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The Internal Revenue Service has a long history of ruling privately and providing private guidance on the tax aspects of certain transactions. “Privately” is the operative word because the rulings and guidance are taxpayer specific and theoretically have no precedential value to any other taxpayer. These private issuances give taxpayers a level of comfort and a kind of insurance. They know that if they have fully disclosed the facts of the transaction and made truthful representations, the transaction will be treated by the IRS as described in the private letter ruling, commonly known as a PLR.
Every year the IRS issues a revenue procedure on questions on which the IRS will not rule. In other words, do not bother. This year’s revenue procedure was a surprise in that the IRS may rule on whether a domestic corporation’s instrument is equity or debt if (1) “the taxpayer believes the facts strongly support the classification as stock [equity] and (2) the taxpayer can demonstrate that there are unique and compelling reasons to justify the issuance of a letter ruling.” The stock [equity] versus debt issue is essentially factual, and the IRS is historically hesitant about ruling on factual issues. (PLRs are mini-lessons in the law rather than the facts.)
Note that a ruling will be given only if the taxpayer wants a ruling that the instrument is stock [equity], not debt.
The revenue procedure is strange in that before submitting a ruling request a taxpayer should first contact the office of the Associate Chief Counsel (Corporate) of the IRS to discuss whether the agency will consider issuing a letter ruling for a particular factual situation. In other words, call so we can talk.
Unfortunately, the potential ruling will apply only to corporate equity and not partnership equity, but it is surprising that the IRS may rule at all on this essentially factual issue.
IRS Circular 230 Notice
To the extent this client alert within it concern tax matters, the information is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law or in promoting, marketing, or recommending to another party any transaction or matter addressed. |
