance every year governing the Private Letter Ruling process, including rules, guidelines, checklists and even templates for the ruling request itself. This year’s principal guidance is in Revenue Procedure (“Rev. Proc.”) 2017-1, which is published in the Federal Register and may also be accessed online at www.irs.gov. It is also very important to review Rev. Proc. 2017-3, the current listing of those areas and transactions for which the IRS will not issue a Private Letter Ruling, because the issue is under study, the particular statutory provision is so new that Treasury Regulations have not been issued, the issue is involved in pending litigation in the courts, or other stated reasons. In addition, if the taxpayer already has the issue before the IRS or the courts, the IRS will not issue a Private Letter Ruling.
The IRS will not issue advisory opinions or rule on proposed legislation or a hypothetical situation or transaction. The taxpayer will be required to demonstrate that there is a real live situation presented or transaction contemplated. Any and all pertinent documents and agreements have to be submitted and parties have to be identified. So much information needs to be disclosed that in most cases the taxpayer will be so committed to the process that the tax position will not be taken or the transaction will not be undertaken if a favorable ruling is not obtained. That is not to say that the IRS is always right when it declines to issue a favorable ruling, but if a taxpayer takes a particular position notwithstanding the IRS’s refusal to rule, the taxpayer is likely to have a fight on its hands.
The taxpayer is required to provide pertinent legal authority in its ruling request, including any authority that may arguably be opposed to the taxpayer’s position. In effect, in addition to setting forth the facts and circumstances of the matter in detail, the taxpayer must submit a legal brief.
Given the stakes and the time and legal expense that can be involved in seeking a Private Letter Ruling, it will often be prudent to contact the IRS informally with a preliminary memo to see if there are any problems or issues which will make the issuance of a favorable ruling impossible or especially difficult. Throughout this process, you will be dealing with the rulings branch of the IRS in Washington, D.C., which consists of experts in particular areas of Federal tax law, such as “corporate”, “partnerships and pass-throughs”, “income tax accounting”, “employment tax” and so on. At an early stage of the process after the ruling request is submitted, a particular person in the IRS rulings branch will be assigned to the request, and he or she will become your principal point of contact. At any stage along the way the IRS may request additional information or legal analysis, and either the IRS or the taxpayer may request an in-person conference.
The ruling request must be accompanied by a statement under penalty of perjury warranting to the IRS that the facts the taxpayer has presented are true and correct to the best of his or her knowledge, and a statement of whether any information in addition to names, addresses and identifying information should be redacted from the published Private Letter Ruling. It is sometimes the case that sensitive or proprietary information is submitted as part of the ruling request process, and the taxpayer may request that this sort of information be redacted. A redacted version of every Private Letter Ruling is published within a few months of being issued, and these become very important for tax lawyers to study, to note and identify trends in the law and how the IRS addresses certain circumstances.
While the IRS is required to respond to the taxpayer within stated time frames, the timing of when a ruling may be issued, how long the process may take, and indeed whether a favorable ruling will even be issued, depends on the particular circumstances and the taxpayer’s ability to satisfactorily respond to the IRS’s inquiries in a timely manner. Undertaking the ruling request process is not appropriate in every circumstance, and is not for the faint of heart.
If you are contemplating requesting a Private Letter Ruling, having competent, knowledgeable and experienced tax counsel is essential. Please contact me to assist you in determining whether to file for a Private Letter Ruling and to help with the request.
Written by E. Morgan Maxwell
Since beginning his own firm, Mr. Maxwell has continued a tax-law oriented practice encompassing a wide range of transactions, planning and dispute resolution. His dispute resolution experience includes involvement at all levels of the Internal Revenue Service (Examinations, Appeals, Collections, Office of Professional Responsibility, the U.S. Tax Court), the Pennsylvania Department of Revenue, the Tax Litigation Section of the Pennsylvania Attorney General’s Office, Pennsylvania Commonwealth Court, Common Pleas Court and local taxing jurisdictions in southeastern Pennsylvania.
