Revenue Rulings

1. Revenue Rulings • Second most important administrative source. • Official position of the IRS (no hearings) • Favorable to TP – IRS is bound to follow, at all levels • If unfavorable, all divisions of IRS are bound, except Appeals Division not bound. • Deals with a specific fact situation. • Public need for guidance with a specific fact situation. • But the need for public hearings and formal regs are not justified.

2. Revenue Rulings (cont’d) • Distinguish from Regulations • No public hearings or requests for comment • Limited to specific fact situation • Effective Date - It may state. Generally, being interpretative, is retroactive. • If contradictory to previous position, and • unfavorable to taxpayers, will be prospective. • Are reliable and may be cited as authority by the taxpayer but not IRS.

3. Rauenhorst Decision prompts IRS Chief Counsel to clarify authority of IRS rulings

4. Rauenhorst, 119 TC --, No. 9., Filed October 7, 2002 • IRS attorneys sought to reject a position in a previous IRS Ruling: Rev. Rul. 78-197. • The Tax Court protested: “The [IRS] has neither revoked nor modified Rev. Rul. 78-197. . . . Indeed, [it] has continued to rely on Rev. Rul. 78-197 in issuing [its] private letter rulings."

5. Rauenhorst • The court added that while it agrees with the IRS that "revenue rulings are not binding on this Court, or other Federal courts for that matter," it could not agree that the IRS "is not bound to follow his revenue rulings in Tax Court proceedings.

6. Rauenhorst • . . [The IRS's] position in this case directly contradicted [its] long-standing and clearly articulated administrative position. . . . [The IRS's] counsel may not choose to litigate against the officially published rulings of the Commissioner without first withdrawing or modifying those rulings. The result of contrary action is capricious application of the law."

7. Chief Counsel Notice CC-2002-043 (IRS response to Rauenhorst) • It has been a longstanding policy of the Office of Chief Counsel that we are bound by our published positions, whether in regulations, revenue rulings, or revenue procedures, and that we will not argue to the contrary. • Accordingly, we do NOT take positions in litigation, TAMs, PLRs, CCAs, advisory opinions, etc., inconsistent with a position that the Service has taken in published guidance or in proposed regulations.

8. Chief Counsel Notice CC-2002-043 • This policy applies even when [IRS] attorneys disagree with the published guidance or even if there are plans to revoke, change or clarify the position taken in the published guidance. • Note: CC2002-043 is also indirectly applicable to revenue agents and appellate conferees.

9. Review of Most Recent Transportation Deduction RulingRev. Rul. 99-7 • In Walker , 101 T.C. 537 (1993); the Tax Court treated IRS's position in Rev. Rul. 90-23 as a concession that the taxpayers were entitled to deduct the full amount of their truck expenses if they could establish that they met the factual requirements of the ruling. (See also Burleson TC Memo. 1994-364, (August 1, 1994)).

10. Revenue Rulings (cont’d) • Format • Issue • Facts • Law and Analysis • Holding

11. Revenue Rulings (cont’d) • Cite: • (Temp) Rev. Rul. 02-34, 2002-62 I.R.B. 58 • 02 = year • 34= consecutive number of the ruling (published that year) • 2002 = year (again) • 62 = consecutive number of IRB’s volume • I.R.B. = Internal Revenue Bulletin • 58 = page number

12. Revenue Rulings (cont’d) • (Perm) Rev. Rul. 02-34, 2002-1 C.B. 373 • 02 = year • 34 = consecutive number of ruling published that year • 2002-1 = year/volume of C.B. • C.B. = Cumulative Bulletin • 373 = page number

13. Revenue Procedure • Guidance regarding procedures. How to…. such as: • Request a Private Letter Ruling • Request approval to change accounting method • Etc. • Cite – same as Revenue Ruling, except is a Procedure.

14. Letter Rulings • Prepared in Several Formats • Private Letter Rulings • Determination Letters • Technical Advice Memorandums

15. Letter Rulings (cont’d) • Are not published by the IRS • Are available through FOIA • In sanitized format to protect the identity of the requester • Most tax services have them and publish most of them • Again, all are sanitized – Code Sec. 6110.

16. Private Letter Ruling (PLR) • Is a great opportunity for TPs contemplating a significant transaction – especially if it may controversial tax-wise • Is requested by a specific TP contemplating a proposed transaction, with a specific fact situation, and wanting the assurance of the tax results before entering into the transaction. • TPs and practitioners may request as a “comfort ruling,” where they know the answer, but want confirmation. Common with mergers.

17. PLR (cont’d) • If the IRS foresees a response unfavorable to the requester, they may • Offer an opportunity for a conference to discuss, either by telephone or a personal conference in Washington, D.C. • Make suggestions to revise the transaction that would bring more favorable results. (PLR’s are issued by the IRS’ National Office)

18. PLR (cont’d) • Very reliable to the requesteronly. • But, for research purposes, provides good insight into IRSs position • May not be relied upon by the requester if the facts presented were inaccurate/incomplete, or • If the actual facts or transaction differs from those presented.

19. PLR (Cont’d) Precedential value is limited by §6110(f) • They may not be cited as authority • By either the TP or IRS • Revenue Agent need not honor them except in respect to the TP to whom issued • Are good guidance as to how IRS feels about an issue

20. PLR (cont’d) • Significantly, is among the “substantial authorities” listed in Reg. §1.6662-4(d)(3)(iii) – the TP may rely on it to avoid some penalties

21. PLR (cont’d) If IRS receives repeated requests regarding particular or similar transactions, they may issue a Revenue Ruling

22. Determination Letter Generally: • Issued locally (formerly District Director) • Deals with issues/transactions not exceptionally complex or controversial • After the fact, completed transactions • Usually pension plan qualification, exempt organization.

23. Determination Letters (cont’d) • Are not published. May be available through FOIA.

24. Technical Advice Memorandum (TAM) • Issued by the NO upon request of an Internal Revenue Agent or the TP during an administrative proceeding. • After the fact, completed (closed) transaction. • Facts must be established. • TP may request a conference if a proposed response is unfavorable.

25. PLRs and TAMs • If the IRS National Office receives requests for guidance in the nature of PLRs or TAMs with respect to any particular type of transaction indicating the need for guidance to the public, they may issue a Revenue Ruling.

26. Acquiescence • When IRS loses a judicial decision, the Commissioner of Internal Revenue may issue an “Acquiescence” or “Non-Acquiescence” (except Supreme Court cases) in an Action on Decision (AOD) • In an AOD, IRS agrees or disagrees with the court’s decision. • Are published (as a list in IRB / CB’s, and are included in the case cite by some publishers

27. Acquiescence (cont’d) • Relevance: • IRS will (acq.) or will not (non-acq) follow the judicial decision • Acq. does not necessarily mean the IRS agrees, but only that it will not pursue litigation further • And, is a clue that the issue will not be further challenged • May acq. or non-acq. only to some particular issue decided by the Court • May be issued immediately, or years later • May be reversed later

28. Acquiescence (cont’d) • Are NOT driven, as the text states, by litigation costs.

29. Internal Revenue Bulletins Cumulative Bulletins • Internal Revenue Bulletin – a periodic publication in which IRS publishes its pronouncements, and other documents: New Public Laws Committee Reports Revenue Rulings Revenue Procedures Treasury Decisions New Treaties • Etc.

30. Internal Revenue Bulletins Cumulative Bulletins (cont’d) • Internal Revenue Bulletins are accumulated into a Cumulative Bulletin, generally twice a year, but may be more or less depending upon the volume of pronouncements issued

31. Announcements and Notices • Concern items of general importance to taxpayers (e.g., notice to announce mailing of individual tax return forms) • Notice of pending regulatons.

32. Example: Notice 2005-45, 2005-24 IRB 1228 “This notice provides interim guidance to taxpayers on the limitation under § 274(e) of the Internal Revenue Code on the deductible amount of trade or business expenses for use of a business aircraft for entertainment. Section 274(e) was amended by § 907 of the American Jobs Creation Act of 2004 (AJCA), effective for amounts incurred after October 22, 2004. The rules provided in this notice apply until regulations are effective.”

33. Example of Chief Counsel Advice

34. Home Office DepreciationChief Counsel Advice 200526002 • IRS concludes that the owner of a multi-unit residential rental property may depreciate the home-office portion of the unit he occupies over a 27.5-year period. • He doesn't have to use the 39-year writeoff period that would apply if the home-office were treated as commercial property.

35. Chief Counsel Advice 200526002 • Facts: • Yao owns an eight-unit apartment building. • He lives in one of the apartments and leases the other seven to residential tenants. • The unit that he occupies is 1,200 square feet. • Yao exclusively uses 200 square feet of the apartment for a home office for a single trade or business (home office).

36. Chief Counsel Advice 200526002 Background • Residential rental property, which is depreciated via straight line over 27.5 years under MACRS, is any building or structure if 80% or more of its gross rental income is rental income from dwelling units. ( Code Sec. 168(e)(2)(A)(i) ) • If any part of the building or structure is occupied by the taxpayer, the gross rental income from it includes the rental value of the occupied portion. (Code Sec. 168(e)(2)(A)(ii)(II) ) • The CCA says that a building is residential rental property only if at least one rental unit actually is rented to provide living accommodations.

37. Chief Counsel Advice 200526002 Background • If this threshold test is passed, then the 80%-gross-rental-income test is applied. CCA Holding • The CCA concludes that Yao met both tests. • Although the rental value of the 200 square feet of the apartment unit used by Yao for a home office isn’t treated as rental income from a dwelling unit, the entire building satisfies the 80% test for treating the structure as residential rental property.

38. Chief Counsel Advice 200526002 CCA Holding • Code Sec. 280A doesn't require a taxpayer to carve out a “nonresidential real property” portion from a building that is residential rental property under Code Sec. 168(e)(2) . • Yao may depreciate the home office portion of the apartment unit as residential rental property over a 27.5 year recovery period.

39. Chief Counsel Advice 200526002 CCA Holding • The CCA points out that home-offices qualifying under Code Sec. 280A but located in a single-dwelling-unit structure are treated for depreciation purposes as commercial property written off over a 39-year MACRS period. • The residence is not residential rental property because it is not used to provide living accommodations on a rental basis. • If the only rental income from dwelling units in a building is deemed rental income that results from the taxpayer's occupancy of the building as a residence, the building is not used to provide living accommodations on a rental basis.

40. Substantial Understatement Penalty Authority • Types of authority. • Except in cases described in paragraph (d)(3)(iv) of this section concerning written determinations, only the following are authority for purposes of determining whether there is substantial authority for the tax treatment of an item: applicable provisions of the Internal Revenue Code and other statutory provisions; proposed, temporary and final regulations construing such statutes; revenue rulings and revenue procedures; • tax treaties and regulations thereunder, and Treasury Department and other official explanations of such treaties; court cases; congressional intent as reflected in committee reports, joint explanatory statements of managers included in conference committee reports, and floor statements made prior to enactment by one of a bill's managers; General Explanations of tax legislation prepared by the Joint Committee on Taxation (the Blue Book);

41. Substantial Understatement Penalty Authority • private letter rulings and technical advice memoranda issued after October 31, 1976; actions on decisions and general counsel memoranda issued after March 12, 1981 (as well as general counsel memoranda published in pre-1955 volumes of the Cumulative Bulletin); Internal Revenue Service information or press releases; and notices, announcements and other administrative pronouncements published by the Service in the Internal Revenue Bulletin. • Conclusions reached in treatises, legal periodicals, legal opinions or opinions rendered by tax professionals are not authority. • The authorities underlying such expressions of opinion where applicable to the facts of a particular case, however, may give rise to substantial authority for the tax treatment of an item.

42. Substantial Understatement Penalty Authority • Notwithstanding the preceding list of authorities, an authority does not continue to be an authority to the extent it is overruled or modified, implicitly or explicitly, by a body with the power to overrule or modify the earlier authority. • In the case of court decisions, for example, a district court opinion on an issue is not an authority if overruled or reversed by the United States Court of Appeals for such district. • However, a Tax Court opinion is not considered to be overruled or modified by a court of appeals to which a taxpayer does not have a right of appeal, unless the Tax Court adopts the holding of the court of appeals. • Similarly, a private letter ruling is not authority if revoked or if inconsistent with a subsequent proposed regulation, revenue ruling or other administrative pronouncement published in the Internal Revenue Bulletin.