Information Resource Associates in its continuing research for Worthington Group, Inc., presents a subject which Worthington Group believes is of interest. We hope this information will help to educate the reader to the point of inquiring further on the subject. This Information Is Not Intended As Legal Advice.

"The interpretation and Administration of The Tax Law Are The Subject of Treasury Regulations and Service Rulings".

Regulations, if not inconsistent with the controlling statute have the force of law. Rulings, are guides to service policy, but have little weight in litigation. A taxpayer may obtain a Private Ruling to cover a completed or prospective transaction.

Although tax statutes are ultimately subject to interpretation by the tax court and other judicial tribunals, the first governmental agency with an interpretive function is the United States Department of The Treasury. An important function of the Treasury Department is the promulgation of regulations and rulings so that taxpayers may have something to rely upon, i.e.: administrative interpretations of their transactions.

Regulations are issued by the United States Department of The Treasury. Revenue Rulings are published by the Internal Revenue Service. Regulations are given great weight by the courts, especially with the passage of time, although they will be invalidated when they are unreasonable. Internal Revenue Rulings, on the other hand, normally mean little to the courts but often are decisive administratively, since they represent the services legal position on an issue.

Unpublished, or private letter rulings cover only the taxpayers receiving them, they are not regarded as precedent.

TREASURY REGULATIONS/DECISIONS

Treasury regulations and decisions are prescribed by the Commissioner and approved by the Secretary of the Treasury. Under the Administrative Procedure Act, a preliminary notice of proposed regulation/s is published in the federal register. Comments regarding proposed regulation/s is published in the Federal Register. A petition to change a final regulation, may be addressed to the Commissioner, hopefully, it will be given careful consideration.

Names, comments, and data which are not designated as confidential are available to the public. Treasury Regulation § 601.601.

"Drafts of proposed regulations and related transmittal memoranda are exempt from disclosure pursuant to the Freedom of Information Act since they are predecisional documents". Pies v I.R.S., 668 F.2d 1350.

Each portion of the regulation/s is published currently in the Federal Register and in the weekly Internal Revenue Bulletin as a numbered Treasury Decision (T.D.), and is reprinted in the semi-annual cumulative bulletin.

EFFECT OF REGULATIONS, CASE CITINGS

We have listed several case citings effecting Regulation/s, so that the reader can ascertain what the courts have to say in support of the validity of the subject matter.

"A reasonable treasury regulation is binding upon both the commissioner  and the taxpayer". Helvering v Reynolds Tobacco Co., 306 U.S. 110; Commissioner v Wheeler, 324 U.S.542 (Commissioner v Sternberger Estate, 348 U.S. 187; Cammarano v United States, 358 U.S. 498.

"A regulation has special force where it is considered as "interpretive,"

i.e.: "broad rule-making power has been delegated to the commissioner by the particular statute involved". Commissioner v South Texas Lumber Co., 333 U.S. 496; Textile Apron Co., 21 Tax Court 147.

"A regulation which contravenes the applicable statute is invalid". Bingham Trust v Commissioner, 325 U.S. 365; Commissioner v Acker, 361 U.S. 87; Mitchell v Commissioner, 300 F.2d 533; Smith v Commissioner. 332 F.2d 671;

Dorfman v Commissioner, 394 F.2d 651.

"Where a statute lists a series of requirements, regulations may not add to that list".

"Although a regulation represents a reasonable interpretation of the law, it may be altered prospectively in favor of another reasonable interpretation". Helvering v Wilshire Coil Co., 308 U.S. 90; U.S. v Leslie Salt Co., 350 U.S. 383.

PUBLIC RULINGS

The service has extended its publication policy for the Internal Revenue Bulletin to include all rulings issued to field officers or to tax payers which are intended to be used as precedents or guides. Each ruling is designated as a "Revenue Ruling" (Rev.Rul.).

In 1954 a new numbering system was instituted, each ruling is prefixed by the last two digits of the year. Example: Rev.Rul.54-1, Rev.Rul.54-2, etc. during 1954. Statements of practice and procedure were published as "Revenue Procedures." Rev.Proc.72-1, C.B.1972-1,693. Published ruling/s are contained in the weekly Internal Revenue Bulletin (I.R.B.), and are accumulated semi-annually in the Cumulative Bulletin (C.B.).

"The services' file, and background documents on a Revenue Ruling are exempt from disclosure under the Freedom of Information Act as intra-agency information which was part of the predecisional process". Arthur Anderson and Co. v I.R.S., 679 F.2d 254.

The courts have recognized a substantial difference between treasury regulations and rulings or practice of the Internal Revenue Service. In the latter case:

"Not even the 'fiction' of implied congressional approval lends weight to such interpretations when they are challenged in court, whether the challenge is by the taxpayer or by the government". Helvering v New York Trust Co., 292 U.S. 455; Biddle v Commissioner, 302 U.S. 573; Commissioner v Lake, Inc., 356 U.S. 260.

"A revenue ruling, without more, is simply the contingent of one of the parties to the litigation and is entitled to no greater weight". Grace E. Lang Estate, 613 F.2d 770.

In one interesting application of this rule, a taxpayer was upheld in challenging an administrative interpretation that had been applied for nearly 30 years. Alcoma Association, Inc. v U.S., 239 F.2d 365.

The Treasury Regulation relied on in the above case stated:

"no unpublished ruling or decision will be relied on, used, or cited by any officer or employee of the service as a precedent in the disposition of other cases." Treasury Regulation § 601.601 (d)(2)(v)(d).

TAXPAYER REQUESTS FOR RULINGS

Under some circumstances a taxpayer may obtain an advance ruling on a prospective transaction. Except in the few cases where the statute requires a prior determination the issuance of such a ruling is discretionary. A ruling may also be requested as to a completed transaction. However, if the return has already been filed, the request will normally be referred to the field office. The taxpayer may then request the field office to seek technical advice from Washington.

The general policies and procedures are set forth in (Code of Federal Regulations) CFR 601.201; Revenue Procedure 88-1, I.R.B. 1988-1,7. In an attempt to limit and formalize procedure, the service has ruled that a taxpayer may normally have only one conference attended by a person in the appropriate branch of the office of the associate commissioner who has authority to act for the branch chief.

The conference will be held after the branch has had the opportunity to study the problem presented in the request. Possible adverse factors will be discussed with the taxpayer, but no advice as to final disposition will be given until after review.

There is no further administrative appeal unless the branch's own recommendation is adversely changed by a higher echelon, or an adverse recommendation is sustained but on a different issue or on substantially different grounds. Information as to the status of a pending ruling request may be obtained by the taxpayer. (A closing agreement may be required as a condition to issuing a ruling).

While no ruling will be issued on an oral request, an oral inquiry as to whether the service will rule on a particular matter may be made. The name and identifying number of the taxpayer making the request must be disclosed when calling. Within 21 days after the written request is received, the service will contact the taxpayer or the authorized representative to inform them whether the Service will rule as requested, rule adversely, or not rule at all; whether more information must be submitted; or whether no conclusion can be reached because of the nature of the issue presented. The taxpayer will also be informed if modification of the transaction might result in a favorable ruling. Revenue Procedure 88-1, Supra.

After a person has received a ruling, it should be attached to the return to which it applies. It is the duty of the examining agent to determine the existence of any material discrepancy between the ruling and the actual transaction. A ruling request may be withdrawn, but the Internal Revenue Office in Washington D.C., may nevertheless furnish its views or other information to the IRS field office.

THE EFFECT OF A PRIVATE RULING

As a matter of practice, ruling/s made on the basis of complete and accurate representations are generally respected. Nevertheless,

"a retroactive revocation of an exemption ruling was justified where the taxpayer did not notify the commissioner of changed activities". Stevens Brothers Foundation, Inc., v Commissioner 324 F.2d 633; Birmingham Business College, Inc. v Commissioner, 276 F.2d 476; Coastal Club, Inc., 386 F.2d 231.

"In the absence of a change in law or a discrepancy in facts, a revocation of a ruling will be made only prospectively if the taxpayer has relied upon the ruling and if retroactive revocation would be to his detriment". Revenue Procedure 88-1, I.R.B. 1988-1,7. McMurtry v Commissioner, 203 F.2d 659.

"Such a ruling has no statutory sanction as a binding agreement. It may be revoked as part of a general policy applicable to all similar situations, and the revocation may affect a period preceding formal notice of the new policy to the particular taxpayer". Automobile Club of Michigan v Commissioner, 353 U.S. 180.

"The commissioner's retroactive revocation of a ruling which was relied upon by the taxpayer is subject to judicial review. The issue of whether the commissioner abused his discretion is resolved by looking at the full record before him when he made his decision". Pierson v United States, 428 F.Supp 384.

If the taxpayer desires the finality of a closing agreement, the taxpayer should make an application in that form, but with the understanding that a closing agreement is a more difficult and more time consuming procedure.

The IRS Code expressly provides that absent a contrary procedure established by regulations, a private ruling

"may not be used or cited as precedent". Title 26 USC Internal Revenue Code § 6110(j)(3).

The courts have sustained the commissioners right to ignore a ruling issued to another taxpayer on which the present taxpayer relied, Eli D. Goodstein, 267 F.2d 127. An appellate court has held:

"a taxpayer was not entitled to a deduction merely because other taxpayers secured similar deductions under an erroneous private letter ruling which was revoked prospectively". Over a dissent, the court held:

"unlawful discrimination between similarly situated taxpayers does not exist because the taxpayer was taxed the same as others similarly situated who did not obtain a ruling". The court also emphasized:

"the absence of reliance and distinguished the case as not involving an unjustifiable favoring of one competitor over another". Bookwalter v Brecklein, 357 F.2d 78).

PUBLICITY OF PRIVATE RULINGS

The confidentiality of private ruling/s and the applications therefore has had a stormy history since the passage of the Freedom of Information Act in 1967. The problem involves elements of personal privacy, legal privilege, preference afforded special tax payers, political interference, and in one well known case apparent deception.

Prior to a specific 1976 code amendment which superseded the Freedom of Information Act on this point, the leading cases had held:

"private rulings must be expurgated and then published including the taxpayers identity, but were divided about technical advice memoranda". Tax Analysts and Advocates v I.R.S., 505 F.2d 350; Fruehauf Corp. v I.R.S., 566 F.2d 574; Taxation With Representation Fund v I.R.S., 646, F.2d 666. The current rules are set forth in the statute (drafted jointly by Internal Revenue Service and Public Interest Law Groups, which had brought the court challenges).

Available for public inspection are all rulings, determination letters, or technical advice memoranda, together with their "background file documents" (ruling request, supplement, correspondence, etc., but not the Services internal memoranda or that between the Internal Revenue Service and the Justice Department on tax matters).

"The name, address, and other identifying details of the taxpayer are not to be revealed". I.R.C. section 6110 (a), (b), (c), (1), (e); Treasury Regulation §301.6110-127. All ruling/s, etc., are available for inspection and copying at the reading room of the national office, upon written request.

Treasury Regulation § 301.6110-1(c) states:

"disclosure of revenue rulings may be had by a court order directing discovery". "If discovery of revenue rulings are sought in a tax court proceeding they are not exempt as privileged".

"They are discoverable if relevant to the pending case". Franco Corelli, 66 Tax Court 220. The court has also held:

"since private letter rulings to others may not be relied on so as to require this taxpayer to be given treatment as the one to whom the ruling was issued, such rulings are not relevant". Bernard E. Teichgraeber, 64 Tax Court 453.

FORM OF RULING REQUEST

The procedure for applying for a private letter ruling is stated in detail in Revenue Procedure 88-1, I.R.B. 1988-1, 7 Revenue Procedure 88-1. A written request should be addressed to the associate chief counsel (technical). A request need not be in duplicate unless more than one issue or a closing agreement is involved.

The request must be accompanied by a declaration, under penalty of perjury, as to the accuracy of the facts presented, sworn to by the taxpayer (not his representative).

A complete statement of all the facts related to the transaction is required, including the names, addresses, and taxpayer account numbers of all interested parties. The request may also contain a copy of each contract or other document necessary to present the facts, as well as an analysis of the relevant portions of such documents, and all of this must be in writing.

The request must state whether the identical issue is in the return of the taxpayer and provide additional information if it is. There must be included a full and precise statement of the business reasons for the transaction. A taxpayer is encouraged to inform the service of and discuss any legislation, tax treaties, court decisions, regulations, revenue rulings or revenue procedures that the taxpayer determines to be contrary to the position advanced.

If prompt consideration is necessary, a request for consideration out of regular order should be included, showing clear need for such treatment. If a conference is desired, such a request should be included in the letter. Where the application does not comply with all requirements, it will not be acted on until the required data are submitted.

The taxpayer may request a determination letter by the director for the district in which the return is to be filed. Such determination may apply only to a completed transaction in which the return has not yet been filed, and only if the question is specifically covered by statute, treasury decision or regulation, or specifically by a ruling, opinion, or court decision published in the Internal Revenue Bulletin.

The director will not issue a determination letter if a similar inquiry by the taxpayer has been addressed to Washington, or if the request is by an industry, trade association, or similar group, or if it involves an industry wide problem.

A directors determination letter will probably have the same status as a Washington ruling, Treasury Regulation § 601.201(c); Revenue Procedure 88-1, I.R.B. 1988-1, 7. (There is a special procedure for determination that an organization is exempt from tax.)

It has been the traditional policy of the service not to issue rulings on questions of fact. The service has also published an extensive list of particular questions on which it will not issue rulings. One of the latest such list can be found in Revenue Procedure 88-3, I.R.B. 1988-1, 29.

This information is of course is not intended as all encompassing, but was researched to benefit the reader.

Research Information Resource Associates