Question

What information should be included in a request for a private letter ruling? In what circumstances will the IRS rue on estate tax issues? On which of the following issues will the IRS likely issue a private letter ruling and why? In your answer, assume that no other IRS pronouncement addresses the issue and that pertinent Treasury Regulations are not forthcoming: [a] Whether the taxpayer correctly calculated a capital gain reported on last year’s tax return; [b] The tax consequences of using stock derivatives in a corporate reorganization; [c] Whether a mathematical formula correctly calculates the fair market value of a stock derivative

Answer 1

1. It is important to distinguish between a PLR, generally issued by Chief Counsel, and TEB’s Voluntary Closing Agreement Program. A PLR is appropriate when the issuer/taxpayer wishes to confirm with the IRS that a prospective transaction will not likely result in a tax violation. Whereas, a closing agreement is appropriate when the issuer/taxpayer wants to conclusively resolve tax matters relating to a violation, even if there are legal arguments that can be asserted to suggest a violation did not in fact occur.

2. There can be some variation, but for returns that are accepted as filed and contain no other errors or special circumstances, you should expect to receive a closing letter about four to six months after the tax return is filed. Returns that are selected for examination or reviewed for statistical purposes will take longer.

3. A private letter ruling, or PLR, is a written statement issued to a taxpayer that interprets and applies tax laws to the taxpayer's represented set of facts. A PLR is issued in response to a written request submitted by a taxpayer. A PLR may not be relied on as precedent by other taxpayers or by IRS personnel.

First, the IRS moves like a sloth (no offense, hardworking IRS employees). Second, the IRS has the power of a gorilla. Combining these two characteristics results in a problem. You may go down a tax planning path that you think is right, but by the time the IRS finds out and disagrees, you will have years of non-compliance that have compounded. This can leave you with a tax bill or controversy you were not prepared for.