Estate and Succession Planning
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A taxpayer may, for a fee, request a written letter ruling from the IRS interpreting and applying tax laws to the taxpayer’s represented set of facts. However, there are some issues in which the IRS will not issue a letter ruling. Taxpayers should note that the IRS has recently added three new issues to its informal S corporation no-rule list, thus negating a taxpayer’s ability to receive a private letter ruling in these areas.
At a Federal Bar Association Section of Taxation Tax Law Conference in Washington, D.C., Brad Poston, Branch 3 Senior Counsel, IRS Office of Associate Chief Counsel (Passthroughs and Special Industries), stated that “resource constraints” have contributed to the decision to stop issuing letter rulings in three areas, and also added that “there is a doubt about the correctness and/or the value” of some of the letter rulings that had been issued in the past.[1]
The first informal S corporation no-rule area involves S corporations that have made disproportionate distributions. Poston stated that disproportionate distributions are the largest category of S corporation rulings that will no longer be given. According to Poston, this started with cases in which an S corporation had been making disproportionate distributions to shareholders despite having governing agreements that require equal distribution and liquidation rights where taxpayers approach the IRS for a fix. The IRS has created uncertainty by providing different rulings to similarly situated taxpayers based on who was assigned the case. Some rulings cited Regulation Section 1.1362-1(l)(2)(i) and concluded that there was not a termination as a result of the disproportionate distributions, while other rulings have cited Section 1362(f) and forgave an inadvertent termination if one occurred as a result of disproportionate distributions. It should also be noted that in most, if not all of these rulings, the ruling was contingent on the taxpayer making equalizing distributions so that all distributions were proportionate.
The second category in which the IRS will no longer issue rulings involves the second-class of stock regulations involving tests with an objective and subjective prong, such as employment agreements, options or warrants.
The final category of issues that the IRS will no longer rule on is taxpayers with bad filings. Poston stated that “we really don’t consider that by itself to be something that presents a real threat to the validity of an S election.”
Poston stated that although the IRS will not issue letter rulings when the S corporation has a bad return filing or when an S corporation election or consent is filed with missing or incomplete information, there is administrative relief available for some types of missing information to an S election.[2] Poston stated that relief can be obtained at the IRS Service Center level and not by contacting the IRS Office of Chief Counsel. Specifically, Reg. Sec. 1.1362-6(b)(3)(iii) permits an extension for an S corporation to file consents to an election if shareholders fail to file timely consents.
Poston additionally stated that the IRS will not issue rulings when the S corporation filed a C corporation return in some past year or years. He specifically stated that “we don’t consider that by itself something that terminates the S election.” Poston also stated that although the IRS will continue to consider ruling requests when an “election wasn’t made at all or wasn’t signed by the necessary parties,” it would not issue rulings when the issue involved missing or incorrect information.
About the Author(s):
Stephen R. Looney is the chair of the Tax department at Dean Mead in Orlando. He represents clients in a variety of business and tax matters including entity formation (S and C corporations, partnerships, and LLCs), acquisitions, dispositions, redemptions, liquidations, reorganizations, tax-free exchanges of real estate and tax controversies. His clients include closely held businesses, with an emphasis on medical and other professional services practices. He is a member of the Board of Trustees of the Southern Federal Tax Institute, as well as former Chair of the S Corporations Committee of the American Bar Association’s Tax Section. He is Board Certified in Tax Law by the Florida Bar, as well as being a Certified Public Accountant (CPA). He may be reached at slooney@www.deanmead.com.
[1] Matthew Medara, “IRS’s Informal No-Rule List Includes 3 Items,” 2017 TNT 42-6 (March 6, 2017).
[2] Matthew Medara, “Alternative Relief Exists For Some S Corp Election Errors, “2017 TNT 45-3 (March 9, 2017).
