CHAPTER 2 REVENUE RULINGS AND TAX PLANNING
| Jurisdiction | United States |
(Mar-Apr 1977)
REVENUE RULINGS AND TAX PLANNING
Sutherland, Asbill & Brennan
Washington, D.C.
I. Introduction
The Internal Revenue Service's rulings program enables taxpayers to seek the IRS's guidance and advice on the tax treatment of proposed transactions and of transactions which have already been consummated. Ordinarily, but subject to the limitations which I shall discuss, a taxpayer who has requested and received a ruling from the IRS is entitled to rely upon it in the tax treatment of the transaction. The position taken by the IRS in a ruling will often be of interest not only to the taxpayer who has requested the ruling but also to other members of the same industry who may be actively contemplating similar transactions. Therefore, after discussing the mechanics of soliciting a ruling from the IRS, I will consider the extent to which a taxpayer may rely upon a ruling issued to another taxpayer, and I will assess the impact that provisions of the Tax Reform Act of 19761 dealing with the public disclosure of rulings may have upon this question. Finally, I will discuss the availability of rulings in certain areas of minerals taxation.
II. Mechanics of Obtaining a Ruling
At the outset, it will be useful to define several terms which I shall use herein.
The term "ruling" is used generically to refer to "a written statement issued to a taxpayer or his authorized representative by the National Office [of the IRS] that interprets and applies the tax laws to a specific set of facts."2 "Revenue Ruling" is a narrower term referring to official interpretations published by the IRS in the Internal Revenue Bulletin.3 Only a small percentage of rulings issued to taxpayers are published by IRS. For example, of the 28,346 ruling requests handled by
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IRS during 1974, only 626 revenue rulings were published in the Internal Revenue Bulletin.4 It is thus apparent that a letter ruling will not necessarily become a revenue ruling.5
The National Office interprets and applies the revenue laws by way of "technical advice" to the field. A District Director may request "technical advice" from the IRS National Office in connection with the examination of a taxpayer's return or ancillary to a taxpayer's claim for refund or credit. A taxpayer may ask the District Director to refer an issue to the National Office if a lack of uniformity exists among the districts in the treatment of the issue or if its unusual or complex nature warrants referral to the National Office. The technical advice procedure thus enables the taxpayer to obtain the views of the National Office in connection with the examination of the taxpayer's tax return, and provides an alternative to the rulings process with respect to completed transactions. The procedure for requesting technical advice is set out in detail in Rev. Proc. 73-8,6 and will not be discussed extensively here.
The rulings program implements the Internal Revenue Service's declared policy "to answer inquiries of individuals and organizations, whenever appropriate in the interest of sound tax administration, as to their status for tax purposes and as to the tax effects of their acts or transactions."7 Rulings are issued only by the National Office of the IRS in Washington, D. C.8 The rulings program is administered by
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the Assistant Commissioner (Technical), who has largely redelegated his responsibility to the Directors of the Corporation Tax and the Individual Tax Divisions.9
The IRS will issue rulings on prospective transactions and on completed transactions before the tax return with respect to that transaction is filed. An important limitation on the foregoing statement is that the IRS will not ordinarily rule where the identical issue is present in the taxpayer's return for a prior year which is either under active examination or audit by a district office or is under consideration by a branch office of the Appellate Division. The IRS also will refuse to rule upon a ruling request submitted by a trade association or similar industry spokesman which seeks a ruling on the application of the tax laws to the constituent members of the group. (Of course, the association is free to seek a ruling concerning its own tax liability.)
In addition to the foregoing strictures, the IRS has announced that it will uniformly refuse to rule or will ordinarily refuse to rule in certain general areas. For example, the IRS will not rule upon the tax consequences of a transaction that lacks a bona fide business purpose or the principal purpose of which is the reduction of federal taxes. Similarly, the IRS refuses to rule upon a matter involving hypothetical situations or alternate plans of proposed transactions, and ordinarily will not rule upon the tax effect of a transaction which is to be consummated at some indefinite future time. Finally, the IRS will not issue a ruling where, as in the case of the market value of property, the determination sought is primarily one of fact.10
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In other areas, the IRS, although not refusing to issue rulings, has narrowly confined the circumstances under which rulings will be issued. For example, the IRS, concerned that many limited partnerships are formed with the principal purpose of reduction of federal taxes, has promulgated "operating rules" prescribing conditions that must be present before the IRS will rule that an organization is classified as a partnership for tax purposes.11
A taxpayer who is uncertain whether the IRS will entertain a ruling request concerning a particular transaction may call the IRS National Office and inquire whether it will rule on a particular question. In making such an inquiry, however, the taxpayer's name and his tax identification number must be disclosed. The National Office's willingness to indicate whether it will rule on a particular question is an exception to the rule that, prior to the receipt of a written ruling request, the officials and employees of the National Office will ordinarily refuse to discuss a substantive tax issue with a taxpayer or his representative.12
The format and content of the ruling request must conform to the detailed instructions set forth in Rev. Proc. 72-3 and the IRS's procedural rules. A ruling request must be submitted in duplicate if it contains more than one issue or if the taxpayer is requesting a closing agreement13 with respect to the issue presented. Even though a duplicate is not otherwise required, it is generally advisable to submit a duplicate as a matter of course to avoid delay in processing should the ruling request have to be referred to more than
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one office within the IRS.14
The ruling request must contain a full statement of all the relevant facts concerning the transaction. (If the transaction constitutes one step of a larger transaction, then the facts and circumstances of the larger transaction must be submitted in the ruling request).
The facts that must be contained in the ruling request include the names, addresses, and taxpayer identification numbers of all interested parties; the location of the District Office that has audit jurisdiction over the return of each party; a full and precise statement of the business reasons for the transaction, and a carefully detailed description of the transaction. Copies of any documents relevant to the transaction must accompany the ruling request. Any relevant facts embodied in the documents must be included in the statement of facts; with appropriate reference to the pertinent provisions of the documents, the ruling request must contain an analysis of how the facts contained in the documents have a bearing on the issues presented.
The ruling request must also contain a statement whether, to the best of the knowledge of the taxpayer or his representative, the identical issue is being considered by any IRS field office in connection with an active examination or audit of a tax return already filed, or is being considered by a branch office of the Appellate Division.
At his option, the taxpayer may submit a "two-part" ruling request to the IRS. Such a request would contain, in addition to the complete and detailed statement of facts that must be included in every ruling request, a summary statement of the facts that the taxpayer considers control the issue. Although the IRS reserves the right to rule on the basis of a more complete statement of facts that it considers controlling, if the IRS agrees with the taxpayer's summary statement of controlling facts, it will use the statement as the basis for the ruling and only the statement will be incorporated in the ruling.
If, as is usually the case, the taxpayer is contending for a particular determination, he must explain the grounds for his position and buttress it with a discussion of the relevant authorities that assertedly support his view. However, even if the taxpayer is not arguing for acceptance of a particular viewpoint concerning the ruling request, he must nonetheless present his views concerning the tax results of the transaction along with a statement of relevant authorities.
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Recent amendments to the IRS's Procedural Rules15 require that all ruling requests filed after October 31, 1976 be accompanied by a separate statement of those portions of the ruling that the taxpayer believes are exempt from the disclosure provisions of the Tax Reform Act of 1976 and that thus should be deleted.16 The statement of proposed deletions is to be accompanied by a copy of the ruling request on which the person making the ruling request has indicated, by the use of brackets, the material to be deleted.
The ruling request must be signed by the taxpayer or his authorized representative. The person signing the request should include a telephone number for the IRS to call in the event it needs any further information. In addition, ruling requests filed after October...
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