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Obtaining Private Letter Rulings

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At certain times, tax planning may involve taking a position on a tax return that is uncertain, or even controversial. If the position involves a potentially large liability, taxpayers may be left with the undesirable choices of either taking a risk in reporting the position or deciding not to and paying a much larger tax.

Thankfully, in some instances, the IRS allows for a way to receive clarification on a specific tax position for individual taxpayers, called Private Letter Rulings. The basic mechanism of obtaining a Private Letter Ruling is the essence of this essay.

Private Letter Rulings are issued by the National Office of the IRS upon request by individual taxpayers. Basically, Private Letter Rulings state how a specified tax position will be treated by the IRS if it is taken on a tax return. Hence, this process is one of the best ways to ensure proper, safe tax planning on otherwise potentially risky positions. The IRS will only issue letter rulings based upon actual transactions (even if they have not been completed yet); mere hypothetical scenarios will not qualify. While the IRS is not legally bound by letter rulings, in general, it has honored the determinations made to specific taxpayers.

A Private Letter Ruling that is issued to an individual taxpayer must be attached to the tax return filed for the year that the position in question is reported. In certain circumstances, the IRS may issue subsequent determinations to other taxpayers, based upon almost the same set of facts, that seem to contradict the earlier letter ruling. Generally, in such cases, the new ruling will not be applied retroactively to the original taxpayer who requested a letter ruling.

Furthermore, the IRS is required to make Private Letter Rulings available for the general public, with identifying individual details removed. In most cases, a Private Letter Ruling only applies to the individual taxpayer who request it. For the purposes of avoiding accuracy-related penalties, however, Private Letter Rulings issued after 1984 may be used as substantial authority by other non-requesting taxpayers.

Because a letter ruling represents the current IRS view of a tax issue, letter rulings may be superseded by new case law. Keep in mind, however, that there are limitations with respect to the IRS revocation or modification of a letter ruling sent to an individual taxpayer.

Of course, as most things in life, the benefits of a Private Letter Ruling come with certain costs. There is a fairly steep fee charged by the IRS for making a request. In addition, the legal fees involved in obtaining a Private Letter Ruling are often comparable to an administrative appeal or an arbitration case (depending on the complexity of your case). Also, there are certain prescribed areas of the law that the IRS will not rule on for Private Letter Purposes. The same applies to requests that involve only issues of fact. In fact, the complexity of obtaining the Private Ruling is such that your best course of action is to retain a tax attorney if you seek to minimize your potential tax liability and audit risk by requesting a letter ruling.

Contact Sherayzen Law Office For Help In Obtaining a Private Letter Ruling

Obtaining a Private Letter Ruling usually involves complex issues, and this articles only provides a very general background information that should not be relied upon in making the determination of your specific situation. Rather, if you would like to consider obtaining a Private Letter Ruling from the IRS, you should contact Sherayzen Law Office for legal help. Our experienced tax firm will help you determine whether your case qualifies for a Private Letter Ruling, whether this is the best course of action available, and provide rigorous, ethical and affordable IRS representation.

Case Note: Weller v. Commissioner of Internal Revenue

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This brief case note describes one of the recent cases of the U.S. tax court.  This description is not a legal advice and may not be relied upon as such.

On September 20, 2011, the tax court ruled in favor of the taxpayer and found that he engaged in his business activities for profit (see Weller v. Comm’r, T.C.M. 2011-224 (T.C. 09/20/11)).

The main issue in this case was whether the taxpayer engaged in his glider plane-related activities during the years in issue with the objective of making a profit within the meaning of section 183.  After being laid off from Boeing in 2002, the taxpayer decided to start a business where he would off high-performance glider training.  On August 1, 2003, petitioner formed Northwest Eagle Soaring, L.L.C. (“Northwest”), in Washington. Northwest provides private glider flight instruction and glider plane rides. The taxpayer did not prepare a business plan for Northwest.

The taxpayer is licensed by the Federal Aviation Administration (FAA) as a Certified Flight Instructor Airplane, Certified Flight Instructor Instruments, and Certified Flight Instructor Glider. Petitioner performed flight instruction for the Boeing Employees Soaring Club.

In late 2003, the taxpayer used money he inherited to complete his purchase of a DG-1000 high-performance glider plane for $180,000, and he placed it in service on November 22, 2003. Northwest conducts its activities primarily on weekends from March through November. Glider flights are restricted to times of good visibility. For business promotion, Northwest maintains a Web site, distributes marketing flyers to locations such as airports and aviation-related businesses, and advertises in a flying publication. The taxpayer  maintained flight logs for the glider activities as required by the FAA.

In 2004, the taxpayer focused his time on the Northwest activities and did not have other employment.  For the years 2005-2007, he worked for other companies, but still deducted unreimbursed employee expenses related to Northwest.

The IRS audited the tax returns for the years 2005-2007 and found that the taxpayer did not have a profit-making objective (i.e. that his Northwest activities were just a hobby).

The tax court disagreed. After finding that the taxpayer’s subjective intent to make profit is the focus of the test, the court looked in detail at the factors provided by the IRS regulations to determine such intent (Section 1.183-2(b)).   There were nine relevant factors: (1) The manner in which the taxpayer carried on the activity; (2) the expertise of the taxpayer or his advisers; (3) the time and effort expended by the taxpayer in carrying on the activity; (4) the expectation that the assets used in the activity may appreciate in value; (5) the success of the taxpayer in carrying on other activities for profit; (6) the taxpayer’s history of income or losses with respect to the activity; (7) the amount of occasional profits, if any, that are earned from the activity; (8) the financial status of the taxpayer; and (9) whether elements of personal pleasure or recreation are involved in the activity.

Upon careful application of the facts to these nine factors, the court found that the taxpayer engaged in the glider activities with the primary purpose and intent of realizing an economic profit independent of tax savings during the years in issue.

Contact Sherayzen Law Office For Tax Court Representation

If you disagree with the IRS determination in your case and wish to challenge it the Tax Court, contact Sherayzen Law Office for diligent, zealous, and affordable tax court representation.