Originally published on Passive Activities and Other Oxymorons on February 14th, 2010.
Rev. Proc. 2011-7, 2011-1 IRB 233
Rev. Proc. 2011-3, 2011-1 IRB 111
If you are thinking about doing a transaction, but don't want to proceed before you are certain of its tax effects, you can apply to the IRS for a private letter ruling. This has the collateral benefit of providing me material for my blog. Even though private letter rulings apply only to the taxpayer who receive them and the IRS would just as soon they stayed, well, private, the Freedom of Information Act means they get published by Research Institute of America. And that means that the one in a hundred of them that is really kind of interesting gets written about here.
You can't just ask the IRS anything, though. And one of the things they do to start the year is to tell you all the questions they don't want to answer. They do it in two revenue procedures one about foreign transactions and the other about domestic matters. Some things they won't rule on because they are "highly factual". The rest of the things they say they won't rule on I kind of treat this like the list of things they ask you about before you can buy life insurance or give blood. I pretty much haven't done them and now I know to cross them off my bucket list. At any rate, here are a few of the things that you just shouldn't bother to ask.
Section 61.—Gross Income Defined.— Whether amounts voluntarily deferred by a taxpayer under a deferred—compensation plan maintained by an organization described in § 501 (other than a plan maintained by an eligible employer pursuant to the provisions of § 457) are currently includible in the taxpayer's gross income.
Section 61.—Gross Income Defined.— Whether a split-dollar life insurance arrangement is “materially modified” within the meaning of § 1.61-22(j)(2) of the Income Tax Regulations.
Split-dollar is one of those great ideas whose time has passed.
Section 83.—Property Transferred in Connection with Performance of Services.— Whether a restriction constitutes a substantial risk of forfeiture, if the employee is a controlling shareholder. Also, whether a transfer has occurred, if the amount paid for the property involves a nonrecourse obligation.
Section 107.—Rental Value of Parsonages.—Whether an individual is a “minister of the gospel” for Federal tax purposes. (Also , §§ 1402(a)(8), (c)(4) and (e), 3121(b)(8)(A), and 3401(a)(9)).
As I note in my most comprehensive post on the parsonage exclusion, I resent the IRS reticence in this area. Rulings on who is or is not a "minister of the gospel" have as much potential for bizarre humour as those on exempt status such as the lady who was conveying the teachings of the Pleiadians or the fellow who started a foundation to distribute his own sperm.
Section 121.—Exclusion of Gain from Sale of Principal Residence.— Whether property qualifies as the taxpayer's principal residence
This is an example of a "highly factual" question.
Section 7701(b).—Definition of Resident Alien and Nonresident Alien.—Whether an alien individual is a nonresident of the United States, including whether the individual has met the requirements of the substantial presence test or exceptions to the substantial presence test. However, the Service may rule regarding the legal interpretation of a particular provision of § 7701(b) or the regulations thereunder.
This is probably an example of something that is highly factual.
Whether a proposed transaction would subject a taxpayer to criminal penalties.
This is one of those situations where if you ask the question you probably already know the answer.
Section 893.—Compensation of Employees of Foreign Governments and International Organizations.—Whether wages, fees, or salary of an employee of a foreign government or of an international organization received as compensation for official services to such government or international organization is excluded from gross income and exempt from taxation and any underlying issue related to that determination.
Functional Currency.—Whether a currency is the functional currency of a qualified business unit.
I find this refusal regrettable. In my very first post I speculated that the Linden dollar, the currency in Second Life, meets the definition of "functional currency" (Hard to believe that this blog started out even more frivolous than it is now).
Any frivolous issue, as that term is defined in § 6.10 of Rev. Proc. 2011-1.
Those guys just don't have that much of a sense of humor. You would think they would enjoy some frivolity.
Whether a taxpayer has a business purpose for a transaction or arrangement.
It's up to the courts to ultimately decide whether you were doing business or up to monkey business.
Situations where a taxpayer or a related party is domiciled or organized in a foreign jurisdiction with which the United States does not have an effective mechanism for obtaining tax information with respect to civil tax examinations and criminal tax investigations, which would preclude the Service from obtaining information located in such jurisdiction that is relevant to the analysis or examination of the tax issues involved in the ruling request.
If the promoter starts telling you how talkative bank employees are drawn and quartered, you probably don't want to do the deal anyway.
Section 163.—Interest.—The income tax consequences of transactions involving “shared appreciation mortgage” (SAM) loans in which a taxpayer, borrowing money to purchase real property, pays a fixed rate of interest on the mortgage loan below the prevailing market rate and will also pay the lender a percentage of the appreciation in value of the real property upon termination of the mortgage.
Just thinking about that one gives me a headache.
Section 170.—Charitable, Etc., Contributions and Gifts.—Whether a taxpayer who advances funds to a charitable organization and receives therefor a promissory note may deduct as contributions, in one taxable year or in each of several years, amounts forgiven by the taxpayer in each of several years by endorsement on the note.
This is an example where cutting some extra checks might help.
Section 213.—Medical, Dental, Etc., Expenses.—Whether a capital expenditure for an item that is ordinarily used for personal, living, or family purposes, such as a swimming pool, has as its primary purpose the medical care of the taxpayer or the taxpayer's spouse or dependent, or is related directly to such medical care.
My doctor made me do it.
Section 312.—Effect on Earnings and Profits.—The determination of the amount of earnings and profits of a corporation.
It would be nice if someone who wants to purge their earnings and profits could have certainty as to what they are, but you can't get a ruling. I once did an earnings and profits analysis on a company that had been founded in 1919. It was quite a project. And no I'm not that old that I was doing it in 1925 or something.
Section 704(b)(2).—Partner's Distributive Share.—Whether the allocation to a partner under the partnership agreement of income, gain, loss, deduction, or credit (or an item thereof) has substantial economic effect.
Don't ask them. They have already given you pages and pages of impenetrable regulations that attorneys transform into partnership agreements nobody can understand.
The results of transactions that lack a bona fide business purpose or have as their principal purpose the reduction of Federal taxes
You wouldn't want to do anything like that anyway. Right ?
This is a small sample of the areas where they won't issue rulings. There is a follow on list of areas where they will not ordinarily issue rulings. I don't know if it would be shorter for them to make a list of things where they will issue rulings, but it seems almost possible.