7 THE AMERICAN LAW INSTITUTE Continuing Legal Education Obtaining IRS Private Letter Rulings: Remove the Uncertainty of Tax Consequences January 30, 2017 Telephone Seminar/Audio Webcast Obtaining IRS Private Letter Rulings: Remove the Uncertainty of Tax Consequences By Ronald D. Aucutt McGuireWoods LLP McLean, Virginia Stephanie Loomis-Price Winstead PC Houston, Texas Kelly L. Hellmuth McGuireWoods LLP Jacksonville, Florida Copyright 2017 by Ronald D. Aucutt. All Rights Reserved.
8 OBTAINING IRS PRIVATE LETTER RULINGS: REMOVE THE UNCERTAINTY OF TAX CONSEQUENCES TABLE OF CONTENTS I. INTRODUCTION...1 II. LEGAL BASIS AND HISTORY...1 A. In General...1 B. Application to Estate Tax Issues...1 III. THE SERVICE S DISCRETION...2 A. General Rules...2 B. No-Rule Areas...3 IV. STRATEGIC CONSIDERATIONS...8 A. When to Ask for a Ruling...8 B. When Not to Ask for a Ruling...9 C. Determining the Ruling or Rulings to Request...9 V. REQUESTS FOR EXTENSIONS OF TIME REGARDING MISSED ELECTIONS...11 A. 9100 Relief in General...11 B. Allocations and Elections Regarding the GST Exemption...13 VI. PREPARATION OF THE RULING REQUEST...15 A. Describing the Proposed Transaction (Course of Conduct)...15 B. Dealing with Disclosure About Those Ws, Xs, Ys, and Zs...15 C. Drafting the Ruling Request...16 D. Consultation with the Service...17 E. Expedited Handling...18 i
9 F. User Fees...18 VII. THE SERVICE S CONSIDERATION OF A RULING REQUEST...19 A. Personnel...19 B. The Taxpayer s Participation...19 VIII. OPTIONS IF THE SERVICE WILL NOT RULE FAVORABLY...20 A. Modifying the Ruling Request...20 B. Withdrawing the Ruling Request...20 C. Accepting an Adverse Ruling...20 D. Achieving Reconsideration Above the Branch Level...21 IX. THE EFFECT OF A RULING...21 A. Reliance...21 B. Necessary Modification or Supplementation...21 ii
10 OBTAINING IRS PRIVATE LETTER RULINGS: REMOVE THE UNCERTAINTY OF TAX CONSEQUENCES I. INTRODUCTION A letter ruling is a written determination issued to a taxpayer by an Associate office [Office of Associate Chief Counsel] 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. A letter ruling is issued when appropriate in the interest of sound tax administration. Rev. Proc. 2017-1, 2017-1 I.R.B. 1, 2.01. Cf. Reg. 601.201(a)(2). II. LEGAL BASIS AND HISTORY A. In General 1. Supplementing the general statutory authority of the Treasury Department and the Internal Revenue Service ( the Service ) to administer the tax law under section 7805 of the Internal Revenue Code, the authority for issuing rulings is derived from Reg. 601.201. 2. Rev. Proc. 2017-1 is the bible for ruling requests. This revenue procedure is updated annually and is usually the first revenue procedure of the year. B. Application to Estate Tax Issues 1. Historically, the Service would not rule on the application of estate tax to the property or estate of a living person. See, e.g., Rev. Proc. 87-1, 1987-1 C.B. 503, 5.02. Such a ruling was regarded as hypothetical, given that no transaction had occurred or was proposed to be undertaken, and no tax return was due. 2. On October 26, 1987, the Service announced a one-year test program of issuing prospective estate tax rulings on the basis of executed or proposed documents. Rev. Proc. 87-58, 1987-2 C.B. 764; Rev. Proc. 88-1, 1988-1 C.B. 557, 560, 5.02. The test was limited to ruling requests involving three specific subjects: a. Whether a power of disposition over property is a general power of appointment under section 2041. b. Whether an interest in property is a terminable interest (including QTIP) for purposes of the estate tax marital deduction. 1
11 c. Whether a governing document provides a surviving spouse with a general power of appointment over trust property for purposes of the estate tax marital deduction. 3. On October 24, 1988, the Service extended this test until December 31, 1989, and extended it to all estate tax subjects. Rev. Proc. 88-50, 1988-2 C.B. 711; Rev. Proc. 89-1, 1989-1 C.B. 740, 5.02. 4. The test was then made permanent. Rev. Proc. 90-1, 1990-1 C.B. 356, 17.02. 5. Currently, the Service may issue letter rulings on transactions affecting the estate tax on the prospective estate of a living person, except on computations of tax, actuarial factors, or factual matters. Rev. Proc. 2017-1, 5.06. 6. Even so, there are topics that are still subject to the historical limitation, such as the eligibility of a person s business structure for deferred estate tax payment under section 6166. a. Theoretically, section 6166 does not affect the amount of the estate tax. In addition, section 6166 is under the jurisdiction of a different division of the Chief Counsel s office. b. A ruling under section 6166 may be requested after a decedent has died but before the estate tax return is filed. III. THE SERVICE S DISCRETION A. General Rules 1. Except in the few cases where the Internal Revenue Code or the regulations require a ruling, the Service is not obligated to issue a ruling. 2. The Service will not rule on: a. Tax issues that are in audit (including Appeals) or litigation. Rev. Proc. 2017-1, 6.01. b. Frivolous issues issues without basis in fact or law, or that assert a position that courts have held frivolous or groundless. Id. 6.10. 3. The Service will ordinarily not rule on: a. Issues that are factual. Id. 6.02. b. Only part of an integrated transaction (generally a request must pertain to the larger transaction). Id. 6.03. 2