Letter Ruling

In tax law a written interpretation of certain provisions of federal statutes by the Office of the Assistant Commissioner of the Internal Revenue Service.

Tax laws are often the subject of dispute between U.S. taxpayers and the Internal Revenue Service (IRS). Authority for interpreting the laws, which are found in the Internal Revenue Code, rests with regional IRS agents, who have the power to review tax returns through an audit. If a taxpayer disagrees with an interpretation of the law, she or he may ask the national IRS office to issue a ruling on the point of contention. This statement is called a private letter ruling.

Because of the time and expense involved in preparing a request for a letter ruling, such a request is seldom made. The taxpayer must submit a complete record of the transaction in dispute, including a justification for the transaction, all pertinent documents, the section of the tax code in question, and any relevant IRS regulations, rulings, and court precedents.

Letter rulings are issued by the Office of the Assistant Commissioner of the IRS. They are numbered—for example, Private Letter Ruling 8616003. Each discusses the applicable facts before the IRS as well as the IRS ruling, but does not name the individual or organization that requested the ruling. After the ruling is issued to the regional office and the taxpayer, it is published by the IRS. Several thousand letter rulings are issued annually.

The legal value of a letter ruling is extremely limited. The ruling applies only to the taxpayer who requested it and only for the year in which it is issued; federal tax law states that a letter ruling may not be used or cited by another taxpayer (I.R.C. § 6110(j)(3)). If the ruling favors the taxpayer, the regional IRS agent is bound by it. If the ruling is adverse, the taxpayer can submit the issue to a Tax Court.

Since the 1930s courts have refused to give precedential weight to letter rulings. In the 1989 case of Phi Delta Theta Fraternity v. Commissioner of Internal Revenue, 887 F.2d 1302 (6th Cir.), a national fraternity appealing an order of the U.S. Tax Court based part of its argument on several letter rulings. In affirming the Tax Court's decision, the appellate court described the weight courts are to give letter rulings: "Although private letter rulings are helpful in determining the contours of tax statutes and may be considered when evaluating the consistency of application of statutes, such letter rulings have no precedential effect."

Despite the limited application of letter rulings, they are widely read by tax attorneys. Specialists use them to keep abreast of IRS interpretation, and the documents are available from electronic databases.

Further readings

Banoff, Sheldon I., and Richard M. Lipton, eds. 1995. "Letter Ruling Held Relevant Authority in Malpractice Case." Journal of Taxation 82 (April).

Kanter, Burton W., and Sheldon I. Banoff, eds. 1992. "Associate Chief Counsel Speaks Out on Letter Rulings." Journal of Taxation 76 (January).

Cross-references

Income Tax; Taxation.